Quarterly Report (10-q)

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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 March 31, 2022


☐	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 May 6, 2022, 6,615,785 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 March 31, 2022 (unaudited) and December 31, 2021 (audited)	2

	Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	3

	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	4

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited)	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

	SIGNATURES	37

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AFFINITY BANCSHARES, INC.

Consolidated Balance Sheets


	March 31, 2022			December 31, 2021
	(unaudited)			(audited)
	(In thousands)
Assets

Cash and due from banks, including reserve requirement of $0 at March 31, 2022 and December 31, 2021	$	14,302		$	16,239
Interest-earning deposits in other depository institutions		55,596			95,537
Cash and cash equivalents		69,898			111,776
Investment securities available-for-sale		45,911			48,557
Other investments		1,022			2,476
Loans, net		592,887			575,825
Other real estate owned		3,538			3,538
Premises and equipment, net		3,955			3,783
Bank owned life insurance		15,462			15,377
Intangible assets		18,701			18,749
Accrued interest receivable and other assets		8,834			8,007
Total assets	$	760,208		$	788,088

Liabilities and Stockholders' Equity

Liabilities:
Savings accounts	$	86,717		$	86,745
Interest-bearing checking		95,555			91,387
Market rate checking		151,443			145,969
Non-interest-bearing checking		202,042			193,940
Certificates of deposit		92,288			96,758
Total deposits		628,045			614,799
Federal Home Loan Bank advances		10,000			48,988
Accrued interest payable and other liabilities		5,805			3,333
Total liabilities		643,850			667,120

Stockholders' equity:
Common stock (par value $0.01 per share, 40,000,000 shares authorized; 6,618,855 issued and outstanding at March 31, 2022 and 6,872,634 issued and outstanding at December 31, 2021		66			69
Preferred stock (10,000,000 shares authorized, no shares outstanding at March 31, 2022 and December 31, 2021		—			—
Additional paid in capital		64,241			68,038
Unearned ESOP shares		(4,952	)		(5,004	)
Retained earnings		60,014			58,223
Accumulated other comprehensive loss		(3,011	)		(358	)
Total stockholders' equity		116,358			120,968
Total liabilities and stockholders' equity	$	760,208		$	788,088

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Income

(unaudited)


	Three Months Ended March 31,
	2022			2021
	(In thousands)
Interest income:
Loans, including fees	$	6,996		$	9,094
Investment securities, including dividends		266			112
Interest-earning deposits		17			42
Total interest income		7,279			9,248
Interest expense:
Deposits		503			798
Borrowings		(975	)		109
Total interest expense		(472	)		907
Net interest income before provision for loan losses		7,751			8,341
Provision for loan losses		250			450
Net interest income after provision for loan losses		7,501			7,891
Noninterest income:
Service charges on deposit accounts		392			334
Other		203			395
Total noninterest income		595			729
Noninterest expenses:
Salaries and employee benefits		2,942			2,383
Deferred compensation		66			64
Occupancy		582			1,052
Advertising		80			80
Data processing		494			481
Other real estate owned		—			12
Net (gain) on sale of other real estate owned		—			(1	)
Legal and accounting		182			177
Organizational dues and subscriptions		131			71
Director compensation		51			50
Federal deposit insurance premiums		60			73
Writedown of premises and equipment		—			873
FHLB prepayment penalties		647			—
Other		523			577
Total noninterest expenses		5,758			5,892
Income before income taxes		2,338			2,728
Income tax expense		547			596
Net income	$	1,791		$	2,132
Basic earnings per share	$	0.26		$	0.31
Diluted earnings per share	$	0.26		$	0.31

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)


	Three Months Ended March 31,
	2022			2021
				(In thousands)
Net income	$	1,791		$	2,132

Other comprehensive loss:

Net unrealized loss on available-for-sale securities, net of taxes of $(896) and $(43)		(2,653	)		(278	)

Total other comprehensive loss		(2,653	)		(278	)

Total comprehensive (loss) income	$	(862	)	$	1,854

See accompanying notes to unaudited consolidated financial statements.

AFFINITY BANCSHARES, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)


	Three Months Ended March 31, 2021 and 2022
																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, 2020	$	69		$	33,628			$	(1,268	)	$	(2,453	)	$	50,650	$	159		$	80,785
ESOP loan payment and release of ESOP shares		—			5				—			52			—		—			57
Stock-based compensation expense		—			110				—			—			—		—			110
Change in unrealized loss on investment securities available- for-sale, net of tax		—			—				—			—			—		(278	)		(278	)
Corporate reorganization
Issuance of common stock (less stock offering expenses of $1,699)		—			32,448				—			—			—		—			32,448
Issuance of shares and loan to ESOP		—			2,961				—			(2,961	)		—		—			—
Treasury stock retired		—			(1,268	)			1,268			—			—		—			—
Net income		—			—				—			—			2,132		—			2,132
Ending balance March 31, 2021	$	69		$	67,884			$	—		$	(5,362	)	$	52,782	$	(119	)	$	115,254

Ending balance December 31, 2021	$	69		$	68,038			$	—		$	(5,004	)	$	58,223	$	(358	)	$	120,968
ESOP loan payment and release of ESOP shares		—			29				—			52			—		—			81
Stock-based compensation expense		—			113				—			—			—		—			113
Change in unrealized loss on investment securities available- for-sale		—			—				—			—			—		(2,653	)		(2,653	)
Common stock repurchase		(3	)		(3,939	)			—			—			—		—			(3,942	)
Net income		—			—				—			—			1,791		—			1,791
Ending balance March 31, 2022	$	66		$	64,241			$	—		$	(4,952	)	$	60,014	$	(3,011	)	$	116,358

(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)


