UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
Commission File No. 001-39914
Affinity Bancshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
82-1147778
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
3175 Highway 278
Covington, Georgia
30014
(Address of Principal Executive Offices)
(Zip Code)
(770) 786-7088
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
AFBI
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 8, 2023, 6,421,700 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding.
Form 10-Q
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
2
Consolidated Balance Sheets at June 30, 2023 (unaudited) and December 31, 2022
Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2023 and 2022 (unaudited)
3
Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2023 and 2022 (unaudited)
4
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months and Six Months Ended June 30, 2023 and 2022 (unaudited)
5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (unaudited)
6
Notes to Unaudited Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
37
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
38
SIGNATURES
39
1
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
AFFINITY BANCSHARES, INC.
Consolidated Balance Sheets
June 30, 2023
December 31, 2022
(unaudited)
(Dollars in thousands except per share amounts)
Assets
Cash and due from banks
$
7,061
2,928
Interest-earning deposits in other depository institutions
75,833
23,396
Cash and cash equivalents
82,894
26,324
Investment securities available-for-sale
49,931
46,200
Investment securities held-to-maturity (estimated fair value of $33,053, net of allowance for credit losses of $42 at June 30, 2023 and estimated fair value of $26,251 at December 31, 2022)
34,145
26,527
Other investments
1,508
1,082
Loans
663,141
646,234
Allowance for credit loss on loans
(9,252
)
(9,325
Net loans
653,889
636,909
Other real estate owned
2,901
Premises and equipment, net
4,052
4,257
Bank owned life insurance
15,899
15,724
Intangible assets
18,462
18,558
Other assets
13,224
12,801
Total assets
876,905
791,283
Liabilities and Stockholders' Equity
Liabilities:
Non-interest-bearing checking
174,752
190,297
Interest-bearing checking
93,358
91,167
Money market accounts
141,157
148,097
Savings accounts
85,845
101,622
Certificates of deposit
235,930
125,989
Total deposits
731,042
657,172
Federal Home Loan Bank advances and other borrowings
20,000
10,025
Accrued interest payable and other liabilities
7,924
6,983
Total liabilities
758,966
674,180
Stockholders' equity:
Common stock (par value $0.01 per share, 40,000,000 shares authorized; 6,430,300 issued and outstanding at June 30, 2023 and 6,605,384 issued and outstanding at December 31, 2022)
64
66
Preferred stock (10,000,000 shares authorized, no shares outstanding)
—
Additional paid in capital
61,027
63,130
Unearned ESOP shares
(4,692
(4,795
Retained earnings
68,209
65,357
Accumulated other comprehensive loss
(6,669
(6,655
Total stockholders' equity
117,939
117,103
Total liabilities and stockholders' equity
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Income
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
Interest income:
Loans, including fees
8,727
7,283
17,018
14,279
Investment securities
986
291
1,935
556
Interest-earning deposits
1,150
79
1,638
97
Total interest income
10,863
7,653
20,591
14,932
Interest expense:
Deposits
3,785
484
6,099
987
FHLB advances and other borrowings
385
28
901
(947
Total interest expense
4,170
512
7,000
40
Net interest income before provision for credit losses
6,693
7,141
13,591
14,892
Provision for credit losses
217
467
Net interest income after provision for credit losses
6,924
13,584
14,425
Noninterest income:
Service charges on deposit accounts
405
393
796
785
Other
273
255
434
458
Total noninterest income
678
648
1,230
1,243
Noninterest expenses:
Salaries and employee benefits
3,036
3,023
6,040
6,032
Occupancy
638
541
1,282
1,123
Advertising
82
118
179
198
Data processing
487
497
980
990
FHLB prepayment penalties
647
1,041
1,058
1,997
2,005
Total noninterest expenses
5,284
5,237
10,478
10,995
Income before income taxes
2,087
2,335
4,336
4,673
Income tax expense
552
1,024
1,099
Net income
1,590
1,783
3,312
3,574
Weighted average common shares outstanding
Basic
6,486,260
6,591,627
6,542,653
6,698,423
Diluted
6,546,382
6,684,721
6,616,294
6,791,517
Basic earnings per share
0.25
0.27
0.51
0.53
Diluted earnings per share
0.24
0.50
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Other comprehensive income (loss):
Net unrealized loss on available-for-sale securities, net of taxes of $171, $730, $6 and $1,602
(488
(2,078
(14
(4,731
Total other comprehensive loss
Total comprehensive income (loss)
1,102
(295
3,298
(1,157
Consolidated Statements of Changes in Stockholders’ Equity
Three and Six Months Ended June 30, 2023 and 2022
Accumulated
Additional
Common
Paid In
Unearned
Retained
Comprehensive
Stock
Capital
ESOP Shares
Earnings
Income (Loss)
Total
Ending balance December 31, 2022
ESOP loan payment and release of ESOP shares
26
52
78
Stock-based compensation expense
260
Change in unrealized loss on investment securities available-for-sale, net of tax
474
Common stock repurchase
(867
Adoption of new accounting pronouncement (see Note 1)
(460
1,722
Ending balance March 31, 2023
62,549
(4,743
66,619
(6,181
118,310
16
51
67
264
(2
(1,802
(1,804
Ending balance June 30, 2023
Beginning balance December 31, 2021
69
68,038
(5,004
58,223
(358
120,968
29
81
113
Change in unrealized loss on investment securities available- for-sale, net of tax
(2,653
(3
(3,939
(3,942
1,791
Ending balance March 31, 2022
64,241
(4,952
60,014
(3,011
116,358
53
(1
(836
(837
Ending balance June 30, 2022
65
63,497
(4,899
61,797
(5,089
115,371
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and (accretion) amortization
425
(602
524
ESOP expense
145
160
Increase in cash surrender value of bank owned life insurance
(175
(172
Change in:
Accrued interest receivable and other assets
(260
426
355
1,831
Net cash provided by operating activities
4,333
5,863
Cash flows from investing activities:
Purchases of investment securities held-to-maturity
(7,609
Purchases of investment securities available-for-sale
(5,710
(5,201
Purchases of premises and equipment
(285
(678
Proceeds from paydowns of investment securities available-for-sale
1,936
2,780
Proceeds from maturity of investment securities held-to-maturity
30
Purchases of other investments
(2,339
(756
Proceeds from sales of other investments
1,913
1,832
Net change in loans
(16,874
(38,821
Net cash used in investing activities
(28,938
(40,844
Cash flows from financing activities:
Net change in deposits
73,871
11,383
Stock repurchase
(2,671
(4,779
Proceeds from FHLB advances
65,000
75,000
Repayment of FHLB advances
(55,000
(103,000
Repayment of federal funds purchased
(25
Net cash provided by (used in) financing activities
81,175
(21,396
Net change in cash and cash equivalents
56,570
(56,377
Cash and cash equivalents at beginning of period
111,776
Cash and cash equivalents at end of period
55,399
Supplemental disclosures of cash flow information:
Cash paid for income taxes
819
929
Cash paid for interest
7,382
1,134
(1) Nature of Operations
Affinity Bancshares, Inc. (the “Company”) is a savings and loan holding company headquartered in Covington, Georgia. The Company has one operating subsidiary, Affinity Bank (the “Bank”, and formerly named “Newton Federal Bank”), a federally chartered savings association, conducting banking activities primarily in Newton County, Georgia and surrounding counties and in Cobb and Fulton Counties, Georgia and surrounding counties, and originating dental practice loans and indirect automobile loans throughout the Southeastern United States. The Bank offers such customary banking services as consumer and commercial checking accounts, savings accounts, certificates of deposit, mortgage, commercial and consumer loans, including indirect automobile loans, money transfers and a variety of other banking services. The Company was incorporated in 2020 to be the successor corporation to Community First Bancshares, Inc., a federal corporation, upon completion of the second-step mutual-to-stock conversion (the “Conversion”) of Community First Bancshares, MHC, the top tier mutual holding company of Community First Bancshares, Inc. Community First Bancshares, Inc. was the former mid-tier holding company for the Bank (formerly named Newton Federal Bank). Prior to completion of the Conversion, approximately 54% of the shares of common stock of Community First Bancshares, Inc. were owned by Community First Bancshares, MHC. In conjunction with the Conversion, Community First Bancshares, Inc. was merged into Affinity Bancshares, Inc. (and ceased to exist) and Affinity Bancshares, Inc. became its successor holding company for Newton Federal Bank.
