Affinity Bancshares, Inc. - Quarter Report: 2021 September (Form 10-Q)

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, 2021


☐	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		86-1339773
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3175 Highway 278 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 8, 2021, 6,872,634 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, 2021 (unaudited) and December 31, 2020 (audited)	2

	Consolidated Statements of Earnings for the Three Months and Nine Months Ended September 30, 2021 and 2020 (unaudited)	3

	Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2021 and 2020 (unaudited)	4

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months and Nine Months Ended September 30, 2021 and 2020 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (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	41

Item 4.	Controls and Procedures	42

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	43

	SIGNATURES	44

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AFFINITY BANCSHARES, INC.

Consolidated Balance Sheets


	September 30, 2021			December 31, 2020
	(unaudited)			(audited)
	(In thousands)
Assets

Cash and due from banks, including reserve requirement of $0 at September 30, 2021 and December 31, 2020	$	17,321		$	5,552
Interest-earning deposits in other depository institutions		113,589			172,701
Cash and cash equivalents		130,910			178,253
Investment securities available-for-sale		44,071			24,005
Other investments		2,476			1,596
Loans, net		563,539			592,254
Other real estate owned		—			1,292
Premises and equipment, net		7,425			8,617
Bank owned life insurance		15,285			15,311
Intangible assets		18,797			18,940
Accrued interest receivable and other assets		7,462			10,360
Total assets	$	789,965		$	850,628

Liabilities and Stockholders' Equity

Liabilities:
Savings accounts	$	92,003		$	96,591
Interest-bearing checking		82,750			129,813
Market rate checking		138,592			121,317
Non-interest-bearing checking		196,990			160,819
Certificates of deposit		104,896			131,625
Total deposits		615,231			640,165
Federal Home Loan Bank advances		49,020			19,117
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings		—			100,813
Other borrowings		—			5,000
Accrued interest payable and other liabilities		6,011			4,748
Total liabilities		670,262			769,843

Stockholders' equity:
Common stock (par value $0.01 per share, 40,000,000 shares authorized, 6,872,634 issued and outstanding at September 30, 2021 and 19,000,000 shares authorized, 6,968,469 issued and 6,865,653 outstanding at December 31, 2020) (1)		69			69
Preferred stock (10,000,000 shares authorized, no shares outstanding at September 30, 2021 and 1,000,000 shares authorized, no shares outstanding at December 31, 2020)		—			—
Additional paid in capital		67,899			33,628
Treasury stock, 102,816 shares at December 31, 2020, at cost (1)		—			(1,268	)
Unearned ESOP shares		(5,056	)		(2,453	)
Retained earnings		56,905			50,650
Accumulated other comprehensive (loss) income		(114	)		159
Total stockholders' equity		119,703			80,785
Total liabilities and stockholders' equity	$	789,965		$	850,628

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

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Earnings

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021			2020
			(In thousands)
Interest income:
Loans, including fees	$	7,332	$	8,526	$	24,424		$	22,046
Investment securities, including dividends		237		109		529			392
Interest-earning deposits		53		36		134			185
Total interest income		7,622		8,671		25,087			22,623
Interest expense:
Deposits		629		1,163		2,110			3,789
Borrowings		132		257		365			649
Total interest expense		761		1,420		2,475			4,438
Net interest income before provision for loan losses		6,861		7,251		22,612			18,185
Provision for loan losses		225		600		975			1,400
Net interest income after provision for loan losses		6,636		6,651		21,637			16,785
Noninterest income:
Service charges on deposit accounts		416		351		1,126			1,009
Gain on sales of investment securities available-for-sale		—		—		—			20
Other		355		195		980			569
Total noninterest income		771		546		2,106			1,598
Noninterest expenses:
Salaries and employee benefits		2,715		2,415		7,609			8,767
Deferred compensation		62		70		188			211
Occupancy		633		734		2,329			2,071
Advertising		116		40		296			173
Data processing		520		523		1,518			1,773
Other real estate owned		—		9		19			11
Net (gain) loss on sale of other real estate owned		—		159		(127	)		188
Legal and accounting		153		230		555			1,196
Organizational dues and subscriptions		105		70		266			238
Director compensation		50		51		150			153
Federal deposit insurance premiums		61		51		201			304
Writedown of premises and equipment		14		—		888			—
Other		598		400		1,700			1,324
Total noninterest expenses		5,027		4,752		15,592			16,409
Income before income taxes		2,380		2,445		8,151			1,974
Income tax expense		575		575		1,896			324
Net income	$	1,805	$	1,870	$	6,255		$	1,650
Basic earnings per share (1)	$	0.26	$	0.25	$	0.90		$	0.22
Diluted earnings per share (1)	$	0.26	$	0.25	$	0.89		$	0.22

(1) 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).

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Comprehensive Income

(unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2021		2020			2021			2020
			(In thousands)
Net income	$	1,805	$	1,870		$	6,255		$	1,650

Other comprehensive (loss) income:

Net unrealized (loss) gain on available-for-sale securities, net of taxes of $29, $(11), $(96) and $52		82		(32	)		(273	)		150

Reclassification adjustment for gain included in net income, net of taxes of ($5)		—		—			—			(15	)

Total other comprehensive (loss) income		82		(32	)		(273	)		135

Total comprehensive income	$	1,887	$	1,838		$	5,982		$	1,785

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)


	Three and Nine Months Ended September 30, 2020 and 2021
																Accumulated
			Additional													Other
	Common		Paid In				Treasury			Unearned			Retained			Comprehensive
	Stock (1)		Capital				Stock			ESOP Shares			Earnings			Income (Loss)			Total
						(In thousands)
Beginning balance December 31, 2019	$	69	$	33,366			$	(1,268	)	$	(2,571	)	$	47,562		$	9		$	77,167
ESOP loan payment and release of ESOP shares		—		—				—			30			—			—			30
Purchase of treasury stock		—		(80	)			—			—			—			—			(80	)
Change in unrealized gain on investment securities available- for-sale, net of tax		—		—				—			—			—			121			121
Net loss		—		—				—			—			(1,298	)		—			(1,298	)
Ending balance March 31, 2020	$	69	$	33,286			$	(1,268	)	$	(2,541	)	$	46,264		$	130		$	75,940
ESOP loan payment and release of ESOP shares	$	—	$	(8	)		$	—		$	29		$	—		$	—		$	21
Issuance of restricted stock awards		—		17				—			—			—			—			17
Stock-based compensation expense		—		141				—			—			—			—			141
Change in unrealized gain on investment securities available- for-sale		—		—				—			—			—			46			46
Net income		—		—				—			—			1,079			—			1,079
Ending balance June 30, 2020	$	69	$	33,436			$	(1,268	)	$	(2,512	)	$	47,343		$	176		$	77,244
ESOP loan payment and release of ESOP shares	$	—	$	(10	)		$	—		$	30		$	—		$	—		$	20
Issuance of restricted stock awards		—		—				—			—			—			—			—
Stock-based compensation expense		—		110				—			—			—			—			110
Change in unrealized gain on investment securities available- for-sale		—		—				—			—			—			(32	)		(32	)
Net income		—		—				—			—			1,870			—			1,870
Ending balance September 30, 2020	$	69	$	33,536			$	(1,268	)	$	(2,482	)	$	49,213		$	144		$	79,212

Ending 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 gain on investment securities available- for-sale		—		—				—			—			—			(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
Purchase of treasury stock		—		—				—			—			—			—			—


Change in unrealized gain on investment securities available-for-sale, net of tax		—		—			—		—			—		(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, net of tax		—		—			—		—			—		82			82
Net income		—		—			—		—			1,805		—			1,805
Ending balance September 30, 2021	$	69	$	67,899		$	—	$	(5,056	)	$	56,905	$	(114	)	$	119,703

