Equibles

10-Q

Affinity Bancshares, Inc. (AFBI)

10-Q 2022-11-10 For: 2022-09-30
View Original
Added on April 06, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period

Commission File No. 001-39914

Affinity Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland 82-1147778
(State or Other Jurisdiction of<br><br>Incorporation or Organization) (I.R.S. Employer<br><br>Identification No.)
3175 Highway 278<br><br>Covington, Georgia 30014
(Address of Principal Executive Offices) (Zip Code)

(770) 786-7088

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share AFBI The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 4, 2022, 6,634,189 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding.

Affinity Bancshares, Inc.

Form 10-Q

Table of Contents

Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Consolidated Balance Sheets at September 30, 2022 (unaudited) and December 31, 2021 2
Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2022 and 2021 (unaudited) 3
Consolidated Statements of Comprehensive (Loss) Income for the Three Months and Nine Months Ended September 30, 2022 and 2021 (unaudited) 4
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months and Nine Months Ended September 30, 2022 and 2021 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited) 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Item 4. Controls and Procedures 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 1A. Risk Factors 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Mine Safety Disclosures 40
Item 5. Other Information 40
Item 6. Exhibits 41
SIGNATURES 42

Item 1. Financial Statements

AFFINITY BANCSHARES, INC.

Consolidated Balance Sheets

December 31, 2021
Assets
Cash and due from banks 6,887 $ 16,239
Interest-earning deposits in other depository institutions 33,619 95,537
Cash and cash equivalents 40,506 111,776
Investment securities available-for-sale 41,878 48,557
Other investments 1,025 2,476
Loans, net 641,062 575,825
Other real estate owned 3,538 3,538
Premises and equipment, net 4,069 3,783
Bank owned life insurance 15,637 15,377
Intangible assets 18,606 18,749
Other assets 10,069 8,007
Total assets 776,390 $ 788,088
Liabilities and Stockholders' Equity
Liabilities:
Non-interest-bearing checking 204,781 $ 193,940
Interest-bearing checking 93,235 91,387
Market rate checking 160,377 145,969
Savings accounts 88,840 86,745
Certificates of deposit 98,784 96,758
Total deposits 646,017 614,799
Federal Home Loan Bank advances 10,000 48,988
Accrued interest payable and other liabilities 5,152 3,333
Total liabilities 661,169 667,120
Stockholders' equity:
Preferred stock (10,000,000 shares authorized, no shares outstanding at    September 30, 2022 and December 31, 2021) — —
Common stock (par value 0.01 per share, 40,000,000 shares authorized;    6,634,885 issued and outstanding at September 30, 2022 and 6,872,634     issued and outstanding at December 31, 2021) 66 69
Additional paid in capital 63,288 68,038
Unearned ESOP shares (4,847 ) (5,004 )
Retained earnings 63,658 58,223
Accumulated other comprehensive loss (6,944 ) (358 )
Total stockholders' equity 115,221 120,968
Total liabilities and stockholders' equity 776,390 $ 788,088

All values are in US Dollars.

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Income

(unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(In thousands)
Interest income:
Loans, including fees $ 7,734 $ 7,332 $ 22,013 $ 24,424
Investment securities 301 237 857 529
Interest-earning deposits 189 53 286 134
Total interest income 8,224 7,622 23,156 25,087
Interest expense:
Deposits 625 629 1,612 2,110
Borrowings 73 132 (874 ) 365
Total interest expense 698 761 738 2,475
Net interest income before provision for loan losses 7,526 6,861 22,418 22,612
Provision for loan losses 187 225 654 975
Net interest income after provision for loan losses 7,339 6,636 21,764 21,637
Noninterest income:
Service charges on deposit accounts 420 416 1,205 1,126
Other 173 355 631 980
Total noninterest income 593 771 1,836 2,106
Noninterest expenses:
Salaries and employee benefits 3,187 2,777 9,219 7,797
Occupancy 675 633 1,798 2,329
Advertising 128 116 326 296
Data processing 486 520 1,476 1,518
Writedown of premises and equipment — 14 — 888
FHLB prepayment penalties — — 647 —
Other 1,014 967 3,019 2,764
Total noninterest expenses 5,490 5,027 16,485 15,592
Income before income taxes 2,442 2,380 7,115 8,151
Income tax expense 581 575 1,680 1,896
Net income $ 1,861 $ 1,805 $ 5,435 $ 6,255
Weighted average common shares outstanding
Basic
Diluted
Basic earnings per share $ 0.28 $ 0.26 $ 0.81 $ 0.90
Diluted earnings per share $ 0.27 $ 0.26 $ 0.80 $ 0.89

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

Nine Months Ended September 30,
2021 2022 2021
(In thousands)
Net income 1,861 $ 1,805 $ 5,435 $ 6,255
Other comprehensive (loss) income:
Net unrealized (loss) gain on available-for-sale securities, net of taxes of (629), 29, (2,230) and (96) (1,855 ) 82 (6,586 ) (273 )
Total other comprehensive (loss) income (1,855 ) 82 (6,586 ) (273 )
Total comprehensive (loss) income 6 $ 1,887 $ (1,151 ) $ 5,982

All values are in US Dollars.

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)
Accumulated
Additional Other
Paid In Treasury Unearned Retained Comprehensive
Capital Stock ESOP Shares Earnings Income (Loss) Total
(In thousands)
Beginning balance December 31, 2020 69 $ 33,628 $ (1,268 ) $ (2,453 ) $ 50,650 $ 159 $ 80,785
ESOP loan payment  and release of   ESOP shares — 5 — 52 — — 57
Stock-based compensation expense — 110 — — — — 110
Change in unrealized  loss on investment   securities available-  for-sale, net of tax — — — — — (278 ) (278 )
Corporate reorganization
Issuance of common     stock (less stock     offering expenses     of 1,699) — 32,448 — — — — 32,448
Issuance of shares     and loan to ESOP — 2,961 — (2,961 ) — — —
Treasury stock retired — (1,268 ) 1,268 — — — —
Net income — — — — 2,132 — 2,132
Ending balance March 31, 2021 69 $ 67,884 $ — $ (5,362 ) $ 52,782 $ (119 ) $ 115,254
ESOP loan payment  and release of   ESOP shares — $ 13 $ — $ 52 $ — $ — $ 65
Stock-based   compensation   expense — 75 — — — — 75
Change in unrealized  loss on investment  securities available-  for-sale — — — — — (77 ) (77 )
Net income — — — — 2,318 — 2,318
Ending balance June 30, 2021 69 $ 67,972 $ — $ (5,310 ) $ 55,100 $ (196 ) $ 117,635
ESOP loan payment  and release of   ESOP shares — $ (183 ) $ — $ 254 $ — $ — $ 71
Stock-based   compensation   expense — 110 — — — — 110
Change in unrealized  gain on investment  securities available-  for-sale — — — — — 82 82
Net income — — — — 1,805 — 1,805
Ending balance September 30, 2021 69 $ 67,899 $ — $ (5,056 ) $ 56,905 $ (114 ) $ 119,703
Ending balance December 31, 2021 69 $ 68,038 $ — $ (5,004 ) $ 58,223 $ (358 ) $ 120,968
ESOP loan payment  and release of   ESOP shares — 29 — 52 — — 81
Stock-based   compensation   expense — 113 — — — — 113
Change in unrealized  loss on investment  securities available-  for-sale — — — — — (2,653 ) (2,653 )
Common stock repurchase (3 ) (3,939 ) — — — — (3,942 )
Net income — — — — 1,791 — 1,791

All values are in US Dollars.

Ending balance March 31, 2022 $ 66 $ 64,241 $ — $ (4,952 ) $ 60,014 $ (3,011 ) $ 116,358
ESOP loan payment and<br>  release of ESOP shares $ — $ 26 $ — $ 53 $ — $ — $ 79
Stock-based compensation<br>  expense — 66 — — — — 66
Change in unrealized loss <br>  on investment securities<br>  available-for-sale, net of <br>  tax — — — — — (2,078 ) (2,078 )
Common stock repurchase (1 ) (836 ) (837 )
Net income — — — — 1,783 — 1,783
Ending balance June 30, 2022 $ 65 $ 63,497 $ — $ (4,899 ) $ 61,797 $ (5,089 ) $ 115,371
ESOP loan payment and<br>  release of ESOP shares $ — $ 25 $ — $ 52 $ — $ — $ 77
Issuance of restricted stock awards 1 77 — — — — 78
Stock-based compensation<br>  expense — 203 — — — — 203
Change in unrealized loss <br>  on investment securities<br>  available-for-sale, net of <br>  tax — — — — — (1,855 ) (1,855 )
Common stock repurchase (514 ) (514 )
Net income — — — — 1,861 — 1,861
Ending balance September 30, 2022 $ 66 $ 63,288 $ — $ (4,847 ) $ 63,658 $ (6,944 ) $ 115,221

(1) Amounts concerning shares related to periods prior to the date of the Conversion (January 20, 2021) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (0.90686-to-one).

