ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
Overview
Total assets increased $23.6 million, or 2.8%, to $866.8 million at December 31, 2024 from $843.3 million at December 31, 2023. The increase was due primarily to anincrease in net loans ($54.7 million, or 8.4%), offset by decreases in cash and cash equivalents ($8.6 million, or 17.2%) and investments (available-for-sale, held-to-maturity, and other) ($18.2 million or 20.7%).
Net income decreased $1.0 million, or 15.6%, to $5.4 million for the year ended December 31, 2024, compared to $6.4 million for the year ended December 31, 2023. The decrease was due to increases in deposit costs, noninterest expenses, and the provision for credit loss and a decrease in noninterest income offset by an increase in interest income and a decrease in income tax expense. Interest income increased $5.3 million, or 12.3%, to $48.0 million for the year ended December 31, 2024 from $42.7 million for the year ended December 31, 2023. The increase was due to a $5.9 million increase in interest income on loans, and a $123,000 increase in income on investment securities, offset by a $777,000 decrease in interest income on interest-earning deposits. Interest expense increased $3.3 million, or 21.3%, to $18.8 million for the year ended December 31, 2024 compared to $15.5 million for the year ended December 31, 2023, due to increases in all interest expense categories. Noninterest expenses increased $2.4 million, or 11.5%, to $23.8 million for the year ended December 31, 2024, from $21.3 million for the year ended December 31, 2023. Income tax expense decreased $399,000, or 20.6%, to $1.5 million for the year ended December 31, 2024 compared to $1.9 million for the year ended December 31, 2023.
Summary of Significant Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The following represent our significant accounting policies:
Allowance for Credit Losses. 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 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.
Management believes the allowance for credit losses was appropriate at December 31, 2024 and 2023. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for credit losses. 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 the responsibility of Affinity Bank and any increase or decrease in the allowance is the responsibility of management.
Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future
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events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.
The Company files a consolidated federal and a state income tax return. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
Comparison of Financial Condition at December 31, 2024 and December 31, 2023
Total assets increased $23.6 million, or 2.8%, to $866.8 million at December 31, 2024 from $843.3 million at December 31, 2023. The increase was due primarily to an increase in net loans ($54.7 million, or 8.4%), that was partially offset by decreases in cash and cash equivalents ($8.6 million, or 17.2%) and investments (available-for-sale, held-to-maturity, and other) ($18.2 million or 20.7%).
Cash and cash equivalents decreased $8.6 million, or 17.2% to $41.4 million at December 31, 2024 from $50.0 million at December 31, 2023, due to loan funding at year end.
Gross loans increased $54.2 million, or 8.2%, to $714.1 million at December 31, 2024 from $659.9 million at December 31, 2023.Non-owner occupied commercial real estate loans increased $21.6 million, or 14.9%, to $166.7 million at December 31, 2024 from $145.1 million at December 31, 2023, and consumer loans increased $5.2 million, or 4.6%, to $120.6 million at December 31, 2024 from $115.3 million at December 31, 2023. In addition, construction loans increased $19.9 million, or 41.8% to $67.6 million at December 31, 2024 from $47.7 million at December 31, 2023, as we have seen continued success with our strategic initiative to increase construction lending to continue to diversify our loan portfolio. One-to-four family residential real estate loans increased $492,000, or 0.9%, to $54.1 million at December 31, 2024 from $53.7 million at December 31, 2023. Commercial and industrial loans increased $7.7 million, or 5.5%, to $148.2 million at December 31, 2024 from $140.4 million at December 31, 2023 . We recorded a decrease in owner occupied commercial real estate loans of $768,000, or 0.5% to $156.9 million at December 31, 2024 from $157.7 million at December 31, 2023.
Securities held-to-maturity decreased to$27.3 million at December 31, 2024, from $34.2 million at December 31, 2023, as securities were called throughout the year. Securities available-for-sale decreased $12.1 million to $36.5 million at December 31, 2024 from $48.6 million at December 31, 2023. The decreases in securities available-for-sale and held-to-maturity related to $10.9 million in paydown of securities and sales of $8.8 million in 2024 with no purchases to offset the decreases.
Total deposits decreased $962,000, or 0.1%, to $673.5 million at December 31, 2024 from $674.4 million at December 31, 2023. Certificates of deposit increased $2.5 million, or 1.1%, to $223.4 million at December 31, 2024 from $221.0 million at December 31, 2023, money market accounts increased $10.0 million or 7.4% to $148.8 million at December 31, 2024 from $138.7 million at December 31, 2023, and savings accounts increased $1.3 million , or 1.7% to $76.1 million at December 31, 2024 from $74.8 million at December 31, 2023. The growth in certificates of deposit is attributed to our enhancing liquidity through obtaining brokered deposits and the customer shift towards longer-term instruments as market interest rates have increased. These increases were offset by decreases in non-interest-bearing checking ($3.3 million , or 2.1%), and interest-bearing checking ($11.5 million or 13.5%), accounts. The loan-to-deposit ratio at December 31, 2024 was 106.0%, as compared to 97.8% at December 31, 2023.
We had $54.0 million of Federal Home Loan Bank advances and $4.8 million outstanding under the Bank Term Funding Program at December 31, 2024, compared to $40.0 million of Federal Home Loan Bank advances at December 31, 2023. Borrowings were increased during the year ended December 31, 2024 as we evaluated our borrowing needs to enhance liquidity.
Stockholders’ equity increased $7.6 million or 6.3%, to $129.1 million at December 31, 2024 from $121.5 million at December 31, 2023. We recognized net income of $5.4 million for the year ended December 31, 2024, change in accumulated other comprehensive loss of $620,000 and $1.5 million related to stock compensation and ESOP expenses.
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Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years 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. Loan fees are included in the interest income computations presented below, but such amounts were not material.
For the Year Ended December 31,
(Dollars in thousands)
Interest-earning assets:
Interest-bearing liabilities:
Total liabilities and stockholders' equity $ 872,350 $ 863,253
Net interest rate spread 2.59 % 2.50 %
Net interest margin 3.54 % 3.35 %
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years 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
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allocated proportionately based on the changes due to rate and the changes due to volume. No out-of-period item adjustments have been included in the following table.
