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 SeptemberJune 30, 20222023

OR

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

For the transition period

Commission File No. 001-39914

Affinity Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

82-1147778

(State or Other Jurisdiction of

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. YesNo

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). YesNo

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). YesNo

As of November 4, 2022,August 8, 2023, 6,634,1896,421,700 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 SeptemberJune 30, 20222023 (unaudited) and December 31, 20212022

2

Consolidated Statements of Income for the Three Months and NineSix Months Ended SeptemberJune 30, 20222023 and 20212022 (unaudited)

3

Consolidated Statements of Comprehensive Income (Loss) Income for the Three Months and NineSix Months Ended SeptemberJune 30, 20222023 and 20212022 (unaudited)

4

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months and NineSix Months Ended SeptemberJune 30, 20222023 and 20212022 (unaudited)

5

Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20222023 and 20212022 (unaudited)

76

Notes to Unaudited Consolidated Financial Statements

87

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3836

Item 4.

Controls and Procedures

3936

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

4037

Item 1A.

Risk Factors

4037

Item 2.

Unregistered Sales of Equity Securities, and Use of Proceeds, and Issuer Purchases of Equity Securities

4037

Item 3.

Defaults Upon Senior Securities

4037

Item 4.

Mine Safety Disclosures

4037

Item 5.

Other Information

4037

Item 6.

Exhibits

4138

SIGNATURES

4239

1


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AFFINITY BANCSHARES, INC.

Consolidated Balance Sheets

 

September 30, 2022

 

 

December 31, 2021

 

 

June 30, 2023

 

 

December 31, 2022

 

 

(unaudited)

 

 

 

 

 

(unaudited)

 

 

 

 

 

(In thousands)

 

 

(Dollars in thousands except per share amounts)

 

Assets

Assets

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

6,887

 

 

$

16,239

 

 

$

7,061

 

 

$

2,928

 

Interest-earning deposits in other depository institutions

 

 

33,619

 

 

 

95,537

 

 

 

75,833

 

 

 

23,396

 

Cash and cash equivalents

 

 

40,506

 

 

 

111,776

 

 

 

82,894

 

 

 

26,324

 

Investment securities available-for-sale

 

 

41,878

 

 

 

48,557

 

 

 

49,931

 

 

 

46,200

 

Investment securities held-to-maturity (estimated fair value of $33,053, net of allowance for credit losses of $42 at June 30, 2023 and estimated fair value of $26,251 at December 31, 2022)

 

 

34,145

 

 

 

26,527

 

Other investments

 

 

1,025

 

 

 

2,476

 

 

 

1,508

 

 

 

1,082

 

Loans, net

 

 

641,062

 

 

 

575,825

 

Loans

 

 

663,141

 

 

 

646,234

 

Allowance for credit loss on loans

 

 

(9,252

)

 

 

(9,325

)

Net loans

 

 

653,889

 

 

 

636,909

 

Other real estate owned

 

 

3,538

 

 

 

3,538

 

 

 

2,901

 

 

 

2,901

 

Premises and equipment, net

 

 

4,069

 

 

 

3,783

 

 

 

4,052

 

 

 

4,257

 

Bank owned life insurance

 

 

15,637

 

 

 

15,377

 

 

 

15,899

 

 

 

15,724

 

Intangible assets

 

 

18,606

 

 

 

18,749

 

 

 

18,462

 

 

 

18,558

 

Other assets

 

 

10,069

 

 

 

8,007

 

 

 

13,224

 

 

 

12,801

 

Total assets

 

$

776,390

 

 

$

788,088

 

 

$

876,905

 

 

$

791,283

 

 

 

 

 

 

Liabilities and Stockholders' Equity

Liabilities and Stockholders' Equity

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing checking

 

$

204,781

 

 

$

193,940

 

 

$

174,752

 

 

$

190,297

 

Interest-bearing checking

 

 

93,235

 

 

 

91,387

 

 

 

93,358

 

 

 

91,167

 

Market rate checking

 

 

160,377

 

 

 

145,969

 

Money market accounts

 

 

141,157

 

 

 

148,097

 

Savings accounts

 

 

88,840

 

 

 

86,745

 

 

 

85,845

 

 

 

101,622

 

Certificates of deposit

 

 

98,784

 

 

 

96,758

 

 

 

235,930

 

 

 

125,989

 

Total deposits

 

 

646,017

 

 

 

614,799

 

 

 

731,042

 

 

 

657,172

 

Federal Home Loan Bank advances

 

 

10,000

 

 

 

48,988

 

Federal Home Loan Bank advances and other borrowings

 

 

20,000

 

 

 

10,025

 

Accrued interest payable and other liabilities

 

 

5,152

 

 

 

3,333

 

 

 

7,924

 

 

 

6,983

 

Total liabilities

 

 

661,169

 

 

 

667,120

 

 

 

758,966

 

 

 

674,180

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock (10,000,000 shares authorized, no shares outstanding at
September 30, 2022 and December 31, 2021)

 

 

 

 

 

 

Common stock (par value $0.01 per share, 40,000,000 shares authorized;
6,634,885 issued and outstanding at September 30, 2022 and 6,872,634
issued and outstanding at December 31, 2021)

 

 

66

 

 

 

69

 

Common stock (par value $0.01 per share, 40,000,000 shares authorized;
6,430,300 issued and outstanding at June 30, 2023 and 6,605,384
issued and outstanding at December 31, 2022)

 

 

64

 

 

 

66

 

Preferred stock (10,000,000 shares authorized, no shares outstanding)

 

 

 

 

 

 

Additional paid in capital

 

 

63,288

 

 

 

68,038

 

 

 

61,027

 

 

 

63,130

 

Unearned ESOP shares

 

 

(4,847

)

 

 

(5,004

)

 

 

(4,692

)

 

 

(4,795

)

Retained earnings

 

 

63,658

 

 

 

58,223

 

 

 

68,209

 

 

 

65,357

 

Accumulated other comprehensive loss

 

 

(6,944

)

 

 

(358

)

 

 

(6,669

)

 

 

(6,655

)

Total stockholders' equity

 

 

115,221

 

 

 

120,968

 

 

 

117,939

 

 

 

117,103

 

Total liabilities and stockholders' equity

 

$

776,390

 

 

$

788,088

 

 

$

876,905

 

 

$

791,283

 

See accompanying notes to unaudited consolidated financial statements.

2


AFFINITY BANCSHARES, INC.

Consolidated Statements of Income

(unaudited)

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(In thousands)

 

 

(Dollars in thousands except per share amounts)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,734

 

 

$

7,332

 

 

$

22,013

 

 

$

24,424

 

 

$

8,727

 

 

$

7,283

 

 

$

17,018

 

 

$

14,279

 

Investment securities

 

 

301

 

 

 

237

 

 

 

857

 

 

 

529

 

 

 

986

 

 

 

291

 

 

 

1,935

 

 

 

556

 

Interest-earning deposits

 

 

189

 

 

 

53

 

 

 

286

 

 

 

134

 

 

 

1,150

 

 

 

79

 

 

 

1,638

 

 

 

97

 

Total interest income

 

 

8,224

 

 

 

7,622

 

 

 

23,156

 

 

 

25,087

 

 

 

10,863

 

 

 

7,653

 

 

 

20,591

 

 

 

14,932

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

625

 

 

 

629

 

 

 

1,612

 

 

 

2,110

 

 

 

3,785

 

 

 

484

 

 

 

6,099

 

 

 

987

 

Borrowings

 

 

73

 

 

 

132

 

 

 

(874

)

 

 

365

 

FHLB advances and other borrowings

 

 

385

 

 

 

28

 

 

 

901

 

 

 

(947

)

Total interest expense

 

 

698

 

 

 

761

 

 

 

738

 

 

 

2,475

 

 

 

4,170

 

 

 

512

 

 

 

7,000

 

 

 

40

 

Net interest income before provision for loan losses

 

 

7,526

 

 

 

6,861

 

 

 

22,418

 

 

 

22,612

 

Provision for loan losses

 

 

187

 

 

 

225

 

 

 

654

 

 

 

975

 

Net interest income after provision for loan losses

 

 

7,339

 

 

 

6,636

 

 

 

21,764

 

 

 

21,637

 

Net interest income before provision for credit losses

 

 

6,693

 

 

 

7,141

 

 

 

13,591

 

 

 

14,892

 

Provision for credit losses

 

 

 

 

 

217

 

 

 

7

 

 

 

467

 

Net interest income after provision for credit losses

 

 

6,693

 

 

 

6,924

 

 

 

13,584

 

 

 

14,425

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

420

 

 

 

416

 

 

 

1,205

 

 

 

1,126

 

 

 

405

 

 

 

393

 

 

 

796

 

 

 

785

 

Other

 

 

173

 

 

 

355

 

 

 

631

 

 

 

980

 

 

 

273

 

 

 

255

 

 

 

434

 

 

 

458

 

Total noninterest income

 

 

593

 

 

 

771

 

 

 

1,836

 

 

 

2,106

 

 

 

678

 

 

 

648

 

 

 

1,230

 

 

 

1,243

 

Noninterest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,187

 

 

 

2,777

 

 

 

9,219

 

 

 

7,797

 

 

 

3,036

 

 

 

3,023

 

 

 

6,040

 

 

 

6,032

 

Occupancy

 

 

675

 

 

 

633

 

 

 

1,798

 

 

 

2,329

 

 

 

638

 

 

 

541

 

 

 

1,282

 

 

 

1,123

 

Advertising

 

 

128

 

 

 

116

 

 

 

326

 

 

 

296

 

 

 

82

 

 

 

118

 

 

 

179

 

 

 

198

 

Data processing

 

 

486

 

 

 

520

 

 

 

1,476

 

 

 

1,518

 

 

 

487

 

 

 

497

 

 

 

980

 

 

 

990

 

Writedown of premises and equipment

 

 

 

 

 

14

 

 

 

 

 

 

888

 

FHLB prepayment penalties

 

 

 

 

 

 

 

 

647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

647

 

Other

 

 

1,014

 

 

 

967

 

 

 

3,019

 

 

 

2,764

 

 

 

1,041

 

 

 

1,058

 

 

 

1,997

 

 

 

2,005

 

Total noninterest expenses

 

 

5,490

 

 

 

5,027

 

 

 

16,485

 

 

 

15,592

 

 

 

5,284

 

 

 

5,237

 

 

 

10,478

 

 

 

10,995

 

Income before income taxes

 

 

2,442

 

 

 

2,380

 

 

 

7,115

 

 

 

8,151

 

 

 

2,087

 

 

 

2,335

 

 

 

4,336

 

 

 

4,673

 

Income tax expense

 

 

581

 

 

 

575

 

 

 

1,680

 

 

 

1,896

 

 

 

497

 

 

 

552

 

 

 

1,024

 

 

 

1,099

 

Net income

 

$

1,861

 

 

$

1,805

 

 

$

5,435

 

 

$

6,255

 

 

$

1,590

 

 

$

1,783

 

 

$

3,312

 

 

$

3,574

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,486,260

 

 

 

6,591,627

 

 

 

6,542,653

 

 

 

6,698,423

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,546,382

 

 

 

6,684,721

 

 

 

6,616,294

 

 

 

6,791,517

 

Basic earnings per share

 

$

0.28

 

 

$

0.26

 

 

$

0.81

 

 

$

0.90

 

 

$

0.25

 

 

$

0.27

 

 

$

0.51

 

 

$

0.53

 

Diluted earnings per share

 

$

0.27

 

 

$

0.26

 

 

$

0.80

 

 

$

0.89

 

 

$

0.24

 

 

$

0.27

 

 

$

0.50

 

 

$

0.53

 

See accompanying notes to unaudited consolidated financial statements.

