Executive Summary / Key Takeaways

• Affinity Bancshares operates as a community bank in Georgia with a strategic focus on specialized dental practice and indirect auto lending across the Southeast, providing a niche growth avenue beyond its core geographic footprint.
• Recent financial performance in Q1 2025 shows improved profitability driven by strong net interest income growth, benefiting from loan portfolio expansion and yield improvement outpacing deposit cost increases.
• The bank maintains a solid liquidity position supported by deposit growth and access to borrowing facilities, exceeding regulatory capital requirements and classified as well-capitalized.
• Key challenges include managing interest rate risk in a dynamic environment, maintaining asset quality, and competing against larger, more technologically advanced institutions that benefit from greater scale and investment in digital innovation.
• Investors should monitor the bank's ability to sustain loan growth and manage funding costs, the performance of its specialized lending portfolios, and its strategic response to competitive pressures, particularly regarding technological adoption.

Setting the Scene: A Community Bank with a Specialized Edge

Affinity Bancshares, Inc. ($AFBI) stands as a bank holding company rooted in the community banking tradition of Georgia, primarily serving Newton, Cobb, and Fulton Counties and their surrounding areas through its subsidiary, Affinity Bank, National Association. The company's history traces back to a mutual-to-stock conversion completed in 2020, a foundational event that shaped its current corporate structure and capital base, enabling subsequent growth initiatives.

While deeply embedded in its local Georgia markets, offering a customary suite of banking services from deposit accounts to various loan products, Affinity Bank has strategically expanded its reach through specialized lending. A notable differentiator is its focus on originating dental practice loans and indirect automobile loans. These activities extend the bank's operational footprint throughout the Southeastern United States, providing access to specific professional and consumer markets that complement its traditional community banking activities. This diversification in lending is not merely about growth; it's also a strategic lever employed to manage interest rate risk by incorporating loans with typically shorter maturities or balloon payments into the portfolio.

The banking industry landscape is intensely competitive, with institutions ranging from global giants like JPMorgan Chase & Co. (JPM) to regional players like Citizens Financial Group, Inc. (CFG) and specialized lenders such as Synchrony Financial (SYF) and Discover Financial Services (DFS). Affinity Bancshares competes directly with these entities for deposits and loans, facing inherent scale disadvantages against larger rivals that can leverage vast resources and extensive branch networks. While Affinity's community focus and relationship-based banking offer a distinct value proposition, particularly in its core geographic markets and niche lending segments, larger competitors often benefit from lower operating costs per unit and greater efficiency.

In terms of technology, the competitive analysis highlights a significant disparity. While larger banks are investing heavily in digital transformation and artificial intelligence (AI) to enhance efficiency, customer experience, and risk management—leading to faster processing speeds and lower operational costs—information does not detail specific, differentiated technological advantages for Affinity Bancshares. The lack of significant investment in advanced technologies like AI, which competitors are using for faster loan approvals and reduced customer care costs, represents a potential vulnerability for Affinity, risking slower processing times and higher operational costs relative to more technologically advanced rivals. This technological gap could impact Affinity's ability to compete effectively on efficiency and innovation in the long term, potentially eroding market share in digitally-driven segments.

Affinity's overarching strategy appears centered on leveraging its community ties while pursuing targeted growth in specialized lending, all while actively managing its balance sheet to mitigate interest rate risk. The success of this strategy hinges on effective execution in loan origination, deposit gathering, and prudent risk management in the face of evolving market dynamics and competitive pressures.

Recent Performance: Net Interest Income Fuels Profit Growth

Affinity Bancshares delivered a notable improvement in net income for the first quarter of 2025, reporting $1.83 million compared to $1.34 million for the same period in 2024. This 36.8% increase was primarily driven by robust growth in net interest income, which rose by $588,000, or 8.7%, to $7.34 million for the three months ended March 31, 2025, up from $6.75 million in the prior year period.

The expansion in net interest income reflects the bank's ability to increase earnings on its interest-earning assets at a faster pace than the rise in its funding costs. Interest income saw a healthy increase of $884,000, or 7.9%, reaching $12.10 million in Q1 2025. This was largely attributable to the loan portfolio, where interest income grew by $1.10 million, or 12.1%, to $10.60 million. The growth in loan income stemmed from two key factors: a 7.4% increase in the average balance of loans, which rose by $49.20 million to $713.90 million, reflecting steady loan demand, and a 30-basis point improvement in the average yield on loans, climbing to 6.05%. This yield expansion was supported by new loan originations during the quarter, which totaled approximately $36.50 million with a weighted average rate of 7.32%. While interest income from interest-earning deposits and federal funds decreased due to lower yields despite higher average balances, the strength in the loan portfolio more than compensated.