Increase (Decrease) Due to Total
Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Investment securities held-to-maturity (78 ) 18 (60 )
Investment securities available-for-sale (116 ) 122 6
Interest-earning deposits and federal funds (802 ) 25 (777 )
Interest-bearing liabilities:
Interest-bearing checking accounts (199 ) 376 177
FHLB advances and other borrowings 972 (30 ) 942
Change in net interest income $ 1,979 $ (11 ) $ 1,968
Comparison of Operating Results for the Years Ended December 31, 2024 and 2023
General. Net income decreased $1.0 million, or 15.6%, to $5.4 million for the year ended December 31, 2024, compared to $6.4 million for the year ended December 31, 2023. Increases in interest expense and noninterest expense and a decrease in noninterest income were offset by increases in interest income.
Interest Income. Interest income increased $5.3 million, or 12.3%, to $48.0 million for the year ended December 31, 2024 from $42.7 million for the year ended December 31, 2023. Our average yield on loans increased 64 basis points to 6.01% for the year ended December 31, 2024 from 5.37% for the year ended December 31, 2023. The increasein interest income on loans and associated yield was a result of increases in volume with new loans being made at higher market rates. Our average balance of loans increased $27.4 million, or 4.2%, to $687.5 million for the year ended December 31, 2024 from $660.0 million for the year ended December 31, 2023, as we continued to acquire talent to assist with our strategic initiatives to both increase and diversify the loan portfolio.
Interest income on securities available for sale and held to maturity decreased $54,000 to $3.8 million for the year ended December 31, 2024 from $3.9 million for the year ended December 31, 2023. Our average balance of securities decreased $2.7 million, or 3.2%, to $80.2 million for the year ended December 31, 2024 from $82.9 million for the year ended December 31, 2023. The average rate earned on securities available for sale and held to maturity increased eight basis points during 2024, to 4.73% from 4.65%.
Interest income on interest-earning deposits and federal funds decreased $777,000 to $2.5 million for the year ended December 31, 2024 from $3.2 million for the year ended December 31, 2023. The average balance of interest-earning deposits decreased $15.9 million, or 24.4%, to $49.4 million for the year ended December 31, 2024 from $65.3 million for the year ended December 31, 2023.
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Interest Expense. Interest expense increased $3.3 million, or 21.3%, to $18.8 million for the year ended December 31, 2024 compared to $15.5 million for the year ended December 31, 2023, due to increases in interest expense on deposits and Federal Home Loan Bank advances and other borrowings.
Interest expense on deposits increased $2.4 million, or 16.8%, to $16.5 million for the year ended December 31, 2024 from $14.1 million for the year ended December 31, 2023. We recorded increases in interest expense on all deposits products, except savings accounts. Interest expense on certificates of deposit increased $1.1 million, or 13.9%, to $9.2 million for the year ended December 31, 2024 from $8.0 million for the year ended December 31, 2023. We also recognized increases in interest expense on money market accounts ($1.2 million, or 34.4%), as increases in market interest rates increased the rates we paid on these types of deposits by 72 basis points to 3.24%.
Interest expense on borrowings increased to $2.4 million for the year ended December 31, 2024 compared to $1.4 million for the year ended December 31, 2023. The average balance of borrowings increased $22.3 million to $55.1 million at December 31, 2024 compared to $32.8 million at December 31, 2023. Borrowing increases related to company's funding needs throughout the year.
Net Interest Income. Net interest income before provision for credit losses increased by $2.0 million, or 7.2%, to $29.2 million for the year ended December 31, 2024 from $27.2 million for the year ended December 31, 2023. Our average interest-earning assets increased by $11.6 million, or 1.4%, to $822.8 million for the year ended December 31, 2024 from $811.3 million for the year ended December 31, 2023, while our net interest rate spread increased by 9 basis points to 2.59% for the year ended December 31, 2024 from 2.50% for the year ended December 31, 2023, reflecting a 57 basis point increase in the average rate earned on interest-earning assets offset by an increase of 48 basis points in the rate paid on interest-bearing liabilities. Our net interest margin was 3.54% for the year ended December 31, 2024 compared to 3.35% for the year ended December 31, 2023.
Provisions for Credit Losses. Provisions for credit losses 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. Management determines the ACL balance using relevant available information from internal and external sources, relating to 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. See “—Summary of Significant Accounting Policies” for additional information.
After an evaluation of these factors, we recorded a provision for credit losses of $438,000 for the year ended December 31, 2024, compared to a recovery for credit losses of $42,000 for the year ended December 31, 2023. Our allowance for credit losses was $8.5 million at December 31, 2024 compared to $8.9 million at December 31, 2023. The allowance for credit losses to total loans was 1.19% at December 31, 2024 compared to 1.35% at December 31, 2023, while the allowance for credit losses to non-performing loans was 177.9% at December 31, 2024 compared to 120.1% at December 31, 2023. We had charge-offs of $741,000 and recoveries of $91,000 during the year ended December 31, 2024. To the best of our knowledge, we have recorded all credit losses that are both probable and reasonable to estimate at December 31, 2024. 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, will periodically review 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.
We adopted a new accounting standard, referred to as Current Expected Credit Loss (“CECL”), effective January 1, 2023. CECL requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. This has changed our prior method of recording allowances for credit losses that are probable.
Noninterest Income. Noninterest income decreased $451,000, or 18.3%, to $2.0 million for the year ended December 31, 2024 from $2.5 million for the year ended December 31, 2023. The decrease resulted primarily from an increase in loss on sale of securities of $385,000 partially offset by gain on sale of other real estate of $135,000.
Noninterest Expenses. Noninterest expenses information is as follows.
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Year EndedDecember 31, Change
(Dollars in thousands)
Noninterest expenses increased $2.4 million, or 11.5%, to $23.8 million for the year ended December 31, 2024, from $21.3 million for the year ended December 31, 2023, due to the recently terminated merger transaction.
Income Tax Expense. We recorded income tax expense of $1.5 million and $1.9 million for the years ended December 31, 2024 and 2023. The decrease in income tax expense was due to decreased income before income taxes in 2024.