3


AFFINITY BANCSHARES, INC.

Consolidated Statements of Comprehensive Income (Loss) Income

(unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

(In thousands)

 

 

 

 

Net income

 

$

1,861

 

 

$

1,805

 

 

$

5,435

 

 

$

6,255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on available-for-sale securities, net of taxes of $(629), $29, $(2,230) and $(96)

 

 

(1,855

)

 

 

82

 

 

 

(6,586

)

 

 

(273

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(1,855

)

 

 

82

 

 

 

(6,586

)

 

 

(273

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive (loss) income

 

$

6

 

 

$

1,887

 

 

$

(1,151

)

 

$

5,982

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

(In thousands)

 

Net income

 

$

1,590

 

 

$

1,783

 

 

$

3,312

 

 

$

3,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on available-for-sale securities, net of taxes of $171, $730, $6 and $1,602

 

(488

)

 

(2,078

)

 

(14

)

 

(4,731

)

 

 

 

 

 

 

Total other comprehensive loss

 

(488

)

 

(2,078

)

 

(14

)

 

(4,731

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

1,102

 

 

$

(295

)

 

$

3,298

 

 

$

(1,157

)

See accompanying notes to unaudited consolidated financial statements.

4


AFFINITY BANCSHARES, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

 

 

Three and Nine Months Ended September 30, 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

 

ESOP loan payment
  and release of
  ESOP shares

 

$

 

 

$

13

 

 

$

 

 

$

52

 

 

$

 

 

$

 

 

$

65

 

Stock-based
  compensation
   expense

 

 

 

 

 

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75

 

Change in unrealized
  loss on investment
  securities available-
  for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(77

)

 

 

(77

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,318

 

 

 

 

 

 

2,318

 

Ending balance June 30, 2021

 

$

69

 

 

$

67,972

 

 

$

 

 

$

(5,310

)

 

$

55,100

 

 

$

(196

)

 

$

117,635

 

ESOP loan payment
  and release of
  ESOP shares

 

$

 

 

$

(183

)

 

$

 

 

$

254

 

 

$

 

 

$

 

 

$

71

 

Stock-based
  compensation
   expense

 

 

 

 

 

110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110

 

Change in unrealized
  gain on investment
  securities available-
  for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

82

 

 

 

82

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,805

 

 

 

 

 

 

1,805

 

Ending balance September 30, 2021

 

$

69

 

 

$

67,899

 

 

$

 

 

$

(5,056

)

 

$

56,905

 

 

$

(114

)

 

$

119,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance December 31, 2021

 

$

69

 

 

$

68,038

 

 

$

 

 

$

(5,004

)

 

$

58,223

 

 

$

(358

)

 

$

120,968

 

ESOP loan payment
  and release of
  ESOP shares

 

 

 

 

 

29

 

 

 

 

 

 

52

 

 

 

 

 

 

 

 

 

81

 

Stock-based
  compensation
   expense

 

 

 

 

 

113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

113

 

Change in unrealized
  loss on investment
  securities available-
  for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,653

)

 

 

(2,653

)

  Common stock repurchase

 

 

(3

)

 

 

(3,939

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,942

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,791

 

 

 

 

 

 

1,791

 

 

 

Three and Six Months Ended June 30, 2023 and 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common

 

 

Paid In

 

 

Unearned

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

Stock

 

 

Capital

 

 

ESOP Shares

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance December 31, 2022

 

$

66

 

 

$

63,130

 

 

$

(4,795

)

 

$

65,357

 

 

$

(6,655

)

 

$

117,103

 

ESOP loan payment and release of ESOP shares

 

 

 

 

26

 

 

 

52

 

 

 

 

 

 

78

 

Stock-based compensation expense

 

 

 

 

 

260

 

 

 

 

 

 

 

 

 

 

 

 

260

 

Change in unrealized loss on investment securities available-for-sale, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

474

 

 

 

474

 

Common stock repurchase

 

 

 

 

 

(867

)

 

 

 

 

 

 

 

 

 

 

 

(867

)

Adoption of new accounting pronouncement (see Note 1)

 

 

 

 

 

 

 

 

 

 

 

(460

)

 

 

 

 

 

(460

)

Net income

 

 

 

 

 

 

 

 

 

1,722

 

 

 

 

1,722

 

Ending balance March 31, 2023

 

$

66

 

 

$

62,549

 

 

$

(4,743

)

 

$

66,619

 

 

$

(6,181

)

 

$

118,310

 

ESOP loan payment and release of ESOP shares

 

 

 

 

16

 

 

 

51

 

 

 

 

 

 

67

 

Stock-based compensation expense

 

 

 

 

 

264

 

 

 

 

 

 

 

 

 

 

 

 

264

 

Change in unrealized loss on investment securities available-for-sale, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(488

)

 

 

(488

)

Common stock repurchase

 

 

(2

)

 

 

(1,802

)

 

 

 

 

 

 

 

 

 

 

 

(1,804

)

Net income

 

 

 

 

 

 

 

 

 

1,590

 

 

 

 

1,590

 

Ending balance June 30, 2023

 

$

64

 

 

$

61,027

 

 

$

(4,692

)

 

$

68,209

 

 

$

(6,669

)

 

$

117,939

 

Beginning 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, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

ESOP loan payment and release of ESOP shares

$

 

 

$

26

 

 

$

53

 

$

 

$

 

$

79

 

Stock-based compensation expense

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

66

 

Change in unrealized loss on investment securities available- for-sale, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,078

)

 

 

(2,078

)

Common stock repurchase

 

 

(1

)

 

 

(836

)

 

 

 

 

 

 

 

 

 

 

 

(837

)

 Net income

 

 

 

 

 

 

 

 

 

1,783

 

 

 

 

1,783

 

Ending balance June 30, 2022

 

$

65

 

 

$

63,497

 

 

$

(4,899

)

 

$

61,797

 

 

$

(5,089

)

 

$

115,371

 

5


Ending balance March 31, 2022

 

$

66

 

 

$

64,241

 

 

$

 

 

$

(4,952

)

 

$

60,014

 

 

$

(3,011

)

 

$

116,358

 

ESOP loan payment and
  release of ESOP shares

 

$

 

 

$

26

 

 

$

 

 

$

53

 

 

$

 

 

$

 

 

$

79

 

Stock-based compensation
  expense

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66

 

Change in unrealized loss
  on investment securities
  available-for-sale, net of
  tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,078

)

 

 

(2,078

)

  Common stock repurchase

 

 

(1

)

 

 

(836

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(837

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,783

 

 

 

 

 

 

1,783

 

Ending balance June 30, 2022

 

$

65

 

 

$

63,497

 

 

$

 

 

$

(4,899

)

 

$

61,797

 

 

$

(5,089

)

 

$

115,371

 

ESOP loan payment and
  release of ESOP shares

 

$

 

 

$

25

 

 

$

 

 

$

52

 

 

$

 

 

$

 

 

$

77

 

Issuance of restricted stock awards

 

 

1

 

 

 

77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78

 

Stock-based compensation
  expense

 

 

 

 

 

203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

203

 

Change in unrealized loss
  on investment securities
  available-for-sale, net of
  tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,855

)

 

 

(1,855

)

  Common stock repurchase

 

 

 

 

 

(514

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(514

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,861

 

 

 

 

 

 

1,861

 

Ending balance September 30, 2022

 

$

66

 

 

$

63,288

 

 

$

 

 

$

(4,847

)

 

$

63,658

 

 

$

(6,944

)

 

$

115,221

 

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

See accompanying notes to unaudited consolidated financial statements.

65


AFFINITY BANCSHARES, INC.

Consolidated Statements of Cash Flows

(unaudited)

 

Nine Months Ended September 30,

 

 

Six Months Ended June 30,

 

 

2022

 

 

2021

 

 

2023

 

 

2022

 

 

(In thousands)

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,435

 

 

$

6,255

 

 

$

3,312

 

 

$

3,574

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and (accretion) amortization

 

 

(329

)

 

 

527

 

 

 

425

 

 

 

(602

)

Stock-based compensation expense

 

 

460

 

 

 

295

 

 

 

524

 

 

 

179

 

Provision for loan losses

 

 

654

 

 

 

975

 

Provision for credit losses

 

 

7

 

 

 

467

 

ESOP expense

 

 

237

 

 

 

193

 

 

 

145

 

 

 

160

 

Net gain on sale and writedown of other real estate owned

 

 

 

 

 

(127

)

Increase in cash surrender value of bank owned life insurance

 

 

(260

)

 

 

(274

)

 

 

(175

)

 

 

(172

)

Loss on writedown of premises and equipment

 

 

 

 

 

888

 

Change in:

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

168

 

 

 

3,119

 

 

 

(260

)

 

 

426

 

Accrued interest payable and other liabilities

 

 

1,850

 

 

 

1,302

 

 

 

355

 

 

 

1,831

 

Net cash provided by operating activities

 

 

8,215

 

 

 

13,153

 

 

 

4,333

 

 

 

5,863

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of investment securities held-to-maturity

 

 

(7,609

)

 

 

 

Purchases of investment securities available-for-sale

 

 

(5,701

)

 

 

(23,674

)

 