(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,
	2021			2020
	(In thousands)
Cash flows from operating activities:
Net income	$	6,255		$	1,650
Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of effects of acquisition:
Depreciation and (accretion) amortization		527			(463	)
Stock-based compensation expense		295			188
Provision for loan losses		975			1,400
ESOP expense		193			71
Net gain on sale of investment securities available-for-sale		—			(20	)
Net (gain) loss on sale and writedown of other real estate owned		(127	)		188
Increase in cash surrender value of bank owned life insurance		(274	)		(299	)
Loss on writedown of premises and equipment		888			—
Change in:
Accrued interest receivable and other assets		3,119			(5,989	)
Accrued interest payable and other liabilities		1,302			2,805
Net cash provided by (used in) operating activities		13,153			(469	)
Cash flows from investing activities, net of effects of acquisition:
Purchases of investment securities available-for-sale		(23,674	)		(11,908	)
Purchases of premises and equipment		(577	)		(196	)
Proceeds from disposal of premises and equipment		—			21
Proceeds from sale of investment securities available-for-sale		—			1,677
Proceeds from paydowns of investment securities available-for-sale		3,102			5,639
Purchases of other investments		(1,412	)		(1,358	)
Proceeds from sales of other investments		533			1,063
Proceeds from bank owned life insurance death claim		300			—
Net change in loans		28,090			(116,135	)
Proceeds from sales of other real estate owned		1,420			129
Net cash paid in business combination		—			(22,749	)
Net cash provided by (used in) investing activities		7,782			(143,817	)
Cash flows from financing activities, net of effects of acquisition:
Net change in demand and savings deposits		(24,913	)		138,474
Proceeds from FHLB advances		35,000			45,000
Repayment of FHLB advances		(5,000	)		(45,000	)
Proceeds from PPPLF borrowings		—			129,909
Repayment of PPPLF borrowings		(100,813	)		—
Proceeds from holding company loan		—			5,000
Repayment of holding company loan		(5,000	)		—
Net change in repurchase agreements and other borrowings		—			2,357
Proceeds from stock offering		37,108			—
Stock offering expenses		(1,699	)		—
Funding of ESOP		(2,961	)		—
Net cash (used in) provided by financing activities		(68,278	)		275,740
Net change in cash and cash equivalents		(47,343	)		131,454
Cash and cash equivalents at beginning of period		178,253			48,117
Cash and cash equivalents at end of period	$	130,910		$	179,571
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	2,405		$	1,790
Cash paid for interest		2,552			4,138
Vacant land transferred to other real estate owned		—			460

Fair value of assets acquired	$	—			317,742
Fair value of liabilities assumed		—			288,732
Net assets acquired		—			29,019

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

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 County, Georgia and surrounding counties, and originating dental practice loans and indirect automobile loans throughout the Southeastern United States. The Bank offers such customary banking services as consumer and commercial checking accounts, savings accounts, certificates of deposit, mortgage, commercial and consumer loans, including indirect automobile loans, money transfers and a variety of other banking services. The Company was incorporated in 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.

On January 20, 2021, the Company completed the Conversion. Accordingly, prior comparable periods within the financial statements and notes thereto reflect the operations of Community First Bancshares, Inc., and not the Company. However, references to the Company include Community First Bancshares, Inc. where indicated by the context.

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, 2021 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, 2020. The results of operations for the three and nine months ended September 30, 2021 and 2020 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

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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, 2020 included in the Company’s Form 10-K.

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,
	2021		2020		2021		2020
	(In thousands except per share data)

Net income	$	1,805	$	1,870	$	6,255	$	1,650
Weighted average common shares outstanding		6,872,634		7,570,797		6,931,128		7,547,363
Effect of dilutive common stock awards		93,002		—		93,002		—
Diluted weighted average common shares outstanding		6,965,636		7,570,797		7,024,130		7,547,363
Basic earnings per common share*	$	0.26	$	0.25	$	0.90	$	0.22
Diluted earnings per common share*	$	0.26	$	0.25	$	0.89	$	0.22

*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.

For the three months and nine months ended September 30, 2020, options to purchase 90,441 shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. There were no anti-dilutive options for the three and nine months ended September 30, 2021.

Recent Accounting Pronouncements

There have been no pronouncements issued during the quarter that would have a material impact on the Company's financial statements.

(2) Acquisition

On January 10, 2020, the Company consummated its merger with ABB Financial Group, Inc. (“ABB”) pursuant to the Agreement and Plan of Merger by and between the Company and ABB dated August 19, 2019, (the “Merger Agreement”), whereby ABB was merged with and into the Company, and Affinity Bank, ABB’s wholly owned commercial bank subsidiary serving Cobb County, Georgia and Fulton County, Georgia and surrounding counties, was merged with and into Newton Federal Bank. The system integration was completed in September 2020. Affinity Bank operated one branch office in Cobb County, Georgia and one loan production office in Fulton County, Georgia.

The purpose of the merger was for strategic reasons beneficial to the Company. The acquisition is consistent with its plan to drive growth and efficiency through increased scale, leverage the strengths of each bank across the combined customer base, enhance profitability, and add shareholder value.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Under the terms of the Merger Agreement, each outstanding share of ABB common stock was converted into the right to receive $7.50 in cash, for a total paid of $40.3 million in cash with no stock issued. Pre-existing ABB equity awards (restricted stock units and stock options) immediately vested upon consummation of the merger. The Company paid $2.7 million reflecting the net value for the vested ABB restricted stock outstanding at the consummation of the merger.

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of ABB prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, other real estate owned, bank owned life insurance and other assets, deposits, debt and deferred taxes with the assistance of third-party valuations, appraisals, and third-party advisors. The estimated fair values will be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation.

The fair value of the assets acquired and liabilities assumed on January 10, 2020 was as follows:


	As recorded by		Fair Value			As recorded by
	ABB		Adjustments			CFBI
			(in thousands)

Cash, cash equivalents and securities available-for-sale	$	41,561	$	—		$	41,561
Loans		264,176		(2,327	)		261,849
Other real estate owned		790		—			790
Core deposit intangible		—		1,913			1,913
Fixed assets and other assets		11,629		—			11,629
Total assets acquired		318,156		(414	)		317,742

Deposits		249,049		265			249,314
Borrowings and other liabilities		37,764		1,654			39,418
Total liabilities acquired		286,813		1,919			288,732

Excess of assets acquired over liabilities acquired		31,343		(2,333	)		29,010

Purchase price							40,338
Net assets acquired							29,010
Less preferred stock redeemed							(5,891	)
Net assets acquired less preferred stock							23,119
Goodwill						$	17,219

The following unaudited pro forma information presents the results of operations for nine months ended September 30, 2020, as if the acquisition had occurred January 1 of the period. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.


	Nine Months Ended September 30,
	2020
	(In thousands except per share data)

Total revenues, net of interest expense	$	20,083
Net income		591
Diluted earnings per share		0.08

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(3) Investment Securities

Investment securities available-for-sale at September 30, 2021 and December 31, 2020 are as follows: (in thousands)


	Amortized		Gross Unrealized		Gross Unrealized			Estimated
September 30, 2021	Cost		Gains		Losses			Fair Value
U.S. Treasury securities	$	4,074	$	13	$	(4	)	$	4,083
Municipal securities - tax exempt		541		—		(8	)		533
Municipal securities - taxable		797		—		(8	)		789
U. S. Government sponsored enterprises		11,837		2		(133	)		11,706
Government agency mortgage-backed securities		20,258		263		(186	)		20,335
Corporate securities		6,717		16		(108	)		6,625
Total	$	44,224	$	294	$	(447	)	$	44,071
December 31, 2020
U. S. Government sponsored enterprises	$	11,870	$	1	$	(12	)	$	11,859
Government agency mortgage-backed securities		9,206		326		—			9,532
Corporate securities		2,715		—		(101	)		2,614
Total	$	23,791	$	327	$	(113	)	$	24,005

There were 23 securities in an unrealized loss position as of September 30, 2021 for less than 12 months. There were two securities in an unrealized loss position for 12 months or greater as of September 30, 2021. 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. Two of the securities are agency bonds and one is a U.S. Treasury bonds, so all of these are direct obligations of the U.S. Government. Twelve of the securities are mortgage backed bonds that have the direct or implied backing of the U.S. Government. Two of the bonds are municipal securities and the remaining eight 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, 2021, by contractual maturity, are shown below. Maturities of mortgage-backed securities will differ from contractual maturities because borrowers

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		4,074		4,083
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		541		533
Municipal securities - taxable
Within 1 year		—		—
Greater than 1 to 5 years		—		—
Greater than 5 to 10 years		—		—
Greater than 10 years		797		789
Government agency securities
Within 1 year		—		—
Greater than 1 to 5 years		—		—
Greater than 5 to 10 years		—		—
Greater than 10 years		11,837		11,706
Corporate securities
Within 1 year		—		—
Greater than 1 to 5 years		—		—
Greater than 5 to 10 years		6,217		6,200
Greater than 10 years		500		425
		23,966		23,736
Government agency mortgage-backed securities		20,258		20,335
Total	$	44,224	$	44,071

No securities were sold during the three months or nine months ended September 30, 2021. No securities were sold during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company sold available-for-sale securities with a book value of $1.7 million at a gain of $20,000.