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:
•
limiting our reliance on non-core/wholesale funding sources;
•
growing our volume of transaction deposit accounts;
•
increasing our investment securities portfolio, with an average maturity of less than 15 years;
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diversifying our loan portfolio by adding more commercial-related loans, which typically have shorter maturities and/or balloon payments; and
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continuing to price our one- to four-family residential real estate loan products in a way that encourages borrowers to select our adjustable rate loans as opposed to longer-term, fixed-rate loans.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market 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.
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The table below sets forth, as of December 31, 2024, 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. The estimated changes noted below are within Company's policy guidelines.
(Dollars in thousands)
(1)
Assumes an immediate uniform change in interest rates at all maturities.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. 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 and net economic value tables presented assume 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 and NEV tables provide 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 NEV 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. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table.
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. The company utilizes the Sources and Uses of Liquidity Analysis as its primarily liquidity test to assess its ability to meet short-term and long-term funding needs on at least a monthly basis and more often when needed. We calculate our liquidity ratio as the sum of cash, short-term assets (generally securities with a remaining maturity of less than one year) and marketable assets (generally securities with a remaining maturity of greater than one year and are not pledged to liabilities) divided by the sum of net deposits (generally core deposits including time deposits both under and over $250,000), short-term liabilities (generally borrowings with a remaining maturity of one year or less) and volatile liabilities (generally brokered deposits and listing service deposits both under and over $250,000). We seek to maintain a liquidity ratio of 12.0% or greater. At December 31, 2024 and 2023, we were in compliance with these guidelines. 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 December 31, 2024, we had a $40.0 million line of credit with the Federal Home Loan Bank of Atlanta with $54.0 million in borrowings and a $12.5 million letter of credit outstanding which is used to collateralize public deposits. In addition, at December 31, 2024, we had a $32.5 million in unsecured federal funds lines of credit. Nothing was outstanding on these lines of credit at December 31, 2024. We also have a line of $65.1 million with the Federal Reserve Bank of Atlanta Discount Window (the "Discount Window") secured by $84.0 million in loans. No amount was outstanding on the Discount Window line at December 31, 2024. At December 31, 2024, there was $4.8 million outstanding secured by $4.8 million in securities under the Bank Term Funding Program, which expired March 11, 2024.
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 $6.8 million and $7.9 million for the years ended December 31,
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2024 and 2023, respectively. Net cash used in investing activities was $33.3 million and $28.1 million for the years ended December 31, 2024 and 2023, respectively. Net cash used in investing activities typically consists primarily of disbursements for loan originations and purchases of investment securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and paydowns on securities. Net cash provided by financing activities, which consists primarily of activity in deposit accounts and proceeds from or repayments of borrowings, was $17.9 million for the year ended December 31, 2024, compared to net cash provided by financing activities of $44.0 for the year ended December 31, 2023.
We are committed to maintaining a strong liquidity position. 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 December 31, 2024, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at December 31, 2024 and 2023. Management is not aware of any conditions or events since the most recent notification that would change our category.
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 according to loans we make. At December 31, 2024, we had outstanding commitments to originate loans of$91.2 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 December 31, 2024 totaled $123.9 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 Federal Home Loan Bank 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.
Future Accounting Pronouncements
Please refer to Note 1 to the financial statements included as Item 8 in this Annual Report for a description of future accounting pronouncements that may affect our financial condition and results of operations.
Impact of Inflation and Changing Price
The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Subsequent Event
On February 27, 2025, the Company declared the payment of a special cash dividend. The dividend of $1.50 per share will be paid on March 27, 2025 to stockholders of record as of March 13, 2025.
On March 7, 2025, the Company adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to 320,480 shares of its common stock, or approximately 5% of the current outstanding shares.
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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
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ITEM 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2024 and 2023 F-4
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Affinity Bancshares, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Affinity Bancshares, Inc. and subsidiary (the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended and the related notes to the consolidated financial statements (the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Estimate of allowance for credit losses – reserves related to loans collectively evaluated for impairment
As described in Notes 1 and 3 to the financial statements, the Company’s allowance for credit losses (“ACL”) totaled $8,496,000 of which the full amount relates to collectively evaluated loans (general reserve). The Company has identified loan pools with similar risk characteristics and estimated the general reserves for all loan pools using the discounted cash flow method.
The discounted cash flow method utilizes loan-level term information (including maturity date, payment amount, and interest rate) and certain assumptions by management (including default rates, prepayment speeds, and curtailment rates) to estimate the expected future cash flows for the full life of each loan pool. The results of the discounted cash flow calculations are aggregated by pool to produce the net present value of each loan pool. The net present value of each loan pool is used to calculate the ACL reserve based on the book balance of the pool. The reserves are then adjusted for certain qualitative factors related to current conditions in addition to adjustments for reasonable and supportable forecasts for future periods to arrive at general reserves.
F-2
We identified management’s selection of qualitative factor adjustments, including reasonable and supportable forecasts, used in the calculation of general reserves as a critical audit matter. Management’s selection of qualitative factor adjustments, including reasonable and supportable forecasts, which are used to adjust the quantitative historical losses, are highly subjective and could have a significant impact on the ACL. Auditing these complex judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill and knowledge needed.
The primary audit procedures we performed to address this critical audit matter included:
•
We tested the Company’s ACL calculation for computational accuracy.
•
We tested the completeness and accuracy of the information used by management to calculate general reserves, including evaluating the relevance and reliability of such information.
•
We evaluated management’s judgments and assumptions used in the development of the qualitative factor adjustments, including reasonable and supportable forecasts, for reasonableness, and tested the reliability of underlying data on which these factors are based, by comparing information to source documents and external information sources.
•
We analyzed the qualitative factor adjustments in comparison to observable data utilized by management and to historical periods to evaluate the directional consistency in relation to the Company’s loan portfolio and local economy.
•
We evaluated the completeness and accuracy of disclosures made within the financial statements with regards to the ACL.
/s/ Wipfli LLP
We have served as the Company’s auditor since 2004.
Atlanta, Georgia
March 21, 2025
F-3
AFFINITY BANCSHARES, INC.