Basis of Presentation
The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company as of June 30, 2023 and the results of its operations and its cash flows for the periods presented. The interim consolidated financial information should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for the three months and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for a full year or for any other period.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for credit losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.
Summary of Significant Accounting Policies – The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in the Company’s financial statements for the year ended December 31, 2022 included in the Company’s Form 10-K.
Earnings per Share
Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options), if any. Presented below are the calculations for basic and diluted earnings per common share.
(Dollars in thousands except per share data)
Effect of dilutive common stock awards
60,122
93,094
73,641
Diluted weighted average common shares outstanding
Basic earnings per common share
Diluted earnings per common share*
* Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted average shares outstanding during the interim period, and not on an annualized weighted average basis. Accordingly, the sum of the earnings per share data for the quarters will not necessarily equal the year-to-date earnings per share data.
There were 285,454 anti-dilutive options for the three months and six months ended June 30, 2023 and 13,454 anti-dilutive options for the three months and six months ended June 30, 2022.
Adoption of New Accounting Standards
On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including held-to-maturity securities. It also applies to off-balance sheet credit exposures. In addition, Accounting Standard Codification ("ASC") 326 made changes to the accounting for available-for-sale securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted this ASU on January 1, 2023, and recorded a one-time entry to retained earnings of $460,000, net of tax ($437,000 related to credit losses for unfunded commitments and $23,000 related to credit losses for securities held-to-maturity).
In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Bank no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the Allowance. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements; however, it resulted in new disclosures. See Note 3 for the new disclosures.
Allowance for Credit Losses ("ACL") - Loans
The CECL framework requires an estimate of expected credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. The following discussion provides a description of the methodology applied to calculate the ACL under CECL.
The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed. Accrued interest receivable is excluded from the estimate of credit losses.
Management determines the ACL balance using relevant available information from internal and external sources, relating to
8
past events, current conditions, and reasonable and supportable forecasts. Historical credit behaviors along with model judgments provide the basis for the estimation of expected credit losses. Adjustments to modeled loss estimates may be made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in economic conditions, property values, or other relevant factors. For the majority of loans and leases, the ACL is calculated using a discounted cash flow methodology applied at a loan level with a one-year reasonable and supportable forecast period and a two-year straight-line reversion period.
The ACL-loans is measured on a collective basis when similar risk characteristics exist. The Bank has identified the following portfolio segments and calculates the ACL for each using a discounted cash flow methodology at the loan level, with loss rates, prepayment assumptions and curtailment assumptions driven by each loan’s collateral type:
Commercial (secured by real estate - owner occupied)- Loans in this category are susceptible to business failure and general economic conditions.
Commercial (secured by real estate - non-owner occupied) - Common risks for this loan category are declines in general economic conditions, declines in real estate value, declines in occupancy rates, and lack of suitable alternative use for the property.
Commercial & industrial - Risks to this loan category include the inability to monitor the condition of the collateral, which often consists of inventory, accounts receivable and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.
Construction, land, and acquisition and development - Risks common to construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements and declines in real estate values.Residential mortgage - Residential mortgage loans are susceptible to weakening general economic conditions, increases in unemployment rates and declining real estate values.
Consumer installment - Risks common to consumer direct loans include unemployment and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.
When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
When the discounted cash flow method is used to determine the ACL, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. The ACL on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.
Determining the Contractual Term: Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Bank.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures
The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet credit exposures is adjusted through provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic forecasts.
9
Allowance for Credit Losses - Investment Securities Available-for-Sale
For available-for-sale securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale securities that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the securities by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected form the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in the comprehensive income. Accrued interest receivable on available-for-sale securities is excluded from the estimate of credit losses. The guidance under ASC Topic 326 had no impact on the Bank’s available-for-sale debt securities at January 1, or June 30, 2023.
Changes in the allowance for credit losses are recorded as provision of (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Allowance for Credit Losses - Investment Securities Held-to-Maturity
Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses.
10
Management classifies the held-to-maturity portfolio into the following major security types: U.S. Treasuries, government agency mortgage-backed, and corporate securities. Both the U.S. Treasuries and the Government agency mortgage-backed securities held by the Bank are issues by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. The corporate securities are comprised of investments in corporate bonds whose issuers are primarily banks. At June 30, 2023, these securities are all rated as investment grade.
(2) Investment Securities
Investment securities available-for-sale at June 30, 2023 and December 31, 2022 are as follows: (in thousands)
Amortized
Gross Unrealized
Estimated
Cost
Gains
Losses
Fair Value
U.S. Treasury securities
6,116
(711
5,405
Municipal securities - tax exempt
530
(94
436
Municipal securities - taxable
2,530
(392
2,138
U. S. Government sponsored enterprises
11,837
(3,320
8,517
Government agency mortgage-backed securities
19,569
(2,829
16,740
Corporate securities
18,278
35
(1,618
16,695
58,860
(8,964
6,084
(776
5,308
533
(96
437
2,529
(485
2,044
(3,499
8,338
20,555
(3,053
17,502
13,571
(1,005
12,571
55,109
(8,914
Investment securities held-to-maturity at June 30, 2023 and December 31, 2022 are as follows: (in thousands)
Estimated Allowance for
Credit Losses
999
(9
816
(76
740
32,372
17
(1,066
31,323
(42
34,187
(1,151
33,053
998
837
(13
824
24,692
(267
24,429
(280
26,251
The Bank recorded $32,000 on January 1, 2023 upon adoption of ASC 326, and recorded an additional provision for credit losses for the three and six months ended June 30, 2023 of $0 and $10,000 for held-to-maturity securities, respectively.