Securities with a carrying value of approximately $1.5 million and $2.3 million were pledged to secure public deposits at September 30, 2021 and December 31, 2020, respectively.

(4) Loans and Allowance for Loan Losses

Major classifications of loans, by collateral code, at September 30, 2021 and December 31, 2020 are summarized as follows: (in thousands)


	September 30, 2021			December 31, 2020
Commercial (secured by real estate)	$	207,018		$	178,571
Commercial and industrial		170,123			155,554
Paycheck Protection Program loans		31,715			101,749
Construction, land and acquisition & development		21,713			23,571
Residential mortgage 1-4 family		73,532			91,777
Consumer installment		67,069			47,393
Total		571,170			598,615
Less allowance for loan losses		(7,631	)		(6,361	)
Total loans, net	$	563,539		$	592,254

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 is a premier lender 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 nine months ended September 30, 2021 and the year ended December 31, 2020, respectively. These loans are fully guaranteed by the Small Business Administration.

Qualifying loans in the amount of $328.6 million and $309.9 million were pledged to secure the line of credit from the Federal Home Loan Bank of Atlanta (“FHLB”) at September 30, 2021 and December 31, 2020, respectively.

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, 2021 and 2020: (in thousands)


September 30, 2021	Commercial (Secured by Real Estate)			Commercial and Industrial			Paycheck Protection Program (1)		Construction, Land and Acquisition & Development			Residential Mortgage			Consumer Installment			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	3,084		$	1,320		$	—	$	224		$	970		$	719		$	44		$	6,361
Provision		316			1,210			—		(42	)		(555	)		69			(23	)		975
Charge-offs		—			(54	)		—		—			—			(31	)		—			(85	)
Recoveries		265			37			—		—			73			5			—			380
Ending balance	$	3,665		$	2,513		$	—	$	182		$	488		$	762		$	21		$	7,631
Ending allowance attributable to loans:
Individually evaluated for impairment	$	—		$	45		$	—	$	—		$	8		$	—		$	—		$	53
Collectively evaluated for impairment		3,665			2,468			—		182			480			762			21			7,578
Total ending allowance	$	3,665			2,513		$	—		182			488			762			21			7,631
Loans:
Individually evaluated for impairment	$	3,553		$	933		$	—	$	—		$	3,221		$	2		$	—		$	7,709
Collectively evaluated for impairment		203,465			169,190			31,715		21,713			70,311			67,067			—			563,461
Total loans	$	207,018		$	170,123		$	31,715	$	21,713		$	73,532		$	67,069		$	—		$	571,170

December 31, 2020
Allowance for loan losses:
Beginning balance	$	1,661		$	1,478		$	—	$	153		$	369		$	466		$	7		$	4,134
Provision		1,207			(194	)		—		71			627			252			37			2,000
Charge-offs		(30	)		—			—		—			(126	)		(29	)		—			(185	)
Recoveries		246			36			—		—			100			30			—			412
Ending balance	$	3,084		$	1,320		$		$	224		$	970		$	719		$	44		$	6,361
Ending allowance attributable to loans:
Individually evaluated for impairment	$	2		$	35		$	—	$	—		$	14		$	—		$	—		$	51

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements


Collectively evaluated for impairment		3,082		1,285		—		224		956		719		44		6,310
Total ending allowance	$	3,084	$	1,320	$	—	$	224	$	970	$	719	$	44	$	6,361
Loans:
Individually evaluated for impairment	$	2,584	$	1,085	$	—	$	—	$	3,597	$	8	$	—	$	7,274
Collectively evaluated for impairment		175,987		154,469		101,749		23,571		88,180		47,385		—		591,341
Total loans	$	178,571	$	155,554	$	101,749	$	23,571	$	91,777	$	47,393	$	—	$	598,615

(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.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Impaired loans at September 30, 2021 and December 31, 2020 were as follows: (in thousands)


September 30, 2021	Recorded Investment		Unpaid Principal Balance		Allocated Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial (secured by real estate)	$	3,553	$	3,599	$	—	$	3,549	$	61
Commercial and industrial		315		315		—		315		—
Paycheck Protection Program		—		—		—		—		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		1,934		2,951		—		1,952		—
Consumer installment		2		2		—		2		—
		5,804		6,867		—		5,818		60
With an allowance recorded:
Commercial (secured by real estate)		—		—		—		—		—
Commercial and industrial		618		618		45		618		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		1,287		2,217		8		1,295		66
Consumer installment		—		—		—		—		—
		1,905		2,835		53		1,913		66
Total impaired loans	$	7,709	$	9,702	$	53	$	7,731	$	126

December 31, 2020
With no related allowance recorded:
Commercial (secured by real estate)	$	1,136	$	2,232	$	—	$	1,138	$	42
Commercial and industrial		395		395		—		395		—
Paycheck Protection Program		—		—		—		—		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		1,986		1,987		—		2,041		9
Consumer installment		8		8		—		9		1
		3,525		4,622		—		3,583		52
With an allowance recorded:
Commercial (secured by real estate)		1,448		1,449		2		—		91
Commercial and industrial		690		690		35		1,481		6
Construction, land and acquisition & development		—		—		—		727		—
Residential mortgage		1,611		1,613		14		—		73
Consumer installment		—		—		—		1,634		—
		3,749		3,752		51		3,842		170
Total impaired loans	$	7,274	$	8,374	$	51	$	7,425	$	222

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, 2021 and December 31, 2020 by class of loans: (in thousands)


September 30, 2021	30 -59 Days Past Due		60- 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total		Nonaccrual
Commercial (secured by real estate)	$	—	$	—	$	470	$	470	$	206,548	$	207,018	$	2,181
Commercial and industrial		—		317		959		1,276		168,847		170,123		1,001
Paycheck Protection Program		—		—		—		—		31,715		31,715		—
Construction, land and acquisition & development		—		—		—		—		21,713		21,713		—
Residential mortgage		349		1,114		214		1,677		71,855		73,532		2,985
Consumer installment		340		14		4		358		66,711		67,069		49
Total	$	689	$	1,445	$	1,647	$	3,781	$	567,389	$	571,170	$	6,216

December 31, 2020
Commercial (secured by real estate)	$	3,386	$	—	$	1,136	$	4,522	$	174,049	$	178,571	$	1,157
Commercial and industrial		29		—		1,085		1,114		154,440		155,554		1,085
Paycheck Protection Program		—		—		—		—		101,749		101,749		—
Construction, land and acquisition & development		1,392		—		—		1,392		22,179		23,571		—
Residential mortgage		4,308		1,094		1,444		6,846		84,931		91,777		2,587
Consumer installment		78		—		73		151		47,242		47,393		73
Total	$	9,193	$	1,094	$	3,738	$	14,025	$	584,590	$	598,615	$	4,902

There were no loans past due 90 days or greater and still accruing interest as of September 30, 2021 and December 31, 2020.

There was one new troubled debt restructuring during the nine months ended September 30, 2021 and no new troubled debt restructurings during the nine months ended September 30, 2020. No troubled debt restructurings subsequently defaulted during the nine months ended September 30, 2021 or 2020.

The Bank has allocated an allowance for loan losses of approximately $8,000 and $17,000 to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2021 and December 31, 2020, 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.