Consolidated Balance Sheets
(Dollars in thousands except per share amounts)
Assets
Interest-earning deposits in other depository institutions 34,333 44,001
Investment securities available-for-sale 36,502 48,561
Allowance for credit loss on loans (8,496 ) (8,921 )
Other real estate owned — 2,850
Liabilities and Stockholders' Equity
Liabilities:
Federal Home Loan Bank advances and other borrowings 58,815 40,000
Accrued interest payable and other liabilities 5,406 7,299
Stockholders' equity:
Preferred stock (10,000,000 shares authorized, no shares outstanding) — —
Accumulated other comprehensive loss (5,712 ) (6,332 )
Total liabilities and stockholders' equity $ 866,817 $ 843,258
See accompanying notes to consolidated financial statements.
F-4
AFFINITY BANCSHARES, INC.
Consolidated Statements of Income
Year Ended December 31,
(Dollars in thousands except per share amounts)
Interest income:
Interest expense:
FHLB advances and other borrowings 2,351 1,409
Net interest income before provision for credit losses 29,166 27,198
Provision (recovery) for credit losses 438 (42 )
Net interest income after provision (recovery) for credit losses 28,728 27,240
Noninterest income:
Service charges on deposit accounts 1,520 1,620
Loss on sales of investment securities available-for-sale (385 ) —
Net gain on sale of other real estate owned 135 —
Noninterest expenses:
Weighted average common shares outstanding
Basic earnings per share $ 0.85 $ 1.00
Diluted earnings per share $ 0.83 $ 0.98
See accompanying notes to consolidated financial statements.
F-5
AFFINITY BANCSHARES, INC.
Consolidated Statements of Comprehensive Income
Year Ended December 31,
(In thousands)
Other comprehensive income:
Total other comprehensive income 620 323
Total comprehensive income $ 6,061 $ 6,771
See accompanying notes to consolidated financial statements.
F-6
AFFINITY BANCSHARES, INC.
Consolidated Statements of Changes in Stockholders’ Equity
Accumulated
Additional Other
Common Paid In Unearned Retained Comprehensive
Stock Capital ESOP Shares Earnings Income (Loss) Total
(In thousands)
ESOP loan payment and release of ESOP shares — 195 209 — — 404
Stock-based compensation expense — 1,134 — — — 1,134
ESOP loan payment and release of ESOP shares — 87 208 — — 295
Stock-based compensation expense — 1,090 — — — 1,090
Common stock repurchase (2 ) (3,281 ) (3,283 )
See accompanying notes to consolidated financial statements.
F-7
AFFINITY BANCSHARES, INC.
Consolidated Statements of Cash Flows
Year Ended December 31,
(In thousands)
Cash flows from operating activities:
Depreciation, (accretion) and amortization 738 735
Stock-based compensation expense 1,134 1,090
Deferred income tax expense 162 399
Provision (recovery) for credit losses 438 (42 )
Net loss on sale of investment securities available-for-sale 385 —
Net loss (gain) on sale of other real estate owned (135 ) —
Increase in cash surrender value of bank owned life insurance (401 ) (362 )
Write-down on other real estate — 51
Change in:
Accrued interest receivable and other assets 731 (527 )
Accrued interest payable and other liabilities (2,106 ) (215 )
Net cash provided by operating activities 6,791 7,872
Cash flows from investing activities:
Purchases of investment securities held-to-maturity - (7,609 )
Purchases of investment securities available-for-sale - (5,710 )
Purchases of premises and equipment (422 ) (527 )
Proceeds from sale of investment securities available-for-sale 8,813 —
Proceeds from paydowns of investment securities available-for-sale 3,758 3,823
Proceeds from paydowns of investment securities held-to-maturity 7,095 58
Purchases of other investments (741 ) (6,666 )
Proceeds from sales of other investments - 2,314
Proceeds from sales of other real estate owned 2,985 —
Net cash used in investing activities (33,245 ) (28,135 )
Cash flows from financing activities:
Stock repurchase - (3,283 )
Proceeds from federal funds purchased 27 26
Repayment of federal funds purchased (27 ) (51 )
Proceeds from other borrowings 11,838 —
Repayment of other borrowings (7,023 ) —
Net cash provided by financing activities 17,853 43,965
Net change in cash and cash equivalents (8,601 ) 23,702
Cash and cash equivalents at beginning of period 50,026 26,324
Cash and cash equivalents at end of period $ 41,425 $ 50,026
Supplemental disclosures of cash flow information:
See accompanying notes to consolidated financial statements.
F-8
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies
Nature of Operations
Affinity Bancshares, Inc. (the “Company”) is a bank holding company headquartered in Covington, Georgia. The Company has one operating subsidiary, Affinity Bank, National Association (the “Bank”, and formerly named “Affinity Bank”), a national bank, conducting banking activities in Newton County, Georgia and surrounding counties and in Cobb and Fulton County, 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.
Basis of Presentation
The accounting principles followed by the Company and the methods of applying these standards and principles conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ significantly 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 real estate acquired in connection with or in lieu of foreclosure on loans, and valuation allowances associated with deferred tax assets, the recognition of which are based on future taxable income.
Earnings Per Share
Year Ended December 31,
(Dollars in thousands except per share data)
Basic earnings per common share $ 0.85 $ 1.00
Diluted earnings per common share 0.83 0.98
Adopted Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance was originally effective for all entities from March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The Company has been diligent in responding to reference rate reform and adoption has not had a material impact on its financial statements.
F-9
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
Pronouncements Not Effective as of December 31, 2024
ASU 2023-09, “Income Taxes (Topic 740) Improvements to Income Tax Disclosures" The amendments in this update address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This update also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2024 and are to be applied on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact on its disclosures.
FASB ASU 2024-01 Stock Compensation - Scope Application of Profits Interest and Similar Awards
The amendments in this update improve the understandability of paragraph 718-10-15-3 apply to all entities that enter into share-based payments transactions. The amendments in this update are effective for fiscal years beginning after December 15, 2024 and are to be applied on a prospective basis. The Company is currently evaluating the impact on its disclosures.
FASB Accounting Standards Update (ASU) 2024-03, "Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures,
This amendment requires enhanced disaggregation of certain expense categories within the income statement to provide more detailed information about the nature and function of expenses. The objective is to improve the transparency and usefulness of financial statements for users by offering greater insight into the components of operating expenses. The amendments in this update are effective for fiscal years beginning after December 15, 2026. These changes may be applied prospectively or retroactively. Early adoption is permitted and the Company is currently evaluating the impact on its disclosures.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks and interest-earning deposits in other depository institutions.