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Cash Flows

(unaudited)

Nine Months Ended September 30,
2022 2021
(In thousands)
Cash flows from operating activities:
Net income $ 5,435 $ 6,255
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and (accretion) amortization (329 ) 527
Stock-based compensation expense 460 295
Provision for loan losses 654 975
ESOP expense 237 193
Net gain on sale and writedown of other real estate owned — (127 )
Increase in cash surrender value of bank owned life insurance (260 ) (274 )
Loss on writedown of premises and equipment — 888
Change in:
Accrued interest receivable and other assets 168 3,119
Accrued interest payable and other liabilities 1,850 1,302
Net cash provided by operating activities 8,215 13,153
Cash flows from investing activities:
Purchases of investment securities available-for-sale (5,701 ) (23,674 )
Purchases of premises and equipment (930 ) (577 )
Proceeds from paydowns of investment securities available-for-sale 3,428 3,102
Purchases of other investments (1,130 ) (1,412 )
Proceeds from sales of other investments 2,581 533
Proceeds from bank owned life insurance death claim — 300
Net change in loans (65,665 ) 28,090
Proceeds from sales of other real estate owned — 1,420
Net cash (used in) provided by investing activities (67,417 ) 7,782
Cash flows from financing activities:
Net change in deposits 31,225 (24,913 )
Stock repurchase (5,293 ) —
Proceeds from FHLB advances 105,000 35,000
Repayment of FHLB advances (143,000 ) (5,000 )
Repayment of PPPLF borrowings — (100,813 )
Repayment of holding company loan — (5,000 )
Proceeds from stock offering — 37,108
Stock offering expenses — (1,699 )
Funding of ESOP — (2,961 )
Net cash used in financing activities (12,068 ) (68,278 )
Net change in cash and cash equivalents (71,270 ) (47,343 )
Cash and cash equivalents at beginning of period 111,776 178,253
Cash and cash equivalents at end of period $ 40,506 $ 130,910
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 1,019 $ 2,405
Cash paid for interest $ 1,788 $ 2,552

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(1) Nature of Operations

Affinity Bancshares, Inc. (the “Company”) is a savings and loan holding company headquartered in Covington, Georgia. The Company has one operating subsidiary, Affinity Bank (the “Bank”, and formerly named “Newton Federal Bank”), a federally chartered savings association, conducting banking activities primarily in Newton County, Georgia and surrounding counties and in Cobb and Fulton Counties, Georgia and surrounding counties, and originating dental practice loans and indirect automobile loans throughout the Southeastern United States. The Bank offers such customary banking services as consumer and commercial checking accounts, savings accounts, certificates of deposit, mortgage, commercial and consumer loans, including indirect automobile loans, money transfers and a variety of other banking services. The Company was incorporated in September 2020 to be the successor corporation to Community First Bancshares, Inc., a federal corporation, upon completion of the second-step mutual-to-stock conversion (the “Conversion”) of Community First Bancshares, MHC, the top tier mutual holding company of Community First Bancshares, Inc. Community First Bancshares, Inc. was the former mid-tier holding company for the Bank (formerly named Newton Federal Bank). Prior to completion of the Conversion, approximately 54% of the shares of common stock of Community First Bancshares, Inc. were owned by Community First Bancshares, MHC. In conjunction with the Conversion, Community First Bancshares, Inc. was merged into Affinity Bancshares, Inc. (and ceased to exist) and Affinity Bancshares, Inc. became its successor holding company for Newton Federal Bank.

Reorganization

On January 20, 2021, the Company completed 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 Affinity Bank (formerly named Newton Federal Bank). Prior to completion of the Conversion, approximately 54% of the shares of common stock of Community First Bancshares, Inc. were owned by Community First Bancshares, MHC. In conjunction with the Conversion, Community First Bancshares, Inc. was merged into Affinity Bancshares, Inc. (and ceased to exist) and Affinity Bancshares, Inc. became its successor holding company for Newton Federal Bank.

As part of the Conversion, on January 20, 2021, the Company raised gross proceeds of $37.1 million by selling a total of 3,701,509 shares of common stock at $10.00 per share in a stock offering. The Company utilized $3.0 million of the proceeds to fund an addition to its Employee Stock Ownership Plan (“ESOP”) loan for the acquisition of additional shares at $10.00 per share. Expenses incurred related to the offering were $1.7 million and have been recorded against offering proceeds. The Company invested $16.3 million of the net proceeds it received from the sale into the Bank’s operations and has retained the remaining amount for general corporate purposes. Concurrent with the completion of the stock offering, each share of Community First Bancshares, Inc. common stock owned by public stockholders (stockholders other than Community First Bancshares, MHC) was exchanged for 0.90686 shares of Company common stock. All share amounts have been adjusted for the conversion, including outstanding restricted stock and stock options.

Basis of Presentation

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company as of September 30, 2022 and the results of its operations and its cash flows for the periods presented. The interim consolidated financial information should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three months and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for a full year or for any other period. Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of acquired loans, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income. Summary of Significant Accounting Policies – The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in the Company’s financial statements for the year ended December 31, 2021 included in the Company’s Form 10-K.

8

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Earnings per Share

Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options), if any. Presented below are the calculations for basic and diluted earnings per common share.

Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(In thousands except per share data)
Net income $ 1,861 $ 1,805 $ 5,435 $ 6,255
Weighted average common shares outstanding 6,652,811 6,872,634 6,683,052 6,931,128
Effect of dilutive common stock awards 99,341 93,002 99,341 93,002
Diluted weighted average common shares outstanding 6,752,152 6,965,636 6,782,393 7,024,130
Basic earnings per common share $ 0.28 $ 0.26 $ 0.81 $ 0.90
Diluted earnings per common share* $ 0.27 $ 0.26 $ 0.80 $ 0.89

*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted average shares outstanding during the interim period, and not on an annualized weighted average basis. Accordingly, the sum of the earnings per share data for the quarters will not necessarily equal the year-to-date earnings per share data.

There were 234,954 anti-dilutive options for the three months and nine months ended September 30, 2022 and there were no anti-dilutive options for the three months and nine months ended September 30, 2021.

Recent Accounting Pronouncements

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This ASU sets forth a “current expected credit loss” ("CECL") model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supported forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019, the Financial Accounting Standards Board ("FASB") voted to extend the delay of the effective date of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022. The Company is in the process of working with a third party vendor using their software solution to assist with adoption. The Company is also currently gathering necessary data to implement this change and is continuing to assess the impact of the adoption of this ASU on its consolidated financial statements. Based on our analysis, the Company estimates a 5-15% increase to its aggregate reserve levels upon adoption of the current expected credit losses standard on January 1, 2023; however, this estimate is based on current economic conditions, forecasts, and our existing loan portfolio at September 30, 2022, and the estimate is likely to change between now and adoption.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(2) Investment Securities

Investment securities available-for-sale at September 30, 2022 and December 31, 2021 are as follows: (in thousands)

Amortized Gross <br>Unrealized Gross <br>Unrealized Estimated
September 30, 2022 Cost Gains Losses Fair Value
U.S. Treasury securities $ 5,097 $ — $ (820 ) $ 4,277
Municipal securities - tax exempt 535 — (132 ) $ 403
Municipal securities - taxable 2,529 — (490 ) $ 2,039
U. S. Government sponsored enterprises 11,837 — (3,387 ) $ 8,450
Government agency mortgage-backed securities 21,061 — (3,565 ) $ 17,496
Corporate securities 10,115 — (902 ) $ 9,213
Total $ 51,174 $ — $ (9,296 ) $ 41,878
December 31, 2021
U.S. Treasury securities $ 5,068 $ 5 $ (23 ) $ 5,050
Municipal securities - tax exempt 540 — (4 ) 536
Municipal securities - taxable 796 — (6 ) 790
U. S. Government sponsored enterprises 11,837 — (295 ) 11,542
Government agency mortgage-backed securities 21,371 200 (232 ) 21,339
Corporate securities 9,425 20 (145 ) 9,300
Total $ 49,037 $ 225 $ (705 ) $ 48,557

There were 38 securities in an unrealized loss position as of September 30, 2022 for less than 12 months. There were 27 securities in an unrealized loss position for 12 months or greater as of September 30, 2022. 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. Thirty-nine of the securities are mortgage backed bonds that have the direct or implied backing of the U.S. Government. Four of the bonds are municipal securities and the remaining 13 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. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis which may be at maturity.

The amortized cost and estimated fair value of investment securities available-for-sale at September 30, 2022, by contractual maturity, are shown below. Maturities of mortgage-backed securities will differ from contractual maturities because borrowers

10

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

may have the right to call or prepay certain obligations with or without call or prepayment penalties. Therefore, these securities are not included in the maturity categories. (in thousands)

Amortized Estimated
Cost Fair Value
U.S. Treasury securities
Within 1 year $ — —
Greater than 1 to 5 years — —
Greater than 5 to 10 years 5,097 4,277
Greater than 10 years — —
Municipal securities - tax exempt
Within 1 year — —
Greater than 1 to 5 years — —
Greater than 5 to 10 years — —
Greater than 10 years 535 403
Municipal securities - taxable
Within 1 year — —
Greater than 1 to 5 years — —
Greater than 5 to 10 years 1,278 1,063
Greater than 10 years 1,251 976
Government agency securities
Within 1 year — —
Greater than 1 to 5 years — —
Greater than 5 to 10 years 2,022 1,571
Greater than 10 years 9,815 6,879
Corporate securities
Within 1 year — —
Greater than 1 to 5 years 496 470
Greater than 5 to 10 years 9,119 8,318
Greater than 10 years 500 425
30,113 24,382
Government agency mortgage-backed securities 21,061 17,496
Total $ 51,174 $ 41,878

No securities were sold during the three months or nine months ended September 30, 2022 or 2021.

Securities with a carrying value of approximately $4.7 million and $2.8 million were pledged to secure public deposits at September 30, 2022 and December 31, 2021, respectively.