Interest expense increased by $296,000 to $4.80 million, driven by higher average balances and rates paid on interest-bearing liabilities. The most significant contributor was interest expense on certificates of deposit, which increased by $159,000 to $2.40 million. This rise occurred despite a slight decrease in the average rate paid on CDs (down 3 basis points to 4.15%), primarily due to a substantial $19.10 million increase in the average balance of certificates of deposit, reaching $238.90 million. Interest expense on borrowings also increased modestly due to a higher average balance.

The net result was an improvement in key profitability metrics. The net interest rate spread increased to 2.65% in Q1 2025 from 2.49% in Q1 2024, and the net interest margin expanded to 3.52% from 3.38% over the same period.

Offsetting some of the gains from net interest income was a decrease in non-interest income, which fell by $103,000, or 17.6%, to $481,000, primarily due to a decline in merchant services volume. Non-interest expenses saw a modest decrease of $211,000, or 3.8%, totaling $5.36 million. This was influenced by an increase in salaries and employee benefits, specifically due to additional stock compensation related to an ESOP expense tied to a special dividend, partially offset by a decrease in other expenses, including professional fees.

The bank recorded a provision for credit losses of $50,000 in Q1 2025, compared to no provision in Q1 2024. The allowance for credit losses stood at $8.50 million at March 31, 2025, representing 1.17% of total loans, a slight decrease from 1.19% at December 31, 2024. The allowance coverage of non-performing loans improved significantly to 190.30% from 177.80%. Net loan charge-offs were lower in Q1 2025 at $89,000 compared to $326,000 in Q1 2024. Management evaluates the allowance based on various factors, including historical experience, economic conditions, and loan quality trends, noting that future changes in these factors could necessitate adjustments.

Financial Condition and Risk Management

Affinity Bancshares' balance sheet expanded in the first quarter of 2025, with total assets increasing by $45.70 million, or 5.3%, to $912.50 million from $866.80 million at the end of 2024. This growth was primarily driven by increases in loans and cash. Gross loans grew by $6.90 million, or 1.0%, reaching $721.00 million. This growth was seen across several categories, including construction loans (up $4.00 million, 5.9%), commercial and industrial loans (up $0.86 million, 0.6%), owner-occupied commercial real estate loans (up $0.63 million, 0.4%), and consumer installment loans (up $3.20 million, 2.7%). Residential mortgage loans experienced a decrease of $1.80 million, or 3.4%.

Deposit growth was a significant factor in funding asset expansion, with total deposits increasing by $56.80 million, or 8.4%, to $730.30 million. This increase was broad-based, with demand deposits rising by $12.50 million (5.5%) and money market accounts increasing by $15.70 million (10.6%), partly attributed to cyclical business customer activity. Certificates of deposit also saw substantial growth, contributing to the overall deposit increase. Brokered CDs constituted a notable portion of the CD portfolio, totaling $106.80 million with a weighted average rate of 4.32% and average maturity of 21 months at March 31, 2025. The loan-to-deposit ratio edged up slightly to 98.7% from 97.8%.

Borrowings remained a component of the funding structure. FHLB advances totaled $54.00 million at quarter-end, consistent with the prior year-end balance. Notably, $4.80 million outstanding under the Federal Reserve Bank Term Funding Program at December 31, 2024, was paid in full during the first quarter of 2025. The bank maintains access to FHLB lines of credit ($216.70 million available) and Federal Reserve Bank lines ($60.10 million available) to support liquidity needs.

Stockholders' equity decreased by $6.80 million, or 5.3%, to $122.30 million. This was primarily influenced by an $8.80 million special dividend payment ($1.50 per share) and $1.20 million in common stock repurchases during the quarter, partially offset by net income, ESOP/stock compensation expense, and a positive change in unrealized gains on available-for-sale securities. Despite the decrease, the bank's capital position remains strong, with the bank exceeding all regulatory capital requirements and classified as well-capitalized at March 31, 2025. For instance, its Common Equity Tier 1 to Risk Weighted Assets ratio was 11.47%, well above the 6.50% requirement for a well-capitalized institution.