Investment Securities
The Company classifies its investment securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities for which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value. Unrealized holding gains and losses, net of the related deferred tax effect, on available-for-sale securities are excluded from earnings and are reported in other comprehensive income as a separate component of shareholders’ equity until realized.
Held-to-maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Transfers of securities between categories are recorded at fair value at the date of transfer.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the yield. Realized gains and losses for securities classified as held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Allowance for Credit Losses ("ACL") - 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 from 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.
F-10
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
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.
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. Management classifies the held-to-maturity portfolio into the following major security types: U.S. Treasuries, government agency mortgage-backed, and corporate securities. 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 December 31, 2024, these securities are all rated as investment grade.
Other Investments
The Federal Home Loan Bank (“FHLB”) stock is an investment that does not have a readily determinable fair value and is carried at cost.The Company is required to hold the FHLB stock as a member of the FHLB and transfer of the stock is substantially restricted.
The First National Bankers Bank (“FNBB”) stock is an investment that does not have a readily determinable fair value and is carried at cost.The Company acquired the stock when it borrowed funds at the holding company from FNBB.
Loans, Loan Fees and Interest Income on Loans
Loans are stated at the principal amount outstanding, net of the allowance for credit losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding.
Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that collection of interest is doubtful. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged to interest income on loans. Generally, payments on nonaccrual loans are applied first to principal. Interest income is recorded after principal has been satisfied and as payments are received.
Loan fees, net of certain origination costs, are deferred and amortized over the lives of the respective loans as an adjustment to the yield.
Allowance for Credit Losses - 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 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,
F-11
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
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 discounted cash flow method utilizes loan-level term information (including maturity date, payment amount, and interest rate) and certain assumptions (including default rates, prepayment speeds, and curtailment rates) to estimate the expected future cash flows for the full life of each loan pool.
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 loan modification 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 loan modification 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
F-12
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
expected to be funded over its estimated life. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic forecasts.
Other Real Estate Owned
Other real estate owned includes real estate acquired through foreclosure. Each other real estate property is initially recorded at its fair value less estimated costs to sell and is subsequently carried at fair value less estimated costs to sell. All foreclosed properties are actively marketed for sale. Fair value is principally based on independent appraisals performed by local credentialed appraisers. Any excess of the carrying value of the related loan over the fair value of the real estate at the date of foreclosure is charged against the allowance for credit losses. Properties in other real estate are re-evaluated annually. Any expense incurred in connection with holding such real estate or resulting from any write-downs in value subsequent to foreclosure is included in noninterest expense. When the other real estate property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in earnings for the period. The cost of maintenance and repairs that do not improve or extend the useful life of the respective asset is charged to earnings as incurred, whereas significant renewals and improvements are capitalized. The range of estimated useful lives for premises and equipment are as follows:
Equipment and furniture 3 - 10 years
Buildings 40 years
Automobile 5 years
Leases
The lease liability is initially and subsequently recognized based on the present value of its future lease payments. Variable payments are included in the future lease payments when those variable payments depend on an index or a rate. Increases (decreases) to variable lease payments due to subsequent changes in an index or rate are recorded as variable lease expense (income) in the future period in which they are incurred.
The discount rate used is the implicit rate in the lease contract, if it is readily determinable, or the Company’s incremental borrowing rate. The implicit rates of our leases are not readily determinable and accordingly, the Company uses the incremental borrowing rate based on the information available at the commencement date for all leases. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an
amount equal to the lease payments under similar terms and in a similar economic environment.
The right-of-use ("ROU") asset for operating leases is subsequently measured throughout the lease term at the amount of the remeasured lease liability (i.e., present value of the remaining lease payments), plus unamortized initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received, and any impairment recognized. For operating leases with lease payments that fluctuate over the lease term, the total lease costs are recognized on a straight-line basis over the lease term.
For all underlying classes of assets, the Company has elected to not recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less at lease commencement and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Leases containing termination clauses in which either party may terminate the lease without cause and the notice period is less than 12 months are deemed short-term leases with
F-13
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
lease costs included in short-term lease expense. The Company recognizes short-term lease cost on a straight-line basis over the lease term.
Bank Owned Life Insurance
The Bank has purchased life insurance policies on certain key executives and members of management. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or other amounts due that are probable at settlement.
Intangible Assets
Intangible assets attributable to the value of core deposits are stated at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated lives of the assets. The excess of purchase price over fair value of net assets acquired (goodwill) is not amortized.
The Company evaluates whether goodwill and other intangible assets may be impaired at least annually and whenever events or changes in circumstances indicate it is more likely than not the fair value of the reporting unit or asset is less than its carrying amount.
Income Taxes
The Company uses the liability method of accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Additionally, this method requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realization of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.
The Company currently evaluates income tax positions judged to be uncertain. A loss contingency reserve is accrued if it is probable that the tax position will be challenged, it is probable that the future resolution of the challenge will confirm that a loss has been incurred, and the amount of such loss can be reasonably estimated.
Stock Compensation Plans
Stock compensation awards are measured at the grant date based on the fair value of the awards and are recognized as compensation expense over the service period, which is also the vesting period.
Other Comprehensive Income
Other comprehensive income is shown on the consolidated statements of comprehensive income. Accumulated other comprehensive loss consists of unrealized loss on securities available-for-sale, net of tax, and is shown on the consolidated statements of changes in stockholders’ equity.
Revenue Recognition
F-14
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
The core revenue recognition principle requires the Company to recognize revenue to depict the transfer of services or products to customers in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those services or products recognized as performance obligations are satisfied. The guidance includes a five-step model to apply to revenue recognition, consisting of the following: (1) identify the contract with a customer; (2) identify the performance obligation(s) within the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s) within the contract; and (5) recognize revenue when (or as) the performance obligation(s) are/is satisfied.
The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Since performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying revenue recognition that significantly affects the determination of the amount and timing of revenue from contracts with customers.
The following significant revenue-generating transactions are within the scope of Accounting Standards Codification ("ASC") 606, which are presented in the consolidated statements of income as components of noninterest income:
Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services for which the Company earns a fee, including non-sufficient funds and analysis charges, related to the deposit account. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.