	Three Months Ended March 31,
	2022			2021
	(In thousands)
Cash flows from operating activities:
Net income	$	1,791		$	2,132
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and (accretion) amortization		(804	)		188
Stock-based compensation expense		113			110
Provision for loan losses		250			450
ESOP expense		81			57
Net gain on sale and writedown of other real estate owned		—			(1	)
Increase in cash surrender value of bank owned life insurance		(85	)		(89	)
Loss on writedown of premises and equipment		—			873
Change in:
Accrued interest receivable and other assets		70			1,871
Accrued interest payable and other liabilities		2,492			3,075
Net cash provided by operating activities		3,908			8,666
Cash flows from investing activities:
Purchases of investment securities available-for-sale		(1,751	)		(1,516	)
Purchases of premises and equipment		(380	)		(190	)
Proceeds from paydowns of investment securities available-for-sale		799			1,061
Purchases of other investments		(378	)		(850	)
Proceeds from sales of other investments		1,832			345
Proceeds from bank owned life insurance death claim		—			300
Net change in loans		(17,215	)		(27,254	)
Proceeds from sales of other real estate owned		—			979
Net cash used in investing activities		(17,093	)		(27,125	)
Cash flows from financing activities:
Net change in deposits		13,249			(5,039	)
Stock repurchase		(3,942	)		—
Proceeds from FHLB advances		20,000			20,000
Repayment of FHLB advances		(58,000	)		—
Repayment of PPPLF borrowings		—			(100,813	)
Repayment of holding company loan		—			(5,000	)
Proceeds from stock offering		—			37,116
Stock offering expenses		—			(1,699	)
Funding of ESOP		—			(2,961	)
Net cash used in financing activities		(28,693	)		(58,396	)
Net change in cash and cash equivalents		(41,878	)		(76,855	)
Cash and cash equivalents at beginning of period		111,776			178,253
Cash and cash equivalents at end of period	$	69,898		$	101,398
Supplemental disclosures of cash flow information:
Cash paid for interest	$	587		$	914

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.

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 March 31, 2022 and the results of its operations and its cash flows for the periods presented. The interim consolidated financial information should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for a full year or for any other period.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of acquired loans, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.

Summary of Significant Accounting Policies – The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in the Company’s financial statements for the year ended December 31, 2021 included in the Company’s Form 10-K.

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 March 31,
	2022		2021
	(In thousands except per share data)

Net income	$	1,791	$	2,132
Weighted average common shares outstanding		6,806,405		6,873,137
Effect of dilutive common stock awards		102,260		16,615
Diluted weighted average common shares outstanding		6,908,665		6,889,752
Basic earnings per common share	$	0.26	$	0.31
Diluted earnings per common share	$	0.26	$	0.31

There were 13,454 anti-dilutive options for the three ended March 31, 2022 and 190,928 anti-dilutive options for the three months ended March 31, 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.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(2) Investment Securities

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


	Amortized		Gross Unrealized		Gross Unrealized			Estimated
March 31, 2022	Cost		Gains		Losses			Fair Value
U.S. Treasury securities	$	5,078	$	—	$	(401	)	$	4,677
Municipal securities - tax exempt		538		—		(50	)		488
Municipal securities - taxable		2,046		—		(166	)		1,880
U. S. Government sponsored enterprises		11,837		—		(1,511	)		10,326
Government agency mortgage-backed securities		20,536		—		(1,521	)		19,015
Corporate securities		9,905		—		(380	)		9,525
Total	$	49,940	$	—	$	(4,029	)	$	45,911
December 31, 2021
U.S. Treasury securities	$	5,068	$	5	$	(23	)	$	5,050
Municipal securities - tax exempt		540		—		(4	)		536
Municipal securities - taxable		796		—		(6	)		790
U. S. Government sponsored enterprises		11,837		—		(295	)		11,542
Government agency mortgage-backed securities		21,371		200		(232	)		21,339
Corporate securities		9,425		20		(145	)		9,300
Total	$	49,037	$	225	$	(705	)	$	48,557

There were 57 securities in an unrealized loss position as of March 31, 2022 for less than 12 months. There were four securities in an unrealized loss position for 12 months or greater as of March 31, 2022. The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades and are reviewed regularly. Four of the securities are agency bonds and five are U.S. Treasury bonds, so all of these are direct obligations of the U.S. Government. Thirty-six of the securities are mortgage backed bonds that have the direct or implied backing of the U.S. Government. Three of the bonds are municipal securities and the remaining 13 securities are corporate securities that are either trust preferred securities or subordinated debentures where the Bank performs a credit review regularly and such review has raised no concerns. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis which may be at maturity.

The amortized cost and estimated fair value of investment securities available-for-sale at March 31, 2022, 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		5,078		4,677
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		538		488
Municipal securities - taxable
Within 1 year		—		—
Greater than 1 to 5 years		—		—
Greater than 5 to 10 years		796		724
Greater than 10 years		1,250		1,156
Government agency securities
Within 1 year		—		—
Greater than 1 to 5 years		—		—
Greater than 5 to 10 years		—		—
Greater than 10 years		11,837		10,326
Corporate securities
Within 1 year		—		—
Greater than 1 to 5 years		495		486
Greater than 5 to 10 years		8,910		8,614
Greater than 10 years		500		425
		29,404		26,896
Government agency mortgage-backed securities		20,536		19,015
Total	$	49,940	$	45,911

No securities were sold during the three months ended March 31, 2022 or 2021.

Securities with a carrying value of approximately $2.5 million and $2.8 million were pledged to secure public deposits at March, 2022 and December 31, 2021, respectively.

(3) Loans and Allowance for Loan Losses

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


	March 31, 2022			December 31, 2021
Commercial (secured by real estate - owner occupied)	$	156,332		$	158,662
Commercial (secured by real estate - non-owner occupied)		119,461			104,042
Commercial and industrial		155,374			152,834
Paycheck Protection Program loans		7,078			17,883
Construction, land and acquisition & development		27,138			16,317
Residential mortgage 1-4 family		56,448			63,065
Consumer installment		79,862			71,580
Total		601,693			584,384
Less allowance for loan losses		(8,806	)		(8,559	)
Total loans, net	$	592,887		$	575,825

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 years ended December 31, 2021 and 2020, respectively. These loans are fully guaranteed by the Small Business Administration.