 

(5,710

)

 

 

(5,201

)

Purchases of premises and equipment

 

 

(930

)

 

 

(577

)

 

 

(285

)

 

 

(678

)

Proceeds from paydowns of investment securities available-for-sale

 

 

3,428

 

 

 

3,102

 

 

 

1,936

 

 

 

2,780

 

Proceeds from maturity of investment securities held-to-maturity

 

 

30

 

 

 

 

Purchases of other investments

 

 

(1,130

)

 

 

(1,412

)

 

 

(2,339

)

 

 

(756

)

Proceeds from sales of other investments

 

 

2,581

 

 

 

533

 

 

 

1,913

 

 

 

1,832

 

Proceeds from bank owned life insurance death claim

 

 

 

 

 

300

 

Net change in loans

 

 

(65,665

)

 

 

28,090

 

 

 

(16,874

)

 

 

(38,821

)

Proceeds from sales of other real estate owned

 

 

 

 

 

1,420

 

Net cash (used in) provided by investing activities

 

 

(67,417

)

 

 

7,782

 

Net cash used in investing activities

 

 

(28,938

)

 

 

(40,844

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net change in deposits

 

 

31,225

 

 

 

(24,913

)

 

 

73,871

 

 

 

11,383

 

Stock repurchase

 

 

(5,293

)

 

 

 

 

 

(2,671

)

 

 

(4,779

)

Proceeds from FHLB advances

 

 

105,000

 

 

 

35,000

 

 

 

65,000

 

 

 

75,000

 

Repayment of FHLB advances

 

 

(143,000

)

 

 

(5,000

)

 

 

(55,000

)

 

 

(103,000

)

Repayment of PPPLF borrowings

 

 

 

 

 

(100,813

)

Repayment of holding company loan

 

 

 

 

 

(5,000

)

Proceeds from stock offering

 

 

 

 

 

37,108

 

Stock offering expenses

 

 

 

 

 

(1,699

)

Funding of ESOP

 

 

 

 

 

(2,961

)

Net cash used in financing activities

 

 

(12,068

)

 

 

(68,278

)

Repayment of federal funds purchased

 

 

(25

)

 

 

 

Net cash provided by (used in) financing activities

 

 

81,175

 

 

 

(21,396

)

Net change in cash and cash equivalents

 

 

(71,270

)

 

 

(47,343

)

 

 

56,570

 

 

 

(56,377

)

Cash and cash equivalents at beginning of period

 

 

111,776

 

 

 

178,253

 

 

 

26,324

 

 

 

111,776

 

Cash and cash equivalents at end of period

 

$

40,506

 

 

$

130,910

 

 

$

82,894

 

 

$

55,399

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

1,019

 

 

$

2,405

 

 

$

819

 

 

$

929

 

Cash paid for interest

 

$

1,788

 

 

$

2,552

 

 

$

7,382

 

 

$

1,134

 

Change in unrealized loss on investment securities available-for-sale, net of tax

 

$

(14

)

 

$

(4,731

)

See accompanying notes to unaudited consolidated financial statements.

76


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(1) Nature of Operations

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

Reorganization

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

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

Basis of Presentation

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company as of SeptemberJune 30, 20222023 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, 2021.2022. The results of operations for the three months and ninesix months ended SeptemberJune 30, 20222023 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 loancredit 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 PoliciesPolicies – The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in the Company’s financial statements for the year ended December 31, 20212022 included in the Company’s Form 10-K.

8


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Earnings per Share

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

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

(In thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

1,861

 

 

$

1,805

 

 

$

5,435

 

 

$

6,255

 

Weighted average common shares outstanding

 

6,652,811

 

 

 

6,872,634

 

 

 

6,683,052

 

 

 

6,931,128

 

Effect of dilutive common stock awards

 

99,341

 

 

 

93,002

 

 

 

99,341

 

 

 

93,002

 

Diluted weighted average common shares outstanding

 

6,752,152

 

 

 

6,965,636

 

 

 

6,782,393

 

 

 

7,024,130

 

Basic earnings per common share

$

0.28

 

 

$

0.26

 

 

$

0.81

 

 

$

0.90

 

Diluted earnings per common share*

$

0.27

 

 

$

0.26

 

 

$

0.80

 

 

$

0.89

 

7


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(Dollars in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

1,590

 

 

$

1,783

 

 

$

3,312

 

 

$

3,574

 

Weighted average common shares outstanding

 

6,486,260

 

 

 

6,591,627

 

 

 

6,542,653

 

 

 

6,698,423

 

Effect of dilutive common stock awards

 

60,122

 

 

 

93,094

 

 

 

73,641

 

 

 

93,094

 

Diluted weighted average common shares outstanding

 

6,546,382

 

 

 

6,684,721

 

 

 

6,616,294

 

 

 

6,791,517

 

Basic earnings per common share

$

0.25

 

 

$

0.27

 

 

$

0.51

 

 

$

0.53

 

Diluted earnings per common share*

 

0.24

 

 

$

0.27

 

 

 

0.50

 

 

 

0.53

 

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

There were 234,954285,454anti-dilutive options for the three months and six months ended June 30, 2023 and 13,454 anti-dilutive options for the three months and ninesix months ended SeptemberJune 30, 2022 and there were 2022.no

 anti-dilutive options for the three months and nine months ended September 30, 2021.

RecentAdoption of New Accounting PronouncementsStandards

ASUOn January 1, 2023, the Company adopted Accounting Standards Update ("ASU") 2016-13 Financial Instruments - Credit Losses (Topic 326). This ASU sets forth a “current: Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss” ("CECL") model which requires the Company to measure allloss (CECL) methodology. The measurement of expected credit losses for financial instruments held atunder the reporting date based on historical experience, current conditions and reasonable supported forecasts. This replaces the existing incurred loss model andCECL methodology is applicable to financial assets measured at amortized cost, including held-to-maturity securities. It also applies to off-balance sheet credit exposures. In addition, Accounting Standard Codification ("ASC") 326 made changes to the measurement ofaccounting for available-for-sale securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and appliesoff-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to somebe reported in accordance with previously applicable GAAP. The Company adopted this ASU on January 1, 2023, and recorded a one-time entry to retained earnings of $460,000, net of tax ($437,000 related to credit losses for unfunded commitments and $23,000 related to credit losses for securities held-to-maturity).

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Bank no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the Allowance. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements; however, it resulted in new disclosures. See Note 3 for the new disclosures.

Allowance for Credit Losses ("ACL") - Loans

The CECL framework requires an estimate of expected credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. The following discussion provides a description of the methodology applied to calculate the ACL under CECL.

The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed. Accrued interest receivable is excluded from the estimate of credit losses.


Management determines the ACL balance using relevant available information from internal and external sources, relating to

8


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

past events, current conditions, and reasonable and supportable forecasts. Historical credit behaviors along with model judgments provide the basis for the estimation of expected credit losses. Adjustments to modeled loss estimates may be made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in economic conditions, property values, or other relevant factors. For the majority of loans and leases, the ACL is calculated using a discounted cash flow methodology applied at a loan level with a one-year reasonable and supportable forecast period and a two-year straight-line reversion period.


The ACL-loans is measured on a collective basis when similar risk characteristics exist. The Bank has identified the following portfolio segments and calculates the ACL for each using a discounted cash flow methodology at the loan level, with loss rates, prepayment assumptions and curtailment assumptions driven by each loan’s collateral type:

Commercial (secured by real estate - owner occupied)- Loans in this category are susceptible to business failure and general economic conditions.

Commercial (secured by real estate - non-owner occupied) - Common risks for this loan category are declines in general economic conditions, declines in real estate value, declines in occupancy rates, and lack of suitable alternative use for the property.

Commercial & industrial - Risks to this loan category include the inability to monitor the condition of the collateral, which often consists of inventory, accounts receivable and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.


Construction, land, and acquisition and development - Risks common to construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements and declines in real estate values.

Residential mortgage - Residential mortgage loans are susceptible to weakening general economic conditions, increases in unemployment rates and declining real estate values.

Consumer installment - Risks common to consumer direct loans include unemployment and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.

When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

When the discounted cash flow method is used to determine the ACL, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. The ACL on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.


Determining the Contractual Term: Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Bank.

Allowance for Credit Losses - Off-Balance Sheet Credit Exposures

The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet credit exposures. This ASUexposures is effectiveadjusted through provision for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019, the Financial Accounting Standards Board ("FASB") voted to extend the delaycredit loss expense. The estimate includes consideration of the effective datelikelihood that funding will occur and an estimate of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022. The Company is in the process of working with a third party vendor using their software solution to assist with adoption. The Company is also currently gathering necessary data to implement this change and is continuing to assess the impact of the adoption of this ASU on its consolidated financial statements. Based on our analysis, the Company estimates a 5-15% increase to its aggregate reserve levels upon adoption of the current expected credit losses standard on January 1, 2023; however, thiscommitments expected to be funded over its estimated life. The estimate is based oninfluenced by historical loss experience, adjusted for current risk characteristics, and economic conditions, forecasts, and our existing loan portfolio at September 30, 2022, and the estimate is likely to change between now and adoption.forecasts.

9


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Allowance for Credit Losses - Investment Securities Available-for-Sale

For available-for-sale securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale securities that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the securities by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected form the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in the comprehensive income. Accrued interest receivable on available-for-sale securities is excluded from the estimate of credit losses. The guidance under ASC Topic 326 had no impact on the Bank’s available-for-sale debt securities at January 1, or June 30, 2023.

Changes in the allowance for credit losses are recorded as provision of (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Allowance for Credit Losses - Investment Securities Held-to-Maturity

Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses.

10


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Management classifies the held-to-maturity portfolio into the following major security types: U.S. Treasuries, government agency mortgage-backed, and corporate securities. Both the U.S. Treasuries and the Government agency mortgage-backed securities held by the Bank are issues by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. The corporate securities are comprised of investments in corporate bonds whose issuers are primarily banks. At June 30, 2023, these securities are all rated as investment grade.