11
Investment securities available-for-sale in an unrealized loss position at June 30, 2023 and December 31, 2022 are as follows: (in thousands)
Less Than 12 Months
12 Months or More
Unrealized Loss
4,418
(708
6,862
(284
8,233
(1,334
15,095
7,849
(287
40,482
(8,677
48,331
4,331
452
(32
1,592
(453
5,598
(452
11,904
(2,601
4,541
(324
5,466
(681
10,007
10,591
(808
32,068
(8,106
42,659
There were six available-for-sale securities in an unrealized loss position totaling $287,000 as of June 30, 2023 for less than 12 months. There were 65 available-for-sale securities in an unrealized loss position for 12 months or greater totaling $8.7 million as of June 30, 2023. The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades and are reviewed regularly. Four of the securities are agency bonds and six are U.S. Treasury bonds, so all of these are direct obligations of the U.S. Government. Thirty-nine of the securities are mortgage backed bonds that have the direct or implied backing of the U.S. Government. Four of the bonds are municipal securities and the remaining 18 securities are corporate securities that are either trust preferred securities or subordinated debentures where the Bank performs a credit review regularly and such review has raised no concerns.
Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises ("GSEs"), and the U.S. Treasury, including notes and mortgage backed securities, accounted for the majority of the available-for-sale portfolio as of June 30, 2023, and the Bank expects no credit losses on these securities, given the explicit and implicit guarantees provided by the U.S. federal government. The available-for-sale portfolio also includes corporate securities, but are underwritten as loans with features that are typically found in commercial loans. Accordingly, the Bank monitors the credit quality of these corporate bonds through quarterly credit reviews to determine impairment, if any. The decline in fair value is attributable to changes in interest rates, and not credit quality, and the Bank does not have the intent to sell the U.S. government and agencies debt securities and the corporate securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Bank does not consider impairments on these securities to be credit related as of June 30, 2023.
There were 17 held-to-maturity securities in an unrealized loss position totaling $1.2 million as of June 30, 2023 for less than 12 months. There were no held-to-maturity securities in an unrealized loss position greater than 12 months as of June 30, 2023. The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades and are reviewed regularly. One security is a U.S. Treasury bonds, so it is a direct obligations of the U.S. Government. One security is a mortgage-backed security of a U.S. Government sponsored agency that has the implied backing of the U.S. Government. Fifteen are subordinated debentures of banks where the Bank performs a credit review quarterly and such reviews have raised no concerns.
Corporate securities account for the majority of the held-to-maturity portfolio as of June 30, 2023. As stated above, these corporate securities are accounted for as securities, but are underwritten as loans with features that are typically found in commercial loans. Accordingly, the Bank monitors the credit quality of these corporate bonds through quarterly credit reviews
12
to determine impairment, if any. At June 30, 2023, these securities are all rated as investment grade and the $42,000 of allowance for credit losses associated with these securities was calculated using a Moody's report on the cumulative default rates of corporate issuers.
The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at June 30, 2023, by contractual maturity, are shown below. Maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties. Therefore, these securities are not included in the maturity categories. (in thousands)
Available-for-Sale
Held-to-Maturity
Within 1 year
989
Greater than 1 to 5 years
3,980
3,818
17,744
17,314
Greater than 5 to 10 years
22,226
19,561
15,627
14,999
Greater than 10 years
12,096
8,825
39,291
33,191
33,371
32,313
There were no sales of investment securities available-for-sale during the three and six months ended June 30, 2023 or 2022.
Available-for-sale securities with a carrying value of approximately $4.4 million and $4.7 million were pledged to secure public deposits at June 30, 2023 and December 31, 2022, respectively.
(3) Loans and Allowance for Credit Losses
Major classifications of loans, by collateral code, at June 30, 2023 and December 31, 2022 are summarized as follows: (in thousands)
Commercial (secured by real estate - owner occupied)
162,248
162,989
Commercial (secured by real estate - non-owner occupied)
142,280
135,720
Commercial and industrial
151,007
147,775
Construction, land and acquisition & development
42,028
37,158
Residential mortgage 1-4 family
51,976
51,324
Consumer installment
113,602
111,268
Less allowance for credit losses
Total loans, net
The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Atlanta, Georgia MSA. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. With the acquisition of Affinity Bank, the Bank enhanced its lending within professional markets, with a primary focus on the dental industry in Georgia and adjoining states. The majority of these loans are commercial and industrial credits for practice acquisitions and equipment financing with the remainder being owner-occupied real estate. Accrued interest on loans totaled $1.7 million on June 30, 2023 and $1.6 million on December 31, 2022 and is included in other assets on the consolidated balance sheet.
The adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) did not result in an increase to allowance for credit losses for loans for the Bank.
13
The following table presents the balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on impairment method as of and for the three and six months ended June 30, 2023 and as of December 31, 2022: (in thousands)
Commercial(Secured by RealEstate - Owner Occupied)
Commercial(Secured by RealEstate - Non-Owner Occupied)
Commercial and Industrial
Construction, Land andAcquisition & Development
Residential Mortgage
ConsumerInstallment
Unallocated
Allowance for credit losses:
Beginning balance December 31, 2022
2,403
2,079
2,292
345
1,675
44
9,325
Provision
(915
(748
(1,173
523
1,094
756
463
Charge-offs
(4
(148
(155
Recoveries
Ending balance
1,492
1,331
1,116
1,010
1,475
2,321
507
9,252
Beginning balance March 31, 2023
1,509
1,396
1,205
930
1,514
2,323
357
9,234
(17
(65
(89
80
(75
150
-
(49
31
Beginning balance
2,701
1,980
2,242
162
502
969
8,559
(421
99
55
325
(196
801
41
704
(26
(123
(149
123
21
211
Ending allowance attributable to loans:
Individually evaluated for impairment
85
90
Collectively evaluated for impairment
2,318
2,078
341
9,235
Total ending allowance
Loans:
3,265
2,399
5,749
162,904
132,455
48,925
640,485
Total loans
The Bank recorded a provision for credit losses for unfunded commitments of $586,000 on January 1, 2023 upon adoption of ASC 326. A release on unfunded commitments for the six months ended June 30, 2023 of $3,000 was recorded, and is included in other liabilities on the consolidated balance sheet. The Bank also recorded a provision of $10,000 for credit losses for held-to-maturity securities for a net $7,000 recorded of provision for credit losses for the six months ended June 30, 2023. No provision for credit losses was recorded for the three months ended June 30, 2023.
The Bank individually evaluates all loans for impairment that are on nonaccrual status or are rated substandard (as described below). Additionally, all loan modifications to a borrower with financial difficulty are evaluated for impairment. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of expected future
14
cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired loans are applied as a reduction of the outstanding principal balance.