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.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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, 2021 and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (in thousands)


September 30, 2021	Pass		Special Mention		Substandard		Doubtful/ Loss		Total
Commercial (secured by real estate)	$	202,171	$	1,161	$	3,686	$	—	$	207,018
Commercial and industrial		168,805		317		1,001		—		170,123
Paycheck Protection Program		31,715		—		—		—		31,715
Construction, land and acquisition & development		21,713		—		—		—		21,713
Residential mortgage		69,025		—		4,507		—		73,532
Consumer installment		67,049		—		20		—		67,069
Total	$	560,478	$	1,478	$	9,214	$	—	$	571,170


December 31, 2020	Pass		Special Mention		Substandard		Doubtful/ Loss		Total
Commercial (secured by real estate)	$	176,629	$	785	$	1,157	$	—	$	178,571
Commercial and industrial		154,469		—		1,085		—		155,554
Paycheck Protection Program		101,749		—		—		—		101,749
Construction, land and acquisition & development		23,571		—		—		—		23,571
Residential mortgage		87,738		62		3,977		—		91,777
Consumer installment		47,332		—		61		—		47,393
Total	$	591,488	$	847	$	6,280	$	—	$	598,615

(5) Deposits

The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $27.3 million at September 30, 2021 and $32.9 million at December 31, 2020.

(6) Borrowings

The following FHLB advances, which required monthly or quarterly interest payments, were outstanding at September 30, 2021:


Advance Date	Advance		Fair Value Adjustment		Interest Rate			Maturity	Rate	Call Feature
5/23/2019		8,000,000		408,788		2.40	%	5/23/2029	Convertible	5/23/2022
12/16/2019		5,000,000		280,422		2.37	%	12/17/2029	Convertible	12/17/2021
11/29/2019		5,000,000		330,841		2.66	%	11/29/2029	Convertible	11/29/2022
1/21/2021		10,000,000		—		0.68	%	1/21/2026	Fixed	None
3/8/2021		10,000,000		—		0.54	%	3/8/2024	Fixed	None
5/3/2021		10,000,000		—		0.76	%	5/2/2025	Fixed	None
	$	48,000,000	$	1,020,050

There were FHLB advances totaling $19.1 million consisting of advances with a book value of $1.8 million and a fair value adjustment of $1.1 million as of December 31, 2020. At September 30, 2021 and December 31, 2020, the FHLB advances were collateralized by certain loans which totaled approximately $328.6 million and $309.9 million, and by the Company’s investment in FHLB stock which totaled approximately $2.2 million and $1.3 million at September 30, 2021 and December 31, 2020.

The Company had one FHLB letter of credit of $8.0 million and $16.0 million, used to collateralize public deposits, outstanding at September 30, 2021 and December 31, 2020, respectively.

The Company borrowed $5.0 million from First National Bankers Bank during the year ended December 31, 2020. The loan had a ten-year term with a floating interest rate equal to the Wall Street Journal Prime Rate. Interest payment were due quarterly and the initial principal payment was due June 29, 2021. There was no prepayment penalty. The loan was secured by Bank stock. In January 2021, the loan was repaid and none was outstanding at September 30, 2021.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

The Company borrowed $100.8 million under the Federal Reserve Bank of Atlanta to fund PPP loans under the U.S. CARES Act (the Paycheck Protection Program Liquidity Facility). This was secured by PPP loans totaling $101.7 million made during the year ended December 31, 2020. These borrowings had a fixed interest rate of 0.35% and a maturity date equal to the maturity date of the related PPP loans, with the PPP loans maturing either two or five years from the origination date of the PPP loan. In January 2021, the borrowing was repaid and none was outstanding at September 30, 2021.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(7) 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 April 2017, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing shares of the Company’s common stock. A total of 295,499 shares were purchased with the loan proceeds as part of the Company’s initial stock offering. In January 2021, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing additional shares of the Company’s common stock. A total of 225,721 shares were purchased with the loan proceeds as part of the Company’s stock offering. Total ESOP expense for the three months and nine months ended September 30, 2021 and 2020 was approximately $71,000 and $20,000 and $193,000 and $71,000, respectively. The balance of the note payable of the ESOP was approximately $5.6 million and $2.6 million at September 30, 2021 and December 31, 2020. 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, 2021 and December 31, 2020, 47,200 shares had been released.

(8) Stock-Based Compensation

In August 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).

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants were as follows. Dividend yield is 0%, expected volatility is 36.62%, the risk-free interest rate is 1.04%, expected average life is 7.5 years and the weighted average per share fair value of options is $5.34.

Stock options of 13,454 shares with a weighted average exercise price of $13.09 were granted during the nine months ended September 30, 2021. There were no restricted stock grants during the nine months ended September 30, 2021.

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, 2020		321,516	$	9.77
Granted		—		—
Exercise of stock options*		—	—
Forfeited		—		—
Outstanding - March 31, 2021		321,516	$	9.77		8.20	$	464
Exercisable - March 31, 2021		38,186	$	11.14		8.00	$	—
Granted		—		—
Exercise of stock options*		—	—
Forfeited		—		—
Outstanding - June 30, 2021		321,516	$	9.77		7.95	$	521
Exercisable - June 30, 2021		102,489	$	10.28		8.08	$	104
Granted		13,454	$	13.09
Exercise of stock options*			—
Forfeited		—		—
Outstanding - September 30, 2021		334,970	$	9.90		8.05	$	842
Exercisable - September 30, 2021		102,489	$	10.28		7.83	$	216

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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, 2020	$	8.63			120,123
Granted		—			—
Vested*		—			—
Forfeited		—			—
Outstanding - March 31, 2021	$	8.63			120,123
Granted	$	—			—
Vested*		8.63			26,787
Forfeited		—			—
Outstanding - June 30, 2021	$	8.63			93,336
Granted	$	—			—
Vested*		—	—		—
Forfeited		—			—
Outstanding - September 30, 2021	$	8.63			93,336

* 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, 2,641 shares were surrendered during the three months ended June 30, 2021.

The Company recognized approximately $110,000, $295,000, $110,000 and $188,000 (after taking into account the reversals of previously recognized expense related to forfeitures of stock options and restricted stock of approximately $152,000 during the nine months ended September 30, 2020) of stock-based compensation expense during the three months and nine months ended September 30, 2021 and 2020, respectively, associated with its common stock awards granted to directors and officers.

As of September 30, 2021, there was approximately $1.4 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 3.25 years.

(9) 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.

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.

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.

PPPLF and Other Borrowings

The carrying value of other borrowings reasonably approximates fair value. The Paycheck Protection Program Liquidity Facility funding has a fixed rate of 0.35% for all participants; thus, the carrying value approximates the estimated 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 $44.1 million and $24.0 million at September 30, 2021 and December 31, 2020. 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, 2021 and December 31, 2020 (in thousands).


September 30, 2021	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	—	$	—	$	—
Impaired loans		—		—		7,656		7,656
Total assets at fair value	$	—	$	—	$	7,656	$	7,656

December 31, 2020	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	—	$	1,292	$	1,292
Impaired loans		—		—		7,223		7,223
Total assets at fair value	$	—	$	—	$	8,515	$	8,515

The carrying amounts and estimated fair values (in thousands) of the Company’s financial instruments at September 30, 2021 and December 31, 2020 are as follows:


	September 30, 2021				December 31, 2020
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	130,910	$	130,910	$	178,253	$	178,253
Investment securities
available-for-sale		44,071		44,071		24,005		24,005
Other investments		2,476		2,476		1,596		1,596
Loans, net		563,539		573,930		592,254		611,625
Cash surrender value of life insurance		15,285		15,285		15,311		15,311
Financial liabilities:
Deposits		615,231		606,610		640,165		639,269
FHLB advances		49,020		47,694		19,117		16,769
PPPLF borrowings		—		—		100,813		100,813
Other borrowings		—		—		5,000		5,000

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, 2021 and December 31, 2020 and for the three months and nine months ended September 30, 2021 and 2020 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:



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;



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;



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.

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the novel coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:



demand for products and services may decline, making it difficult to grow assets and income;



if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;



collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;



the allowance for loan losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;



the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;



as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on assets may decline to a greater extent than the decline in the cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;



cyber-security risks are increased as the result of an increase in the number of employees working remotely;



government action in response to the COVID-19 pandemic may affect our business and operations, including vaccination mandates, which may affect our workforce, human capital resources and infrastructure; and



FDIC premiums may increase if the agency experiences additional resolution costs.