Qualifying loans in the amount of $361.0 million and $343.6 million were pledged to secure the line of credit from the Federal Home Loan Bank of Atlanta (“FHLB”) at March 31, 2022 and December 31, 2021, respectively.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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


March 31, 2022	Commercial (Secured by Real Estate - Owner Occupied)			Commercial (Secured by Real Estate - Non-Owner Occupied)		Commercial and Industrial			Paycheck Protection Program (1)		Construction, Land and Acquisition & Development			Residential Mortgage			Consumer Installment			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	2,701		$	1,980	$	2,242		$	—	$	162		$	502		$	969		$	3		$	8,559
Provision		(266	)		240		33			—		174			(89	)		147			11			250
Charge-offs		—			—		(26	)		—		—			—			(25	)		—			(51	)
Recoveries		—			—		3			—		—			38			7			—			48
Ending balance	$	2,435		$	2,220	$	2,252		$	—	$	336		$	451		$	1,098		$	14		$	8,806
Ending allowance attributable to loans:
Individually evaluated for impairment	$	—		$	1	$	—		$	—	$	—		$	5		$	—		$	—		$	6
Collectively evaluated for impairment		2,435			2,219		2,252			—		336			446			1,098			14			8,800
Total ending allowance	$	2,435		$	2,220		2,252		$	—	$	336		$	451		$	1,098		$	14		$	8,806
Loans:
Individually evaluated for impairment	$	93		$	3,374	$	388		$	—	$	—		$	2,705		$	—		$	—		$	6,560
Collectively evaluated for impairment		156,239			116,087		154,986			7,078		27,138			53,743			79,862			—			595,133
Total loans	$	156,332		$	119,461	$	155,374		$	7,078	$	27,138		$	56,448		$	79,862		$	—		$	601,693

December 31, 2021
Allowance for loan losses:
Beginning balance	$	1,913		$	1,171	$	1,320		$	—	$	224		$	970		$	719		$	44		$	6,361
Provision		(519	)		809		1,119			—		(62	)		(541	)		310			(41	)		1,075
Charge-offs		-			-		(234	)		—		—			—			(76	)		—			(310	)
Recoveries		1,307			-		37			—		—			73			16			—			1,433
Ending balance	$	2,701		$	1,980	$	2,242		$		$	162		$	502		$	969		$	3		$	8,559
Ending allowance attributable to loans:
Individually evaluated for impairment	$	—		$	1	$	1		$	—	$	—		$	5		$	—		$	—		$	7
Collectively evaluated for impairment		2,701			1,979		2,241			—		162			497			969			3			8,552
Total ending allowance	$	2,701		$	1,980	$	2,242		$	—	$	162		$	502		$	969		$	3		$	8,559
Loans:
Individually evaluated for impairment	$	95		$	3,387	$	753		$	—	$	—		$	2,992		$	1		$	—		$	7,228
Collectively evaluated for impairment		158,567			100,655		152,082			17,883		16,317			60,073			71,579			—			577,156
Total loans	$	158,662		$	104,042	$	152,835		$	17,883	$	16,317		$	63,065		$	71,580		$	—		$	584,384

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(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.

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


March 31, 2022	Recorded Investment		Unpaid Principal Balance		Allocated Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial (secured by real estate - owner occupied)	$	93	$	93	$	—	$	96	$	1
Commercial (secured by real estate - non-owner occupied)		3,188		3,188		—		3,172		11
Commercial and industrial		388		388		—		418		—
Paycheck Protection Program		—		—		—		—		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		1,776		1,776		—		1,836		3
Consumer installment		—		—		—		2		—
		5,445		5,445		—		5,524		15
With an allowance recorded:
Commercial (secured by real estate - owner occupied)	$	—	$	—	$	—	$	—	$	—
Commercial (secured by real estate - non-owner occupied)		186		186		1		190		3
Commercial and industrial		—		—		—		—		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		929		929		5		951		13
Consumer installment		—		—		—		—		—
		1,115		1,115		6		1,141		16
Total impaired loans	$	6,560	$	6,560	$	6	$	6,665	$	31


December 31, 2021
With no related allowance recorded:
Commercial (secured by real estate - owner occupied)	$	95	$	95	$	—	$	100	$	6
Commercial (secured by real estate - non-owner occupied)		3,199		3,199		—		3,177		45
Commercial and industrial		388		421		—		458		—
Paycheck Protection Program		—		—		—		—		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		2,052		2,052		—		2,110		31
Consumer installment		1		1		—		3		—
		5,735		5,768		—		5,848		82
With an allowance recorded:
Commercial (secured by real estate - owner occupied)	$	—	$	—	$	—	$	—	$	—
Commercial (secured by real estate - non-owner occupied)		188		189		1		192		12
Commercial and industrial		365		365		1		379		—
Construction, land and acquisition & development		—		—		—		—		—
Residential mortgage		940		941		5		960		60
Consumer installment		—		—		—		—		—
		1,493		1,495		7		1,531		72
Total impaired loans	$	7,228	$	7,263	$	7	$	7,379	$	154

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


March 31, 2022	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 - owner occupied)	$	44	$	—	$	—	$	44	$	156,288	$	156,332	$	—
Commercial (secured by real estate - non-owner occupied)		18		5		—		23		119,438		119,461		3,189
Commercial and industrial		—		—		388		388		154,986		155,374		388
Paycheck Protection Program		—		—		—		—		7,078		7,078		—
Construction, land and acquisition & development		—		—		—		—		27,138		27,138		—
Residential mortgage		2,871		97		213		3,181		53,267		56,448		2,683
Consumer installment		355		—		—		355		79,507		79,862		78
Total	$	3,288	$	102	$	601	$	3,991	$	597,702	$	601,693	$	6,338

December 31, 2021
Commercial (secured by real estate - owner occupied)	$	—	$	—	$	—	$	—	$	158,662	$	158,662	$	—
Commercial (secured by real estate - non-owner occupied)		—		—		3,200		3,200		100,842		104,042		3,200
Commercial and industrial		338		—		813		1,151		151,684		152,835		813
Paycheck Protection Program		—		—		—		—		17,883		17,883		—
Construction, land and acquisition & development		—		—		-		-		16,317		16,317		-
Residential mortgage		4,094		1,711		321		6,126		56,939		63,065		2,873
Consumer installment		289		45		—		334		71,246		71,580		125
Total	$	4,721	$	1,756	$	4,334	$	10,811	$	573,573	$	584,384	$	7,011

There were no loans past due 90 days or greater and still accruing interest as of March 31, 2022 and December 31, 2021.

