Affinity Bancshares(AFBI) - 2022 Q4 - Annual Report

Part I Business Affinity Bancshares, Inc. operates as a Maryland-based holding company for Affinity Bank, focusing on diversified lending and deposit gathering nationwide - Affinity Bancshares, Inc. operates as the holding company for its wholly-owned subsidiary, Affinity Bank16 Company Financial Snapshot as of December 31, 2022 | Metric | Amount (in millions) | | :--- | :--- | | Total Assets | $791.3 | | Loans | $636.9 | | Deposits | $657.2 | | Stockholders' Equity | $117.1 | Lending Activities Lending activities focus on commercial, residential, and consumer loans, with a significant niche in dental practice financing and growing auto loans - The company has a specialized expertise in lending to the dental industry, with these loans totaling $185.1 million, or 28.6% of the total loan portfolio, as of December 31, 202224 25 Loan Portfolio Composition (December 31, 2022 vs. 2021) | Loan Type | 2022 Amount (in thousands) | 2022 Percent | 2021 Amount (in thousands) | 2021 Percent | | :--- | :--- | :--- | :--- | :--- | | Commercial (secured by real estate - owner occupied) | $162,989 | 25.22% | $158,662 | 27.15% | | Commercial (secured by real estate - non-owner occupied) | $135,720 | 21.00% | $104,042 | 17.81% | | Commercial and industrial | $147,775 | 22.87% | $170,718 | 29.21% | | Construction, land and acquisition & development | $37,158 | 5.75% | $16,317 | 2.79% | | Residential mortgage 1-4 family | $51,324 | 7.94% | $63,065 | 10.79% | | Consumer installment | $111,268 | 17.22% | $71,580 | 12.25% | | Total | $646,234 | 100.00% | $584,384 | 100.00% | - The indirect automobile lending division, Affinity Bank Dealer Select (ABDS), has grown significantly, with $108.5 million in indirect auto loans as of December 31, 202249 Delinquencies and Asset Quality Asset quality improved in 2022, with non-performing assets and classified assets decreasing, indicating a stronger portfolio Non-Performing Assets (December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Total non-accrual loans | $6,720 | $7,011 | | Total real estate owned | $2,901 | $3,538 | | Total non-performing assets | $9,870 | $10,549 | | Total non-performing loans to total loans | 1.04% | 1.42% | | Total non-performing assets to total assets | 1.25% | 1.34% | Classified and Special Mention Assets (December 31, 2022 vs. 2021) | Category | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Substandard assets | $6,667 | $8,398 | | Doubtful assets | $0 | $0 | | Loss assets | $0 | $0 | | Total classified assets | $6,667 | $8,398 | | Special mention assets | $2,739 | $3,054 | Allowance for Loan Losses The allowance for loan losses increased to $9.3 million, improving coverage of non-performing loans despite a slight decrease as a percentage of total loans Allowance for Loan Losses Activity (Years Ended December 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Allowance at beginning of period | $8,559 | $6,361 | | Provision for loan losses | $704 | $1,075 | | Net (charge-offs) recoveries | $62 | $1,123 | | Allowance at end of period | $9,325 | $8,559 | Key Allowance Ratios (at Year-End) | Ratio | 2022 | 2021 | | :--- | :--- | :--- | | Allowance to non-performing loans | 138.75% | 122.08% | | Allowance to total loans outstanding | 1.44% | 1.74% | Sources of Funds Deposits are the primary funding source, growing to $657.2 million, while FHLB borrowings were significantly reduced Deposit Composition (December 31, 2022 vs. 2021) | Account Type | 2022 Amount (in thousands) | 2022 Percent | 2021 Amount (in thousands) | 2021 Percent | | :--- | :--- | :--- | :--- | :--- | | Non-interest-bearing checking | $190,297 | 28.96% | $193,940 | 31.65% | | Interest-bearing checking | $91,167 | 13.87% | $89,384 | 14.59% | | Money market accounts | $148,097 | 22.54% | $145,969 | 23.82% | | Savings accounts | $101,622 | 15.46% | $86,745 | 14.15% | | Certificates of deposit | $125,989 | 19.17% | $96,758 | 15.79% | | Total | $657,172 | 100.00% | $612,796 | 100.00% | - FHLB advances were reduced from $49.0 million at year-end 2021 to $10.0 million at year-end 2022104 Supervision and Regulation The bank and holding company are extensively regulated, with the bank exceeding all capital requirements and considered "well capitalized" - Affinity Bank has exercised the "covered savings association election," which permits a federal savings bank to operate with the same rights and privileges as a national bank128 129 - The bank is subject to minimum capital standards, including a common equity Tier 1 ratio of 4.5%, a Tier 1 ratio of 6.0%, and a total capital ratio of 8.0% It must also maintain a capital conservation buffer of 2.5% to avoid limits on capital distributions132 134 - As of December 31, 2022, Affinity Bank's capital levels exceeded all applicable requirements and it met the criteria for being considered "well capitalized"137 152 Risk Factors This item is not applicable as the company qualifies as a "smaller reporting company" Unresolved Staff Comments The company reported no unresolved staff comments Properties Company properties, including offices and equipment, had a net book value of $4.3 million as of December 31, 2022 - The net book value of office properties was $2.0 million, and furniture, fixtures, and equipment was $2.3 million as of December 31, 2022171 Legal Proceedings The company is involved in routine legal claims but no material adverse proceedings are pending Mine Safety Disclosures This item is not applicable to the company Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with 6.6 million shares outstanding and 372,315 shares repurchased in 2022 - The company's common stock is traded on the Nasdaq Capital Market under the symbol "AFBI" As of March 20, 2023, there were 6,596,910 shares outstanding176 Share Repurchases for the Year Ended December 31, 2022 | Metric | Value | | :--- | :--- | | Total Shares Purchased | 372,315 | | Average Price Paid per Share | $15.32 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased to $7.1 million in 