(3) Loans and Allowance for Loan Losses

Major classifications of loans, by collateral code, at September 30, 2022 and December 31, 2021 are summarized as follows: (in thousands)

September 30, 2022 December 31, 2021
Commercial (secured by real estate - owner occupied) $ 160,164 $ 158,662
Commercial (secured by real estate - non-owner occupied) 138,351 104,042
Commercial and industrial 149,855 152,835
Paycheck Protection Program loans — 17,883
Construction, land and acquisition & development 42,881 16,317
Residential mortgage 1-4 family 52,904 63,065
Consumer installment 106,228 71,580
Total 650,383 584,384
Less allowance for loan losses (9,321 ) (8,559 )
Total loans, net $ 641,062 $ 575,825

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AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Atlanta, Georgia MSA. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. With the acquisition of Affinity Bank, the Bank enhanced its lending within professional markets, with a primary focus on the dental industry in Georgia and adjoining states. The majority of these loans are commercial and industrial credits for practice acquisitions and equipment financing with the remainder being owner-occupied real estate.

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is an economic stimulus bill signed

into law on March 27, 2020, in response to the economic fallout of the COVID-19 pandemic in the United States. The

creation of the Paycheck Protection Program (PPP) enacted under the CARES Act provides forgivable loans to small

businesses for payroll obligations, emergency grants to cover immediate operating costs, and a mechanism for loan

forgiveness by the Small Business Administration should all criteria be met. The Bank received SBA authorization for 730 and 1,171 PPP loans totaling $66.1 million and $130.3 million for the years ended December 31, 2021 and 2020, respectively. These loans are fully guaranteed by the Small Business Administration, and almost all have been paid off by forgiveness.

Qualifying loans in the amount of $393.9 million and $343.6 million were pledged to secure the line of credit from the Federal Home Loan Bank of Atlanta (“FHLB”) at September 30, 2022 and December 31, 2021, respectively.

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AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of and for the nine months ended September 30, 2022 and as of December 31, 2021: (in thousands)

September 30, 2022 Commercial<br>(Secured by Real<br>Estate - Owner Occupied) Commercial<br>(Secured by Real<br>Estate - Non-Owner Occupied) Commercial <br>and Industrial Paycheck<br>Protection<br>Program<br>(1) Construction, <br>Land and<br>Acquisition & Development Residential<br> Mortgage Consumer<br>Installment Unallocated Total
Allowance for loan losses:
Beginning balance $ 2,701 $ 1,980 $ 2,242 $ — $ 162 $ 502 $ 969 $ 3 $ 8,559
Provision (606 ) 137 103 — 516 (183 ) 678 9 654
Charge-offs — — (26 ) — — — (74 ) — (100 )
Recoveries 123 — 20 — — 39 26 — 208
Ending balance $ 2,218 $ 2,117 $ 2,339 $ — $ 678 $ 358 $ 1,599 $ 12 $ 9,321
Ending allowance attributable to<br>   loans:
Individually evaluated<br>   for impairment $ 1 $ 1 $ — $ — $ — $ 7 $ — $ — $ 9
Collectively evaluated<br>   for impairment 2,217 2,116 2,339 — 678 351 1,599 12 9,312
Total ending allowance $ 2,218 $ 2,117 2,339 $ — $ 678 $ 358 $ 1,599 $ 12 $ 9,321
Loans:
Individually evaluated<br>   for impairment $ 89 $ 3,304 $ — $ — $ — $ 2,475 $ — $ — $ 5,868
Collectively evaluated<br>   for impairment 160,075 135,047 149,855 — 42,881 50,429 106,228 — 644,515
Total loans $ 160,164 $ 138,351 $ 149,855 $ — $ 42,881 $ 52,904 $ 106,228 $ — $ 650,383
December 31, 2021
Allowance for loan losses:
Beginning balance $ 1,913 $ 1,171 $ 1,320 $ — $ 224 $ 970 $ 719 $ 44 $ 6,361
Provision (519 ) 809 1,119 — (62 ) (541 ) 310 (41 ) 1,075
Charge-offs — — (234 ) — — — (76 ) — (310 )
Recoveries 1,307 — 37 — — 73 16 — 1,433
Ending balance $ 2,701 $ 1,980 $ 2,242 $ — $ 162 $ 502 $ 969 $ 3 $ 8,559
Ending allowance attributable to<br>   loans:
Individually evaluated<br>   for impairment $ — $ 1 $ 1 $ — $ — $ 5 $ — $ — $ 7
Collectively evaluated<br>   for impairment 2,701 1,979 2,241 — 162 497 969 3 8,552
Total ending allowance $ 2,701 $ 1,980 $ 2,242 $ — $ 162 $ 502 $ 969 $ 3 $ 8,559
Loans:
Individually evaluated<br>   for impairment $ 95 $ 3,387 $ 753 $ — $ — $ 2,992 $ 1 $ — $ 7,228
Collectively evaluated<br>   for impairment 158,567 100,655 152,082 17,883 16,317 60,073 71,579 — 577,156

13

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Total loans $ 158,662 $ 104,042 $ 152,835 $ 17,883 $ 16,317 $ 63,065 $ 71,580 $ — $ 584,384

(1) Includes PPP loans that are fully guaranteed by the SBA; thus no allowance for loan losses has been allocated to these loans.

The Bank individually evaluates all loans for impairment that are on nonaccrual status or are rated substandard (as described below). Additionally, all troubled debt restructurings are evaluated for impairment. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired loans are applied as a reduction of the outstanding principal balance.

14

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Impaired loans at September 30, 2022 and December 31, 2021 were as follows: (in thousands)

September 30, 2022 Recorded<br>Investment Unpaid<br>Principal<br>Balance Allocated<br>Related<br>Allowance Average<br>Recorded<br>Investment Interest<br>Income<br>Recognized
With no related allowance recorded:
Commercial (secured by real estate - owner occupied) $ — $ — $ — $ — $ —
Commercial (secured by real estate - non-owner occupied) 3,122 3,122 — 3,161 —
Commercial and industrial — — — — —
Paycheck Protection Program — — — — —
Construction, land and acquisition & development — — — — —
Residential mortgage 1,581 1,581 — 1,636 5
Consumer installment — — — — —
4,703 4,703 — 4,797 5
With an allowance recorded:
Commercial (secured by real estate - owner occupied) $ 89 $ 89 $ 1 $ 93 $ 4
Commercial (secured by real estate - non-owner occupied) 182 182 1 186 8
Commercial and industrial — — — — —
Construction, land and acquisition & development — — — — —
Residential mortgage 894 894 7 922 18
Consumer installment — — — — —
1,165 1,165 9 1,201 30
Total impaired loans $ 5,868 $ 5,867 $ 9 $ 5,998 $ 35
December 31, 2021
With no related allowance recorded:
Commercial (secured by real estate - owner occupied) $ 95 $ 95 $ — $ 100 $ 6
Commercial (secured by real estate - non-owner occupied) 3,199 3,199 — 3,177 45
Commercial and industrial 388 421 — 458 —
Paycheck Protection Program — — — — —
Construction, land and acquisition & development — — — — —
Residential mortgage 2,052 2,052 — 2,110 31
Consumer installment 1 1 — 3 —
5,735 5,768 — 5,848 82
With an allowance recorded:
Commercial (secured by real estate - owner occupied) $ — $ — $ — $ — $ —
Commercial (secured by real estate - non-owner occupied) 188 189 1 192 12
Commercial and industrial 365 365 1 379 —
Construction, land and acquisition & development — — — — —
Residential mortgage 940 941 5 960 60
Consumer installment — — — — —
1,493 1,495 7 1,531 72
Total impaired loans $ 7,228 $ 7,263 $ 7 $ 7,379 $ 154

15

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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 September 30, 2022 and December 31, 2021 by class of loans: (in thousands)

September 30, 2022 30 -59 <br>Days<br> Past Due 60- 89 <br>Days<br> Past Due 90 Daysor GreaterPast Due Total Accruing Loans<br>Past Due Nonaccrual Current Total
Commercial (secured by real estate - owner occupied) $ — $ — $ — $ 89 $ 160,075 $ 160,164
Commercial (secured by real estate - non-owner occupied) — — — 3,354 134,997 138,351
Commercial and industrial — — — 100 149,755 149,855
Paycheck Protection Program — — — — — —
Construction, land and acquisition &<br>   development — — — — 42,881 42,881
Residential mortgage 897 537 1,434 3,302 48,168 52,904
Consumer installment 399 12 411 172 105,645 106,228
Total $ 1,296 $ 549 $ 1,845 $ 7,017 $ 641,521 $ 650,383
December 31, 2021
Commercial (secured by real estate - owner occupied) $ — $ — $ — $ — $ 158,662 $ 158,662
Commercial (secured by real estate - non-owner occupied) — — — 3,200 100,842 104,042
Commercial and industrial 338 — 338 813 151,684 152,835
Paycheck Protection Program — — — — 17,883 17,883
Construction, land and acquisition &<br>   development — — — — 16,317 16,317
Residential mortgage 3,547 1,148 4,695 2,873 55,497 63,065
Consumer installment 271 25 296 125 71,159 71,580
Total $ 4,156 $ 1,173 $ 5,329 $ 7,011 $ 572,044 $ 584,384

All values are in US Dollars.

There was no new troubled debt restructuring during the nine months ended September 30, 2022 or 2021. No troubled debt restructurings subsequently defaulted during the nine months ended September 30, 2022 or 2021.

The Bank has allocated an allowance for loan losses of approximately $9,000 and $6,000 to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2022 and December 31, 2021, respectively.

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.

16

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Substandard. Inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans have a well-defined weakness or weaknesses such as primary source of repayment is gone or severely impaired or cash flow is insufficient to reduce debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans have the same weaknesses as those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable. The likelihood of a loss on an asset or portion of an asset classified Doubtful is high.