There was no new troubled debt restructuring during the three months ended March 31, 2022 or March 31, 2021. No troubled debt restructurings subsequently defaulted during the three months ended March 31, 2022 or 2021.

The Bank has allocated an allowance for loan losses of approximately $6,000 and $10,000 to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2022 and December 31, 2021, respectively.

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Bank uses the following definitions for its risk ratings:

Special Mention. Loans have potential weaknesses that may, if not corrected, weaken or inadequately protect the Bank's credit position at some future date. Weaknesses are generally the result of deviation from prudent lending practices, such as over advances on collateral. Credits in this category should, within a 12-month period, move to Pass if improved or drop to Substandard if poor trends continue.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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

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

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

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


March 31, 2022	Pass		Special Mention		Substandard		Doubtful/ Loss		Total
Commercial (secured by real estate - owner occupied)	$	155,949	$	383	$	—	$	—	$	156,332
Commercial (secured by real estate - non-owner occupied)		113,719		2,336		3,406		—		119,461
Commercial and industrial		154,949		—		425		—		155,374
Paycheck Protection Program		7,078		—		—		—		7,078
Construction, land and acquisition & development		27,138		—		—		—		27,138
Residential mortgage		52,728		—		3,720		—		56,448
Consumer installment		79,784		—		78		—		79,862
Total	$	591,345	$	2,719	$	7,629	$	—	$	601,693


December 31, 2021	Pass		Special Mention		Substandard		Doubtful/ Loss		Total
Commercial (secured by real estate - owner occupied)	$	158,272	$	390	$	—	$	—	$	158,662
Commercial (secured by real estate - non-owner occupied)		98,269		2,352		3,421		—		104,042
Commercial and industrial		151,983		—		852		—		152,835
Paycheck Protection Program		17,883		—		—		—		17,883
Construction, land and acquisition & development		16,005		312		—		—		16,317
Residential mortgage		59,080		—		3,985		—		63,065
Consumer installment		71,440		—		140		—		71,580
Total	$	572,932	$	3,054	$	8,398	$	—	$	584,384

(4) Deposits

The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $20.4 million at March 31, 2022 and $22.6 million at December 31, 2021.

(5) Borrowings

The following FHLB advances, which required monthly or quarterly interest payments, were outstanding at March 31, 2022:


Advance Date	Advance		Fair Value Adjustment		Interest Rate			Maturity	Rate	Call Feature
3/4/2022	$	10,000,000	$	—		0.27	%	4/4/2022	Fixed	N/A
	$	10,000,000	$	—

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

There were FHLB advances totaling $49.0 million consisting of advances with a book value of $48.0 million and a fair value adjustment of $1.0 million as of December 31, 2021. At March 31, 2022 and December 31, 2021, the FHLB advances were collateralized by certain loans which totaled approximately $361.0 million and $343.6 million, and by the Company’s investment in FHLB stock which totaled approximately $772,000 and $2.2 million at March 31, 2021 and December 31, 2021. Acquired FHLB advances totaling $49.0 million were paid off during the three months ended March 31, 2022. We were able to accrete to income the remaining $1.0 million fair value adjustment associated with these acquired advances. This decreased our interest expense for the three months ended March 31, 2022 to a negative $472,000.

The Company had one FHLB letter of credit of $2.5 million and $8.0 million, used to collateralize public deposits, outstanding at March 31, 2022 and December 31, 2021, 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.

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.

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(6) Employee Stock Ownership Plan

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

In 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 second stock offering. Total ESOP expense for the three months ended March 31, 2022 and 2021 was approximately $81,000 and $57,000, respectively. The balance of the note payable of the ESOP was approximately $5.4 million at March 31, 2022 and December 31, 2021. Because the source of the loan payments is contributions received by the ESOP from the Company, the related note receivable is shown as a reduction of stockholders’ equity. As of March 31, 2022 and December 31, 2021, 59,000 shares had been released.

(7) 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.

There were no stock options or restricted stock grants during the three months ended March 31, 2022.

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


Stock Options	Option Shares Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)		Aggregate Intrinsic Value (in thousands)

Outstanding - December 31, 2021		334,970	$	9.90
Granted		—		—
Exercise of stock options		—	—
Forfeited		—		—
Outstanding - March 31, 2022		334,970	$	9.90		7.56	$	1,009
Exercisable - March 31, 2022		102,489	$	10.28		7.33	$	535

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


Restricted Stock	Weighted Average Grant Date Fair Value		Restricted Shares Outstanding

Outstanding - December 31, 2021	$	8.63		93,336
Granted		—		—
Vested		—		—
Forfeited		—		—
Outstanding - March 31, 2022	$	8.63		93,336

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

The Company recognized approximately $113,000 and $110,000 of stock-based compensation expense during the three months ended March 31, 2022 and 2021 respectively, associated with its common stock awards granted to directors and officers.

As of March 31, 2022, there was approximately $1.1 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 2.75 years.

(8) Fair Value Measurements and Disclosures

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

Fair Value Hierarchy

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

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

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

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

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,

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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.