Managing market risk, particularly interest rate risk, is a key focus. The bank utilizes modeling to assess its sensitivity to interest rate changes. As of March 31, 2025, the model indicated that an instantaneous parallel 200-basis point increase in interest rates could result in a 1.24% decrease in net interest income over the next 12 months, while a 200-basis point decrease could lead to a 3.38% decrease. These figures suggest a degree of asset sensitivity, though the bank has implemented strategies like diversifying its loan portfolio towards shorter-term assets and managing funding sources to mitigate this risk. The bank does not engage in complex hedging activities.

Credit risk is inherent in lending operations. The bank's loan portfolio is substantially collateralized by real estate, making it susceptible to fluctuations in the real estate market. The bank employs a risk rating system (Special Mention, Substandard, Doubtful, Loss) and performs ongoing credit reviews, particularly for commercial and industrial loans and corporate securities held-to-maturity. While the allowance for credit losses is deemed adequate by management based on current assessments, it remains a key area of potential variability influenced by economic conditions and portfolio performance.

Competitive Landscape and Strategic Outlook

Affinity Bancshares operates in a competitive environment where its community-focused model and specialized lending niches face off against larger, more diversified financial institutions. While precise market share data for all competitors in Affinity's specific operating areas is not readily available, the competitive analysis highlights that major players like JPM, SYF, and DFS operate with significantly larger scale and often demonstrate superior financial efficiency metrics.

Comparing TTM ratios, Affinity's Net Profit Margin of 14.45% stands below that of JPM (22%), SYF (37%), and DFS (23%), though it is higher than CFG (12%). Similarly, while not directly comparable across all institutions due to different business models, the competitive analysis suggests larger players often achieve higher returns on capital employed (ROIC) than can be inferred for Affinity, reflecting their operational scale and potentially greater technological leverage. For instance, the competitive analysis estimates JPM's ROIC at 10-12% and SYF/DFS at 8-12%, significantly higher than an estimated 3-5% for Affinity. This difference implies that larger competitors are more efficient at generating returns from their capital base, partly due to lower operating costs per unit enabled by scale and technology.

Affinity's competitive advantages lie in its established community presence, fostering strong customer relationships and potentially leading to more stable, lower-cost deposit funding in its core markets. Its regulatory licenses also provide a barrier to entry for new competitors. However, its smaller scale results in higher operating costs per unit compared to national banks. The lack of significant investment in cutting-edge banking technology, particularly AI-driven tools that competitors are using for faster processing and cost reduction, represents a notable disadvantage. While Affinity's relationship-based model offers personalized service, it risks lagging behind competitors in areas like digital customer experience and operational efficiency if it does not enhance its technological capabilities.

The strategic outlook for Affinity Bancshares centers on continuing to grow its loan and deposit portfolios while navigating the current interest rate environment. Management anticipates sufficient funds to meet current lending commitments, supported by existing liquidity sources and expected retention of a substantial portion of maturing time deposits. However, potential non-retention could necessitate raising deposit rates or increasing borrowings, impacting interest expense and net interest margin.

The specialized dental practice and indirect auto lending segments are likely to remain key growth drivers, leveraging expertise in these niches. The performance of these portfolios, particularly asset quality in potentially slowing economic conditions, will be crucial. While specific quantitative guidance figures were not provided in the recent filing, the focus remains on prudent growth and risk management. The ability to maintain asset quality, control funding costs, and potentially invest in technology to enhance efficiency and customer service will be critical factors influencing future performance and competitive positioning.

Conclusion

Affinity Bancshares presents an investment narrative centered on a community banking foundation augmented by strategic expansion into specialized, higher-yielding lending niches. The recent financial results for the first quarter of 2025 demonstrate solid execution, with strong net interest income growth driving improved profitability, benefiting from both loan portfolio expansion and effective management of interest rate dynamics relative to funding costs. The bank maintains a sound financial condition, characterized by healthy deposit growth, ample liquidity, and robust capital levels that exceed regulatory requirements.

However, the competitive landscape, dominated by institutions with significantly greater scale and technological sophistication, poses ongoing challenges. Affinity's ability to sustain its growth trajectory and profitability will depend on its success in managing interest rate and credit risks, particularly within its specialized lending segments, and its strategic response to the technological advancements being adopted by larger rivals. While its community ties and niche focus provide a degree of resilience, investors should closely monitor the bank's operational efficiency, asset quality trends, and any future initiatives to enhance its technological capabilities to remain competitive in an evolving financial services market.