Loss. Loans considered uncollectible and of such little value that the continuance as a Bank asset is not warranted. This does not mean that the loan has no recovery or salvage value, but rather the asset should be charged off even though partial recovery may be possible in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. As of September 30, 2022 and December 31, 2021, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (in thousands)

September 30, 2022 Pass Special<br>Mention Substandard Doubtful/<br>Loss Total
Commercial (secured by real estate - owner occupied) $ 159,706 $ 369 $ 89 $ — $ 160,164
Commercial (secured by real estate - non-owner occupied) 132,691 2,306 3,354 — 138,351
Commercial and industrial 149,755 — 100 — 149,855
Paycheck Protection Program — — — — —
Construction, land and acquisition & development 42,881 — — — 42,881
Residential mortgage 49,658 — 3,246 — 52,904
Consumer installment 106,056 — 172 — 106,228
Total $ 640,747 $ 2,675 $ 6,961 $ — $ 650,383
December 31, 2021 Pass Special<br>Mention Substandard Doubtful/<br>Loss Total
--- --- --- --- --- --- --- --- --- --- ---
Commercial (secured by real estate - owner occupied) $ 158,272 $ 390 $ — $ — $ 158,662
Commercial (secured by real estate - non-owner occupied) 98,269 2,352 3,421 — 104,042
Commercial and industrial 151,983 — 852 — 152,835
Paycheck Protection Program 17,883 — — — 17,883
Construction, land and acquisition & development 16,005 312 — — 16,317
Residential mortgage 59,080 — 3,985 — 63,065
Consumer installment 71,440 — 140 — 71,580
Total $ 572,932 $ 3,054 $ 8,398 $ — $ 584,384

(4) Deposits

The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $17.1 million at September 30, 2022 and $22.6 million at December 31, 2021.

(5) Borrowings

The following FHLB advances, which required monthly or quarterly interest payments, were outstanding at September 30, 2022:

Advance Date Advance Interest Rate Maturity Rate Call Feature
8/24/2022 $ 10,000,000 2.70 % 10/24/2022 Fixed N/A
$ 10,000,000

17

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

There were FHLB advances totaling $49.0 million consisting of advances with a book value of $48.0 million and a fair value adjustment of $1.0 million as of December 31, 2021. At September 30, 2022 and December 31, 2021, the FHLB advances were collateralized by certain loans which totaled approximately $393.9 million and $343.6 million, and by the Company’s investment in FHLB stock which totaled approximately $775,000 and $2.2 million at September 30, 2022 and December 31, 2021. Acquired FHLB advances totaling $49.0 million were paid off during the nine months ended September 30, 2022. We were able to accrete to income the remaining $1.0 million fair value adjustment associated with these acquired advances. This decreased our interest expense for the nine months ended September 30, 2022 to $738,000. We also incurred $647,000 of prepayment penalties during the nine months ended September 30, 2022 in connection with the payoff of the acquired advances.

The Company had one FHLB letter of credit of $5.0 million and $8.0 million, used to collateralize public deposits, outstanding at September 30, 2022 and December 31, 2021, respectively.

The Company has a Federal Funds unsecured line of credit with Texas Independent Bankers Bank (TIB) of $20.0 million. No amount was borrowed under this line as of September 30, 2022.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(6) Employee Stock Ownership Plan

The Company sponsors an employee stock ownership plan (“ESOP”) that covers all employees who meet certain service requirements. The Company makes annual contributions to the ESOP in amounts as defined by the plan document. These contributions are used to pay debt service and purchase additional shares. Certain ESOP shares are pledged as collateral for debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year.

In 2017, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing shares of the Company’s common stock. A total of 295,499 shares were purchased with the loan proceeds as part of the Company’s initial stock offering. In 2021, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing additional shares of the Company’s common stock. A total of 225,721 shares were purchased with the loan proceeds as part of the Company’s second stock offering. Total ESOP expense for the three months and nine months ended September 30, 2022 and 2021 was approximately $77,000, $71,000, $237,000 and $193,000, respectively. The balance of the note payable of the ESOP was approximately $5.4 million at September 30, 2022 and December 31, 2021. Because the source of the loan payments is contributions received by the ESOP from the Company, the related note receivable is shown as a reduction of stockholders’ equity. As of September 30, 2022 and December 31, 2021, 59,000 shares had been released.

(7) Stock-Based Compensation

In 2018, shareholders approved the Company’s 2018 Equity Incentive Plan, which authorizes the issuance of up to 133,987 shares of common stock pursuant to restricted stock grants and up to 334,970 shares of common stock pursuant to the exercise of options. Amounts related to periods prior to the date of the Conversion (January 20, 2021) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (0.90686-to-one) (see Note 1).

In May 2022, shareholders approved the Company’s 2022 Equity Incentive Plan, which authorizes the issuance of up to 148,060 shares of common stock pursuant to restricted stock grants and up to 370,150 shares of common stock pursuant to the exercise of options.

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in Black-Scholes model for valuing stock option grants were as follows: dividend yield is 0%, expected volatility is 32.12%, the risk-free interest rate is 2.84%, expected average life is

7.32

, and the weighted average per share fair value of options is $6.04. Stock options of 221,500 shares with a weighted average exercise price of $14.86 were granted during the nine months ended September 30, 2022. Restricted stock of 114,000 shares with a weighted average grant date value of $14.85 were also granted during the nine months ended September 30, 2022.

A summary of the Company’s stock option activity is summarized below.

Stock Options Option Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Life (Years) Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2021 334,970 $ 9.90
Granted — —
Exercise of stock options — —
Forfeited — —
Outstanding - March 31, 2022 334,970 $ 9.90 7.59 $ 1,009
Exercisable - March 31, 2022 102,475 $ 10.28 8.00 $ 535
Granted 73,500 14.87
Exercise of stock options — —
Forfeited — —
Outstanding - June 30, 2022 408,470 $ 10.80 7.91 $ 1,696
Exercisable - June 30, 2022 166,779 $ 10.08 7.31 $ 812
Granted 148,000 $ 14.85
Exercise of stock options* —
Forfeited 13,399 11.14
Outstanding - September 30, 2022 543,071 $ 11.89 8.15 $ 1,789

19

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Exercisable - September 30, 2022 169,469 $ 10.13 6.91 $ 791

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. A summary of the Company’s restricted stock activity is summarized below.

Restricted Stock Weighted Average Grant Date Fair Value Restricted Shares Outstanding
Outstanding - December 31, 2021 $ 8.63 93,336
Granted — —
Vested — —
Forfeited — —
Outstanding - March 31, 2022 $ 8.63 93,336
Granted $ 14.87 29,400
Vested* 8.63 (26,787 )
Forfeited — —
Outstanding - June 30, 2022 $ 10.48 95,949
Granted $ 14.85 84,600
Vested* — —
Forfeited 11.14 (5,051 )
Outstanding - September 30, 2022 $ 11.97 175,498

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 3,070 and 2,641 shares were surrendered during the nine months ended September 30, 2022 and 2021.

The Company recognized approximately $281,000, $110,000, $460,000 and $295,000 of stock-based compensation expense during the three months and nine months ended September 30, 2022 and 2021 respectively, associated with its common stock awards granted to directors and officers. This expense is net of approximately $47,000 and $34,000 during the nine months ended September 30, 2022 and 2021 for shares surrendered to satisfy applicable tax withholding requirements.

As of September 30, 2022, there was approximately $3.7 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the weighted average remaining vesting period of approximately

3.08

years.

(8) Fair Value Measurements and Disclosures

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

20

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Cash and Cash Equivalents

The carrying value of cash and cash equivalents is a reasonable estimate of fair value.

Investment Securities Available-for-Sale

Available-for-sale securities are recorded at market value. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds. Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and state, county and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Other Investments

The carrying value of other investments includes FHLB stock and FNBB stock and approximates fair value.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve may be required to be established within the allowance for loan losses. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with GAAP. The fair value of impaired loans is estimated using one of three methods, including collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with GAAP, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. For disclosure purposes, the fair value of fixed rate loans which are not considered impaired is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes.

Other Real Estate Owned

Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate assets are carried at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price, the Bank records the other real estate as nonrecurring Level 2. When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the other real estate asset as nonrecurring Level 3.

Bank Owned Life Insurance

The carrying value of the cash surrender value of life insurance reasonably approximates fair value.

Deposits

The fair value of savings accounts, interest bearing checking accounts, non-interest bearing checking accounts and market rate checking accounts is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates would be issued.

21

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

FHLB Advances

The fair value of FHLB fixed-rate borrowings is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements, but since the only advances we have borrowed have a one or two month maturity, the carrying value of the these advances reasonably approximates fair value.

Commitments to Extend Credit

Commitments to extend credit are short-term and, therefore, the carrying value and the fair value are considered immaterial for disclosure.

Assets Recorded at Fair Value on a Recurring Basis

The Company’s only assets recorded at fair value on a recurring basis are available-for-sale securities that had fair values of approximately $41.9 million and $48.6 million at September 30, 2022 and December 31, 2021. They are classified as Level 2.

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2022 and December 31, 2021 (in thousands).