Collateral-Dependent LoansWe classify a loan as collateral-dependent when our borrower is experiencing financial difficulty, and we expect repayment to be provided substantially through the operation or sale of collateral. Our commercial loans have collateral that is comprised of real estate and business assets. Our consumer loans have collateral that is substantially comprised of residential real estate. There were no significant changes in the extent to which collateral secures our collateral-dependent loans during the six months ended June 30, 2023, and we had $4.0 million of collateral-dependent loans without an allowance and no collateral-dependent loans with an allowance at June 30, 2023.
Impaired loans at December 31, 2022 were as follows: (in thousands)
RecordedInvestment
UnpaidPrincipalBalance
AllocatedRelatedAllowance
AverageRecordedInvestment
InterestIncomeRecognized
With no related allowance recorded:
3,089
3,145
Residential mortgage
1,526
1,596
4,615
4,741
With an allowance recorded:
176
182
873
907
22
1,179
34
Total impaired loans
5,920
15
The following table presents the aging of the recorded investment in past due loans, as well as the recorded investment in nonaccrual loans, as of June 30, 2023 and December 31, 2022 by class of loans: (in thousands)
30 -59 Days Past Due
60- 89 Days Past Due
90 Daysor GreaterPast Due
Total Accruing LoansPast Due
Nonaccrual with Allowance
Nonaccrual without Allowance
Current
162,169
165
3,020
139,095
637
2,027
48,323
161
247
113,194
881
5,294
655,816
Nonaccrual
132,408
147,772
37,073
2,341
249
3,123
3,185
45,016
571
59
630
135
110,503
2,997
592
3,838
6,720
635,676
On January 1, 2023, the Bank adopted ASU 2022-02, which eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for certain loan modifications to borrowers experiencing financial difficulty. There was one loan that was both experiencing financial difficulty and was modified during the six months ended June 30, 2023.
There was one new residential mortgage loan modification to a borrower with financial difficulty for $26,000 during the six months ended June 30, 2023. The maturity date was extended. No loan modifications made to a borrower with financial difficulty subsequently defaulted during the six months ended June 30, 2023.
The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Bank uses the following definitions for its risk ratings:
Special Mention. Loans have potential weaknesses that may, if not corrected, weaken or inadequately protect the Bank's credit position at some future date. Weaknesses are generally the result of deviation from prudent lending practices, such as over advances on collateral. Credits in this category should, within a 12-month period, move to Pass if improved or drop to Substandard if poor trends continue.
Substandard. Inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans have a well-defined weakness or weaknesses such as primary source of repayment is gone or severely impaired or cash flow is insufficient to reduce debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans have the same weaknesses as those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable. The likelihood of a loss on an asset or portion of an asset classified Doubtful is high.
Loss. Loans considered uncollectible and of such little value that the continuance as a Bank asset is not warranted. This does not mean that the loan has no recovery or salvage value, but rather the asset should be charged off even though partial recovery may be possible in the future.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. As of June 30, 2023 and December 31, 2022, and based on the most recent analysis performed, the risk category and year of origination of loans by class of loans is as follows: (in thousands)
2021
2020
2019
Prior
Revolvers
Pass
2,848
28,324
32,137
24,221
10,513
53,509
10,270
161,822
22,077
36,757
26,462
5,077
10,725
24,308
9,509
134,915
13,896
23,041
28,953
16,150
22,575
31,341
15,051
8,959
23,784
6,245
111
189
1,231
1,486
42,005
3,313
5,445
1,995
1,846
1,488
31,186
3,737
49,010
23,031
56,730
22,350
6,865
3,031
366
769
113,142
Total pass
74,124
174,081
118,142
54,270
48,521
141,941
40,822
651,901
Special Mention
347
3,589
545
4,134
50
251
Total special mention
3,639
1,074
4,914
Substandard
3,216
3,231
23
210
122
2,228
2,784
57
130
18
209
Total substandard
267
241
140
5,523
6,326
74,137
174,513
122,022
54,425
48,669
148,538
40,837
Current year to date period gross write-offs
148
Total current period gross write-offs
155
SpecialMention
Doubtful/Loss
162,541
362
86
130,115
2,293
48,193
3,131
111,049
84
636,828
2,739
6,667
(4) Intangible Assets
The core deposit premium intangible asset had a gross carrying amount of $1.9 million and accumulated amortization of $670,000 at June 30, 2023. The core deposit premium intangible asset had a gross carrying amount of $1.9 million and accumulated amortization of $574,000 at December 31, 2022. Aggregate amortization expense was $48,000 and $96,000 during for the three and six months ended June 30, 2023 and 2022.
Goodwill acquired through acquisition was $17.2 million at June 30, 2023 and 2022. No impairment loss was recognized during the six months ended June 30, 2023 or 2022.
(5) Deposits
The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $37.1 million at June 30, 2023 and $26.4 million at December 31, 2022. Due to the FDIC insurance coverage rules and limits for a depositor's specific group of deposit accounts, it is important to note not all deposits in excess of $250,000 are uninsured.
Brokered CDs totaled $116.4 million and had a weighted average rate of 4.90% and a weighted average maturity of 32 months at June 30, 2023 and $34.9 million and had a weighted average rate of 4.50% and a weighted average maturity of 34 months at December 31, 2022.
(6) Borrowings
The following FHLB advances, which required monthly or quarterly interest payments, were outstanding at June 30, 2023:
Advance Date
Advance
Interest Rate
Maturity
Rate
Call Feature
1/6/2023
10,000,000
4.22
%
1/6/2026
Fixed
N/A
3.94
1/6/2028
20,000,000
There were FHLB advances totaling $10.0 million consisting of advances with a book value of $10.0 million and no fair value adjustment as of December 31, 2022. At June 30, 2023 and December 31, 2022, the FHLB advances were collateralized by certain loans which totaled approximately $393.3 million and $384.4 million, and by the Company’s investment in FHLB stock which totaled approximately $1.3 million and $832,000 at June 30, 2023 and December 31, 2022. Acquired FHLB advances totaling $49.0 million were paid off during the six months ended June 30, 2022. We were able to accrete to income the remaining $1.0 million fair value adjustment associated with these acquired advances, resulting in a reduction in interest expense for the six months ended June 30, 2022. We also incurred $647,000 of prepayment penalties during the six months ended June 30, 2022 in connection with the payoff of the acquired advances.
The Company had one FHLB letter of credit of $12.5 million, used to collateralize public deposits, outstanding at both June 30, 2023 and December 31, 2022.
The Company has Federal Funds unsecured lines of credit totaling $32.5 million. No amount was borrowed under these lines as of June 30, 2023.
19
(7) Employee Stock Ownership Plan
The Company sponsors an employee stock ownership plan (“ESOP”) that covers all employees who meet certain service requirements. The Company makes annual contributions to the ESOP in amounts as defined by the plan document. These contributions are used to pay debt service and purchase additional shares. Certain ESOP shares are pledged as collateral for debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year.