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, 2020. The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our significant accounting policies:

Business Combinations and Valuation of Loans Acquired in Business Combinations. We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it is not possible to estimate the acquisition date fair value upon consummation.

In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Substantially all loans acquired in the transaction are evaluated in pools of loans with similar characteristics; and since the estimated fair value of acquired loans includes a credit consideration, no carryover of any previously recorded allowance for loan losses is recorded at acquisition. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

In determining the Day 1 Fair Values of acquired loans, which are the fair value on all acquired loans at the time of the acquisition, management calculates a nonaccretable difference (the credit mark component of the acquired loans) and an accretable difference (the market rate or yield component of the acquired loans). The nonaccretable difference is the difference between the undiscounted contractually required payments and the undiscounted cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, and nonaccretable difference which would have a positive impact on interest income.

The accretable yield on acquired loans is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings using the effective yield method over the term of the loans. Management separately monitors the acquired loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values.

Allowance for Loan Losses. The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for loan losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involve judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the allowance for loan losses could change significantly.

The allocation methodology applied by the Bank is designed to assess the appropriateness of the allowance for loan losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, 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. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for loan losses was appropriate at September 30, 2021. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for loan losses. 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 the responsibility of the Bank and any increase or decrease in the allowance is the responsibility of management.

Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.

The Company and the Bank file consolidated federal and state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

Impact of COVID-19 Outbreak

During 2020, global financial markets experienced significant volatility resulting from the spread of a novel coronavirus known as COVID-19. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, the governments of the state of Georgia and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures have dramatically increased unemployment in the United States and have negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.

To address the economic impact in the United States, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”). The CARES Act also established the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”), which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meet certain other requirements. In addition, the Federal Reserve took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero

In response to the pandemic, we have implemented protocols and processes to help protect our employees, customers and communities. These measures include:

• Operating our branches under a drive-through model with appointment-only lobby service for a period of time, leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home.

• Offering assistance to our customers affected by the COVID-19 pandemic, which has previously included payment deferrals, waiving certain fees, suspending property foreclosures, and participating in the CARES Act and lending programs for businesses, including the SBA PPP.

We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from TDR classification under accounting principles generally accepted in the United States of America (GAAP). In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted for loans that were current as of the loan modification program implementation date are not TDRs. During the year ended December 31, 2020, we granted short-term deferrals on 737 loans totaling $186.9 million that were otherwise performing, including $115.0 million of dental practice loans. As of December 31, 2020, all of these loans had returned to normal payment status. During the nine months ended September 30, 2021, we granted short-term deferrals on seven loans totaling $2.7 million that were otherwise performing. As of September 30, 2021 all but one of these has returned to normal payment status. That one loan is currently in nonaccrual status.

Given the unprecedented uncertainty and rapidly evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are highly uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services, protracted periods of lower interest rates, increased noninterest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total assets decreased $60.7 million, or 7.1%, to $790.0 million at September 30, 2021 from $850.6 million at December 31, 2020. The decrease was due primarily to a decrease in cash and cash equivalents of $47.3 million due to our no longer using the Paycheck Protection Liquidity Facility (PPPLF) for funding as well as a decrease of net loans of $28.7 million.

Cash and cash equivalents decreased $47.3 million, or 26.6%, to $130.9 million at September 30, 2021 from $178.3 million at December 31, 2020 as the PPPLF was not used for funding at quarter-end and excess cash from our oversubscribed January 2021 stock offering was returned.

Net loans decreased $28.7 million, or 4.8%, to $563.5 million at September 30, 2021 from $592.3 million at December 31, 2020. Commercial real estate loans increased $28.4 million, or 15.9%, to $207.0 million at September 30, 2021 from $178.6 million at December 31, 2020 and commercial and industrial loans, excluding PPP loans, increased $14.6 million, or 9.4%, to $170.1 million at September 30, 2021 from $155.6 million at December 31, 2020. PPP loans decreased $70.0 million or 68.8%, to $31.7 million at September 30, 2021 from $101.7 million at December 31, 2020, as a result of forgiveness of loans by SBA. Consumer loans increased $19.7 million, or 41.5%, to $67.1 million at September 30, 2021 from $47.4 million at December 31, 2020. These increases were partially offset by a decrease in one-to-four family residential real estate loans of $18.2 million, or 19.9%, to $73.5 million at September 30, 2021 from $91.8 million at December 31, 2020, as mortgage loans continue to be refinanced at lower rates than we offer, and a decrease in construction loans of $1.9 million, or 7.9%, to $21.7 million at September 30, 2021 from $23.6 million at December 31, 2020.

Securities available-for-sale increased $20.1 million, or 83.6%, to $44.1 million at September 30, 2021 from $24.0 million at December 31, 2020, due to our using excess cash from loan repayments and prepayments to invest in securities.

Net deferred tax asset (included within the accrued interest receivable and other assets line item on the balance sheet) decreased $620,000, or 14.3% to $3.6 million at September 30, 2021 from $4.2 million at December 31, 2020 due to increased earnings allowing recognition of prior year tax credits.

Total deposits decreased $24.9 million, or 3.9%, to $615.2 million at September 30, 2021 from $640.2 million at December 31, 2020. Interest-bearing checking accounts decreased $47.1 million, or 36.3%, as a result of the completion of the second step conversion in January 2021, as subscriptions for our common stock were either fulfilled or returned. Certificates of deposit decreased $26.7 million, or 20.3% as a decreasing interest rate environment pushed customers to keep funds in more liquid deposits, and savings accounts decreased $4.6 million, or 4.7%. These decreases were partially offset by an increase of $36.2 million, or 22.5%, in noninterest-bearing checking accounts, as customers received funds from the new round of PPP loans, and an increase of $17.3 million, or 14.2%, in market rate checking accounts. The loan-to-deposit ratio at September 30, 2021 was 92.8%, as compared to 93.5% at December 31, 2020.

We had $49.0 million of FHLB advances and no other borrowings at September 30, 2021, compared to $19.1 million of Federal Home Loan Bank advances, $100.8 million in Federal Reserve Bank PPP Liquidity Facility funds, and $5.0 million of other borrowings at December 31, 2020. Borrowings were decreased during the nine months ended September 30, 2021 as we repaid PPPLF and Company borrowings. We increased FHLB borrowings to benefit from low interest rates and address the uncertainty of current liquidity levels as a result of the new round of PPP loans.

Stockholders’ equity increased by $38.9 million, or 48.2% to $119.7 million at September 30, 2021 compared to $80.8 million at December 31, 2020, primarily due to the completion of our stock offering in January 2021. We sold 3,701,509 shares of common stock at $10.00 per share and raised gross proceeds of $37.1 million in the offering.

Average Balance Sheets

The following tables set forth average balance sheets, average 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,
	2021								2020
	Average Outstanding Balance			Interest		Average Yield/Rate			Average Outstanding Balance			Interest		Average Yield/Rate
	(Dollars in thousands)
Interest-earning assets:
Loans excluding PPP loans	$	520,273		$	6,470		4.97	%	$	500,616		$	6,418		5.13	%
PPP loans		48,169			862		7.16	%		130,352			2,108		6.47	%
Securities		40,569			216		2.13	%		20,619			80		1.55	%
Interest-earning deposits		115,330			53		0.18	%		107,029			36		0.13	%
Other investments		2,476			21		3.37	%		2,722			29		4.26	%
Total interest-earning assets		726,817			7,622		4.19	%		761,338			8,671		4.56	%
Non-interest-earning assets		64,408								67,455
Total assets	$	791,225							$	828,793

Interest-bearing liabilities:
Savings accounts	$	93,717			100		0.43	%	$	100,335			206		0.82	%
Interest-bearing checking accounts		83,519			43		0.21	%		71,374			69		0.38	%
Market rate checking accounts		136,984			117		0.34	%		121,118			227		0.75	%
Certificates of deposit		105,285			369		1.40	%		157,911			661		1.68	%
Total interest-bearing deposits		419,505			629		0.60	%		450,738			1,163		1.03	%
FHLB advances		49,039			132		1.07	%		46,362			159		1.37	%
PPPLF borrowings		—			—		—			59,118			52		0.35	%
Other borrowings		—			—		—			10,717			46		1.72	%
Total interest-bearing liabilities		468,544			761		0.65	%		566,935			1,420		1.00	%
Non-interest-bearing liabilities		203,336								183,275
Total liabilities		671,880								750,210
Total stockholders' equity		119,345								78,583
Total liabilities and stockholders' equity	$	791,225							$	828,793
Net interest income				$	6,861							$	7,251
Net interest rate spread (1)							3.54	%							3.56	%
Net interest-earning assets (2)	$	258,273							$	194,403
Net interest margin (3)							3.78	%							3.81	%
Average interest-earning assets to interest- bearing liabilities		155.12	%							134.29	%