(2) Investment Securities

Investment securities available-for-sale at SeptemberJune 30, 20222023 and December 31, 20212022 are as follows: (in thousands)

 

Amortized

 

Gross
Unrealized

 

Gross
Unrealized

 

Estimated

 

 

Amortized

 

Gross
Unrealized

 

Gross
Unrealized

 

Estimated

 

September 30, 2022

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

June 30, 2023

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Treasury securities

 

$

5,097

 

 

$

 

 

$

(820

)

 

$

4,277

 

 

$

6,116

 

 

$

 

 

$

(711

)

 

$

5,405

 

Municipal securities - tax exempt

 

 

535

 

 

 

 

 

 

(132

)

 

$

403

 

 

 

530

 

 

 

 

 

 

(94

)

 

 

436

 

Municipal securities - taxable

 

 

2,529

 

 

 

 

 

 

(490

)

 

$

2,039

 

 

 

2,530

 

 

 

 

 

 

(392

)

 

 

2,138

 

U. S. Government sponsored enterprises

 

 

11,837

 

 

 

 

 

 

(3,387

)

 

$

8,450

 

 

 

11,837

 

 

 

 

 

 

(3,320

)

 

 

8,517

 

Government agency mortgage-backed securities

 

 

21,061

 

 

 

 

 

 

(3,565

)

 

$

17,496

 

 

 

19,569

 

 

 

 

 

 

(2,829

)

 

 

16,740

 

Corporate securities

 

 

10,115

 

 

 

 

 

 

(902

)

 

$

9,213

 

 

 

18,278

 

 

 

35

 

 

 

(1,618

)

 

 

16,695

 

Total

 

$

51,174

 

 

$

 

 

$

(9,296

)

 

$

41,878

 

 

$

58,860

 

 

$

35

 

 

$

(8,964

)

 

$

49,931

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

5,068

 

 

$

5

 

 

$

(23

)

 

$

5,050

 

 

$

6,084

 

 

$

 

 

$

(776

)

 

$

5,308

 

Municipal securities - tax exempt

 

 

540

 

 

 

 

 

 

(4

)

 

 

536

 

 

 

533

 

 

 

 

 

 

(96

)

 

 

437

 

Municipal securities - taxable

 

 

796

 

 

 

 

 

 

(6

)

 

 

790

 

 

 

2,529

 

 

 

 

 

 

(485

)

 

 

2,044

 

U. S. Government sponsored enterprises

 

 

11,837

 

 

 

 

 

 

(295

)

 

 

11,542

 

 

 

11,837

 

 

 

 

 

 

(3,499

)

 

 

8,338

 

Government agency mortgage-backed securities

 

 

21,371

 

 

 

200

 

 

 

(232

)

 

 

21,339

 

 

 

20,555

 

 

 

 

 

 

(3,053

)

 

 

17,502

 

Corporate securities

 

 

9,425

 

 

 

20

 

 

 

(145

)

 

 

9,300

 

 

 

13,571

 

 

 

5

 

 

 

(1,005

)

 

 

12,571

 

Total

 

$

49,037

 

 

$

225

 

 

$

(705

)

 

$

48,557

 

 

$

55,109

 

 

$

5

 

 

$

(8,914

)

 

$

46,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities held-to-maturity at June 30, 2023 and December 31, 2022 are as follows: (in thousands)




 

 

Amortized

 

 

Gross
Unrealized

 

 

Gross
Unrealized

 

 

 

 

 

Estimated Allowance for

 

June 30, 2023

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

Credit Losses

 

U.S. Treasury securities

 

$

999

 

 

$

 

 

$

(9

)

 

$

990

 

 

$

 

Government agency mortgage-backed securities

 

 

816

 

 

 

 

 

 

(76

)

 

 

740

 

 

 

 

Corporate securities

 

 

32,372

 

 

 

17

 

 

 

(1,066

)

 

 

31,323

 

 

 

(42

)

Total

 

$

34,187

 

 

$

17

 

 

$

(1,151

)

 

$

33,053

 

 

$

(42

)

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

998

 

 

$

 

 

$

 

 

$

998

 

 

$

 

Government agency mortgage-backed securities

 

 

837

 

 

 

 

 

 

(13

)

 

 

824

 

 

 

 

Corporate securities

 

 

24,692

 

 

 

4

 

 

 

(267

)

 

 

24,429

 

 

 

 

Total

 

$

26,527

 

 

$

4

 

 

$

(280

)

 

$

26,251

 

 

$

 

The Bank recorded $32,000 on January 1, 2023 upon adoption of ASC 326, and recorded an additional provision for credit losses for the three and six months ended June 30, 2023 of $0 and $10,000 for held-to-maturity securities, respectively.

11


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Investment securities available-for-sale in an unrealized loss position at June 30, 2023 and December 31, 2022 are as follows: (in thousands)

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

June 30, 2023

 

Fair Value

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

U.S. Treasury securities

 

$

987

 

 

$

(3

)

 

$

4,418

 

 

$

(708

)

 

$

5,405

 

 

$

(711

)

Municipal securities - tax exempt

 

 

 

 

 

 

 

 

436

 

 

 

(94

)

 

 

436

 

 

 

(94

)

Municipal securities - taxable

 

 

 

 

 

 

 

 

2,138

 

 

 

(392

)

 

 

2,138

 

 

 

(392

)

U. S. Government sponsored enterprises

 

 

 

 

 

 

 

 

8,517

 

 

 

(3,320

)

 

 

8,517

 

 

 

(3,320

)

Government agency mortgage-backed securities

 

 

 

 

 

 

 

 

16,740

 

 

 

(2,829

)

 

 

16,740

 

 

 

(2,829

)

Corporate securities

 

 

6,862

 

 

 

(284

)

 

 

8,233

 

 

 

(1,334

)

 

 

15,095

 

 

 

(1,618

)

Total

 

$

7,849

 

 

$

(287

)

 

$

40,482

 

 

$

(8,677

)

 

$

48,331

 

 

$

(8,964

)

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

 

 

$

 

 

$

4,331

 

 

$

(776

)

 

$

4,331

 

 

$

(776

)

Municipal securities - tax exempt

 

 

 

 

 

 

 

 

437

 

 

 

(96

)

 

 

437

 

 

 

(96

)

Municipal securities - taxable

 

 

452

 

 

 

(32

)

 

 

1,592

 

 

 

(453

)

 

 

2,044

 

 

 

(485

)

U. S. Government sponsored enterprises

 

 

 

 

 

 

 

 

8,338

 

 

 

(3,499

)

 

 

8,338

 

 

 

(3,499

)

Government agency mortgage-backed securities

 

 

5,598

 

 

 

(452

)

 

 

11,904

 

 

 

(2,601

)

 

 

17,502

 

 

 

(3,053

)

Corporate securities

 

 

4,541

 

 

 

(324

)

 

 

5,466

 

 

 

(681

)

 

 

10,007

 

 

 

(1,005

)

Total

 

$

10,591

 

 

$

(808

)

 

$

32,068

 

 

$

(8,106

)

 

$

42,659

 

 

$

(8,914

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There were 38six available-for-sale securities in an unrealized loss position totaling $287,000as of SeptemberJune 30, 20222023 for less than 12 months. There were 2765 available-for-sale securities in an unrealized loss position for 12 months or greater totaling $8.7 million as of SeptemberJune 30, 2022.2023. 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 fivesix are U.S. Treasury bonds, so all of these are direct obligations of the U.S. Government. Thirty-nine of the securities are mortgage backed bonds that have the direct or implied backing of the U.S. Government. Four of the bonds are municipal securities and the remaining 1318 securities are corporate securities that are either trust preferred securities or subordinated debentures where the Bank performs a credit review regularly and such review has raised no concerns.

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises ("GSEs"), and the U.S. Treasury, including notes and mortgage backed securities, accounted for the majority of the available-for-sale portfolio as of June 30, 2023, and the Bank expects no credit losses on these securities, given the explicit and implicit guarantees provided by the U.S. federal government. The Companyavailable-for-sale portfolio also includes corporate securities, but are underwritten as loans with features that are typically found in commercial loans. Accordingly, the Bank monitors the credit quality of these corporate bonds through quarterly credit reviews to determine impairment, if any. The decline in fair value is attributable to changes in interest rates, and not credit quality, and the Bank does not intendhave the intent to sell the investmentsU.S. government and agencies debt securities and the corporate securities and it is not likely that the Companyit will not be required to sell the investmentssecurities before their anticipated recovery, the Bank does not consider impairments on these securities to be credit related as of their amortized cost basis which may be at maturity.June 30, 2023.

There were 17 held-to-maturity securities in an unrealized loss position totaling $1.2 million as of June 30, 2023 for less than 12 months. There were no held-to-maturity securities in an unrealized loss position greater than 12 months as of June 30, 2023. 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. One security is a U.S. Treasury bonds, so it is a direct obligations of the U.S. Government. One security is a mortgage-backed security of a U.S. Government sponsored agency that has the implied backing of the U.S. Government. Fifteen are subordinated debentures of banks where the Bank performs a credit review quarterly and such reviews have raised no concerns.

Corporate securities account for the majority of the held-to-maturity portfolio as of June 30, 2023. As stated above, these corporate securities are accounted for as securities, but are underwritten as loans with features that are typically found in commercial loans. Accordingly, the Bank monitors the credit quality of these corporate bonds through quarterly credit reviews

12


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

to determine impairment, if any. At June 30, 2023, these securities are all rated as investment grade and the $42,000 of allowance for credit losses associated with these securities was calculated using a Moody's report on the cumulative default rates of corporate issuers.