In 2017, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing shares of the Company’s common stock. A total of 295,499 shares were purchased with the loan proceeds as part of the Company’s initial stock offering. In 2021, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing additional shares of the Company’s common stock. A total of 225,721 shares were purchased with the loan proceeds as part of the Company’s second stock offering. Total ESOP expense for the three and six months ended June 30, 2023 and 2022 was approximately $67,000, $79,000, $145,000 and $160,000, respectively. The balance of the note payable of the ESOP was approximately $5.3 million at June 30, 2023 and December 31, 2022. Because the source of the loan payments is contributions received by the ESOP from the Company, the related note receivable is shown as a reduction of stockholders’ equity. As of June 30, 2023 and December 31, 2022, 80,000 shares had been released.
(8) Stock-Based Compensation
In 2018, shareholders approved the Company’s 2018 Equity Incentive Plan, which authorizes the issuance of up to 133,987 shares of common stock pursuant to restricted stock grants and up to 334,970 shares of common stock pursuant to the exercise of options.
In May 2022, shareholders approved the Company’s 2022 Equity Incentive Plan, which authorizes the issuance of up to 148,060 shares of common stock pursuant to restricted stock grants and up to 370,150 shares of common stock pursuant to the exercise of options.
A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants during the six months ended June 30, 2023 were as follows: dividend yield of 0%, expected volatility of 27.32%, risk-free interest rate of 3.66%, expected average life of 6.90, and weighted average per share fair value of options of $5.40.
A summary of the Company’s stock option activity is summarized below.
Stock Options
Option Shares Outstanding
Weighted Average Exercise Price
Weighted Average Remaining Life (Years)
Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2022
484,519
12.28
8.45
1,522
Granted
57,500
14.40
Exercise of stock options*
(8,753
11.14
Outstanding - June 30, 2023
533,266
12.21
7.81
934
Exercisable - June 30, 2023
189,515
10.06
6.50
607
* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. All 2023 exercises of stock options were exercised in this manner.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. A summary of the Company’s restricted stock activity is summarized below.
Restricted Stock
Restricted Shares Outstanding
Weighted Average Grant Date Fair Value
169,504
11.97
12,400
Outstanding - March 31, 2023
181,904
12.08
Vested*
(27,147
10.42
154,757
20
* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 1,751 shares were surrendered during the six months ended June 30, 2023.
The Company recognized approximately $264,000, $66,000, $524,000 and $179,000 of stock-based compensation expense during the three months and six months ended June 30, 2023 and 2022 respectively, associated with its common stock awards granted to directors and officers.
As of June 30, 2023, there was approximately $3.2 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the weighted average remaining vesting period of approximately 2.59 years.
(9) Fair Value Measurements and Disclosures
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Cash and Cash Equivalents
The carrying value of cash and cash equivalents is a reasonable estimate of fair value.
Investment Securities Available-for-Sale
Available-for-sale securities are recorded at market value. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds. Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and state, county and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Other Investments
The carrying value of other investments includes FHLB stock and FNBB stock and approximates fair value.
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve may be required to be established within the allowance for credit losses. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with GAAP. The fair value of impaired loans is estimated using one of three methods, including collateral value, market value
of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with GAAP, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. For disclosure purposes, the fair value of fixed rate loans which are not considered impaired is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes.
Other Real Estate Owned
Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate assets are carried at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price, the Bank records the other real estate as nonrecurring Level 2. When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the other real estate asset as nonrecurring Level 3.
Bank Owned Life Insurance
The carrying value of the cash surrender value of life insurance reasonably approximates fair value.
The fair value of savings accounts, interest bearing checking accounts, non-interest bearing checking accounts and market rate checking accounts is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates would be issued.
FHLB Advances and Other Borrowings
FHLB advances are carried at cost and the fair value is obtained from the Federal Home Loan Bank of Atlanta. Federal FundsPurchased are carried at cost and because they are overnight funds, the carrying value is a reasonable estimate of fair value.
Commitments to Extend Credit
Commitments to extend credit are short-term and, therefore, the carrying value and the fair value are considered immaterial for disclosure.
Assets Recorded at Fair Value on a Recurring Basis
The Company’s only assets recorded at fair value on a recurring basis are available-for-sale securities that had fair values of approximately $49.9 million and $46.2 million at June 30, 2023 and December 31, 2022. They are classified as Level 2.
Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost
at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2023 and December 31, 2022 (in thousands).
Level 1
Level 2
Level 3
Collateral dependent loans
4,022
Total assets at fair value
6,923
Impaired loans
5,659
8,560
The carrying amounts and estimated fair values (in thousands) of the Company’s financial instruments at June 30, 2023 and December 31, 2022 are as follows:
Carrying
Amount
Financial assets:
Investment securities held-to-maturity
Loans, net
629,318
611,687
Financial liabilities:
728,465
653,577
20,374
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis of financial condition and results of operations at June 30, 2023 and December 31, 2022 and for the three months and six months ended June 30, 2023 and 2022 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Accordingly, you should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Summary of Significant Accounting Policies
A summary of our accounting policies is described in Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Comparison of Financial Condition at June 30, 2023 and December 31, 2022
Total assets increased $85.6 million, or 10.8%, to $876.9 million at June 30, 2023 from $791.3 million at December 31, 2022, due primarily to an increase in cash and cash equivalents as well as an increase in loans.
Cash and cash equivalents increased $56.6 million, or 214.9%, to $82.9 million at June 30, 2023 from $26.3 million at December 31, 2022 primarily due to cash received from an increase in deposits as well as an increase in Federal Home Loan Bank advances as we have increased our levels of liquidity in response to recent market events.
Net loans increased $17.0 million, or 2.7%, to $653.9 million at June 30, 2023 from $636.9 million at December 31, 2022. Non-owner-occupied real estate loans increased $6.6 million, or 4.8%, to $142.3 million at June 30, 2023 from $135.7 million at December 31, 2022. Construction loans increased $4.9 million, or 13.1%, to $42.0 million at June 30, 2023 from $37.2 million at December 31, 2022. There were no other material changes in any of our loan categories during the six months.
Total investment securities increased $11.3 million, or 15.6%, to $84.1 million at June 30, 2023, from $72.7 million at December 31, 2022, as we continued to invest excess cash in securities in an effort to increase yield.
25
Total deposits increased $73.9 million, or 11.2%, to $731.0 million at June 30, 2023 from $657.2 million at December 31, 2022, reflecting an increase in certificates of deposit. Certificates of deposit increased $109.9 million, or 87.3%, to $235.9 million at June 30, 2023 from $126.0 million at December 31, 2022. This was partially offset by a decrease in non-time deposits of $36.1 million, or 6.8%, as we believe customers increased deposits in higher-yielding accounts during the current interest rate environment. The certificates of deposits increase included brokered deposits totaling $81.6 million. Brokered deposits have an average life of 2.7 years and an average interest rate of 4.90%. The loan-to-deposit ratio at June 30, 2023 was 90.7%, as compared to 98.3% at December 31, 2022.
We had $20.0 million of FHLB advance and no other borrowings at June 30, 2023, compared to $10.0 million of Federal Home Loan Bank advances at December 31, 2022. We increased borrowings during the first quarter of 2023 to increase our liquidity position in response to recent market events, including the closures of Signature Bank and Silicon Valley Bank. During the second quarter, $15.0 million of FHLB borrowings matured, and an additional $20.0 million of FHLB borrowings was prepaid that was issued in first quarter of 2023.