Small Business Administration ("SBA") loan fees: Origination fees on SBA loans are recognized into income up to the amount of the cost of making the loan as is done with other loans. The remainder is deferred and taken into income over the life of the loan. A portion of proceeds from the sale of SBA loans is taken into income while the remainder is deferred over the life of the loan.
ATM fee income: A contract between the Company, as a card-issuing bank, and its customers whereby the Company receives a transaction fee from the merchant’s bank whenever a customer uses a debit or credit card to make a purchase. These fees are earned as the service is provided (i.e., when the customer uses a debit or ATM card).
Other noninterest income: Other noninterest income includes several items, such as wire transfer income, check cashing fees, and safe deposit box rental fees. This income is generally recognized at the time the service is provided and/or the income is earned.
Reclassification
Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on stockholders’ equity or net income.
F-15
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
(2) Investment Securities
Investment securities available-for-sale at December 31, 2024 and 2023 are as follows: (in thousands)
Municipal securities - tax exempt 520 — (87 ) 433
Municipal securities - tax exempt 527 — (85 ) 442
Investment securities held-to-maturity at December 31, 2024 and 2023 are as follows: (in thousands)
U.S. Treasury securities $ — $ — $ — $ — $ —
Government agency mortgage-backed securities 715 — (103 ) 612 —
U.S. Treasury securities $ 999 $ — $ (4 ) $ 995 $ —
Government agency mortgage-backed securities 795 — (76 ) 719 —
The Bank recorded $32,000 of provision for credit losses on held-to-maturity securities on January 1, 2023 upon adoption of ASC 326, and recorded no additional provision for credit losses for the year ended December 31, 2024 and recorded provision for credit loss of $13,000 for held-to-maturity securities for the year ended December 31, 2023.
Investment securities available-for-sale in an unrealized loss position at December 31, 2024 and 2023 are as follows: (in thousands)
F-16
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
Less Than 12 Months 12 Months or More Total
Municipal securities - tax exempt — — 433 (87 ) 433 (87 )
Municipal securities - tax exempt — — 442 (85 ) 442 (85 )
There were 47 available-for-sale securities in an unrealized loss position for 12 months or greater totaling $7.7 million as of December 31, 2024. 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 five are U.S. Treasury bonds, so all of these are direct obligations of the U.S. Government. Twenty-four of the securities are mortgage-backed bonds that have the direct or implied backing of the U.S. Government. Three of the bonds are municipal securities and the remaining eleven 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 December 31, 2024, 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 December 31, 2024 and no allowance for credit loss is required.
F-17
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value of investment securities available-for-sale and held to maturity at December 31, 2024, 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. (in thousands):
Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
There were $8.8 million and $0 sales of investment securities available-for-sale in 2024 and 2023, respectively, with gross losses of $385,000 and no gross gains in 2024.
Available-for-sale securities with a carrying value of approximately $9.6 million and $4.2 million were pledged to secure public deposits at both December 31, 2024 and 2023, respectively.
(3) Loans and Allowance for Credit Losses
Major classifications of loans, by collateral code, at December 31, 2024 and 2023 are summarized as follows: (in thousands)
Commercial (secured by real estate - owner occupied) $ 156,923 $ 157,691
Commercial (secured by real estate - non-owner occupied) 166,662 145,100
Construction, land and acquisition & development 67,622 47,685
Less allowance for credit losses (8,496 ) (8,921 )
The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Atlanta, Georgia Metropolitan Statistical Area. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. The Bank has specialized expertise in lending to dentists and dental practices, with dental practice loans totaling $185.4 million, or 26.0%, and $176.1 million, or 26.7% of our loan portfolio, as of December 31, 2024 and 2023, respectively. 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 $2.3 million on December 31, 2024 and $2.1 million on December 31, 2023 and is included in other assets on the consolidated balance sheet.
The following table presents a rollforward of the allowance for credit losses on loans as follows (in thousands):
F-18
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
Allowance for Credit Loss
Allowance for Credit Loss
Recoveries — — 9 — — 82 — 91
Allowance for Credit Loss
The Bank individually evaluates all loans that are on nonaccrual status or are rated substandard (as described below). A loan is considered individually evaluated 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. Individually evaluated loans are measured based on the present value of expected future 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 individually evaluated loans are applied as a reduction of the outstanding principal balance.
Allowance for credit loss on unfunded commitments for the year ended December 31, 2024 and 2023 is summarized below:
For the Year ended
(in thousands)
Beginning balance $ 531 $ —
Provision upon adoption — 586
Collateral-Dependent Loans
The Bank classifies 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 year ended December 31, 2024, and we had $2.0 million and $1.4 million of collateral-dependent loans without an allowance and no collateral-dependent loans with an allowance at December 31, 2024 and December 31, 2023, respectively.
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 December 31, 2024 and 2023 by class of loans: (in thousands)
F-19
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
Construction, land and acquisition & development — — — — — 17 67,605 67,622
Construction, land and acquisition & development — — — — — — 47,685 47,685
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.
F-20
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
Doubtful. Loans have weaknesses of 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 December 31, 2024 and 2023, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (in thousands):
Pass
Special Mention
Commercial (secured by real estate - owner occupied) — — — — — 301 — 301
Commercial (secured by real estate - non-owner occupied) — — — — — 534 — 534
Commercial and industrial — — — — — — — —
Construction, land and acquisition & development — — — — — — — —
Residential mortgage — — — — — 212 — 212
Substandard
Commercial (secured by real estate - owner occupied) — — — — — 1,996 — 1,996
Commercial (secured by real estate - non-owner occupied) — — — — — 178 — 178
Commercial and industrial — — — — — — — —
Construction, land and acquisition & development — — — — 17 — — 17
Current year to date period gross charge-offs
Commercial (secured by real estate - non-owner occupied) — — — — — 164 — 164
Commercial and industrial — — — — — — — —
Construction, land and acquisition & development — — — — — — — —
Residential mortgage — — 5 — — 45 — 50
Total current period gross write-offs $ 6 $ 76 $ 365 $ 79 $ — $ 215 $ — $ 741
F-21
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
Pass
Special Mention
Commercial (secured by real estate - owner occupied) — — — — — 332 — 332
Commercial and industrial — — — — — — — —
Construction, land and acquisition & development — — — — — — — —
Residential mortgage — — — — — 222 — 222
Substandard
Commercial (secured by real estate - owner occupied) — — — — — — — —
Commercial (secured by real estate - non-owner occupied) — — — — — 4,535 - 4,535
Commercial and industrial — — — — — — — —
Construction, land and acquisition & development — — — 21 — — — 21
Gross charge-offs
Commercial (secured by real estate - non-owner occupied) — — — — — 204 — 204
Commercial and industrial — — — — — 3 — 3
Construction, land and acquisition & development — — — — — — — —
Residential mortgage — — — — — — — —
Total current period gross write-offs $ 9 $ 159 $ 125 $ 14 $ — $ 207 $ — $ 514
There was one commercial (secured by real estate - owner occupied) loan modification to a borrower with financial difficulty during the year ended December 31, 2024 for $2.0 million and is current. The loan modification provided for a six-month period with fixed payments of $5,000. There were no loan modifications to a borrower with financial difficulty during the year ended December 31, 2023.