September 30, 2022 Level 1 Level 2 Level 3 Total
Other real estate owned $ — $ — $ 3,538 $ 3,538
Impaired loans — — 5,859 5,859
Total assets at fair value $ — $ — $ 9,397 $ 9,397
December 31, 2021 Level 1 Level 2 Level 3 Total
Other real estate owned $ — $ — $ 3,538 $ 3,538
Impaired loans — — 7,221 7,221
Total assets at fair value $ — $ — $ 10,759 $ 10,759

The carrying amounts and estimated fair values (in thousands) of the Company’s financial instruments at September 30, 2022 and December 31, 2021 are as follows:

September 30, 2022 December 31, 2021
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Cash and cash equivalents $ 40,506 $ 40,506 $ 111,776 $ 111,776
Investment securities
available-for-sale 41,878 41,878 48,557 48,557
Other investments 1,025 1,025 2,476 2,476
Loans, net 641,062 613,341 575,825 581,541
Cash surrender value of life insurance 15,637 15,637 15,377 15,377
Financial liabilities:
Deposits 646,017 584,139 614,799 601,036
FHLB advances 10,000 10,000 48,988 48,197

22

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of financial condition and results of operations at September 30, 2022 and December 31, 2021 and for the three months and nine months ended September 30, 2022 and 2021 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

• statements of our goals, intentions and expectations;

• statements regarding our business plans, prospects, growth and operating strategies;

• statements regarding the quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Accordingly, you should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• risks related to the COVID-19 pandemic or any other pandemic;

• general economic conditions, either nationally or in our market areas, that are worse than expected;

• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

• our ability to access cost-effective funding;

• fluctuations in real estate values and both residential and commercial real estate market conditions;

• demand for loans and deposits in our market area;

• our ability to implement and change our business strategies;

• competition among depository and other financial institutions, including with respect to service charges and fees;

• inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

• adverse changes in the securities or secondary mortgage markets;

• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

• changes in tax laws;

• the effects of any Federal government shutdown;

• changes in the quality or composition of our loan or investment portfolios;

• technological changes that may be more difficult or expensive than expected;

• failure or breaches of our IT security systems;

• the inability of third-party providers to perform as expected;

• our ability to manage market risk, credit risk and operational risk in the current economic environment;

• our ability to introduce new products and services, enter new markets successfully and capitalize on growth opportunities;

• our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

• changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

• our ability to retain key employees;

• the effects of global or national war, conflict or acts of terrorism;

• our compensation expense associated with equity allocated or awarded to our employees; and

• changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Summary of Significant Accounting Policies

A summary of our accounting policies is described in Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total assets decreased $11.7 million, or 1.5%, to $776.4 million at September 30, 2022 from $788.1 million at December 31, 2021, due primarily to a decrease in cash and cash equivalents, partially offset by an increase in net loans.

Cash and cash equivalents decreased $71.3 million, or 63.8%, to $40.5 million at September 30, 2022 from $111.8 million at December 31, 2021 as excess liquidity was utilized to pay off Federal Home Loan Bank ("FHLB") advances and fund loan growth.

Net loans increased $65.2 million, or 11.3%, to $641.1 million at September 30, 2022 from $575.8 million at December 31, 2021, including Paycheck Protection Program (PPP) loans of $27,000 and $17.9 million at September 30, 2022 and December 31, 2021, respectively. Commercial real estate loans increased $35.8 million, or 13.6%, to $298.5 million at September 30, 2022 from $262.7 million at December 31, 2021, while construction loans increased $26.6 million or 162.8%, to $42.9 million at September 30, 2022 from $16.3 million at December 31, 2021, as we have been successful with our strategic initiative to increase construction lending to continue to diversify the loan portfolio. In addition, consumer loans increased $34.6 million, or 48.4%, to $106.2 million at September 30, 2022 from $71.6 million at December 31, 2021, as we continue to experience growth in our indirect automobile loans. These increases were partially offset by a decrease in PPP loans, which decreased $17.9 million or 99.8% to $27,000 at September 30, 2022 from $17.9 million at December 31, 2021 as a result of continued forgiveness of loans by SBA, a decrease in one-to-four family residential real estate loans of $10.2 million, or 16.1%, to $52.9 million at September 30, 2022 from $63.1 million at December 31, 2021, as mortgage loans continue to be refinanced at lower rates than we offer, and a decrease in commercial and industrial loans of $2.9 million, or 1.9%, to $149.9 million at September 30, 2022 from $152.8 million at December 31, 2021.

Securities available-for-sale decreased $6.7 million, or 13.8%, to $41.9 million at September 30, 2022 from $48.6 million at December 31, 2021, as unrealized losses on the investment portfolio increased with the increase in rates.

Total deposits increased $31.2 million, or 5.1%, to $646.0 million at September 30, 2022 from $614.8 million at December 31, 2021, reflecting increases in all categories of deposits. We recorded an increase in non-interest-bearing checking accounts of $10.8 million, or 5.6%, an increase in interest-bearing checking accounts of $1.8 million, or 2.02%, an increase in market-rate checking accounts of $14.4 million, or 9.9%, and an increase in savings accounts of $2.1 million, or 2.4%, due to our continued focus on growing core deposits to fund our loan growth. The loan-to-deposit ratio at September 30, 2022 was 99.2%, as compared to 93.7% at December 31, 2021.

We had a $10.0 million of FHLB advance and no other borrowings at September 30, 2022, compared to $49.0 million of Federal Home Loan Bank advances at December 31, 2021. Borrowings were decreased during the nine months ended September 30, 2022 as we repaid acquired FHLB borrowings, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances. Prepayment penalties in the amount of $647,000 were also recognized with the repayment of these acquired advances for the nine months ended September 30, 2022.

Stockholders’ equity decreased by $5.7 million, or 4.8% to $115.2 million at September 30, 2022 compared to $121.0 million at December 31, 2021, primarily due to $6.9 million in accumulated other comprehensive loss related to our investment portfolio, as well as a decrease in additional paid in capital from the repurchase of 343,632 shares of our common stock totaling $5.3 million with an average price per share of $15.39. Accumulated other comprehensive loss increased by $6.6 million at September 30, 2022 from $358,000 at December 31, 2021.

Average Balance Sheets

The following tables set forth average balance sheets, average annualized yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are monthly average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

For the Three Months Ended September 30,
2022 2021
Average<br>Outstanding<br>Balance Interest Average<br>Yield/Rate Average<br>Outstanding<br>Balance Interest Average<br>Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans $ 639,115 $ 7,734 4.80 % $ 568,442 $ 7,332 5.12 %
Securities 44,690 289 2.56 % 40,569 216 2.13 %
Interest-earning deposits 39,384 189 1.91 % 115,330 53 0.18 %
Other investments 1,163 12 4.19 % 2,476 21 3.37 %
Total interest-earning assets 724,352 8,224 4.50 % 726,817 7,622 4.19 %
Non-interest-earning assets 49,770 64,408
Total assets $ 774,122 $ 791,225
Interest-bearing liabilities:
Interest-bearing checking accounts $ 98,473 $ 47 0.19 % $ 83,519 $ 43 0.21 %
Market rate checking accounts 159,478 100 0.25 % 136,984 117 0.34 %
Savings accounts 83,484 187 0.89 % 93,717 100 0.43 %
Certificates of deposit 89,871 291 1.28 % 105,285 369 1.40 %
Total interest-bearing deposits 431,306 625 0.57 % 419,505 629 0.60 %
FHLB advances 13,696 73 2.12 % 49,039 132 1.07 %
Total interest-bearing liabilities 445,002 698 0.62 % 468,544 761 0.65 %
Non-interest-bearing liabilities 211,986 203,336
Total liabilities 656,988 671,880
Total stockholders' equity 117,134 119,345
Total liabilities and stockholders' equity $ 774,122 $ 791,225
Net interest rate spread 3.88 % 3.54 %
Net interest income $ 7,526 $ 6,861
Net interest-earning assets $ 279,350 $ 258,273
Net interest margin 4.12 % 3.78 %

(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3) Net interest margin represents net interest income divided by average total interest-earning assets.

For the Nine Months Ended September 30,
2022 2021
Average<br>Outstanding<br>Balance Interest Average<br>Yield/Rate Average<br>Outstanding<br>Balance Interest Average<br>Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans $ 616,141 $ 22,013 4.78 % $ 596,024 $ 24,424 5.48 %
Securities 46,585 827 2.37 % 31,374 472 2.01 %
Interest-earning deposits 43,125 286 0.89 % 92,880 134 0.19 %
Other investments 1,117 30 3.57 % 2,273 57 3.32 %
Total interest-earning assets 706,968 23,156 4.38 % 722,551 25,087 4.63 %
Non-interest-earning assets 51,687 63,028
Total assets $ 758,655 $ 785,579
Interest-bearing liabilities:
Interest-bearing checking accounts $ 97,463 $ 134 0.18 % $ 88,154 $ 138 0.21 %
Market rate checking accounts 151,654 282 0.25 % 130,933 378 0.39 %
Savings accounts 84,042 356 0.57 % 93,823 310 0.44 %
Certificates of deposit 91,493 840 1.23 % 114,623 1,284 1.49 %
Total interest-bearing deposits 424,652 1,612 0.51 % 427,533 2,110 0.66 %
FHLB advances 12,304 (875 ) (9.50 )% 41,471 350 1.13 %
Other borrowings 46 1 3.43 % 1,927 15 1.01 %
Total interest-bearing liabilities 437,002 738 0.23 % 470,931 2,475 0.69 %
Non-interest-bearing liabilities 203,164 199,971
Total liabilities 640,166 670,902
Total stockholders' equity 118,489 114,677
Total liabilities and stockholders' equity $ 758,655 $ 785,579
Net interest rate spread 4.15 % 3.94 %
Net interest income $ 22,418 $ 22,612
Net interest-earning assets $ 269,966 $ 251,620
Net interest margin 4.24 % 4.17 %