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.

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 $45.9 million and $48.6 million at March 31, 2022 and December 31, 2021. They are classified as Level 2.

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost

AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of March 31, 2022 and December 31, 2021 (in thousands).


March 31, 2022	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	—	$	3,538	$	3,538
Impaired loans		—		—		6,554		6,554
Total assets at fair value	$	—	$	—	$	10,092	$	10,092

December 31, 2021	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	—	$	3,538	$	3,538
Impaired loans		—		—		7,221		7,221
Total assets at fair value	$	—	$	—	$	10,759	$	10,759

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


	March 31, 2022				December 31, 2021
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	69,898	$	69,898	$	111,776	$	111,776
Investment securities
available-for-sale		45,911		45,911		48,557		48,557
Other investments		1,022		1,022		2,476		2,476
Loans, net		592,887		587,313		575,825		581,541
Cash surrender value of life insurance		15,462		15,462		15,377		15,377
Financial liabilities:
Deposits		628,045		601,324		614,799		601,036
FHLB advances		10,000		10,000		48,988		48,197

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

Cautionary Note Regarding Forward-Looking Statements

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

•

statements of our goals, intentions and expectations;

•

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

•

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

•

estimates of our risks and future costs and benefits.

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

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

•

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;

•

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

•

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

•

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

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 fully controlled and abated. 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;

•

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;

•

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, 2021. 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 March 31, 2022. 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.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Total assets decreased $27.9 million, or 3.5%, to $760.2 million at March 31, 2022 from $788.1 million at December 31, 2021. The decrease was due primarily to paying off Federal Home Loan Bank advances and was partially offset by an increase in net loans.

Cash and cash equivalents decreased $41.9 million, or 37.5%, to $69.9 million at March 31, 2022 from $111.8 million at December 31, 2021 as excess liquidity was utilized to payoff Federal Home Loan Bank advances.

Net loans increased $17.1 million, or 3.0%, to $592.9 million at March 31, 2022 from $575.8 million at December 31, 2021, including Paycheck Protection Program (PPP) loans of $7.1 million and $17.9 million at March 31, 2022 and December 31, 2021, respectively. Commercial real estate loans increased $13.1 million, or 5.0%, to $275.8 million at March 31, 2022 from $262.7 million at December 31, 2021, while construction loans increased $10.8 million or 66.3%, to $27.1 million at March 31, 2022 from $16.3 million at December 31, 2021, as we have been successful with our strategic initiative to increase construction lending to continue to diversify the loan portfolio. In addition, consumer loans increased $8.3 million, or 11.6%, to $79.9 million at March 31, 2022 from $71.6 million at December 31, 2021, as we continue to experience growth in our indirect automobile loans. These increases were partially offset by a decrease in PPP loans, which decreased $10.8 million or 60.4% to $7.1 million at March 31, 2022 from $17.9 million at December 31, 2021 as a result of continued forgiveness of loans by SBA, and a decrease in one-to-four family residential real estate loans of $6.6 million, or 10.5%, to $56.4 million at March 31, 2022 from $63.1 million at December 31, 2021, as mortgage loans continue to be refinanced at lower rates than we offer.

Securities available-for-sale decreased $2.6 million, or 5.4%, to $45.9 million at March 31, 2022 from $48.6 million at December 31, 2021, as the unrealized loss on the investment portfolio increased.

Total deposits increased $13.2 million, or 2.1%, to $628.0 million at March 31, 2022 from $614.8 million at December 31, 2021, which reflected an increase in interest-bearing, market rate, and non-interest-bearing deposits of $17.7 million. We experienced increases in non-interest-bearing checking accounts ($8.1 million, or 4.2%), market-rate checking accounts ($5.5 million, or 3.8%) and interest-bearing checking accounts ($4.2 million, or 4.6%), due to our continued focus to grow core deposits to fund our loan growth. Offsetting these increases, certificates of deposit decreased $4.5 million, or 4.6%, to $92.3 million at March 31, 2022 from $96.8 million at December 31, 2021. We believe the continued shift in our deposit accounts reflected a decreasing interest rate environment resulting in customers maintaining funds in more liquid deposits. The loan-to-deposit ratio at March 31, 2022 was 94.4%, as compared to 93.7% at December 31, 2021.

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

Stockholders’ equity decreased by $4.6 million, or 3.8% to $116.4 million at March 31, 2022 compared to $121.0 million at December 31, 2021, primarily due to the decrease in additional paid in capital from the repurchase of 253,779 shares of AFBI stock totaling $3.9 million with an average price per share of $15.53 as well as $3.0 in accumulated other comprehensive loss related to our investment portfolio, an increase of negative $2.7 million for the three months ended March 31, 2022 as compared to negative $358,000 at December 31, 2021.

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 March 31,
	2022									2021
	Average Outstanding Balance			Interest			Average Yield/Rate			Average Outstanding Balance			Interest		Average Yield/Rate
	(Dollars in thousands)
Interest-earning assets:
Loans excluding PPP loans	$	574,393		$	6,792			4.73	%	$	490,660		$	6,204		5.06	%
PPP loans		12,369			204			6.59	%		123,457			2,890		9.36	%
Securities		48,648			260			2.14	%		23,751			94		1.59	%
Interest-earning deposits		48,231			17			0.14	%		77,950			42		0.22	%
Other investments		1,000			6			2.33	%		1,990			18		3.56	%
Total interest-earning assets		684,641			7,279			4.25	%		717,808			9,248		5.15	%
Non-interest-earning assets		62,343									62,054
Total assets	$	746,984								$	779,862