No loan modifications made to a borrower with financial difficulty subsequently defaulted during the years ended December 31, 2024 and 2023.
F-22
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
(4) Premises and Equipment
Premises and equipment at year ended December 31, 2024 and 2023 are summarized as follows: (in thousands)
Construction in process 277 226
Less: Accumulated depreciation 7,324 6,368
Depreciation expense was approximately $948,000 and $980,000 for the years ended December 31, 2024 and 2023, respectively.
(5) Intangible Assets
The core deposit premium intangible asset had a gross carrying amount of $1.9 million and accumulated amortization of $956,000 at December 31, 2024. The core deposit premium intangible asset had a gross carrying amount of $1.9 million and accumulated amortization of $765,000 at December 31, 2023. Aggregate amortization expense for the years ended was $191,000 during 2024 and 2023.
The following table shows the estimated future amortization of the core deposit premium intangible asset for the next five years (in thousands). The projections of amortization expense are based on existing asset balances as of December 31, 2024.
Years ending December 31,
Goodwill acquired through acquisition was $17.2 million at December 31, 2024 and 2023. The Company tested for impairment during the year and determined there was no impairment of goodwill during 2024 and 2023. No impairment loss was recognized during 2024 and 2023.
(6) Leases
Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through 2027. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease arrangements are required to be recognized on the consolidated balance sheet as a ROU asset and a corresponding lease liability. The following table represents the consolidated balance sheet classification of the Company’s ROU assets and liabilities.
F-23
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
Assets
Operating lease right-of-use assets Other assets $ 1,265 $ 1,746
Liabilities
Operating lease liabilities Other liabilities $ 1,583 $ 2,158
The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet.
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.
For the years ended December 31, 2024 and 2023 operating lease cost was $559,000 and $550,000, respectively. As of December 31, 2024, the weighted average remaining lease term was 2.54 years and the weighted average discount rate was 1.88%. The following table represents the future maturities of the Company’s operating lease liabilities and other lease information.
(dollars in thousands)
Years ending December 31, Lease Liability
Total lease payments $ 1,623
Less: interest 40
Present value of lease liabilities $ 1,583
Supplemental Lease Information: December 31, 2024 December 31, 2023
Operating cash flows from operating leases (cash payments) $ 610 $ 586
(7) Deposits
At December 31, 2024, contractual maturities of certificates of deposit are summarized as follows: (in thousands).
Years ending December 31,
The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $35.2 million and $31.2 million at December 31, 2024 and 2023, respectively. Due to the
F-24
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
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 certificates of deposit ("CDs") totaled $106.3 million and $107.3 million at December 31, 2024 and 2023. At December 31, 2024 brokered CDs had a weighted average rate of 4.50% and a weighted average maturity of 19 months.
(8) Borrowings
At December 31, 2024 and 2023, the Bank had a line of credit totaling $40.0 millionand $64.0 million, respectively, from the FHLB, which is reviewed annually by the FHLB.
The following advances were outstanding at December 31, 2024: (in thousands)
Advance Date Advance Interest Rate Maturity Rate Call Feature
There was $4.8 million and $0 outstanding under the Bank Term Funding Program at December 31, 2024 and December 31, 2023 respectively. The bank had one security pledged in the amount of $4.8 million under the Bank Term Funding Program. The following advances under Bank Term advances, which require interest paid in full at maturity, were outstanding at December 31, 2024: (in thousands).
Advance Date Advance Interest Rate Maturity Rate
At December 31, 2024 and 2023, the FHLB advances were collateralized by certain loans which totaled approximately $434.5 million and $392.6 million at December 31, 2024 and 2023, respectively, and by the Company’s investment in FHLB stock which totaled approximately $3.2 million and $2.5 million at December 31, 2024 and 2023, respectively.
The Company had one FHLB letter of credit of $12.5 million, used to collateralize public deposits, at both December 31, 2024 and 2023.
At December 31, 2024 and 2023 the Bank had unsecured federal funds lines of credit of $32.5 million, for which none was outstanding as of December 31, 2024 and 2023. The Bank also has a line of $65.1 million and $67.4 million with the Federal Reserve Bank of Atlanta Discount Window secured by $84.0 million and $96.1 million in loans as of December 31, 2024 and 2023, respectively. No amount was outstanding on the Discount Window as of December 31, 2024 or 2023.
(9) Income Taxes
The components of income tax expense for the years ended December 31, 2024 and 2023 are as follows: (in thousands)
Year Ended Year Ended
F-25
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
The difference between income tax expense and the amount computed by applying the statutory federal income tax rate to income before taxes for the years ended December 31, 2024 and 2023 is as follows: (dollars in thousands)
Year Ended Year Ended
Statutory Federal tax rate 21 % 21 %
Pretax income at statutory rate $ 1,466 $ 1,761
State income tax, net of federal benefit 92 218
Cash surrender value of life insurance (84 ) (76 )
Permanent adjustments 102 53
The following summarizes the sources and expected tax consequences of future deductions or income for income tax purposes which comprised the net deferred taxes at December 31, 2024 and 2023: (in thousands)
Year Ended Year Ended
Deferred income tax assets:
Allowance for credit losses $ 2,372 $ 2,426
Unrealized loss on investment securities available-for-sale 1,934 2,145
Fair value adjustments 93 133
Total deferred income tax assets 6,732 7,632
Deferred income tax liabilities:
Core deposit intangible 244 293
Total deferred income tax liabilities 970 1,497
Net deferred income tax asset $ 5,762 $ 6,135
The Company establishes a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2024 and 2023, the Company believes that it will have sufficient earnings to realize its deferred tax asset and has not provided an allowance.