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at SeptemberJune 30, 2022,2023, by contractual maturity, are shown below. Maturities of mortgage-backed securities will differ from contractual maturities because borrowers

10


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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

 

Amortized

 

Estimated

 

 

Available-for-Sale

 

 

Held-to-Maturity

 

 

Cost

 

 

Fair Value

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

U.S. Treasury securities

 

 

 

 

 

 

Within 1 year

 

$

 

 

 

 

Greater than 1 to 5 years

 

 

 

 

 

 

Greater than 5 to 10 years

 

 

5,097

 

 

 

4,277

 

Greater than 10 years

 

 

 

 

 

 

Municipal securities - tax exempt

 

 

 

 

 

 

Within 1 year

 

 

 

 

 

 

Greater than 1 to 5 years

 

 

 

 

 

 

Greater than 5 to 10 years

 

 

 

 

 

 

Greater than 10 years

 

 

535

 

 

 

403

 

Municipal securities - taxable

 

 

 

 

 

 

Within 1 year

 

 

 

 

 

 

Greater than 1 to 5 years

 

 

 

 

 

 

Greater than 5 to 10 years

 

 

1,278

 

 

 

1,063

 

Greater than 10 years

 

 

1,251

 

 

 

976

 

Government agency securities

 

 

 

 

 

 

Within 1 year

 

 

 

 

 

 

Greater than 1 to 5 years

 

 

 

 

 

 

Greater than 5 to 10 years

 

 

2,022

 

 

 

1,571

 

Greater than 10 years

 

 

9,815

 

 

 

6,879

 

Corporate securities

 

 

 

 

 

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Within 1 year

 

 

 

 

 

 

 

$

989

 

 

$

987

 

 

$

 

 

$

 

Greater than 1 to 5 years

 

 

496

 

 

 

470

 

 

 

3,980

 

 

 

3,818

 

 

 

17,744

 

 

 

17,314

 

Greater than 5 to 10 years

 

 

9,119

 

 

 

8,318

 

 

 

22,226

 

 

 

19,561

 

 

 

15,627

 

 

 

14,999

 

Greater than 10 years

 

 

500

 

 

 

425

 

 

 

12,096

 

 

 

8,825

 

 

 

 

 

 

 

 

 

30,113

 

 

 

24,382

 

 

 

39,291

 

 

 

33,191

 

 

 

33,371

 

 

 

32,313

 

Government agency mortgage-backed securities

 

 

21,061

 

 

 

17,496

 

 

 

19,569

 

 

 

16,740

 

 

 

816

 

 

 

740

 

Total

 

$

51,174

 

 

$

41,878

 

 

$

58,860

 

 

$

49,931

 

 

$

34,187

 

 

$

33,053

 

 

 

 

 

 

 

 

 

 

 

NoThere were no sales of investment securities were soldavailable-for-sale during the three months or nineand six months ended SeptemberJune 30, 20222023 or 2021.2022.

SecuritiesAvailable-for-sale securities with a carrying value of approximately $4.74.4 million and $2.84.7 million were pledged to secure public deposits at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.

(3) Loans and Allowance for LoanCredit Losses

Major classifications of loans, by collateral code, at SeptemberJune 30, 20222023 and December 31, 20212022 are summarized as follows: (in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

 

June 30, 2023

 

 

December 31, 2022

 

Commercial (secured by real estate - owner occupied)

 

$

160,164

 

 

$

158,662

 

 

$

162,248

 

 

$

162,989

 

Commercial (secured by real estate - non-owner occupied)

 

 

138,351

 

 

 

104,042

 

 

 

142,280

 

 

 

135,720

 

Commercial and industrial

 

 

149,855

 

 

 

152,835

 

 

 

151,007

 

 

 

147,775

 

Paycheck Protection Program loans

 

 

 

 

 

17,883

 

Construction, land and acquisition & development

 

 

42,881

 

 

 

16,317

 

 

 

42,028

 

 

 

37,158

 

Residential mortgage 1-4 family

 

 

52,904

 

 

 

63,065

 

 

 

51,976

 

 

 

51,324

 

Consumer installment

 

 

106,228

 

 

 

71,580

 

 

 

113,602

 

 

 

111,268

 

Total

 

 

650,383

 

 

 

584,384

 

 

 

663,141

 

 

 

646,234

 

Less allowance for loan losses

 

 

(9,321

)

 

 

(8,559

)

Less allowance for credit losses

 

 

(9,252

)

 

 

(9,325

)

Total loans, net

 

$

641,062

 

 

$

575,825

 

 

$

653,889

 

 

$

636,909

 

11


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Atlanta, Georgia MSA. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. With the acquisition of Affinity Bank, the Bank enhanced its lending within professional markets, with a primary focus on the dental industry in Georgia and adjoining states. The majority of these loans are commercial and industrial credits for practice acquisitions and equipment financing with the remainder being owner-occupied real estate. Accrued interest on loans totaled $1.7 million on June 30, 2023 and $1.6 million on December 31, 2022 and is included in other assets on the consolidated balance sheet.

The Coronavirus Aid, Relief, and Economic Security Act, also known asadoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) did not result in an increase to allowance for credit losses for loans for the CARES Act, is an economic stimulus bill signedBank.

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

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

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

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

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

1213


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

The following table presents the balance in the allowance for loancredit losses and the recorded investment in loans by portfolio segment and based on impairment method as of and for the ninethree and six months ended SeptemberJune 30, 20222023 and as of December 31, 2021:2022: (in thousands)

September 30, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2023

 

Commercial
(Secured by Real
Estate - Owner Occupied)

 

 

Commercial
(Secured by Real
Estate - Non-Owner Occupied)

 

 

Commercial
and Industrial

 

 

Construction,
Land and
Acquisition & Development

 

 

Residential
 Mortgage

 

 

Consumer
Installment

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2022

 

$

2,403

 

 

$

2,079

 

 

$

2,292

 

 

$

487

 

 

$

345

 

 

$

1,675

 

 

$

44

 

 

$

9,325

 

Provision

 

 

(915

)

 

 

(748

)

 

 

(1,173

)

 

 

523

 

 

 

1,094

 

 

 

756

 

 

 

463

 

 

 

 

Charge-offs

 

 

(4

)

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

(148

)

 

 

 

 

 

(155

)

Recoveries

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

38

 

 

 

 

 

 

82

 

Ending balance

 

$

1,492

 

 

$

1,331

 

 

$

1,116

 

 

$

1,010

 

 

$

1,475

 

 

$

2,321

 

 

$

507

 

 

$

9,252

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance March 31, 2023

 

$

1,509

 

 

$

1,396

 

 

$

1,205

 

 

$

930

 

 

$

1,514

 

 

$

2,323

 

 

$

357

 

 

$

9,234

 

Provision

 

 

(17

)

 

 

(65

)

 

 

(89

)

 

 

80

 

 

 

(75

)

 

 

16

 

 

 

150

 

 

 

-

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(49

)

 

 

 

 

 

(49

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

31

 

 

 

 

 

 

67

 

Ending balance

 

$

1,492

 

 

$

1,331

 

 

$

1,116

 

 

$

1,010

 

 

$

1,475

 

 

$

2,321

 

 

$

507

 

 

$

9,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,701

 

 

$

1,980

 

 

$

2,242

 

 

$

 

 

$

162

 

 

$

502

 

 

$

969

 

 

$

3

 

 

$

8,559

 

 

$

2,701

 

 

$

1,980

 

 

$

2,242

 

 

$

162

 

 

$

502

 

 

$

969

 

 

$

3

 

 

$

8,559

 

Provision

 

 

(606

)

 

 

137

 

 

 

103

 

 

 

 

 

 

516

 

 

 

(183

)

 

 

678

 

 

 

9

 

 

 

654

 

 

 

(421

)

 

 

99

 

 

 

55

 

 

 

325

 

 

 

(196

)

 

 

801

 

 

 

41

 

 

 

704

 

Charge-offs

 

 

 

 

 

 

 

 

(26

)

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

 

 

 

(100

)

 

 

 

 

 

 

 

 

(26

)

 

 

 

 

 

 

 

 

(123

)

 

 

 

 

 

(149

)

Recoveries

 

 

123

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

39

 

 

 

26

 

 

 

 

 

 

208

 

 

 

123

 

 

 

 

 

 

21

 

 

 

 

 

 

39

 

 

 

28

 

 

 

 

 

 

211

 

Ending balance

 

$

2,218

 

 

$

2,117

 

 

$

2,339

 

 

$

 

 

$

678

 

 

$

358

 

 

$

1,599

 

 

$

12

 

 

$

9,321

 

 

$

2,403

 

 

$

2,079

 

 

$

2,292

 

 

$

487

 

 

$

345

 

 

$

1,675

 

 

$

44

 

 

$

9,325

 

Ending allowance attributable to
loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated
for impairment

 

$

1

 

 

$

1

 

 

$

 

 

$

 

 

$

 

 

$

7

 

 

$

 

 

$

 

 

$

9

 

 

$

85

 

 

$

1

 

 

$

 

 

$

 

 

$

4

 

 

$

 

 

$

 

 

$

90

 

Collectively evaluated
for impairment

 

 

2,217

 

 

 

2,116

 

 

 

2,339

 

 

 

 

 

 

678

 

 

 

351

 

 

 

1,599

 

 

 

12

 

 

 

9,312

 

 

 

2,318

 

 

 

2,078

 

 

 

2,292

 

 

 

487

 

 

 

341

 

 

 

1,675

 

 

 

44

 

 

 

9,235

 

Total ending allowance

 

$

2,218

 

 

$

2,117

 

 

 

2,339

 

 

$

 

 

$

678

 

 

$

358

 

 

$

1,599

 

 

$

12

 

 

$

9,321

 

 

$

2,403

 

 

$

2,079

 

 

$

2,292

 

 

$

487

 

 

$

345

 

 

$

1,675

 

 

$

44

 

 

$

9,325

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated
for impairment

 

$

89

 

 

$

3,304

 

 

$

 

 

$

 

 

$

 

 

$

2,475

 

 

$

 

 

$

 

 

$

5,868

 

 

$

85

 

 

$

3,265

 

 

$

 

 

$

 

 

$

2,399

 

 

$

 

 

$

 

 

$

5,749

 

Collectively evaluated
for impairment

 

 

160,075

 

 

 

135,047

 

 

 

149,855

 

 

 

 

 

 

42,881

 

 

 

50,429

 

 

 

106,228

 

 

 

 

 

 

644,515

 

 

 

162,904

 

 

 

132,455

 

 

 

147,775

 

 

 

37,158

 

 

 

48,925

 

 

 

111,268

 

 

 

 

 

 

640,485

 

Total loans

 

$

160,164

 

 

$

138,351

 

 

$

149,855

 

 

$

 

 

$

42,881

 

 

$

52,904

 

 

$

106,228

 

 

$

 

 

$

650,383

 

 

$

162,989

 

 

$

135,720

 

 

$

147,775

 

 

$

37,158

 

 

$

51,324

 

 

$

111,268

 

 

$

 

 

$

646,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

13


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial StatementsThe Bank recorded a provision for credit losses for unfunded commitments of $586,000 on January 1, 2023 upon adoption of ASC 326. A release on unfunded commitments for the six months ended June 30, 2023 of $3,000 was recorded, and is included in other liabilities on the consolidated balance sheet. The Bank also recorded a provision of $10,000 for credit losses for held-to-maturity securities for a net $7,000 recorded of provision for credit losses for the six months ended June 30, 2023. No provision for credit losses was recorded for the three months ended June 30, 2023.