Stockholders’ equity increased by $836,000, or 0.7% to $117.9 million at June 30, 2023 compared to $117.1 million at December 31, 2022, primarily due to net income of $3.3 million during the first six months of 2023, partially offset by a decrease in additional paid in capital from the repurchase of 192,571 shares of our common stock totaling $2.7 million at an average price per share of $13.78.
Average Balance Sheets
The following tables set forth average balance sheets, average annualized yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are monthly average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
For the Three Months Ended June 30,
AverageOutstandingBalance
Interest
AverageYield/Rate
(Dollars in thousands)
Interest-earning assets:
665,921
5.26
613,396
4.76
34,131
521
6.13
50,758
428
3.38
46,461
279
2.40
Interest-earning deposits and federal funds
93,116
4.95
41,856
0.76
2,167
6.90
1,187
3.95
Total interest-earning assets
846,093
5.15
702,900
4.36
Non-interest-earning assets
52,023
51,662
898,116
754,562
Interest-bearing liabilities:
Interest-bearing checking accounts
95,317
56
0.23
97,618
45
0.19
137,306
825
2.41
150,863
93
88,152
558
2.54
82,478
87
0.42
240,954
2,346
3.91
90,194
259
1.15
Total interest-bearing deposits
561,729
2.70
421,153
0.46
35,495
4.35
14,478
0.78
Total interest-bearing liabilities
597,224
2.80
435,631
0.47
Non-interest-bearing liabilities
182,140
202,296
779,364
637,927
118,752
116,635
Net interest rate spread
2.35
3.89
Net interest income
Net interest margin
3.17
4.06
27
For the Six Months Ended June 30,
658,887
5.21
604,464
33,518
1,025
6.17
49,806
838
3.39
47,549
539
2.26
69,568
4.75
45,026
0.43
72
6.07
3.21
814,182
5.10
698,133
4.28
51,524
52,661
865,706
750,794
93,596
100
0.22
96,949
0.18
138,394
2.17
147,677
92,003
1,110
2.43
84,326
169
0.40
195,260
3,403
3.51
92,318
549
1.19
519,253
2.37
421,270
41,078
4.42
11,665
-16.37
560,331
2.52
432,935
0.02
186,874
198,680
747,205
631,615
118,501
119,179
2.58
4.26
3.37
4.27
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
Three Months Ended June 30,2023 vs. 2022
Six Months Ended June 30,2023 vs. 2022
Increase (Decrease) Due to
Increase
Volume
(Decrease)
451,598
(450,154
1,444
2,599
965
60
(3,291
(3,564
(6,855
240
299
102,122
(101,006
1,373
168
1,541
(8
550,425
(554,728
(4,303
5,229
430
14,770
(14,298
472
(51
Market rate checking accounts
43,521
(43,725
(204
(3,112
4,416
1,304
138
202
340
757
184
941
75,106
(72,786
2,320
2,733
121
2,854
133,535
(130,607
327
4,785
5,112
FHLB advances
45,383
(45,027
356
1,432
416
1,848
178,918
(175,634
3,284
1,759
5,201
6,960
Change in net interest income
371,507
(379,094
(7,587
3,470
(4,771
(1,301
Comparison of Operating Results for the Three Months Ended June 30, 2023 and 2022
General. Net income was $1.6 million for the three months ended June 30, 2023 compared to $1.8 million for the three months ended June 30, 2022. The decrease was caused by an increase in interest expense offset partially by an increase in interest income.
Interest Income. Interest income increased $3.2 million, or 42.0%, to $10.9 million for the three months ended June 30, 2023 from $7.7 million for the three months ended June 30, 2022. The increase was due to increases in all categories of interest-earning assets. Interest income on loans increased $1.4 million, or 19.8%, to $8.7 million for the three months ended June 30, 2023 from $7.3 million for the three months ended June 30, 2022. Our average balance of loans increased by $52.5 million, or 8.6%, to $665.9 million for the three months ended June 30, 2023 from $613.4 million for the three months ended June 30, 2022. The average balance of loans increased due to steady loan demand. The average yield on loans increased 50 basis points to 5.26% for the current quarter, as compared to 4.76% for the prior year period, due to the continued changes in the interest rate environment.
Interest income on interest-earning deposits and federal funds increased $1.1 million to $1.2 million for the three months ended June 30, 2023 from $79,000 for the three months ended June 30, 2022. The average balance of interest-earning deposits and federal funds increased $51.3 million to $93.1 million for the three months ended June 30, 2023 compared to $41.9 million for the three months ended June 30, 2022, as we held excess cash to increase liquidity, as described above. In addition, the yields we received on these funds increased to 4.95% from 0.76% due to the continued changes in the interest rate environment.
Interest income on securities, excluding FHLB stock, increased $670,000 to $949,000 for the three months ended June 30, 2023 from $279,000 for the three months ended June 30, 2022. The average balance of held-to-maturity securities was $34.1 million for the three months ended June 30, 2023 compared to zero for the three months ended June 30, 2022, as we began to classify some new purchases as held-to-maturity.
Interest Expense. Interest expense increased $3.7 million to $4.2 million for the three months ended June 30, 2023, compared to $512,000 for the three months ended June 30, 2022, due to increases in the average balances of interest-bearing liabilities as well as the rates paid on such liabilities.
We recognized increases in all categories of interest-bearing liabilities. Interest expense on deposits increased to $3.8 million for the three months ended June 30, 2023 from $484,000 for the three months ended June 30, 2022. The largest increase was in interest expense on certificates of deposit, which increased $2.1 million to $2.3 million for the three months ended June 30, 2023. The average rate we paid on certificates of deposit increased 276 basis points to 3.91% for the three months ended June 30, 2023 from 1.15% for the three months ended June 30, 2022, due to the continued changes in the interest rate environment. In addition, the average balance of certificates of deposit increased $150.8 million, to $241.0 million for the three months ended June 30, 2023 from $90.2 million for the three months ended June 30, 2022, as we believe customers increased deposits in higher-yielding accounts during the current interest rate environment in addition to the brokered deposits we took out during the first quarter to enhance liquidity. We also experienced increases in interest expense on money market accounts $732,000 to $825,000 for the quarter ended June 30, 2023 and savings accounts $471,000 to $558,000 for the quarter ended June 30, 2023, due to increases in the rates we paid on these accounts of 216 basis points and 212 basis points, respectively.
Interest expense on borrowings increased to $385,000 for the three months ended June 30, 2023 from $28,000 for the three months ended June 30, 2022. We increased borrowings during the first quarter of 2023 to increase our liquidity position in response to recent market events, including the closures of Signature Bank and Silicon Valley Bank.