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

Three Months Ended September 30,<br>2022 vs. 2021 Nine Months Ended September 30,<br>2022 vs. 2021
Increase (Decrease) Due to Total Increase (Decrease) Due to Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans $ 2,671 $ (2,269 ) $ 402 $ 1,242 $ (3,653 ) $ (2,411 )
Securities 23 50 73 260 95 355
Interest-earning deposits (251 ) 387 136 (147 ) 299 152
Other investments (35 ) 26 (9 ) (34 ) 7 (27 )
Total interest-earning assets 2,408 (1,806 ) 602 1,321 (3,252 ) (1,931 )
Interest-bearing liabilities:
Interest-earning demand and savings (72 ) 159 87 (51 ) 97 46
Interest-bearing checking accounts 22 (18 ) 4 19 (23 ) (4 )
Market rate checking accounts 89 (106 ) (17 ) 81 (177 ) (96 )
Certificates of deposit (51 ) (27 ) (78 ) (234 ) (210 ) (444 )
Total interest-bearing deposits (12 ) 8 (4 ) (185 ) (313 ) (498 )
FHLB advances (447 ) 388 (59 ) (85 ) (1,140 ) (1,225 )
Other borrowings — — — — (14 ) (14 )
Total interest-bearing liabilities (459 ) 396 (63 ) (270 ) (1,467 ) (1,737 )
Change in net interest income $ 2,867 $ (2,202 ) $ 665 $ 1,591 $ (1,785 ) $ (194 )

Comparison of Operating Results for the Three Months Ended September 30, 2022 and 2021

General. Net income increased by $56,000, or 3.1% to $1.9 million for the three months ended September 30, 2022 compared to $1.8 million for the three months ended September 30, 2021. The increase was due primarily to an increase in interest income, partially offset by a decrease in noninterest income and an increase in noninterest expenses.

Interest Income. Interest income increased $602,000, or 7.9%, to $8.2 million for the three months ended September 30, 2022 from $7.6 million for the three months ended September 30, 2021. The increase was due primarily to an increase in interest income on loans, which increased $402,000 to $7.7 million for the three months ended September 30, 2022 from $7.3 million for the three months ended September 30, 2021. Interest income on loans increased as our average balance of loans increased by $70.7 million to $639.1 million for the three months ended September 30, 2022 from $568.4 million for the three months ended September 30, 2021. The average balance of loans increased as we continue to acquire talent to assist with our strategic initiatives to both increase and diversify the loan portfolio, while the average yield on loans decreased to 4.80% for the current quarter, as compared to 5.12% for the prior year period, due to the continued changes in the interest rate environment.

Interest income on securities, excluding FHLB stock, increased $73,000 to $289,000 for the three months ended September 30, 2022 from $216,000 for the three months ended September 30, 2021. The average balance of securities increased $4.1 million, or 10.2%, to $44.7 million for the three months ended September 30, 2022 from $40.6 million for the three months ended September 30, 2021, due to our using excess cash from PPP loan repayments and cash previously held in interest-bearing deposit accounts to invest in securities to increase the yield of our interest-earning assets.

Interest Expense. Interest expense decreased $63,000, or 8.3%, to $698,000 for the three months ended September 30, 2022, compared to $761,000 for the three months ended September 30, 2021, due to decreases in interest expense on both deposits and borrowings.

We recorded decreases in interest expense in money rate checking and certificates of deposit and increases in interest expense in savings and interest-bearing checking for the three months ended September 30, 2022 . The decreases were caused by the general decrease in market rates that continued well into this year and a shift in our deposits from certificates of deposit to lower-rate deposit accounts, while the increases were causse by the more recent increase in some rates. Interest expense on certificates of deposit decreased $78,000, or 21.1%, to $291,000 for the three months ended September 30, 2022 from $369,000 for the three months ended September 30, 2021. The average balance of certificates of deposit decreased $15.4 million, or 14.6%, to $89.9 million for the three months ended September 30, 2022 compared to $105.3 million for the three months ended September 30, 2021, and the average rate we paid on certificates of deposit decreased 12 basis points to 1.28% for the three months ended September 30, 2022 from 1.40% for the three months ended September 30, 2021. Interest expense on market rate checking accounts decreased $17,000, or 14.5%, despite an increase in average balance of $22.5 million, or 16.4%, as the rate we paid on these deposits decreased 9 basis points to 0.25% for the three months ended September 30, 2022 from 0.34% for the three months ended September 30, 2021 due to decreases in market rates. Interest expense on savings accounts increased by $87,000, or 87.0%, as the average balance of such accounts decreased $10.2 million, or 10.9%, and the average rate paid on such accounts increased 46 basis points to 0.89% for the three months ended September 30, 2022 compared to 0.43% for the three months ended September 30, 2021. Interest expense on interest-bearing checking accounts increased $4,000, or 9.3%, to $47,000 for the three months ended September 30, 2022 compared to $43,000 for the three months ended September 30, 2021. The average balance of interest-bearing checking accounts increased by $15.0 million, or 17.9%, to $98.5 million for the three months ended September 30, 2022 compared to $83.5 million for the three months ended September 30, 2021, while the average rate paid on such accounts decreased to 0.19% from 0.21%.

Interest expense on borrowings decreased to $73,000 for the three months ended September 30, 2022 from $132,000 for the three months ended September 30, 2021, as we repaid acquired FHLB borrowings.

Net Interest Income. Net interest income increased $665,000, or 9.7% and was $7.5 million for the three months ended September 30, 2022 compared to $6.9 million for the three months ended September 30, 2021. Our net interest rate spread increased to 3.88% for the three months ended September 30, 2022 from 3.54% for the three months ended September 30, 2021, primarily reflecting an increase in interest income on loans, as described above, while our net interest margin was 4.12% for the three months ended September 30, 2022 compared to 3.78% for the three months ended September 30, 2021. For the three months ended September 30, 2022, the cost of average interest-bearing liabilities decreased to 0.62% from 0.65% for the three months ended September 30, 2021, primarily as a result of paying off FHLB acquired advances and recognizing $1.0 million in accretion from fair value adjustments on acquired advances. The total cost of deposits was 0.57% for the three months ended September 30, 2022, compared to 0.60% for the three months ended September 30, 2021. Our average net interest-earning assets increased to $279.4 million for the three months ended September 30, 2022 compared to $258.3 million for the three months ended September 30, 2021.

Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See “—Summary of Significant Accounting Policies” for additional information.

After an evaluation of these factors, we recorded a provision for loan losses of $187,000 for the three months ended September 30, 2022, compared to a provision of $225,000 for the three months ended September 30, 2021. Our allowance for loan losses was $9.3 million at September 30, 2022 compared to $8.6 million at December 31, 2021 and $7.6 million at September 30, 2021. The allowance for loan losses to total loans was 1.43% at September 30, 2022 compared to 1.46% at December 31, 2021 and 1.33% at September 30, 2021. The allowance for loan losses to total loans is an “all-in” number, meaning it includes all originated and acquired loans. This reduces the overall allowance for loan loss to total loans percentage. However, the acquired loans portfolio was marked to fair market value at acquisition and no carryover of the allowance was allowed. The allowance for loan loss to total loans with the total originated and acquired loans is 1.43% at September 30, 2022 compared to 1.46% at December 31, 2021. Excluding the acquired loans, the allowance to total loans is 1.85% at September 30, 2022 compared to 2.06% at December 31, 2021. The allowance for loan losses to non-performing loans was 132.84% at September 30, 2022 compared to 122.09% at December 31, 2021 and 122.76% at September 30, 2021. Net recoveries were $133,000 for the three months ended September 30, 2022, compared

to net loan recoveries of $1.1 million for the year ended December 31, 2021. The net recoveries for 2021 was primarily driven by a $1.0 million recovery on a previously charged off commercial real estate loan.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at September 30, 2022. 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 loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-interest Income. Non-interest income decreased $178,000, or 23.1%, to $593,000 for the three months ended September 30, 2022 from $771,000 for the three months ended September 30, 2021, as a result of a decrease in other non-interest income, primarily due to nonrecurring income received in 2021 for a bank owned life insurance death benefit claim.

Non-interest Expenses. Non-interest expenses information is as follows.

Three Months Ended<br>September 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 3,187 $ 2,777 $ 410 14.7 %
Occupancy 675 633 42 6.6 %
Advertising 128 116 12 10.3 %
Data processing 486 520 (34 ) (6.4 )%
Writedown of premises and equipment — 14 (14 ) (100.0 )%
Other 1,014 967 47 4.9 %
Total non-interest expenses $ 5,490 $ 5,027 $ 463 9.2 %

Operating expenses increased $463,000, or 9.2%, and were $5.5 million for the three months ended September 30, 2022, compared to $5.0 million for the three months ended September 30, 2021, due primarily to increases in salaries and employee benefits. The increase in salaries and employee benefits was due to the Company’s strategic initiative to attract and retain talent.

Income Tax Expense. We recorded income tax expense of $581,000 for the three months ended September 30, 2022 compared to $575,000 for the three months ended September 30, 2021. The effective tax rate was 23.79% for the three months ended September 30, 2022 compared to 24.16% for the three months ended September 30, 2021.

Comparison of Operating Results for the Nine Months Ended September 30, 2022 and 2021

General. Net income decreased $820,000 to $5.4 million for the nine months ended September 30, 2022 compared to $6.3 million for the nine months ended September 30, 2021. The decrease was due primarily to a decrease in PPP loan-related interest and fee income from the receipt of forgiveness payments for these loans, an increase in noninterest expenses and a decrease in noninterest income, partially offset by decreases in interest expense and income tax expense.