The Company is subject to federal income tax and income tax of state taxing authorities. The Company's federal and state income tax returns for the years ended December 31, 2024, 2023, 2022 and 2021 are open to audit under the statutes of limitations. The Company has approximately $5.1 million of Federal net operating loss carryforwards and $6.5 million of state net operating loss carryforwards that will begin to expire in 2032.
Prior to January 1, 1996, the Bank was permitted under the Internal Revenue Code (the “Code”) a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. The provisions of the Code permitted the Bank to deduct from taxable income an allowance for bad debts based on the greater of a percentage of taxable income before such deduction or actual loss experience. Retained earnings at December 31, 2024 includes approximately $3.6 million for which no deferred Federal income tax liability has been recognized. The amounts represent an allocation of income for bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate.
F-26
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
(10) 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 January 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 stock offering. The balance of the note payable of the ESOP was $5.0 million and $5.1 million at December 31, 2024 and 2023, respectively. Because the source of the loan payments are contributions received by the ESOP from the Company, the related notes receivable is shown as a reduction of stockholders’ equity. As of December 31, 2024 and 2023, 122,000 shares and 101,000 shares have been released, respectively.
(11) Benefit Plans
The Company has a profit sharing plan to provide retirement benefits for all employees. Contributions have been paid in the past to a trust fund annually by the Company in an amount determined by the board of directors. No contributions were made to the plan for the plan years ended December 31, 2024 and 2023 as the board of directors adopted an incentive program and paid cash bonuses rather than having contributions made to the profit sharing plan.
In 2014, the Company added a 401(k) feature to the profit sharing plan that covers substantially all employees. Under the terms of the feature, the Company may make matching contributions to the plan and the employees can contribute up to the maximum amounts allowed by Internal Revenue Service guidelines. The contribution expense related to the 401(k) feature totaled $266,000 and $217,000for the plan years ended December 31, 2024 and 2023, respectively.
The Company sponsors a deferred compensation plan for directors. Under this plan, participating directors may defer their Board fees and receive the deferred amounts plus interest upon completion of their time as a director or at their election. The cumulative deferred contributions for the directors in the plan and earnings thereon at December 31, 2024 and 2023 totaled approximately $1.1 millionand $1.6 million, respectively. These amounts are included in other liabilities in the accompanying consolidated balance sheets. No contributions have been made to the plan since 2015 as the plan was frozen as of June 30, 2015.
The Company has a supplemental executive retirement plan ("SERP") for one of its executives. This normal retirement benefit consists of a monthly benefit payment equal to the amount that is paid from the annuity contract designated under the SERP. The normal retirement benefit will commence on the first day of the second month following the date of the executive’s separation from service, payable monthly and continuing for the executive’s lifetime. The monthly benefit equals $8,333. If the executive dies after benefit payments have commenced but before receiving a total of 180 monthly payments, the Company shall pay to the executive’s beneficiary the greater of (i) the account balance or (ii) the present value of the remaining payments to satisfy a total of 180 monthly payments. Such death benefit shall be payable in a lump sum no later than 60 days from the date of death. If the executive dies after receiving 180 or more benefit payments, the SERP will terminate and no additional payments will be made. The accrued liability for the plan at December 31, 2024 and 2023 was approximately $524,000 and $501,000, respectively and is recorded in other liabilities. The related expense for the plan was approximately $23,000 in 2024 and 2023, respectively. There was no earnings from the increase in the value of the annuityfor the years ending December 31, 2024 and 2023. The carrying value of the annuity was approximately $956,000 for the years ended December 31, 2024 and 2023 and is recorded in other assets.
F-27
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
(12) Stock-Based Compensation Plans
The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the board of directors. In 2018, with subsequent shareholder approval, the 2018 Equity Incentive Plan was approved up to 133,987 shares of common stock and up to 334,970 stock options.
In 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 2023 were as follows: dividend yield of 0%, expected volatility of 27.59%, risk-free interest rate of 4.35%, expected average life of 7.37, and weighted average per share fair value of options of $5.92.
A summary of the Company's stock option activity is summarized below.
Exercise of stock options* (8,753 ) 11.14
* 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.
* The terms of the restricted stock agreements permit the surrender of shares of the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 7,030 and 3,417 shares were surrendered during the year ended December 31, 2024 and 2023, respectively.
The Company recognized approximately $1.3 million and $1.1 million of stock-based compensation expense (included in salary and employee benefits on the consolidated statements of income) during 2024 and 2023, respectively, associated with its common stock awards granted to directors and officers. This expense is net of approximately $149,000 and $46,000
F-28
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
during the years ended December 31, 2024 and 2023 for shares surrendered to satisfy applicable tax withholding requirements.
As of December 31, 2024, there was approximately $2.5 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately 1.6 years.
(13)Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Total and Tier I Capital to Risk-Weighted Assets and of Tier I Capital to Average Assets. Management believes, as of December 31, 2024 and 2023, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2024 and 2023, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1 risk-based, total risk-based, Tier I risk-based and Tier I leverage ratios as set forth below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios for December 31, 2024 and 2023 are presented in the table below. (dollars in thousands)
For Capital To Be Well Capitalized
Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
F-29
AFFINITY BANCSHARES, INC.
Notes to Consolidated Financial Statements
(14) Related Party Transactions
The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interest, in the normal course of business. It is the policy of the Company that loan transactions with directors and executive officers be made on substantially the same terms as those prevailing at the time for comparable loans to other persons. The following is a summary of activity for related party loans: (in thousands).
For Year EndedDecember 31, 2024 For Year EndedDecember 31, 2023
The aggregate amount of deposits from directors and executive officers and their affiliates amounted to $5.2 millionand $3.8 million at December 31, 2024 and 2023, respectively.
(15) Commitments
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments could include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.