Interest-bearing liabilities:
Savings accounts	$	86,195			83			0.38	%	$	94,167			107		0.45	%
Interest-bearing checking accounts		96,273			42			0.17	%		96,513			52		0.22	%
Market rate checking accounts		144,455			88			0.25	%		124,209			133		0.43	%
Certificates of deposit		94,465			290			1.23	%		129,913			506		1.56	%
Total interest-bearing deposits		421,388			503			0.48	%		444,802			798		0.72	%
FHLB advances		8,821			(975	)		(44.20	)%		29,549			95		1.29	%
PPPLF borrowings		—			—			—			4,150			4		0.35	%
Other borrowings		—			—			—			1,555			10		2.69	%
Total interest-bearing liabilities		430,209			(472	)		(0.44	)%		480,056			907		0.76	%
Non-interest-bearing liabilities		195,024									192,150
Total liabilities		625,233									672,206
Total stockholders' equity		121,751									107,656
Total liabilities and stockholders' equity	$	746,984								$	779,862
Net interest income				$	7,751								$	8,341
Net interest rate spread (1)								4.69	%							4.39	%
Net interest-earning assets (2)	$	254,432								$	237,752
Net interest margin (3)								4.53	%							4.65	%
Average interest-earning assets to interest- bearing liabilities		159.14	%								149.53	%

(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 March 31, 2022 vs. 2021
	Increase (Decrease) Due to						Total
							Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans excluding PPP loans	$	2,757		$	(2,169	)	$	588
PPP loans		(2,021	)		(665	)		(2,686	)
Securities		125			41			166
Interest-earning deposits		(13	)		(12	)		(25	)
Other investments		(7	)		(5	)		(12	)
Total interest-earning assets		841			(2,810	)		(1,969	)

Interest-bearing liabilities:
Savings accounts		(9	)		(15	)		(24	)
Interest-bearing checking accounts		—			(10	)		(10	)
Market rate checking accounts		114			(159	)		(45	)
Certificates of deposit		(122	)		(94	)		(216	)
Total interest-bearing deposits		(17	)		(278	)		(295	)
FHLB advances		(19	)		(1,051	)		(1,070	)
PPPLF borrowings		(1	)		(3	)		(4	)
Other borrowings		(3	)		(7	)		(10	)
Total interest-bearing liabilities		(40	)		(1,339	)		(1,379	)

Change in net interest income	$	881		$	(1,471	)	$	(590	)

Comparison of Operating Results for the Three Months Ended March 31, 2022 and 2021

General. Net income decreased $341,000 to $1.8 million for the three months ended March 31, 2022 compared to $2.1 million for the three months ended March 31, 2021. The decrease was due primarily to a decrease in Payroll Protection Program (PPP) loan related interest and fee income from the receipt of forgiveness payments for these loans.

Interest Income. Interest income decreased $2.0 million, or 21.3%, to $7.3 million for the three months ended March 31, 2022 from $9.2 million for the three months ended March 31, 2021. The decrease was due to a decrease in interest income on PPP loans, which decreased $2.7 million to $204,000 for the three months ended March 31, 2022 from $2.9 million for the three months ended March 31, 2021. Our average balance of and our average yield on PPP loans both decreased significantly as a result of the forgiveness of loans by the SBA during the 2021 period and the related acceleration of recognized fees.

Excluding PPP loans, interest income on loans increased $588,000, or 9.5%, to $6.8 million for the three months ended March 31, 2022 from $6.2 million for the three months ended March 31, 2021. Our average balance of non-PPP loans increased $83.7 million, or 17.1%, to $574.4 million for the three months ended March 31, 2022 from $490.7 million for the three months ended March 31, 2021, as we continue to acquire talent to assist with our strategic initiatives to both increase and diversify the loan portfolio. Our average yield on loans, not including PPP loans, decreased 33 basis points to 4.73% for the three months ended March 31, 2022 from 5.06% for the three months ended March 31, 2021, due to the continued changes in the interest rate environment.

Interest income on securities increased $166,000 to $260,000 for the three months ended March 31, 2022 from $94,000 for the three months ended March 31, 2021. The average balance of securities more than doubled to $48.6 million for the three months ended March 31, 2022 from $23.8 million for the three months ended March 31, 2021, due to our using excess cash from PPP loan repayments and cash previously held in interest-bearing deposit accounts to invest in securities to increase the yield of our interest-earning assets.

Interest Expense. Interest expense decreased $1.4 million, or 152.0%, to a negative $472,000 for the three months ended March 31, 2022, compared to $907,000 for the three months ended March 31, 2021, due to our repaying acquired FHLB borrowings, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances.

We experienced decreases in interest expense on all deposit categories, primarily as a result of continued decreases in market rates, but also as a result of a shift in our deposits from certificates of deposit to lower-rate deposit accounts. Interest expense on certificates of deposit decreased $216,000, or 42.7%, to $290,000 for the three months ended March 31, 2022 from $506,000 for the three months ended March 31, 2021 . The average balance of certificates of deposit decreased to $35.4 million, or 27.3%, to $94.5 million for the three months ended March 31, 2022 compared to $129.9 million for the three months ended March 31, 2021, and the average rate we paid on certificates of deposit decreased 33 basis points to 1.23% for the three months ended March 31, 2022 from 1.56% for the three months ended March 31, 2021. Interest expense on market rate checking accounts decreased $45,000, or 33.8%, despite an increase in average balance of $20.2 million, or 16.3%, as the rate we paid on these deposits decreased 18 basis points to 0.25% for the three months ended March 31, 2022 from 0.43% for the three months ended March 31, 2021 due to continued decreases in market rates.

Interest expense on borrowings decreased to a negative $472,000 for the three months ended March 31, 2022 compared to $907,000 for the three months ended March 31, 2021, as we repaid acquired FHLB borrowings during the current period, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances.