Total loans

 

$

158,662

 

 

$

104,042

 

 

$

152,835

 

 

$

17,883

 

 

$

16,317

 

 

$

63,065

 

 

$

71,580

 

 

$

 

 

$

584,384

 

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

The Bank individually evaluates all loans for impairment that are on nonaccrual status or are rated substandard (as described below). Additionally, all troubled debt restructuringsloan modifications to a borrower with financial difficulty 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

14


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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.

14Collateral-Dependent Loans


AFFINITY BANCSHARES, INC.

Notes
We classify a loan as collateral-dependent when our borrower is experiencing financial difficulty, and we expect repayment
to Unaudited Consolidated Financial Statementsbe provided substantially through the operation or sale of collateral. Our commercial loans have collateral that is comprised of real estate and business assets. Our consumer loans have collateral that is substantially comprised of residential real estate. There were no significant changes in the extent to which collateral secures our collateral-dependent loans during the six months ended June 30, 2023, and we had $

4.0 million of collateral-dependent loans without an allowance and no collateral-dependent loans with an allowance at June 30, 2023.

Impaired loans at September 30, 2022 and December 31, 20212022 were as follows: (in thousands)

September 30, 2022

 

Recorded
Investment

 

 

Unpaid
Principal
Balance

 

 

Allocated
Related
Allowance

 

 

Average
Recorded
Investment

 

 

Interest
Income
Recognized

 

December 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)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Commercial (secured by real estate - non-owner occupied)

 

 

3,122

 

 

 

3,122

 

 

 

 

 

 

3,161

 

 

 

 

 

 

3,089

 

 

 

3,089

 

 

 

 

 

 

3,145

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paycheck Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and acquisition & development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

1,581

 

 

 

1,581

 

 

 

 

 

 

1,636

 

 

 

5

 

 

 

1,526

 

 

 

1,526

 

 

 

 

 

 

1,596

 

 

 

5

 

Consumer installment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,703

 

 

 

4,703

 

 

 

 

 

 

4,797

 

 

 

5

 

 

 

4,615

 

 

 

4,615

 

 

 

 

 

 

4,741

 

 

 

5

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate - owner occupied)

 

$

89

 

 

$

89

 

 

$

1

 

 

$

93

 

 

$

4

 

 

 

85

 

 

 

85

 

 

 

85

 

 

 

90

 

 

 

4

 

Commercial (secured by real estate - non-owner occupied)

 

 

182

 

 

 

182

 

 

 

1

 

 

 

186

 

 

 

8

 

 

 

176

 

 

 

176

 

 

 

1

 

 

 

182

 

 

 

8

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and acquisition & development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

894

 

 

 

894

 

 

 

7

 

 

 

922

 

 

 

18

 

 

 

873

 

 

 

873

 

 

 

4

 

 

 

907

 

 

 

22

 

Consumer installment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,165

 

 

 

1,165

 

 

 

9

 

 

 

1,201

 

 

 

30

 

 

 

1,134

 

 

 

1,134

 

 

 

90

 

 

 

1,179

 

 

 

34

 

Total impaired loans

 

$

5,868

 

 

$

5,867

 

 

$

9

 

 

$

5,998

 

 

$

35

 

 

$

5,749

 

 

$

5,749

 

 

$

90

 

 

$

5,920

 

 

$

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate - owner occupied)

 

$

95

 

 

$

95

 

 

$

 

 

$

100

 

 

$

6

 

Commercial (secured by real estate - non-owner occupied)

 

 

3,199

 

 

 

3,199

 

 

 

 

 

 

3,177

 

 

 

45

 

Commercial and industrial

 

 

388

 

 

 

421

 

 

 

 

 

 

458

 

 

 

 

Paycheck Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and acquisition & development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

2,052

 

 

 

2,052

 

 

 

 

 

 

2,110

 

 

 

31

 

Consumer installment

 

 

1

 

 

 

1

 

 

 

 

 

 

3

 

 

 

 

 

 

5,735

 

 

 

5,768

 

 

 

 

 

 

5,848

 

 

 

82

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate - owner occupied)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Commercial (secured by real estate - non-owner occupied)

 

 

188

 

 

 

189

 

 

 

1

 

 

 

192

 

 

 

12

 

Commercial and industrial

 

 

365

 

 

 

365

 

 

 

1

 

 

 

379

 

 

 

 

Construction, land and acquisition & development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

940

 

 

 

941

 

 

 

5

 

 

 

960

 

 

 

60

 

Consumer installment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,493

 

 

 

1,495

 

 

 

7

 

 

 

1,531

 

 

 

72

 

Total impaired loans

 

$

7,228

 

 

$

7,263

 

 

$

7

 

 

$

7,379

 

 

$

154

 

15


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

The following table presents the aging of the recorded investment in past due loans, as well as the recorded investment in nonaccrual loans, as of SeptemberJune 30, 20222023 and December 31, 20212022 by class of loans: (in thousands)

September 30, 2022

 

30 -59
Days
 Past Due

 

 

60- 89
Days
 Past Due

 

 

90 Days
or Greater
Past Due

 

 

Total Accruing Loans
Past Due

 

 

Nonaccrual

 

 

Current

 

 

Total

 

June 30, 2023

 

30 -59
Days
 Past Due

 

 

60- 89
Days
 Past Due

 

 

90 Days
or Greater
Past Due

 

 

Total Accruing Loans
Past Due

 

 

Nonaccrual with Allowance

 

 

Nonaccrual without Allowance

 

 

Current

 

 

Total

 

Commercial (secured by real estate - owner occupied)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

89

 

 

$

160,075

 

 

$

160,164

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

79

 

 

$

 

 

$

162,169

 

 

$

162,248

 

Commercial (secured by real estate - non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,354

 

 

 

134,997

 

 

 

138,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

3,020

 

 

 

139,095

 

 

 

142,280

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

149,755

 

 

 

149,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

151,007

 

 

 

151,007

 

Paycheck Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and acquisition &
development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,881

 

 

 

42,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,028

 

 

 

42,028

 

Residential mortgage

 

 

897

 

 

 

537

 

 

 

 

 

 

1,434

 

 

 

3,302

 

 

 

48,168

 

 

 

52,904

 

 

 

989

 

 

 

 

 

 

 

 

 

989

 

 

 

637

 

 

 

2,027

 

 

 

48,323

 

 

 

51,976

 

Consumer installment

 

 

399

 

 

 

12

 

 

 

 

 

 

411

 

 

 

172

 

 

 

105,645

 

 

 

106,228

 

 

 

161

 

 

 

 

 

 

 

 

 

161

 

 

 

 

 

 

247

 

 

 

113,194

 

 

 

113,602

 

Total

 

$

1,296

 

 

$

549

 

 

$

 

 

 

$

1,845

 

 

$

7,017

 

 

$

641,521

 

 

$

650,383

 

 

$

1,150

 

 

$

 

 

$

 

 

$

1,150

 

 

$

881

 

 

$

5,294

 

 

$

655,816

 

 

$

663,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

30 -59
Days
 Past Due

 

 

60- 89
Days
 Past Due

 

 

90 Days
or Greater
Past Due

 

 

Total Accruing Loans
Past Due

 

 

Nonaccrual

 

 

Current

 

 

Total

 

 

 

 

Commercial (secured by real estate - owner occupied)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

158,662

 

 

$

158,662

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

85

 

 

$

162,904

 

 

$

162,989

 

 

 

 

Commercial (secured by real estate - non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,200

 

 

 

100,842

 

 

 

104,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,312

 

 

 

132,408

 

 

 

135,720

 

 

 

 

Commercial and industrial

 

 

338

 

 

 

 

 

 

 

 

 

338

 

 

 

813

 

 

 

151,684

 

 

 

152,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

147,772

 

 

 

147,775

 

 

 

 

Paycheck Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,883

 

 

 

17,883

 

Construction, land and acquisition &
development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,317

 

 

 

16,317

 

 

 

85

 

 

 

 

 

 

 

 

 

85

 

 

 

 

 

 

37,073

 

 

 

37,158

 

 

 

 

Residential mortgage

 

 

3,547

 

 

 

1,148

 

 

 

 

 

 

4,695

 

 

 

2,873

 

 

 

55,497

 

 

 

63,065

 

 

 

2,341

 

 

 

533

 

 

 

249

 

 

 

3,123

 

 

 

3,185

 

 

 

45,016

 

 

 

51,324

 

 

 

 

Consumer installment

 

 

271

 

 

 

25

 

 

 

 

 

 

296

 

 

 

125

 

 

 

71,159

 

 

 

71,580

 

 

 

571

 

 

 

59

 

 

 

 

 

 

630

 

 

 

135

 

 

 

110,503

 

 

 

111,268

 

 

 

 

Total

 

$

4,156

 

 

$

1,173

 

 

$

 

 

$

5,329

 

 

$

7,011

 

 

$

572,044

 

 

$

584,384

 

 

$

2,997

 

 

$

592

 

 

$

249

 

 

$

3,838

 

 

$

6,720

 

 

$

635,676

 

 

$

646,234

 

 

 

 

On January 1, 2023, the Bank adopted ASU 2022-02, which eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for certain loan modifications to borrowers experiencing financial difficulty. There was one loan that was both experiencing financial difficulty and was modified during the six months ended June 30, 2023.

There was noone new residential mortgage loan modification to a borrower with financial difficulty for $new troubled debt restructuring26,000 during the ninesix months ended SeptemberJune 30, 2022 or 2021.2023. The maturity date was extended. No troubled debt restructuringsloan modifications made to a borrower with financial difficulty subsequently defaulted during the ninesix months ended SeptemberJune 30, 2022 or 2021.

The Bank has allocated an allowance for loan losses of approximately $9,000 and $6,000 to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2022 and December 31, 2021, respectively.2023.