(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,
	2021								2020
	Average Outstanding Balance			Interest		Average Yield/Rate			Average Outstanding Balance			Interest		Average Yield/Rate
	(Dollars in thousands)
Interest-earning assets:
Loans excluding PPP loans	$	503,373		$	18,985		5.03	%	$	497,271		$	19,497		5.23	%
PPP loans		92,651			5,439		7.83	%		67,871			2,549		5.01	%
Securities		31,374			472		2.01	%		18,871			304		2.15	%
Interest-earning deposits		92,880			134		0.19	%		69,617			185		0.35	%
Other investments		2,273			57		3.32	%		2,692			88		4.36	%
Total interest-earning assets		722,551			25,087		4.63	%		656,322			22,623		4.60	%
Non-interest-earning assets		63,028								60,721
Total assets	$	785,579							$	717,043

Interest-bearing liabilities:
Savings accounts	$	93,823			310		0.44	%	$	85,261			725		1.13	%
Interest-bearing checking accounts		88,154			138		0.21	%		65,285			214		0.44	%
Market rate checking accounts		130,933			378		0.39	%		108,383			794		0.98	%
Certificates of deposit		114,623			1,284		1.49	%		159,240			2,057		1.72	%
Total interest-bearing deposits		427,533			2,110		0.66	%		418,169			3,790		1.21	%
FHLB advances		41,471			350		1.13	%		49,770			531		1.42	%
PPPLF borrowings		1,368			4		0.35	%		24,255			63		0.35	%
Other borrowings		559			11		2.58	%		8,054			55		0.92	%
Total interest-bearing liabilities		470,931			2,475		0.69	%		500,248			4,439		1.18	%
Non-interest-bearing liabilities		199,971								139,728
Total liabilities		670,902								639,977
Total stockholders' equity		114,677								77,066
Total liabilities and stockholders' equity	$	785,579							$	717,042
Net interest income				$	22,612							$	18,184
Net interest rate spread (1)							3.94	%							3.42	%
Net interest-earning assets (2)	$	251,620							$	156,074
Net interest margin (3)							4.17	%							3.69	%
Average interest-earning assets to interest- bearing liabilities		153.43	%							131.20	%

(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.

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, 2021 vs. 2020									Nine Months Ended September 30, 2021 vs. 2020
	Increase (Decrease) Due to						Total			Increase (Decrease) Due to						Total
							Increase									Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans excluding PPP loans	$	899		$	(847	)	$	52		$	358		$	(871	)	$	(513	)
PPP loans		(2,601	)		1,355			(1,246	)		1,739			1,151			2,890
Securities		97			39			136			201			(33	)		168
Interest-earning deposits		3			14			17			74			(125	)		(51	)
Other investments		(2	)		(6	)		(8	)		(12	)		(18	)		(30	)
Total interest-earning assets		(1,604	)		555			(1,049	)		2,360			104			2,464

Interest-bearing liabilities:
Savings accounts		(13	)		(93	)		(106	)		108			(523	)		(415	)
Interest-bearing checking accounts		61			(87	)		(26	)		89			(165	)		(76	)
Market rate checking accounts		171			(281	)		(110	)		222			(638	)		(416	)
Certificates of deposit		(196	)		(96	)		(292	)		(526	)		(247	)		(773	)
Total interest-bearing deposits		23			(557	)		(534	)		(107	)		(1,573	)		(1,680	)
FHLB advances		76			(103	)		(27	)		(81	)		(100	)		(181	)
PPPLF borrowings		(10	)		(42	)		(52	)		(57	)		(2	)		(59	)
Other borrowings		(21	)		(25	)		(46	)		(108	)		64			(44	)
Total interest-bearing liabilities		68			(727	)		(659	)		(353	)		(1,611	)		(1,964	)

Change in net interest income	$	(1,672	)	$	1,282		$	(390	)	$	2,713		$	1,715		$	4,428

Comparison of Operating Results for the Three Months Ended September 30, 2021 and 2020

General. Net income decreased $65,000 to $1.8 million for the three months ended September 30, 2021 compared to $1.9 million for the three months ended September 30, 2020. The decrease was due primarily to a decrease in interest income on loans and an increase in noninterest expenses related to strategic additional hires to further enhance our business development efforts.

Interest Income. Interest income decreased $1.0 million, or 12.1%, to $7.6 million for the three months ended September 30, 2021 from $8.7 million for the three months ended September 30, 2020, due to a decrease in interest income on loans as a result of forgiveness of PPP loans.

Excluding PPP loans, interest income on loans increased $52,000, or 0.8%, to $6.5 million for the three months ended September 30, 2021 from $6.4 million for the three months ended September 30, 2020. Excluding PPP loans, our average balance of loans increased $19.7 million, or 3.9%, to $520.3 million for the three months ended September 30, 2021 from $500.6 million for the three months ended September 30, 2020. Our average yield on loans, not including PPP loans, decreased 16 basis points to 4.97% for the three months ended September 30, 2021 from 5.13% for the three months ended September 30, 2020, due to the interest rate environment.

Interest income on PPP loans decreased $1.2 million to $862,000 for the three months ended September 30, 2021 from $2.1 million for the three months ended September 30, 2020. Our average yield on PPP loans increased 69 basis points to 7.16% for the three months ended September 30, 2021 from 6.47% for the three months ended September 30, 2020, as a result of the acceleration of recognized fees due to forgiveness of loans by SBA.

Interest income on securities (excluding FHLB stock) increased $136,000, or 170.0%, to $216,000 for the three months ended September 30, 2021 from $80,000 for the three months ended September 30, 2020. The average balance of securities increased $20.0 million, or 96.8%, to $40.6 million for the three months ended September 30, 2021 from $20.6 million for the three months ended September 30, 2020, due to our using excess cash from loan repayments and prepayments to invest in securities.

Interest Expense. Interest expense decreased $659,000, or 46.4%, to $761,000 for the three months ended September 30, 2021, compared to $1.4 million for the three months ended September 30, 2020, due to decreases in interest expense on deposits and borrowings due to the continued low interest rate environment.

Interest expense on certificates of deposit decreased $292,000, or 44.2%, to $369,000 for the three months ended September 30, 2021 from $661,000 for the three months ended September 30, 2020. The average balance of certificates of deposit decreased to $105.3 million for the three months ended September 30, 2021 compared to $157.9 million for the three months ended September 30, 2020, and the average rate we paid on certificates of deposit decreased 28 basis points to 1.40% for the three months ended September 30, 2021 from 1.68% for the three months ended September 30, 2020, as we have lowered rates. Interest expense on savings accounts and market rate checking accounts also decreased $106,000, or 51.5%, and $110,000, or 48.5%, respectively. These decreases were due to continued decreases in market rates.

Interest expense on borrowings decreased to $132,000 for the three months ended September 30, 2021 compared to $257,000 for the three months ended September, 2020, as the average rate paid on FHLB advances decreased 30 basis points from the previous period, and we repaid PPPLF borrowings and prepaid our holding company loan.

Net Interest Income. Net interest income decreased $390,000, or 5.4% and was $6.9 million for the three months ended September 30, 2021 compared to $7.3 million for the three months ended September 30, 2020. Our net interest rate spread decreased to 3.54% for the three months ended September 30, 2021 from 3.56% for the three months ended September 30, 2020, reflecting a 37 basis point decrease in the yield on interest-earning assets and a 35 basis point decrease in the rate paid on interest-bearing liabilities as discussed above. Our net interest margin was 3.78% for the three months ended September 30, 2021 compared to 3.81% for the three months ended September 30, 2020. The net interest margin compression was primarily due to excess balance sheet liquidity and the lower interest rate environment. The total cost of deposits (including non-interest-bearing deposits) was 0.60% for the three months ended September 30, 2021 compared to 1.03% for the three months ended September 30, 2020. Our average net interest-earning assets increased by $63.9 million, or 32.9%, to $258.3 million for the three months ended September 30, 2021 from $194.4 million for the three months ended September 30, 2020.