Net Interest Income. Net interest income decreased $590,000, or 7.1% and was $7.8 million for the three months ended March 31, 2022 compared to $8.3 million for the three months ended March 31, 2021. Our net interest rate spread increased to 4.69% for the three months ended March 31, 2022 from 4.39% for the three months ended March 31, 2021, reflecting the repayment of FHLB borrowings, described above while our net interest margin was 4.53% for the three months ended March 31, 2022 compared to 4.65% for the three months ended March 31, 2021. The decrease in net interest margin was primarily due to the decrease in PPP loans as forgiveness payments were received. For the three months ended March 31, 2022, the cost of average interest-bearing liabilities decreased to (0.44)% from 0.76% for the three months ended March 31, 2021, as a result of paying off FHLB acquired advances and recognizing $1.0 million in accretion from fair value adjustments on acquired advances. The total cost of deposits was 0.48% for the three months ended March 31, 2022, compared to 0.72% for the three months ended March 31, 2021. The decrease was due to decreasing deposit rates related to the decrease in market rates. Our average net interest-earning assets increased by $16.7 million, or 7.0%, to $254.4 million for the three months ended March 31, 2022 from $237.8 million for the three months ended March 31, 2021.

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

After an evaluation of these factors, we recorded a provision for loan losses of $250,000 for the three months ended March 31, 2022, compared to a provision of $450,000 for the three months ended March 31, 2021. We increased our provision expense in 2021 due to the uncertainty related to the COVID-19 pandemic. As the economy began to improve in 2021 and continued to improve 2022, less provision expense was required. Our allowance for loan losses was $8.8 million at March 31, 2022 compared to $8.6 million at December 31, 2021 and $6.9 million at March 31, 2021. The allowance for loan losses to total loans was 1.46% at March 31, 2022 compared to 1.46% at December 31, 2021 and 1.10% at March 31, 2021. The allowance for loan losses to total loans is an “all-in” number, meaning it includes all originated and acquired loans. This reduces the overall allowance for loan loss to total loans percentage. However, the acquired loans portfolio was marked to fair market value at acquisition and no carryover of the allowance was allowed. The allowance for loan loss to total loans with the total originated and acquired loans is 1.46% at March 31, 2022 compared to 1.46% at December 31, 2021. Excluding the acquired loans, the allowance to total loans is 2.01% at March 31, 2022 compared to 2.06% at December 31, 2021. The allowance for loan losses to non-performing loans was 138.94% at March 31, 2022 compared to 122.09% at December 31, 2021 and 141.14% at March 31, 2021. Net loan charge offs were $3,000 for the three months ended March 31, 2022, compared to net loan recoveries of $1.1 million for the year ended December 31, 2021. The increase in net recoveries for 2021 was primarily driven by a $1.0 million recovery on a previously charged off commercial real estate loan.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at March 31, 2022. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the

Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-interest Income. Non-interest income decreased $134,000, or 18.4%, to $595,000 for the three months ended March 31, 2022 from $729,000 for the three months ended March 31, 2021. This was a result of the decrease in other non-interest income as income was received in 2021 for a bank owned life insurance death benefit claim and no such benefit claim in 2022.

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


	Three Months Ended March 31,					Change
	2022		2021			Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	2,942	$	2,383		$	559			23.5	%
Deferred compensation		66		64			2			3.1	%
Occupancy		582		1,052			(470	)		(44.7	)%
Advertising		80		80		—			—
Data processing		494		481			13			2.7	%
Other real estate owned		—		12			(12	)		(100.0	)%
Net (gain) loss on sale of other real estate owned		—		(1	)		(1	)		97.8	%
Legal and accounting		182		177			5			2.8	%
Organizational dues and subscriptions		131		71			60			84.5	%
Director compensation		51		50			1			2.0	%
Federal deposit insurance premiums		60		73			(13	)		(17.8	)%
Writedown of premises and equipment		—		873			(873	)		(100.0	)%
FHLB prepayment penalties		647		—			647			100.0	%
Other		523		577			(54	)		(9.3	)%
Total non-interest expenses	$	5,758	$	5,892		$	(134	)		(2.3	)%

Operating expenses decreased $134,000, and was $5.8 million for the three months ended March 31, 2022, compared to $5.9 million for the three months ended March 31, 2021, as a result of the decrease in occupancy expense due to facilities consolidation offset with increases in salaries and employee benefits.

Income Tax Expense. We recorded income tax expense of $547,000 for the three months ended March 31, 2022 compared to $596,000 for the three months ended March 31, 2021. The lower tax expense for the 2022 period was primarily due to lower pretax income. The effective tax rate was 23.40% for the three months ended March 31, 2022 compared to 21.84% for the three months ended March 31, 2021.

Management of Market Risk

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:

•

limiting our reliance on non-core/wholesale funding sources;

•

growing our volume of transaction deposit accounts;

•

increasing our investment securities portfolio, with an average maturity of less than 15 years;

•

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

•

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

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

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

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

The table below sets forth, as of March 31, 2022, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.


Change in Interest Rates (basis points) (1)	Net Interest Income Year 1 Forecast		Year 1 Change from Level
	(Dollars in thousands)
+400	$	25,071		(3.52	)%
+200		25,554		(1.67	)%
Level		25,987	—
-200		24,690		(4.99	)%
-400		24,441		(5.95	)%

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

The table above indicates that at March 31, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 1.67% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 4.99% decrease in net interest income. At March 31, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 1.13% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 1.31% decrease in net interest income.

Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (net economic value or “NEV”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

The table below sets forth, as of March 31, 2022, the calculation of the estimated changes in our NEV that would result from the designated immediate changes in the United States Treasury yield curve.


Change in Interest			Estimated Increase (Decrease) in NEV						NEV as a Percentage of Present Value of Assets (3)
Rates (basis points) (1)	Estimated NEV (2)		Amount			Percent			NEV Ratio (4)			Increase (Decrease) (basis points)
(Dollars in thousands)
+400	$	103,764	$	(19,938	)		(16.12	)%		15.19	%		(121	)
+200		113,075		(10,627	)		(8.59	)%		15.77	%		(63	)
—		123,702	—			—				16.40	%	—
-200		123,074		(628	)		(0.51	)%		15.69	%		(71	)
-400		126,526		2,824			(-2.28	)%		16.07	%		(33	)

(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 March 31, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 8.59% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 0.51% decrease in net economic value. At March 31, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 3.42% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 6.89% 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 March 31, 2022, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at March 31, 2022, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans. Amounts are based on a preliminary balance sheet as of March 31, 2022, and may not equal amounts included in our unaudited consolidated financial statements for the quarter ended March 31, 2022. However, we believe that there would be no material changes in the results of the gap analysis if the unaudited financial results included in Part 1, Item 1 of this quarterly report had been utilized.