Interest Income. Interest income decreased $1.9 million, or 7.7%, to $23.2 million for the nine months ended September 30, 2022 from $25.1 million for the nine months ended September 30, 2021. The decrease was due primarily to a decrease in interest income on PPP loans, which decreased $4.8 million to $611,000 for the nine months ended September 30, 2022 from $5.4 million for the nine months ended September 30, 2021. Our average balance of and our average yield on PPP loans both decreased significantly as a result of the forgiveness of loans by the SBA and the related acceleration of recognized fees.

Excluding PPP loans, interest income on loans increased $2.4 million, or 12.7%, to $21.4 million for the nine months ended September 30, 2022 from $19.0 million for the nine months ended September 30, 2021. Our average balance of non-PPP loans increased $107.4 million, or 21.3%, to $610.7 million for the nine months ended September 30, 2022 from $503.4 million for the nine months ended September 30, 2021, as we continue to acquire talent to assist with our strategic initiatives to both increase and diversify the loan portfolio. Our average yield on loans, not including PPP loans, decreased 29 basis points to 4.70% for the nine months ended September 30, 2022 from 5.03% for the nine months ended September 30, 2021, due to the continued changes in the interest rate environment.

Interest income on securities, excluding FHLB stock, increased $355,000 to $827,000 for the nine months ended September 30, 2022 from $472,000 for the nine months ended September 30, 2021. The average balance of securities increased by $15.2 million, or 48.5%, to $46.6 million for the nine months ended September 30, 2022 from $31.4 million for the nine months ended September 30, 2021, due to our using excess cash from PPP loan repayments and cash previously held in interest-bearing deposit accounts to invest in securities to increase the yield of our interest-earning assets.

Interest Expense. Interest expense decreased $1.7 million, or 70.2%, to $738,000 for the nine months ended September 30, 2022, compared to $2.5 million for the nine months ended September 30, 2021, due primarily to our repaying acquired FHLB borrowings and recognizing $1.0 million in accretion from the fair value adjustments on acquired advances. Interest expense on deposits also decreased $498,000 or 23.6%.

We recorded decreases in interest expense on all deposit categories except savings accounts for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily as a result of continued decreases in market rates, but also as a result of a shift in our deposits from certificates of deposit to lower-rate deposit accounts. Interest expense on certificates of deposit decreased $444,000, or 34.6%, to $840,000 for the nine months ended September 30, 2022 from $1.3 million for the nine months ended September 30, 2021. The average balance of certificates of deposit decreased $23.1 million, or 20.2%, to $91.5 million for the nine months ended September 30, 2022 compared to $114.6 million for the nine months ended September 30, 2021, and the average rate we paid on certificates of deposit decreased 26 basis points to 1.23% for the nine months ended September 30, 2022 from 1.49% for the nine months ended September 30, 2021. Interest expense on market rate checking accounts decreased $96,000, or 25.4%, to $282,000 for the nine months ended September 30, 2022, despite an increase in average balance of $20.7 million, or 15.8%, to $151.7 million for the nine months ended September 30, 2022, as the rate we paid on these deposits decreased 14 basis points to 0.25% for the nine months ended September 30, 2022 from 0.39% for the nine months ended September 30, 2021 due to decreases in market rates. Interest expense on savings accounts increased by $46,000, or 14.8%, as the average balance of such accounts decreased $9.8 million, or 10.4%, and the average rate paid on such accounts increased to 0.57% for the nine months ended September 30, 2022 compared to 0.44% for the nine months ended September 30, 2021 as rates are starting to go up. Interest expense on interest-bearing checking accounts decreased to $4,000 for the nine months ended September 30, 2022 compared to $138,000 for the nine months ended September 30, 2021. The average balance of interest-bearing checking accounts increased to $97.5 million for the nine months ended September 30, 2022 compared to $88.2 million for the nine months ended September 30, 2021, while the average rate paid on such accounts decreased to 0.18% from 0.21%.

We recognized a gain on borrowings of $874,000 for the nine months ended September 30, 2022 compared to interest expense on borrowings of $365,000 for the nine months ended September 30, 2021, as we repaid acquired FHLB borrowings during the current period, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances.

Net Interest Income. Net interest income was $22.4 million for the nine months ended September 30, 2022 compared to $22.6 million for the nine months ended September 30, 2021. Our net interest rate spread increased to 4.15% for the nine months ended September 30, 2022 from 3.94% for the nine months ended September 30, 2021, primarily reflecting the repayment of FHLB borrowings, as described above, while our net interest margin was 4.24% for the nine months ended September 30, 2022 compared to 4.17% for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the cost of average interest-bearing liabilities decreased to 0.23% from 0.69% for the nine months ended September 30, 2021, primarily as a result of paying off FHLB acquired advances and recognizing $1.0 million in accretion from fair value adjustments on acquired advances. The total cost of deposits was 0.51% for the nine months ended September 30, 2022, compared to 0.66% for the nine months ended September 30, 2021, due to decreases in market rates and in the average balance of higher cost-certificates of deposit. Our average net interest-earning assets increased by $18.3 million, or 7.3%, to $270.0 million for the nine months ended September 30, 2022 from $251.6 million for the nine months ended September 30, 2021.

Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See “—Summary of Significant Accounting Policies” for additional information.

After an evaluation of these factors, we recorded a provision for loan losses of $654,000 for the nine months ended September 30, 2022, compared to a provision of $975,000 for the nine months ended September 30, 2021. Our provision expense was higher in 2021 due to the ongoing uncertainty related to the COVID-19 pandemic. We continue to assess current economic conditions when determining the level of provision expense. Our allowance for loan losses was $9.3 million at September 30, 2022 compared to $8.6 million at December 31, 2021 and $7.6 million at September 30, 2021. The allowance for loan losses to total loans was 1.43% at

September 30, 2022 compared to 1.46% at December 31, 2021 and 1.33% at September 30, 2021. The allowance for loan losses to total loans is an “all-in” number, meaning it includes all originated and acquired loans. This reduces the overall allowance for loan loss to total loans percentage. However, the acquired loans portfolio was marked to fair market value at acquisition and no carryover of the allowance was allowed. The allowance for loan loss to total loans with the total originated and acquired loans is 1.43% at September 30, 2022 compared to 1.46% at December 31, 2021. Excluding the acquired loans, the allowance to total loans is 1.85% at September 30, 2022 compared to 2.06% at December 31, 2021. The allowance for loan losses to non-performing loans was 132.84% at September 30, 2022 compared to 122.09% at December 31, 2021 and 122.76% at September 30, 2021. Net loan recoveries were $108,000 for the nine months ended September 30, 2022, as compared to $295,000 for the nine months ended September 30, 2021.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at September 30, 2022. 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 loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-interest Income. Non-interest income decreased $270,000, or 12.8%, to $1.8 million for the nine months ended September 30, 2022 from $2.1 million for the nine months ended September 30, 2021. This was a result of the decrease in other non-interest income, primarily due to nonrecurring income received in 2021 for a bank owned life insurance death benefit claim.

Non-interest Expenses. Non-interest expenses information is as follows.

Nine Months Ended<br>September 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 9,219 $ 7,797 $ 1,422 18.2 %
Occupancy 1,798 2,329 (531 ) (22.8 )%
Advertising 326 296 30 10.1 %
Data processing 1,476 1,518 (42 ) (2.8 )%
Writedown of premises and equipment — 888 (888 ) (100.0 )%
FHLB prepayment penalties 647 — 647 100.0 %
Other 3,019 2,764 255 9.2 %
Total non-interest expenses $ 16,485 $ 15,592 $ 893 5.7 %

Operating expenses increased $893,000, and were $16.5 million for the nine months ended September 30, 2022, compared to $15.6 million for the nine months ended September 30, 2021, due primarily to an increase in salaries and employee benefits and prepayment penalties associated with the paydown of our FHLB advances. The increase in salaries and employee benefits was due to the Company’s strategic initiative to attract and retain talent. These increases were offset by decreases in the writedown of premises and equipment and in occupancy expense, related primarily to cost savings from facilities consolidation during the previous period.

Income Tax Expense. We recorded income tax expense of $1.7 million for the nine months ended September 30, 2022 compared to $1.9 million for the nine months ended September 30, 2021. The lower tax expense for the 2022 period was primarily due to lower pretax income. The effective tax rate was 23.61% for the nine months ended September 30, 2022 compared to 23.26% for the nine months ended September 30, 2021.

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;

• diversifying our loan portfolio by adding more commercial-related loans and consumer loans, which typically have shorter maturities and/or balloon payments; and

• continuing to price our one-to-four family residential real estate loan products in a way that encourages borrowers to select our balloon loans as opposed to longer-term, fixed-rate loans.

By following these strategies, we believe that we are better positioned to react to increases in market interest rates. In addition, we originate adjustable-rate, one-to-four-family residential real estate loans and home equity loans and lines of credit, which are originated with adjustable interest rates.

We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.

Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

The table below sets forth, as of September 30, 2022, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

Change in Interest Rates <br>(basis points) (1) Net Interest Income<br>Year 1 Forecast Year 1 Change<br>from Level
(Dollars in thousands)
+400 $ 29,424 (3.90 )%
+200 30,048 (1.86 )%
Level 30,619 —
-200 28,377 (7.32 )%
-400 25,579 (16.46 )%

(1) Assumes an immediate uniform change in interest rates at all maturities.

The table above indicates that at September 30, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 1.86% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 7.32% decrease in net interest income. At September 30, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 3.96% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 1.76% decrease in net interest income.

Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (net economic value or “NEV”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract 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.

The table below sets forth, as of September 30, 2022 the calculation of the estimated changes in our NEV that would result from the designated immediate changes in the United States Treasury yield curve.