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 $225,000 for the three months ended September 30, 2021, compared to a provision of $600,000 for the three months ended September 30, 2020. Our allowance for loan losses was $7.6 million at September 30, 2021 compared to $6.4 million at December 31, 2020 and $5.7 million at September 30, 2020. The allowance for loan losses to total loans was 1.33% at September 30, 2021 compared to 1.06% at December 31, 2020 and 0.91% at September 30, 2020. 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 1.33% at September 30, 2021 compared to 1.06% at December 31, 2020. Excluding the acquired loans, the allowance to total loans is 1.89% at September 30,2021 compared to 1.71% at December 31, 2020. The allowance for loan losses to non-performing loans was 122.76% at September 30, 2021 compared to 129.79% at December 31, 2020 and 153.65% at September 30, 2020. We had net recoveries of $19,000 and $124,000 during the three months ended September 30, 2021 and 2020, respectively.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at September 30, 2021. 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 increased $225,000, or 41.2%, to $771,000 for the three months ended September 30, 2021 from $546,000 for the three months ended September 30, 2020. This was a result of increases in service charges on deposits accounts, interchange income, and secondary market fee income. Service charges on deposit accounts increased $65,000, or 18.5%, as debit card income was lower the previous year due to the effects of the lockdown for the pandemic. Other non-interest income increased $160,000, or 82.1%, led partially by increases in secondary market fees.

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


	Three Months Ended September 30,				Change
	2021		2020		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	2,715	$	2,415	$	300			12.4	%
Deferred compensation		62		70		(8	)		(11.4	)%
Occupancy		633		734		(101	)		(13.8	)%
Advertising		116		40		76			190.0	%
Data processing		520		523		(3	)		(0.6	)%
Other real estate owned		—		9		(9	)		(100.0	)%
Net (gain) loss on sale of other real estate owned		—		159		(159	)		(100.0	)%
Legal and accounting		153		230		(77	)		(33.5	)%
Organizational dues and subscriptions		105		70		35			50.0	%
Director compensation		50		51		(1	)		(2.0	)%
Federal deposit insurance premiums		61		51		10			19.6	%
Writedown of premises and equipment		14		—		14			100.0	%
Other		598		400		198			49.7	%
Total non-interest expenses	$	5,027	$	4,752	$	274			5.8	%

Salaries and employee benefits expense, advertising expense, organizational dues and subscriptions and other non-interest expense all increased due to strategic initiatives surrounding business development. Occupancy expense decreased due to facilities consolidation.

Income Tax Expense. We recorded income tax expense of $575,000 for both the three months ended September 30, 2021 and September 30, 2020. The effective tax rate was 24.17% for the three months ended September 30, 2021 compared to 23.53% for the three months ended September 30, 2020.

Comparison of Operating Results for the Nine Months Ended September 30, 2021 and 2020

General. Net income increased $4.6 million to $6.3 million for the nine months ended September 30, 2021 compared to net income of $1.7 million for the nine months ended September 30, 2020. Our net income in 2020 was reduced as a result of merger related expenses. Merger related expenses for the nine months ended September 30, 2020, were $2.8 million.

Interest Income. Interest income increased $2.5 million, or 10.9%, to $25.1 million for the nine months ended September 30, 2021 from $22.6 million for the nine months ended September 30, 2020, due primarily to an increase in interest income and acceleration of recognized fees due to forgiveness on PPP loans.

Excluding PPP loans, interest income on loans decreased $513,000, or 2.6%, to $19.0 million for the nine months ended September 30, 2021 from $19.5 million for the nine months ended September 30, 2020. Excluding PPP loans, our average balance of loans increased $6.1 million, or 1.2%, to $503.4 million for the nine months ended September 30, 2021 from $497.3 million for the nine months ended September 30, 2020. Our average yield on loans, not including PPP loans, decreased 20 basis points to 5.03% for the nine months ended September 30, 2021 from 5.23% for the nine months ended September 30, 2020, due to the interest rate environment.

Interest income on PPP loans increased $2.9 million to $5.4 million for the nine months ended September 30, 2021 from $2.5 million for the nine months ended September 30, 2020. Our average yield on PPP loans increased 282 basis points to 7.83% for the nine months ended September 30, 2021 from 5.01% for the nine months ended September 30, 2020, as a result of the acceleration of recognized fees due to forgiveness of loans by SBA.

Interest income on securities (excluding FHLB stock) increased $168,000 to $472,000 for the nine months ended September 30, 2021 from $304,000 for the nine months ended September 30, 2020. The average balance of securities increased $12.5 million, or 66.3%, to $31.4 million for the nine months ended September 30, 2021 from $18.9 million for the nine months ended September 30,

2020, due to investing excess liquidity in investments securities. The average yield on securities decreased by 14 basis points, to 2.01% from 2.15%, as a result of decreases in interest rates.

Interest income on interest-earning deposits decreased $51,000, or 27.6%, to $134,000 for the nine months ended September 30, 2021 from $185,000 for the nine months ended September 30, 2020. The decrease in interest income on interest-earning deposits was due to a 16 basis point decrease in the average yield, as interest rates decreased during the nine months ended September 30, 2020, partially offset by a $23.3 million increase in the average balance, as a result of excess liquidity.

Interest Expense. Interest expense decreased $2.0 million, or 44.2%, to $2.5 million for the nine months ended September 30, 2021, compared to $4.4 million for the nine months ended September 30, 2020, due to decreases in interest expense on deposits and borrowings due to the continued low interest rate environment and decreases in the average balance of borrowings.

Interest expense on certificates of deposit decreased $773,000, or 37.5%, to $1.3 million for the nine months ended September 30, 2021 from $2.1 million for the nine months ended September 30, 2020. The average balance of certificates of deposit decreased to $114.6 million for the nine months ended September 30, 2021 compared to $159.2 million for the nine months ended September 30, 2020, and the average rate we paid on certificates of deposit decreased 23 basis points to 1.49% for the nine months ended September 30, 2021 from 1.72% for the nine months ended September 30, 2020, as we have lowered rates. Interest expense on savings accounts and market rate checking accounts also decreased $415,000, or 57.2%, and $416,000, or 52.4%, respectively. These decreases were due to continued decreases in market rates, and were partially offset by increases in the average balances of such accounts as a result of excess funds related to PPP loans.

Interest expense on borrowings decreased to $365,000 for the nine months ended September 30, 2021 compared to $649,000 for the nine months ended September 30, 2020, as the average balance of FHLB advances decreased $8.3 million from the previous period, and we repaid PPPLF borrowings and prepaid our holding company loan.

Net Interest Income. Net interest income increased $4.4 million, or 24.4%, and was $22.6 million for the nine months ended September 30, 2021 compared to $18.2 million for the nine months ended September 30, 2020. Our net interest rate spread increased by 52 basis points to 3.94% for the nine months ended September 30, 2021 from 3.42% for the nine months ended September 30, 2020, reflecting a 3 basis point increase in the yield on interest-earning assets and a 49 basis point decrease in the rate paid on interest-bearing liabilities as discussed above. Our net interest margin was 4.17% for the nine months ended September 30, 2021 compared to 3.69% for the nine months ended September 30, 2020.

After an evaluation of these factors we recorded a provision for loan losses of $975,000 for the nine months ended September 30, 2021 and $1.4 million for the nine months ended September 30, 2020. Our allowance for loan losses was $7.6 million at September 30, 2021 compared to $6.4 million at December 31, 2020 and $5.7 million at September 30, 2020. The allowance for loan losses to total loans was 1.33% at September 30, 2021 compared to 1.06% at December 31, 2020 and 0.91% at September 30, 2020. 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 1.33% at September 30, 2021 compared to 1.06% at December 31, 2020. Excluding the acquired loans, the allowance to total loans is 1.89% at September 30,2021 compared to 1.71% at December 31, 2020. The allowance for loan losses to non-performing loans was 122.76% at September 30, 2021 compared to 129.79% at December 31, 2020 and 153.65% at September 30, 2020. We had net recoveries of $295,000 and $177,000 during the nine months ended September 30, 2021 and 2020, respectively.

