I’m always interested in learning more about small regional (or even local) banks as I believe that small, very local banks should also be able to keep their credit risks below average. In this article, I will take a closer look at Affinity Bancshares (AFBI), a small Georgian bank with one main office, an additional branch and a commercial loan origination office. Affinity operates a virtual bank, FitnessBank, which it uses to fund a substantial portion of its loan portfolio.
Robust EPS, but share price looks a bit ahead of itself
As for the bank’s performance in the third quarter, Affinity Bancshares performed quite well despite the shrinking balance sheet. Total interest income decreased by approximately $1M compared to the third quarter of 2020, but as total interest expense also decreased by $0.65M, net interest income decreased by ‘barely less than $0.4M to $6.86M. The bank also recorded total net non-interest expense of approximately $4.25 million, which is in line with the third quarter of the prior year.
That means the bank’s income before tax and loan loss provisions was about $2.6 million in the third quarter. Affinity Bancshares also recorded a provision of $225,000 which reduced pre-tax profit to $2.38 million, leading to net profit of $1.8 million or $0.26 per share. Total net income for the first nine months of the year was just under $6.3 million, representing EPS of $0.90.
The decline in net interest income compared to the third quarter of last year is mainly due to the reduced size of Affinity’s balance sheet. In 2020, it secured a $100 million Paycheck Protection Program liquidity facility and the balance of that facility was repaid in the first quarter of 2021. The immediate consequence is obviously to see the balance sheet shrink while net interest expense also decreases. Based on the current situation, investors can probably expect a “normalized” EPS of around $1/share, although a 0.5% margin expansion on the total loan portfolio would give a very strong boost to these results as I estimate it would boost EPS by about 30 cents per share.
Zoom on the loan book
So let’s take a closer look at the current balance sheet. We see that the bank has a total asset base of just under $790 million. Approximately $131 million is held in cash and cash equivalents, representing a very healthy ratio of over 15% of total assets. We see that the bank held approximately $44 million in investment securities and, more importantly, its total loan portfolio stood at just over $563 million at the end of September.
So let’s see the details of the loan book. We see that the total amount of PPP loans has decreased by 70%, which is a natural evolution because these loans will eventually disappear.
We also see the bank increasing its exposure to commercial real estate while also making more commercial and industrial loans. Additionally, it increased total exposure to consumer installment loans (think auto loans) while exposure to residential mortgages decreased. So, in a quest for yield, it seems Affinity has been looking for higher yielding loans. In addition, total provisions for loan losses amounted to $7.6 million, or approximately 1.35% of the loan portfolio.
These provisions are necessary because documents filed with the SEC show that approximately $3.8 million in loans are past due, while more than $6 million in loans have been classified as non-accrued. Surprisingly, the residential mortgage category is the worst, as more than 2% of the loan portfolio is behind with mortgage payments. Also, almost half of the total amount of unaccumulated loans actually comes from the residential mortgage portfolio, so perhaps Affinity should keep an eye on the residential mortgage portfolio.
That doesn’t mean I think Affinity should be reluctant to make more residential mortgages, but it will have to keep an eye on its level of risk acceptance. Unfortunately, the bank does not provide a detailed breakdown of the LTV ratio of the real estate portfolios (both for the CRE segments and for residential real estate). I like home secured loans because banks usually have a decent margin of safety because even if a loan goes bad the bank can just seize the property as collateral and monetize the assets. It’s not an ideal scenario, but just because $3 million in residential mortgages doesn’t accumulate, the bank will lose that amount on the loans because they will most likely be able to recover a substantial portion, otherwise the totality, of the remaining capital quantity.
Affinity Bancshares raised $37 million by issuing new shares at $10.00 per share about a year ago. Since that increase, the stock price has risen more than 50%, but I’m not sure the bank’s results are good enough to support the current valuation. I’ll keep an eye on the bank, but for now I see no reason to go long at the current stock price above $15 (although the bank is trading at a small premium to its book value tangible). I think there are better opportunities in the regional/local banking segment.