Change in Interest Estimated Increase (Decrease) in NEV NEV as a Percentage of Present<br>Value of Assets (3)
Rates (basis <br>points) (1) Estimated<br>NEV (2) Amount Percent NEV <br>Ratio (4) Increase (Decrease)<br>(basis points)
(Dollars in thousands)
+400 $ 111,014 $ (19,128 ) (14.70 )% 16.28 % (111 )
+200 119,991 (10,151 ) (7.80 )% 16.82 % (57 )
— 130,142 — — 17.39 % —
-200 129,973 (169 ) (0.13 )% 16.56 % (83 )
-400 124,226 (5,916 ) (4.55 )% 15.26 % (213 )

(1) Assumes an immediate uniform change in interest rates at all maturities.

(2) NEV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4) NEV Ratio represents NEV divided by the present value of assets.

The table above indicates that at September 30, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 7.80% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 0.13% decrease in net economic value. At September 30, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 3.98% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 3.16% decrease in net economic value.

GAP Analysis. In addition, we analyze our interest rate sensitivity by monitoring our interest rate sensitivity “gap.” Our interest rate sensitivity gap is the difference between the amount of our interest-earning assets maturing or repricing within a specific time period and the amount of our interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a period exceeds the amount of interest rate sensitive liabilities maturing or repricing during the same period, and a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a period exceeds the amount of interest rate sensitive assets maturing or repricing during the same period.

The following table sets forth our interest-earning assets and our interest-bearing liabilities at September 30, 2022, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at September 30, 2022, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans. Amounts are based on a preliminary balance sheet as of September 30, 2022, and may not equal amounts included in our unaudited consolidated financial statements for the three months or nine months ended September 30, 2022. However, we believe that there would be no material changes in the results of the gap analysis if the unaudited financial results included in Part 1, Item 1 of this quarterly report had been utilized.

Time to Repricing
Zero to 90 Days Zero to 180 Days Zero Days to <br>One Year Zero Days to <br>Two Years Zero Days to<br>Five Years Total
(Dollars in thousands)
Assets:
Cash and due from banks $ 33,619 $ 33,619 $ 33,619 $ 33,619 $ 33,619 $ 40,507
Investments 4,480 5,005 6,024 7,945 20,517 42,902
Net loans 91,734 121,004 177,594 288,585 504,346 641,071
Other assets — — — — — 51,667
Total $ 129,833 159,628 217,237 330,149 558,482 $ 776,147
Liabilities:
Non-maturity deposits $ 176,838 191,304 220,236 278,094 432,096 $ 552,818
Certificates of deposit 8,935 19,104 41,442 55,987 93,223 98,816
Borrowings 15,446 15,446 15,446 15,446 15,446 15,446
Other liabilities — — — — — 13,059
Equity capital — — — — — 96,008
Total (1) $ 201,219 225,854 277,124 349,527 540,765 $ 776,147
Asset/liability gap $ (71,386 ) (66,226 ) (59,887 ) (19,378 ) 17,717
Gap/assets ratio (2) (9.20 )% (8.53 )% (7.72 )% (2.50 )% 2.28 %

(1) Amounts do not foot due to rounding.

(2) Gap/assets ratio equals the asset/liability gap for the period divided by total assets ($776.4 million).

At September 30, 2022, our asset/liability gap from zero days to one year was negative $59.9 million, resulting in a gap/assets ratio of (7.72)%. At September 30, 2021, our asset/liability gap from zero days to one year was $4.2 million, resulting in a gap/assets ratio of (0.53)%.

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. 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 September 30, 2022, we had a $191.6 million line of credit with the Federal Home Loan Bank of Atlanta, with advances of $10.0 million outstanding and a $5.0 million letter of credit outstanding, and we had a $5.0 million unsecured federal funds line of credit, a $7.5 million unsecured federal funds line of credit and a $20.0 million unsecured federal funds line of credit. We also have a line of $79.4 million with the Federal Reserve Bank of Atlanta Discount Window secured by $118.3 million in loans. No amount was outstanding on the unsecured lines of credit or the Discount Window at September 30, 2022.

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 $8.2 million for the nine months ended September 30, 2022, compared to $13.2 million for the nine months ended September 30, 2021. Net cash used in investing activities was $67.4 million for the nine months ended September 30, 2022, compared to net cash provided by investing activities of $7.8 million for the nine months ended September 30, 2021. Net cash used in investing activities typically consists primarily of disbursements for loan originations and purchases of investment securities. Net cash used in financing activities, which consists primarily of activity in deposit accounts and proceeds/repayments of FHLB advances, and beginning in 2022, a stock repurchase program, was $12.1 million for the nine months ended September 30, 2022 which included repaying $143.0 million of FHLB borrowings, borrowing $105.0 million in FHLB advances and repurchasing stock of $5.3 million, compared to $68.3 million for the nine months ended September 30, 2021, which included a capital injection of $35.4 million following our stock offering in January 2021.

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 September 30, 2022, we exceeded all of our regulatory capital requirements and the Bank is categorized as “well capitalized.” Management is not aware of any conditions or events since the most recent notification that would change our category. The Bank’s actual capital amounts and ratios for September 30, 2022 and December 31, 2021 are presented in the table below (in thousands).

For Capital To Be Well Capitalized
Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2022:
Common Equity Tier 1
(to Risk Weighted Assets) $ 90,090 13 % $ 32,174 4.50 % $ 46,473 6.50 %
Total Capital
(to Risk Weighted Assets) $ 99,032 14 % $ 57,197 8 % $ 71,497 10 %
Tier I Capital
(to Risk Weighted Assets) $ 90,090 13 % $ 42,898 6 % $ 57,197 8 %
Tier I Capital
(to Average Assets) $ 90,090 12 % $ 30,412 4 % $ 38,016 5 %
As of December 31, 2021:
Common Equity Tier 1
(to Risk Weighted Assets) $ 83,662 13 % $ 27,960 4.50 % $ 40,386 6.50 %
Total Capital
(to Risk Weighted Assets) $ 91,438 15 % $ 49,706 8 % $ 62,133 10 %
Tier I Capital
(to Risk Weighted Assets) $ 83,662 13 % $ 37,280 6 % $ 49,706 8 %
Tier I Capital
(to Average Assets) $ 83,662 11 % $ 31,070 4 % $ 38,837 5 %

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2022, we had outstanding commitments to originate loans of $101.0 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 September 30, 2022 totaled $41.4 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in Part 1, Item 2 of this quarterly report under “Management of Market Risk.”

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2022. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2022, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 1. Legal Proceedings

We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2022, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

Item 1A. Risk Factors

Not applicable for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The following table sets forth information in connection with repurchases of shares of the Company’s common stock during the three months ended September 30, 2022:

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs (1)
July 1, 2022 through July 31, 2022 — — — 35,030
August 1, 2022 through August 31, 2022 35,030 14.63 35,030 —
September 1, 2022 through September 30, 2022 — — — —
35,030 $ 14.63 35,030 —

(1) The Board of Directors approved a stock repurchase program on January 27, 2022, which authorized the repurchase of up to 343,632 shares (approximately 5.0% of the then-outstanding shares). The total number of shares purchased as part of the publicly announced plan totaled 343,632 as of September 30, 2022, which is the full amount authorized under this repurchase program.

Item 6. Exhibits

Exhibit
Number Description
3.1 Charter of Affinity Bancshares, Inc. (1)
3.2 Bylaws of Affinity Bancshares, Inc. (2)
3.3 Amendment to Bylaws of Affinity Bancshares, Inc. (3)
10.1 Employment Agreement, dated as of May 24, 2021, by and among Affinity Bancshares, Inc., Affinity Bank and Brandi Pajot (4)
10.2 Amendment 1 to Employment Agreement, dated as of August 2, 2022, by and among Affinity Bancshares, Inc., Affinity Bank and Brandi Pajot (5)
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0 The following materials for the quarter ended September 30, 2022, formatted in inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive (Loss) Income, (iv) Statements of Changes in Stockholders’ Equity, (v) Statements of Cash Flows, and (vi) Notes to Financial Statements
104.0 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

(1) Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-215041).

(2) Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-215041).

(3) Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 31, 2017 (Commission File No. 001-38074).

(4) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 3, 2022 (Commission File No. 001-39914).

(5) Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 3, 2022 (Commission File No. 001-39914).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AFFINITY BANCSHARES, INC.
Date: November 10, 2022 /s/ Edward J. Cooney
Edward J. Cooney
President, Chief Executive Officer and Director
Date: November 10, 2022 /s/ Brandi Pajot
Brandi Pajot
Senior Vice President and Chief Financial Officer

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Edward J. Cooney, certify that:

  1. I have reviewed this Quarterly Report on Form 10-Q of Affinity Bancshares, Inc.;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

  1. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2022 /s/ Edward J. Cooney
Edward J. Cooney
President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Brandi Pajot, certify that:

  1. I have reviewed this Quarterly Report on Form 10-Q of Affinity Bancshares, Inc.;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

  1. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2022 /s/ Brandi Pajot
Brandi Pajot
Senior Vice President and Chief Financial Officer

EX-32

Exhibit 32

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Edward J. Cooney, Chief Executive Officer of Affinity Bancshares, Inc. (the “Company”), and Brandi Pajot, Senior Vice President and Chief Financial Officer of the Company, each certify in his or her capacity as an executive officer of the Company that he or she has reviewed the quarterly report on Form 10-Q for the quarter ended September 30, 2022 (the “Report”) and that to the best of his or her knowledge:

  1. the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 10, 2022 /s/ Edward J. Cooney
Edward J. Cooney
President and Chief Executive Officer
Date: November 10, 2022 /s/ Brandi Pajot
Brandi Pajot
Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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