Net Interest Income. Net interest income decreased $448,000, or 6.3%, to $6.7 million for the three months ended June 30, 2023 compared to $7.1 million for the three months ended June 30, 2022. Our net interest rate spread decreased to 2.35% for the three months ended June 30, 2023 from 3.89% for the three months ended June 30, 2022, and our net interest margin decreased to 3.17% for the three months ended June 30, 2023 from 4.06% for the three months ended June 30, 2022 as the rates we paid on interest-bearing liabilities increased faster than the yields we earned on our interest-earning assets, and as we paid off FHLB advances and recognized $1.0 million in accretion from fair value adjustments during the quarter ended March 31, 2022. Our average net interest-earning assets increased to $248.9 million for the three months ended June 30, 2023 compared to $267.6 million for the three months ended June 30, 2022.
Provision for Credit Losses. The provisions for credit losses consists of provisions for credit losses for loans and unfunded loan commitments, as well as held-to-maturity securities.
Provisions for credit losses for loans are charged to operations to establish an allowance for credit losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for credit losses for loans, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.
Provisions for credit losses for unfunded commitments are charged to operations to establish an allowance for credit losses for contractual obligations to extend credit. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic factors.
Provisions for credit losses for held-to-maturity securities are also charged to operations to establish an allowance on a collective basis by major security type. The estimate of expected credit losses for held-to-maturity securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. See “—Summary of Significant Accounting Policies” for additional information.
After an evaluation of these factors, we recorded no provision for credit losses for the three months ended June 30, 2023, compared to a provision of $217,000 for the three months ended June 30, 2022. Our allowance for credit losses was $9.3 million at June 30, 2023 and at December 31, 2022 and $9.0 million at June 30, 2022. The allowance for credit losses to total loans was 1.40% at June 30, 2023 compared to 1.46% at December 31, 2022 and June 30, 2022. This reduces the overall allowance for credit loss to total loans percentage. The allowance for credit losses to non-performing loans was 150.0% at June 30, 2023 compared to 138.8% at December 31, 2022 and 128.4% at June 30, 2022. Net charge-offs were $73,000 for the three months ended June 30, 2023, compared to net loan recoveries of $62,000 for the year ended December 31, 2022.
To the best of our knowledge, we have recorded all credit losses that are both probable and reasonable to estimate at June 30, 2023. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for credit losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for credit losses, and as a result of such reviews, we may have to adjust our allowance for credit losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for credit losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.
Non-interest Income. Non-interest income increased $30,000, or 4.6%, to $678,000 for the three months ended June 30, 2023 from $648,000. There were no material changes in any categories of non-interest income.
Non-interest Expenses. Non-interest expenses information is as follows.
Change
Percent
0.4
17.9
(36
(30.8
)%
(10
(2.0
(1.6
Total non-interest expenses
47
0.9
Occupancy expense increased due mainly to the Atlanta office expansion.
Income Tax Expense. We recorded income tax expense of $497,000 for the three months ended June 30, 2023 compared to $552,000 for the three months ended June 30, 2022. The effective tax rate was 23.8% and 23.6% for the respective periods.
Comparison of Operating Results for the Six Months Ended June 30, 2023 and 2022
General. Net income was $3.3 million for the six months ended June 30, 2023 compared to $3.6 million for the six months ended June 30, 2022. The decrease was caused by an increase in interest expense offset by an increase in interest income and a decrease in noninterest expenses.
Interest Income. Interest income increased $5.7 million, or 37.9%, to $20.6 million for the six months ended June 30, 2023 from $14.9 million for the six months ended June 30, 2022. The increase was due to increases in all categories of interest-earning assets. Interest income on loans increased $2.7 million, or 19.2%, to $17.0 million for the six months ended June 30, 2023 from $14.3 million for the six months ended June 30, 2022. Our average balance of loans increased by $54.4 million, or 9.0%, to $658.9 million for the six months ended June 30, 2023 from $604.5 million for the six months ended June 30, 2022. The average balance of loans increased due to steady loan demand. The average yield on loans increased 45 basis points to 5.21% for the current quarter, as compared to 4.76% for the prior year period, due to the continued changes in the interest rate environment.
Interest income on interest-earning deposits and federal funds increased $1.5 million to $1.6 million for the six months ended June 30, 2023 from $97,000 for the six months ended June 30, 2022. The average balance of interest-earning deposits and federal funds increased $24.5 million to $69.6 million for the six months ended June 30, 2023 compared to $45.0 million for the six months ended June 30, 2022, as we held excess cash to increase liquidity, as described above. In addition, the yields we received on these funds increased to 4.75% from 0.43% due to the continued changes in the interest rate environment.
Interest income on securities, excluding FHLB stock, increased $1.3 million to $1.9 million for the six months ended June 30, 2023 from $539,000 for the six months ended June 30, 2022. The average balance of held-to-maturity securities was $33.5 million for the six months ended June 30, 2023 compared to zero for the six months ended June 30, 2022, as we began to purchase held-to-maturity securities.
Interest Expense. Interest expense increased to $7.0 million for the six months ended June 30, 2023, compared to $40,000 for the six months ended June 30, 2022, due to our repaying acquired FHLB borrowings, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances in the previous period and increases in interest rate environment with respect to the current period.
We recognized increases in all categories of interest-bearing liabilities. Interest expense on deposits increased to $6.1 million for the six months ended June 30, 2023 from $987,000 for the six months ended June 30, 2022. The largest increase was in interest expense on certificates of deposit, which increased $2.9 million to $3.4 million for the six months ended June 30, 2023. The average rate we paid on certificates of deposit increased 232 basis points to 3.51% for the six months ended June 30, 2023 from 1.19% for the six months ended June 30, 2022, due to the continued changes in the interest rate environment. In addition, the average balance of certificates of deposit increased $102.9 million to $195.3 million for the six months ended June 30, 2023 from $92.3 million for the six months ended June 30, 2022, as we believe customers increased deposits in higher-yielding accounts during the current interest rate environment in addition to the brokered deposits we took out during the first quarter to enhance liquidity. We also experienced increases in interest expense on money market accounts, $1.3 million to $1.5 million for the six months ended June 30, 2023 and savings accounts, $941,000 to $1.1 million for the six months ended June 30, 2023, due to increases in the rates we paid on these accounts of 203 basis points and 192 basis points, respectively.
Interest expense on borrowings increased to $901,000 for the six months ended June 30, 2023 from negative $947,000 for the six months ended June 30, 2022, due to our repaying acquired FHLB borrowings, and recognizing $1.0 million in accretion from the fair value adjustments on acquired advances in the previous period. We also increased borrowings during the first quarter of 2023 to increase our liquidity position in response to recent market events, including the closures of Signature Bank and Silicon Valley Bank.