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

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

16


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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

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

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

17


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, and based on the most recent analysis performed, the risk category and year of origination of loans by class of loans is as follows: (in thousands)

September 30, 2022

 

Pass

 

 

Special
Mention

 

 

Substandard

 

 

Doubtful/
Loss

 

 

Total

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolvers

 

 

Total

 

Pass

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate - owner occupied)

 

$

159,706

 

 

$

369

 

 

$

89

 

 

$

 

 

$

160,164

 

$

2,848

 

 

$

28,324

 

 

$

32,137

 

 

$

24,221

 

 

$

10,513

 

 

$

53,509

 

 

$

10,270

 

 

$

161,822

 

Commercial (secured by real estate - non-owner occupied)

 

 

132,691

 

 

 

2,306

 

 

 

3,354

 

 

 

 

 

 

138,351

 

 

22,077

 

 

 

36,757

 

 

 

26,462

 

 

 

5,077

 

 

 

10,725

 

 

 

24,308

 

 

 

9,509

 

 

 

134,915

 

Commercial and industrial

 

 

149,755

 

 

 

 

 

 

100

 

 

 

 

 

 

149,855

 

 

13,896

 

 

 

23,041

 

 

 

28,953

 

 

 

16,150

 

 

 

22,575

 

 

 

31,341

 

 

 

15,051

 

 

 

151,007

 

Paycheck Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and acquisition & development

 

 

42,881

 

 

 

 

 

 

 

 

 

 

 

 

42,881

 

 

8,959

 

 

 

23,784

 

 

 

6,245

 

 

 

111

 

 

 

189

 

 

 

1,231

 

 

 

1,486

 

 

 

42,005

 

Residential mortgage

 

 

49,658

 

 

 

 

 

 

3,246

 

 

 

 

 

 

52,904

 

 

3,313

 

 

 

5,445

 

 

 

1,995

 

 

 

1,846

 

 

 

1,488

 

 

 

31,186

 

 

 

3,737

 

 

 

49,010

 

Consumer installment

 

 

106,056

 

 

 

 

 

 

172

 

 

 

 

 

 

106,228

 

 

23,031

 

 

 

56,730

 

 

 

22,350

 

 

 

6,865

 

 

 

3,031

 

 

 

366

 

 

 

769

 

 

 

113,142

 

Total pass

 

74,124

 

 

 

174,081

 

 

 

118,142

 

 

 

54,270

 

 

 

48,521

 

 

 

141,941

 

 

 

40,822

 

 

 

651,901

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate - owner occupied)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

347

 

 

 

-

 

 

 

347

 

Commercial (secured by real estate - non-owner occupied)

 

-

 

 

 

-

 

 

 

3,589

 

 

 

-

 

 

 

-

 

 

 

545

 

 

 

-

 

 

 

4,134

 

Commercial and industrial

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Construction, land and acquisition & development

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential mortgage

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

182

 

 

 

-

 

 

 

182

 

Consumer installment

 

13

 

 

 

165

 

 

 

50

 

 

 

15

 

 

 

8

 

 

 

 

 

 

 

 

 

251

 

Total special mention

 

13

 

 

 

165

 

 

 

3,639

 

 

 

15

 

 

 

8

 

 

 

1,074

 

 

 

-

 

 

 

4,914

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate - owner occupied)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

79

 

 

 

-

 

 

 

79

 

Commercial (secured by real estate - non-owner occupied)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,216

 

 

 

15

 

 

 

3,231

 

Commercial and industrial

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Construction, land and acquisition & development

 

-

 

 

 

-

 

 

 

-

 

 

 

23

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23

 

Residential mortgage

 

-

 

 

 

210

 

 

 

111

 

 

 

113

 

 

 

122

 

 

 

2,228

 

 

 

-

 

 

 

2,784

 

Consumer installment

 

 

 

 

57

 

 

 

130

 

 

 

4

 

 

 

18

 

 

 

 

 

 

 

 

 

209

 

Total substandard

 

-

 

 

 

267

 

 

 

241

 

 

 

140

 

 

 

140

 

 

 

5,523

 

 

 

15

 

 

 

6,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

640,747

 

 

$

2,675

 

 

$

6,961

 

 

$

 

 

$

650,383

 

$

74,137

 

 

$

174,513

 

 

$

122,022

 

 

$

54,425

 

 

$

48,669

 

 

$

148,538

 

 

$

40,837

 

 

$

663,141

 

Current year to date period gross write-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate - owner occupied)

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

4

 

 

$

 

 

$

4

 

Commercial (secured by real estate - non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Construction, land and acquisition & development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer installment

 

 

 

 

59

 

 

 

78

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

148

 

Total current period gross write-offs

$

 

 

$

59

 

 

$

78

 

 

$

11

 

 

$

 

 

$

7

 

 

$

 

 

$

155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

18


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

December 31, 2022

 

Pass

 

 

Special
Mention

 

 

Substandard

 

 

Doubtful/
Loss

 

 

Total

 

Commercial (secured by real estate - owner occupied)

 

$

162,541

 

 

$

362

 

 

$

86

 

 

$

 

 

$

162,989

 

Commercial (secured by real estate - non-owner occupied)

 

 

130,115

 

 

 

2,293

 

 

 

3,312

 

 

 

 

 

 

135,720

 

Commercial and industrial

 

 

147,772

 

 

 

 

 

 

3

 

 

 

 

 

 

147,775

 

Construction, land and acquisition & development

 

 

37,158

 

 

 

 

 

 

 

 

 

 

 

 

37,158

 

Residential mortgage

 

 

48,193

 

 

 

 

 

 

3,131

 

 

 

 

 

 

51,324

 

Consumer installment

 

 

111,049

 

 

 

84

 

 

 

135

 

 

 

 

 

 

111,268

 

Total

 

$

636,828

 

 

$

2,739

 

 

$

6,667

 

 

$

 

 

$

646,234

 

(4) DepositsIntangible Assets

The core deposit premium intangible asset had a gross carrying amount of $1.9 million and accumulated amortization of $670,000 at June 30, 2023. The core deposit premium intangible asset had a gross carrying amount of $1.9 million and accumulated amortization of $574,000 at December 31, 2022. Aggregate amortization expense was $48,000 and $96,000 during for the three and six months ended June 30, 2023 and 2022.

Goodwill acquired through acquisition was $17.2 million at June 30, 2023 and 2022. No impairment loss was recognized during the six months ended June 30, 2023 or 2022.

(5) Deposits

The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $17.137.1 million at SeptemberJune 30, 20222023 and $22.626.4 million at December 31, 2021.2022. Due to the FDIC insurance coverage rules and limits for a depositor's specific group of deposit accounts, it is important to note not all deposits in excess of $250,000 are uninsured.

Brokered CDs totaled $116.4 million and had a weighted average rate of 4.90% and a weighted average maturity of 32 months at June 30, 2023 and $34.9 million and had a weighted average rate of 4.50% and a weighted average maturity of 34 months at December 31, 2022.

(5)(6) Borrowings

The following FHLB advances, which required monthly or quarterly interest payments, were outstanding at SeptemberJune 30, 2022:2023:

Advance Date

 

Advance

 

 

Interest Rate

 

 

Maturity

 

Rate

 

Call Feature

 

Advance

 

 

Interest Rate

 

 

Maturity

 

Rate

 

Call Feature

8/24/2022

 

$

10,000,000

 

 

 

2.70

%

 

10/24/2022

 

Fixed

 

N/A

1/6/2023

 

$

10,000,000

 

 

 

4.22

%

 

1/6/2026

 

Fixed

 

N/A

1/6/2023

 

 

10,000,000

 

 

 

3.94

%

 

1/6/2028

 

Fixed

 

N/A

 

$

10,000,000

 

 

 

 

 

$

20,000,000

 

 

 

 

17


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

There were FHLB advances totaling $49.010.0 million consisting of advances with a book value of $48.010.0 million and ano fair value adjustment of $1.0 million as of December 31, 2021.2022. At SeptemberJune 30, 20222023 and December 31, 2021,2022, the FHLB advances were collateralized by certain loans which totaled approximately $393.9393.3 million and $343.6384.4 million, and by the Company’s investment in FHLB stock which totaled approximately $775,0001.3 million and $2.2832,000 million at SeptemberJune 30, 20222023 and December 31, 2021.2022. Acquired FHLB advances totaling $49.0 million were paid off during the ninesix months ended SeptemberJune 30, 2022. We were able to accrete to income the remaining $1.0 million fair value adjustment associated with these acquired advances. This decreased ouradvances, resulting in a reduction in interest expense for the ninesix months ended SeptemberJune 30, 2022 to $738,000.2022. We also incurred $647,000 of prepayment penalties during the ninesix months ended SeptemberJune 30, 2022 in connection with the payoff of the acquired advances.

The Company had one FHLB letter of credit of $5.0 million and $8.012.5 million, used to collateralize public deposits, outstanding at Septemberboth June 30, 20222023 and December 31, 2021, respectively.2022.

The Company has a Federal Funds unsecured linelines of credit with Texas Independent Bankers Bank (TIB) oftotaling $20.032.5 million. No amount was borrowed under this linethese lines as of SeptemberJune 30, 2022.2023.

1819


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(6)(7) Employee Stock Ownership Plan

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

In 2017, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing shares of the Company’s common stock. A total of 295,499 shares were purchased with the loan proceeds as part of the Company’s initial stock offering. In 2021, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing additional shares of the Company’s common stock. A total of 225,721 shares were purchased with the loan proceeds as part of the Company’s second stock offering. Total ESOP expense for the three months and ninesix months ended SeptemberJune 30, 20222023 and 20212022 was approximately $77,00067,000, $71,00079,000, $237,000145,000 and $193,000160,000, respectively. The balance of the note payable of the ESOP was approximately $5.45.3 million at SeptemberJune 30, 20222023 and December 31, 2021.2022. 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 SeptemberJune 30, 20222023 and December 31, 2021,2022, 59,00080,000 shares had been released.

(7)(8) Stock-Based Compensation

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

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

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants during the six months ended June 30, 2023 were as follows: dividend yield isof 0%, expected volatility isof 32.1227.32%, the risk-free interest rate isof 2.843.66%, expected average life isof 7.326.90, and the weighted average per share fair value of options is $6.04.

Stock options of 221,500 shares with a weighted average exercise price of $14.865.40 were granted during the nine months ended September 30, 2022. Restricted stock of 114,000 shares with a weighted average grant date value of $14.85 were also granted during the nine months ended September 30, 2022..

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

Stock Options

 

Option Shares Outstanding

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Life (Years)

 

 

Aggregate Intrinsic Value (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Outstanding - December 31, 2022

 

 

484,519

 

 

$

12.28

 

 

 

8.45

 

 

$

1,522

 

 Granted

 

 

57,500

 

 

 

14.40

 

 

 

 

 

 

 

 Exercise of stock options*

 

 

(8,753

)

 

 

11.14

 

 

 

 

 

 

 

 Outstanding - June 30, 2023

 

 

533,266

 

 

$

12.21

 

 

 

7.81

 

 

$

934

 

 Exercisable - June 30, 2023

 

 

189,515

 

 

$

10.06

 

 

 

6.50

 

 

$

607

 

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements. All 2023 exercises of stock options were exercised in this manner.