2022 due to higher expenses and lower interest income, despite slight asset growth - Total assets increased by $3.2 million (0.4%) to $791.3 million, primarily due to a $61.1 million (10.6%) increase in net loans184 - Net income decreased by $439,000 (5.8%) to $7.1 million for 2022, compared to $7.6 million in 2021185 - The decrease in interest income on loans was largely due to a $5.5 million reduction in interest and fee income from Paycheck Protection Program (PPP) loans185 Comparison of Financial Condition Total assets marginally increased to $791.3 million, driven by loan growth funded by reduced cash and FHLB borrowings, while equity decreased - Net loans increased by $61.1 million (10.6%), driven by growth in non-owner occupied commercial real estate (+$31.7M), consumer loans (+$39.7M), and construction loans (+$20.8M)195 - Total deposits increased by $44.4 million (7.2%), led by a $29.2 million increase in certificates of deposit197 - Stockholders' equity decreased by $3.9 million (3.2%) due to a $6.3 million accumulated other comprehensive loss and $5.7 million in stock repurchases, offset by $7.1 million in net income199 Comparison of Operating Results Net income decreased to $7.1 million in 2022 due to higher noninterest expenses and lower noninterest income, despite increased net interest income - Interest income on loans decreased by $1.4 million, primarily due to a $5.5 million reduction in PPP loan interest and fees207 - Interest expense on borrowings decreased significantly to a negative $(854,000) from $497,000 in 2021, due to the repayment of acquired FHLB advances which resulted in the recognition of $1.0 million in accretion from fair value adjustments210 Noninterest Expenses (Years Ended December 31) | Category | 2022 (in thousands) | 2021 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Salaries and employee benefits | $12,221 | $10,663 | 14.6% | | Occupancy | $2,523 | $2,935 | (14.1)% | | FHLB prepayment penalties | $647 | $0 | 100.0% | | Write-down of premises and equipment | $0 | $1,176 | (100.0)% | | Other | $4,312 | $3,880 | 11.1% | | Total noninterest expenses | $22,126 | $20,968 | 5.5% | Management of Market Risk Interest rate risk is managed through portfolio diversification and deposit growth, with a 200 bps rate increase projected to decrease net interest income by 2.34% Net Interest Income Sensitivity Analysis (as of December 31, 2022) | Change in Interest Rates (basis points) | Estimated Year 1 Change from Level | | :--- | :--- | | +400 | (5.07)% | | +200 | (2.34)% | | Level | — | | -200 | (3.14)% | | -400 | (11.86)% | Quantitative and Qualitative Disclosures About Market Risk This section refers to market risk disclosures within Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Statements and Supplementary Data This section presents the consolidated financial statements for 2022 and 2021, including auditor's report and detailed notes - The independent auditor, Wipfli LLP, issued an opinion that the financial statements present fairly, in all material respects, the financial position of the Company in conformity with U.S. GAAP242 - The auditor identified the estimate of the allowance for loan losses for loans collectively evaluated for impairment as a critical audit matter due to the significant judgment and estimation uncertainty involved247 248 Consolidated Financial Statements The consolidated financial statements show total assets of $791.3 million and net income of $7.1 million for 2022 Consolidated Balance Sheet Highlights (as of December 31) | Account | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $26,324 | $111,776 | | Loans, net | $636,909 | $575,825 | | Total assets | $791,283 | $788,088 | | Total deposits | $657,172 | $612,796 | | Total liabilities | $674,180 | $667,120 | | Total stockholders' equity | $117,103 | $120,968 | Consolidated Income Statement Highlights (for the Year Ended December 31) | Account | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net interest income | $29,755 | $29,276 | | Provision for loan losses | $704 | $1,075 | | Noninterest income | $2,402 | $2,678 | | Noninterest expenses | $22,126 | $20,968 | | Net income | $7,134 | $7,573 | | Diluted earnings per share | $1.06 | $1.09 | Notes to Consolidated Financial Statements Notes detail accounting policies, loan portfolio analysis, regulatory capital, and the adoption of new accounting standards like CECL - The company adopted ASU 2016-02 (Leases) on January 1, 2022, resulting in the recognition of a right-of-use asset and lease liability of approximately $2.7 million276 - The company adopted ASU 2016-13 (CECL) on January 1, 2023, recording a one-time entry to retained earnings of $437,000, net of tax, primarily for credit losses on unfunded commitments277 Bank Regulatory Capital Ratios (as of December 31, 2022) | Ratio | Actual Ratio | Minimum for Capital Adequacy | Minimum to be Well Capitalized | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 11.86% | 4.50% | 6.50% | | Total Capital | 13.11% | 8.00% | 10.00% | | Tier I Capital | 11.86% | 6.00% | 8.00% | | Tier I Leverage | 10.97% | 4.00% | 5.00% | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report446 - Based on an assessment using the COSO framework, management believes the company's internal control over financial reporting was effective as of December 31, 2022450 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement Executive Compensation Executive compensation information is incorporated by reference from the 2023 Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans, with 484,519 securities issuable under outstanding options as of December 31, 2022 Equity Compensation Plan Information (as of December 31, 2022) | Plan Category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 484,519 | $12.28 | 230,227 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement Part IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the annual report, including corporate documents and required certifications Form 10-K Summary This item is not applicable