Net Interest Income. Net interest income decreased $1.3 million, or 8.7%, to $13.6 million for the six months ended June 30, 2023 compared to $14.9 million for the six months ended June 30, 2022. Our net interest rate spread decreased to 2.58% for the six months ended June 30, 2023 from 4.26% for the six months ended June 30, 2022, and our net interest margin decreased to 3.37% for the six months ended June 30, 2023 from 4.27% for the six months ended June 30, 2022 as the rates we paid on interest-bearing liabilities increased faster than the yields we earned on our interest-earning assets, and as we paid off FHLB advances and recognized $1.0 million in accretion from fair value adjustments during the first quarter of 2022. Our average net interest-earning assets decreased to $253.9 million for the six months ended June 30, 2023 compared to $265.2 million for the six months ended June 30, 2022.
After an evaluation of these factors, we recorded a provision for credit losses of $7,000 for the six months ended June 30, 2023, compared to a provision of $467,000 for the six months ended June 30, 2022. Our allowance for credit losses was $9.3 million at June 30, 2023 and December 31, 2022 and $9.0 million at June 30, 2022. The allowance for credit losses to total loans was 1.40% at June 30, 2023 compared to 1.46% at December 31, 2022 and June 30, 2022. This reduces the overall allowance for credit loss to total loans percentage. The allowance for credit losses to non-performing loans was 150.0% at June 30, 2023 compared to 138.8% at
32
December 31, 2022 and 128.4% at June 30, 2022. Net charge-offs were $55,000 for the six months ended June 30, 2023, compared to net loan recoveries of $62,000 for the year ended December 31, 2022.
Non-interest Income. Non-interest income decreased $13,000 and was $1.2 million for each of the six months ended June 30, 2023 and 2022.
Six Months EndedJune 30,
0.1
159
14.1
(19
(9.6
(1.1
(647
(100.0
(0.4
(517
(4.7
Income Tax Expense. We recorded income tax expense of $1.0 million for the six months ended June 30, 2023 compared to $1.1 million for the six months ended June 30, 2022. The effective tax rate was 23.6% and 23.5% for the respective periods.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:
33
By following these strategies, we believe that we are better positioned to react to increases in market interest rates. In addition, we originate adjustable-rate, one-to-four-family residential real estate loans and home equity loans and lines of credit, which are originated with adjustable interest rates.
We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The table below sets forth, as of June 30, 2023, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.
Change in Interest Rates (basis points) (1)
Net Interest IncomeYear 1 Forecast
Year 1 Changefrom Level
+400
30,973
1.41
+200
30,806
0.87
Level
30,541
-200
29,257
(4.20
-400
26,225
(14.13
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that at June 30, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 0.87% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 4.20% decrease in net interest income. At June 30, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 2.10% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 9.28% decrease in net interest income.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At June 30, 2023, we had a $233.1 million line of credit with the Federal Home Loan Bank of Atlanta, with advances of $20.0 million outstanding and a $12.5 million letter of credit outstanding, and we had a $5.0 million unsecured federal funds line of credit, a $7.5 million unsecured federal funds line of credit, and a $20.0 million unsecured federal funds line of credit. We also have a line of $73.9 million with the Federal Reserve Bank of Atlanta Discount Window secured by $109.3 million in loans. No amount was outstanding on the unsecured lines of credit or the Discount Window at June 30, 2023.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $4.3 million for the six months ended June 30, 2023, compared to $5.9 million for the six months ended June 30, 2022. Net cash used in investing activities was $28.9 million for the six months ended June 30, 2023, compared to $40.8 million for the six months ended June 30, 2022. Net cash used in investing activities typically consists primarily of disbursements for loan originations and purchases of investment securities. Net cash provided by financing activities, which consists primarily of activity in deposit accounts and proceeds/repayments of FHLB advances, and a stock repurchase program, was $81.2 million for the six months ended June 30, 2023 which included repaying $55.0 million of FHLB borrowings, borrowing $65.0 million in FHLB advances and repurchasing stock of $2.7 million, compared to net cash used in financing activities of $21.4 million for the six months ended June 30, 2022, which included repaying $103.0 million of FHLB borrowings, borrowing $75.0 million in FHLB advances and repurchasing stock of $4.8 million.
We are committed to maintaining a strong liquidity position. In the first quarter, in order to further enhance liquidity, we issued $85.6 million of brokered deposits and borrowed $45.0 million in advances from the FHLB. During the second quarter, $4.0 million of brokered deposits matured, $15.0 million of FHLB borrowings matured, and an additional $20.0 million of FHLB borrowings was prepaid that was issued in first quarter of 2023. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
At June 30, 2023, we exceeded all of our regulatory capital requirements and the Bank is categorized as “well capitalized.” Management is not aware of any conditions or events since the most recent notification that would change our category. The Bank’s actual capital amounts and ratios for June 30, 2023 and December 31, 2022 are presented in the table below (in thousands).
For Capital
To Be Well Capitalized
Adequacy
Under Prompt Corrective
Actual
Purposes
Action Provisions
Ratio
As of June 30, 2023:
Common Equity Tier 1 (to Risk Weighted Assets)
91,153
11.96
34,301
4.50
49,547
Total Capital (to Risk Weighted Assets)
100,685
13.21
60,980
8.00
76,225
10.00
Tier I Capital (to Risk Weighted Assets)
45,735
6.00
Tier I Capital (to Average Assets)
10.28
35,471
4.00
44,339
5.00
As of December 31, 2022:
87,397
11.86
33,170
47,913
96,612
13.11
58,970
73,712
44,227
10.97
31,865
39,832
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At June 30, 2023, we had outstanding commitments to originate loans of $67.3 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from June 30, 2023 totaled $76.7 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in Part 1, Item 2 of this quarterly report under “Management of Market Risk.”
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2023. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended June 30, 2023, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At June 30, 2023, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.
Item 1A. Risk Factors
Not applicable for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table sets forth information in connection with repurchases of shares of the Company’s common stock during the three months ended June 30, 2023:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs (1)
April 1, 2023 through April 30, 2023
28,513
14.86
215,086
May 1, 2023 through May 31, 2023
95,296
13.19
119,790
June 1, 2023 through June 30, 2023
9,047
12.03
110,743
132,856
13.47
(1) The Board of Directors approved a stock repurchase program on October 31, 2022, which authorized the repurchase of up to 331,997 shares (approximately 5.0% of the then-outstanding shares). The total number of shares purchased as part of the publicly announced plan totaled 221,254 as of June 30, 2023. There is no expiration date for the stock repurchase plan.
Item 6. Exhibits
Exhibit
Number
Description
3.1
Charter of Affinity Bancshares, Inc. (1)
3.2
Bylaws of Affinity Bancshares, Inc. (2)
3.3
Amendment to Bylaws of Affinity Bancshares, Inc. (3)
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0
The following materials for the quarter ended June 30, 2023, formatted in inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive (Loss) Income, (iv) Statements of Changes in Stockholders’ Equity, (v) Statements of Cash Flows, and (vi) Notes to Financial Statements
104.0
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
(1) Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-215041).
(2) Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-215041).
(3) Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 31, 2017 (Commission File No. 001-38074).
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
August 11, 2023
/s/ Edward J. Cooney
Edward J. Cooney
President and Chief Executive Officer
/s/ Brandi Pajot
Brandi Pajot
Senior Vice President and Chief Financial Officer