	Time to Repricing
	Zero to 90 Days			Zero to 180 Days			Zero Days to One Year			Zero Days to Two Years			Zero Days to Five Years			Total
				(Dollars in thousands)
Assets:
Cash and due from banks	$	55,596		$	55,596		$	55,596		$	55,596		$	55,596		$	69,898
Investments		5,437			6,497			7,577			9,581			21,281			46,933
Net loans		79,631			109,987			162,026			258,435			475,507			592,895
Other assets		—			—			—			—			—			50,074
Total	$	140,664			172,080			225,199			323,612			552,384		$	759,800


Liabilities:
Non-maturity deposits	$	173,356			188,359			218,364			278,368			423,696		$	542,849
Certificates of deposit		13,511			24,345			43,720			59,326			86,962			92,321
Borrowings		15,446			15,446			15,446			15,446			15,446			15,446
Other liabilities		—			—			—			—			—			6,608
Equity capital		—			—			—			—			—			102,576
Total (1)	$	202,313			228,150			277,530			353,140			526,104		$	759,800

Asset/liability gap	$	(61,649	)		(56,070	)		(52,331	)		(29,528	)		26,280
Gap/assets ratio (2)		(8.11	)%		(7.38	)%		(6.89	)%		(3.89	)%		3.46	%

(1) Amounts do not foot due to rounding.

(2) Gap/assets ratio equals the asset/liability gap for the period divided by total assets ($759.8 million).

At March 31, 2022, our asset/liability gap from zero days to one year was negative $52.3 million, resulting in a gap/assets ratio of (6.89)%. At March 31, 2021, our asset/liability gap from zero days to one year was negative $7.4 million, resulting in a gap/assets ratio of (0.93)%.

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 March 31, 2022, we had a $197.4 million line of credit with the Federal Home Loan Bank of Atlanta, with advances of $10.0 million outstanding and an $2.5 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 $81.7 million with the Federal Reserve Bank of Atlanta Discount Window secured by $111.8 million in loans. No amount was outstanding on the unsecured lines of credit or the Discount Window at March 31, 2022.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $3.9 million for the three months ended March 31, 2022, compared to $8.7 million for the three months ended March 31, 2021. Net cash used in investing activities was $17.1 million for the three months ended March 31, 2022, compared to $27.1 million for the three months ended March 31, 2021. Net cash used in investing activities typically consists primarily of disbursements for loan originations and purchases of investment securities. Net cash used in financing activities, which consists primarily of activity in deposit accounts and proceeds/repayments of FHLB advances, and beginning in 2022, a stock repurchase program, was $28.7 million for the three months ended March 31, 2022, which included repaying $58.0 million of FHLB borrowings and repurchasing stock of $3.9 million, compared to $58.4 million for the three months ended March 31, 2021, which included a capital injection of $35.4 million following our stock offering in January 2021.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

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


						For Capital					To Be Well Capitalized
						Adequacy					Under Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2022:
Common Equity Tier 1
(to Risk Weighted Assets)	$	85,751		13	%	$	29,230		4.50	%	$	42,221		6.50	%
Total Capital
(to Risk Weighted Assets)	$	93,879		14	%	$	51,965		8	%	$	64,956		10	%
Tier I Capital
(to Risk Weighted Assets)	$	85,751		13	%	$	38,974		6	%	$	51,965		8	%
Tier I Capital
(to Average Assets)	$	85,751		12	%	$	29,130		4	%	$	36,412		5	%

As of December 31, 2021:
Common Equity Tier 1
(to Risk Weighted Assets)	$	83,662		13	%	$	27,960		4.50	%	$	40,386		6.50	%
Total Capital
(to Risk Weighted Assets)	$	91,438		15	%	$	49,706		8	%	$	62,133		10	%
Tier I Capital
(to Risk Weighted Assets)	$	83,662		13	%	$	37,280		6	%	$	49,706		8	%
Tier I Capital
(to Average Assets)	$	83,662		11	%	$	31,070		4	%	$	38,837		5	%

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2022, we had outstanding commitments to originate loans of $84.9 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 March 31, 2022 totaled $43.4 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2022. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2022, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 March 31, 2022, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

Item 1A. Risk Factors

Not applicable for smaller reporting companies.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

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

The following table sets forth information in connection with repurchases of shares of the Company’s common stock during the three months ended March 31, 2022:


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs (1)
January 1, 2022 through January 31, 2022	0		$	0	0			343,632
February 1, 2022 through February 28, 2022		0		0		0		343,632
March 1, 2022 through March 31, 2022		253,779	$	15.53		253,779		89,853
		253,779	$	15.53		253,779		89,853

(1) The Board of Directors approved a stock repurchase program on January 27, 2022, which authorized the repurchase of up to 343,632 shares (approximately 5.0% of the then-outstanding shares). The total number of shares purchased as part of the publicly announced plan totaled 253,779 as of March 31, 2022. There is no expiration date for the stock repurchase plan.

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 March 31, 2022, formatted in inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive (Loss) Income, (iv) Statements of Changes in Stockholders’ Equity, (v) Statements of Cash Flows, and (vi) Notes to Financial Statements

104.0		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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

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

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

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:	May 12, 2022	/s/ Edward J. Cooney
		Edward J. Cooney
		Chief Executive Officer and Director

Date:	May 12, 2022	/s/ Tessa M. Nolan
		Tessa M. Nolan
		Senior Vice President and Chief Financial Officer

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