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 increased $508,000, or 31.8%, to $2.1 million for the nine months ended September 30, 2021 from $1.6 million for the nine months ended September 30, 2020. This was primarily a result of an increase of $411,000 in other non-interest income, consisting primarily of income received from a bank owned life insurance death benefit claim, an increase in service charges on deposits accounts, and gains on the sale of Bank owned properties.

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


	Nine Months Ended September 30,					Change
	2021			2020		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	7,609		$	8,767	$	(1,158	)		(13.2	)%
Deferred compensation		188			211		(23	)		(11.0	)%
Occupancy		2,329			2,071		258			12.4	%
Advertising		296			173		123			71.1	%
Data processing		1,518			1,773		(255	)		(14.4	)%
Other real estate owned		19			11		8			72.7	%
Net (gain) loss on sale of other real estate owned		(127	)		188		(315	)		(167.6	)%
Legal and accounting		555			1,196		(641	)		(53.6	)%
Organizational dues and subscriptions		266			238		28			11.8	%
Director compensation		150			153		(3	)		(2.0	)%
Federal deposit insurance premiums		201			304		(103	)		(33.9	)%
Writedown of premises and equipment		888			—		888			100.00	%
Other		1,700			1,324		376			28.4	%
Total non-interest expenses	$	15,592		$	16,409	$	(817	)		(5.0	)%

Salaries and employee benefits expense, data processing expense, and legal and accounting expense decreased significantly for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, due primarily to non-recurring expenses related to our acquisition of ABB Financial and Affinity Bank in the 2020 period. We also recorded a net gain on sale of other real estate owned during the nine months ended September 30, 2021, compared to a net loss during the nine months ended September 30, 2020. Partially offsetting these decreases, we recorded an $888,000 writedown of premises and equipment consisting primarily of a writedown of premises and equipment and occupancy expense, due to facilities consolidation. We also recorded increases in occupancy expense due to the write-off of lease expense on a closed office and in advertising expense due to increased marketing expenses.

Income Tax Expense. We recorded income tax expense of $1.9 million for the nine months ended September 30, 2021 compared to $324,000 for the nine months ended September 30, 2020. The increase in income tax expense was due to the higher net income before taxes in the 2021 period.

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, 2021, 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 (basis points) (1)	Net Interest Income Year 1 Forecast		Year 1 Change from Level
	(Dollars in thousands)
+400	$	25,358		6.87	%
+200		24,669		3.96	%
Level		23,730	—
-200		23,313		(1.76	)%
-400		23,009		(3.04	)%

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

The table above indicates that at September 30, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced an 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. At September 30, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 1.89% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 2.98% increase 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, 2021, 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 Value of Assets (3)
Rates (basis points) (1)	Estimated NEV (2)		Amount			Percent			NEV Ratio (4)			Increase (Decrease) (basis points)
(Dollars in thousands)
+400	$	110,465	$	(9,554	)		(7.96	)%		15.08	%		8
+200		115,243		(4,776	)		(3.98	)%		15.07	%		7
—		120,019	—			—				15.00	%	—
-200		116,229		(3,790	)		(3.16	)%		14.31	%		(69	)
-400		115,862		(4,157	)		(3.46	)%		14.28	%		(72	)

(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, 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. At September 30, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 3.79% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 1.47% 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, 2021, 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, 2021, 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, 2021, and may not equal amounts included in our unaudited consolidated financial statements for the quarter ended September 30, 2021. 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 One Year			Zero Days to Two Years			Zero Days to Five Years			Total
				(Dollars in thousands)
Assets:
Cash and due from banks	$	113,589		$	113,589		$	113,589		$	113,589		$	113,589		$	130,910
Investments		16,046			16,991			19,878			22,523			31,047			46,547
Net loans		65,568			101,704			160,012			251,960			447,833			563,547
Other assets		—			—			—			—			—			48,623
Total	$	195,203			232,284			293,479			388,072			592,469		$	789,627


Liabilities:
Non-maturity deposits	$	168,408			187,870			226,793			275,727			422,301		$	521,254
Certificates of deposit		17,437			33,505			55,855			75,083			99,804			104,935
Borrowings		6,624			6,624			6,624			6,624			36,624			54,624
Other liabilities		—			—			—			—			—			6,885
Equity capital		—			—			—			—			—			101,930
Total (1)	$	192,469			227,999			289,272			357,434			558,729		$	789,628

Asset/liability gap	$	2,734			4,285			4,207			30,638			33,740
Gap/assets ratio (2)		(0.35	)%		(0.54	)%		(0.53	)%		3.88	%		4.27	%

(1) Amounts do not foot due to rounding.

(2) Gap/assets ratio equals the asset/liability gap for the period divided by total assets ($790.0 million).

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)%. At September 30, 2020, our asset/liability gap from zero days to one year was $72.5 million, resulting in a gap/assets ratio of 8.17%.

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, 2021, we had a $196.7 million line of credit with the Federal Home Loan Bank of Atlanta, with advances of $48.0 million outstanding and an $8.0 million letter of credit outstanding, and we had a $5.0 million unsecured federal funds line of credit and a $7.5 million unsecured federal funds line of credit. We also have a line of $59.5 million with the Federal Reserve Bank of Atlanta Discount Window secured by $107.7 million in loans. No amount was outstanding on the unsecured lines of credit or the Discount Window at September 30, 2021.

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 $13.3 million for the nine months ended September 30, 2021, compared to net cash used in operating activities of $469,000 for the nine months ended September 30, 2020. Net cash provided by investing activities was $7.8 million for the nine months ended September 30, 2021, compared to net cash used in investing activities of $143.8 million for the nine months ended September 30, 2020. Net cash used in investing activities typically consists primarily of disbursements for loan originations and purchases of investment securities, but also included $22.7 million net cash disbursed in connection with our acquisition of ABB and Affinity Bank during the nine months ended September 30, 2020. Net cash used in financing activities, which consists primarily of activity in deposit accounts and proceeds/repayments of FHLB advances, was $68.3 million for the nine months ended September 30, 2021, which included repaying $100.8 million of PPPLF borrowings, partially offset by proceeds from our January 2021 stock offering of $37.1 million, compared to net cash provided by financing activities of $275.7 million for the nine months ended September 30, 2020, which included $129.9 million of PPPLF borrowings.

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, 2021, 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, 2021 and December 31, 2020 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, 2021:
Common Equity Tier 1
(to Risk Weighted Assets)	$	81,901		14	%	$	25,999		4.50	%	$	37,555		6.50	%
Total Capital
(to Risk Weighted Assets)	$	89,128		15	%	$	46,221		8	%	$	57,776		10	%
Tier I Capital
(to Risk Weighted Assets)	$	81,901		14	%	$	34,666		6	%	$	46,221		8	%
Tier I Capital
(to Average Assets)	$	81,901		11	%	$	30,830		4	%	$	38,538		5	%

As of December 31, 2020:
Common Equity Tier 1
(to Risk Weighted Assets)	$	61,290		12	%	$	23,531		4.50	%	$	33,989		6.50	%
Total Capital
(to Risk Weighted Assets)	$	67,667		13	%	$	41,833		8	%	$	52,291		10	%
Tier I Capital
(to Risk Weighted Assets)	$	61,290		12	%	$	31,375		6	%	$	41,833		8	%
Tier I Capital
(to Average Assets)	$	61,290		10	%	$	24,661		4	%	$	30,826		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, 2021, we had outstanding commitments to originate loans of $56.4 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, 2021 totaled $55.6 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, 2021. 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, 2021, 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.

PART II – OTHER INFORMATION

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, 2021, 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.

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. Other Information

None.

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)

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, 2021, formatted in inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Earnings, (iii) Statements of Comprehensive 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).

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 12, 2021	/s/ Edward J. Cooney
		Edward J. Cooney
		Chief Executive Officer and Director

Date:	November 12, 2021	/s/ Tessa M. Nolan
		Tessa M. Nolan
		Senior Vice President and Chief Financial Officer