Stock Options

 

Option Shares Outstanding

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Life (Years)

 

 

Aggregate Intrinsic Value (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Outstanding - December 31, 2021

 

 

334,970

 

 

$

9.90

 

 

 

 

 

 

 

 Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 Outstanding - March 31, 2022

 

 

334,970

 

 

$

9.90

 

 

 

7.59

 

 

$

1,009

 

 Exercisable - March 31, 2022

 

 

102,475

 

 

$

10.28

 

 

 

8.00

 

 

$

535

 

 Granted

 

 

73,500

 

 

 

14.87

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 Outstanding - June 30, 2022

 

 

408,470

 

 

$

10.80

 

 

 

7.91

 

 

$

1,696

 

 Exercisable - June 30, 2022

 

 

166,779

 

 

$

10.08

 

 

 

7.31

 

 

$

812

 

 Granted

 

 

148,000

 

 

$

14.85

 

 

 

 

 

 

 

Exercise of stock options*

 

 

 

 

 

 

 

 

 

 

 

 Forfeited

 

 

13,399

 

 

 

11.14

 

 

 

 

 

 

 

 Outstanding - September 30, 2022

 

 

543,071

 

 

$

11.89

 

 

 

8.15

 

 

$

1,789

 

19


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

 Exercisable - September 30, 2022

 

 

169,469

 

 

$

10.13

 

 

 

6.91

 

 

$

791

 

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

Restricted Stock

 

 

 

 

 

Restricted Shares Outstanding

 

 

Weighted Average Grant Date Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 Outstanding - December 31, 2022

 

 

 

 

 

 

169,504

 

 

$

11.97

 

 Granted

 

 

 

 

 

 

12,400

 

 

 

14.40

 

 Outstanding - March 31, 2023

 

 

 

 

 

 

181,904

 

 

$

12.08

 

 Vested*

 

 

 

 

 

 

(27,147

)

 

 

10.42

 

 Outstanding - June 30, 2023

 

 

 

 

 

 

154,757

 

 

$

12.08

 

Restricted Stock

 

 

 

 

 

Weighted Average Grant Date Fair Value

 

 

Restricted Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 Outstanding - December 31, 2021

 

 

 

 

 

$

8.63

 

 

 

93,336

 

 Granted

 

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

 Forfeited

 

 

 

 

 

 

 

 

 

 

 Outstanding - March 31, 2022

 

 

 

 

 

$

8.63

 

 

 

93,336

 

 Granted

 

 

 

 

 

$

14.87

 

 

 

29,400

 

Vested*

 

 

 

 

 

 

8.63

 

 

 

(26,787

)

 Forfeited

 

 

 

 

 

 

 

 

 

 

 Outstanding - June 30, 2022

 

 

 

 

 

$

10.48

 

 

 

95,949

 

 Granted

 

 

 

 

 

$

14.85

 

 

 

84,600

 

Vested*

 

 

 

 

 

 

 

 

 

 

 Forfeited

 

 

 

 

 

 

11.14

 

 

 

(5,051

)

 Outstanding - September 30, 2022

 

 

 

 

 

$

11.97

 

 

 

175,498

 

20


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 3,070 and 2,6411,751 shares were surrendered during the ninesix months ended SeptemberJune 30, 2022 and 2021.2023.

The Company recognized approximately $281,000264,000, $110,00066,000, $460,000524,000 and $295,000179,000 of stock-based compensation expense during the three months and ninesix months ended SeptemberJune 30, 20222023 and 20212022 respectively, associated with its common stock awards granted to directors and officers.

 This expense is net of approximately $47,000 and $34,000 during the nine months ended September 30, 2022 and 2021 for shares surrendered to satisfy applicable tax withholding requirements.

As of SeptemberJune 30, 2022,2023, there was approximately $3.73.2 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the weighted average remaining vesting period of approximately 3.082.59 years.

(8)(9) Fair Value Measurements and Disclosures

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

Fair Value Hierarchy

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

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

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

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

20


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

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

Cash and Cash Equivalents

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

Investment Securities Available-for-Sale

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

Other Investments

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

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve may be required to be established within the allowance for loancredit 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

21


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with GAAP, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. For disclosure purposes, the fair value of fixed rate loans which are not considered impaired is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes.

Other Real Estate Owned

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

Bank Owned Life Insurance

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

Deposits

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

21FHLB Advances and Other Borrowings


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

FHLB Advances

Theadvances are carried at cost and the fair value is obtained from the Federal Home Loan Bank of FHLB fixed-rate borrowings is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements, but since the only advances we have borrowed have a one or two month maturity,Atlanta. Federal Funds

Purchased are carried at cost and because they are overnight funds,
the carrying value is a reasonable estimate of the these advances reasonably approximates fair value.

Commitments to Extend Credit

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

Assets Recorded at Fair Value on a Recurring Basis

The Company’s only assets recorded at fair value on a recurring basis are available-for-sale securities that had fair values of approximately $41.949.9 million and $48.646.2 million at SeptemberJune 30, 20222023 and December 31, 2021.2022. 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

22


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 SeptemberJune 30, 20222023 and December 31, 20212022 (in thousands).

September 30, 2022

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

June 30, 2023

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Other real estate owned

 

$

 

 

$

 

 

$

2,901

 

 

$

2,901

 

Collateral dependent loans

 

 

 

 

 

 

 

 

4,022

 

 

 

4,022

 

Total assets at fair value

 

$

 

 

$

 

 

$

6,923

 

 

$

6,923

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Other real estate owned

 

$

 

 

$

 

 

$

3,538

 

 

$

3,538

 

 

$

 

 

$

 

 

$

2,901

 

 

$

2,901

 

Impaired loans

 

 

 

 

 

 

 

 

5,859

 

 

 

5,859

 

 

 

 

 

 

 

 

 

5,659

 

 

 

5,659

 

Total assets at fair value

 

$

 

 

$

 

 

$

9,397

 

 

$

9,397

 

 

$

 

 

$

 

 

$

8,560

 

 

$

8,560

 

 

 

 

 

 

 

 

 

 

 

 

 

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 SeptemberJune 30, 20222023 and December 31, 20212022 are as follows:

 

September 30, 2022

 

 

December 31, 2021

 

 

June 30, 2023

 

 

December 31, 2022

 

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

 

Amount

 

 

Fair Value

 

 

Amount

 

 

Fair Value

 

 

Amount

 

 

Fair Value

 

 

Amount

 

 

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,506

 

 

$

40,506

 

 

$

111,776

 

 

$

111,776

 

 

$

82,894

 

 

$

82,894

 

 

$

26,324

 

 

$

26,324

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

available-for-sale

 

 

41,878

 

 

 

41,878

 

 

 

48,557

 

 

 

48,557

 

Investment securities available-for-sale

 

 

49,931

 

 

 

49,931

 

 

 

46,200

 

 

 

46,200

 

Investment securities held-to-maturity

 

 

34,145

 

 

 

33,053

 

 

 

26,527

 

 

 

26,251

 

Other investments

 

 

1,025

 

 

 

1,025

 

 

 

2,476

 

 

 

2,476

 

 

 

1,508

 

 

 

1,508

 

 

 

1,082

 

 

 

1,082

 

Loans, net

 

 

641,062

 

 

 

613,341

 

 

 

575,825

 

 

 

581,541

 

 

 

663,141

 

 

 

629,318

 

 

 

646,234

 

 

 

611,687

 

Cash surrender value of life insurance

 

 

15,637

 

 

 

15,637

 

 

 

15,377

 

 

 

15,377

 

Bank owned life insurance

 

 

15,899

 

 

 

15,899

 

 

 

15,724

 

 

 

15,724

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

646,017

 

 

 

584,139

 

 

 

614,799

 

 

 

601,036

 

 

 

731,042

 

 

 

728,465

 

 

 

657,172

 

 

 

653,577

 

FHLB advances

 

 

10,000

 

 

 

10,000

 

 

 

48,988

 

 

 

48,197

 

FHLB advances and other borrowings

 

 

20,000

 

 

 

20,374

 

 

 

10,025

 

 

 

10,025

 

22


AFFINITY BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Limitations

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

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

23


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 SeptemberJune 30, 20222023 and December 31, 20212022 and for the three months and ninesix months ended SeptemberJune 30, 20222023 and 20212022 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

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

statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.

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

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

risks related to the COVID-19 pandemic or any other pandemic;
general economic conditions, either nationally or in our market areas, that are worse than expected;
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loancredit losses;
our ability to access cost-effective funding;
changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
our ability to implement and change our business strategies;
competition among depository and other financial institutions, including with respect to service charges and fees;
inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
adverse changes in the securities or secondary mortgage markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
changes in tax laws;
the effects of any Federal government shutdown;
changes in the quality or composition of our loan or investment portfolios;
technological changes that may be more difficult or expensive than expected;
failure or breaches of our IT security systems;

24


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

24


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;
risks related to the COVID-19 pandemic or any other pandemic;
the effects of any Federal government shutdown;
our compensation expense associated with equity allocated or awarded to our employees; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

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

Summary of Significant Accounting Policies

A summary of our accounting policies is described in Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. There have been no material changes to our significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Comparison of Financial Condition at SeptemberJune 30, 20222023 and December 31, 20212022

Total assets decreased $11.7increased $85.6 million, or 1.5%10.8%, to $776.4$876.9 million at SeptemberJune 30, 20222023 from $788.1$791.3 million at December 31, 2021,2022, due primarily to a decreasean increase in cash and cash equivalents partially offset byas well as an increase in net loans.

Cash and cash equivalents decreased $71.3increased $56.6 million, or 63.8%214.9%, to $40.5$82.9 million at SeptemberJune 30, 20222023 from $111.8$26.3 million at December 31, 20212022 primarily due to cash received from an increase in deposits as excess liquidity was utilized to pay offwell as an increase in Federal Home Loan Bank ("FHLB") advances and fund loan growth.as we have increased our levels of liquidity in response to recent market events.

Net loans increased $65.2$17.0 million, or 11.3%2.7%, to $641.1$653.9 million at SeptemberJune 30, 20222023 from $575.8$636.9 million at December 31, 2021, including Paycheck Protection Program (PPP) loans of $27,000 and $17.9 million at September 30, 2022 and December 31, 2021, respectively. Commercial2022. Non-owner-occupied real estate loans increased $35.8$6.6 million, or 13.6%4.8%, to $298.5$142.3 million at SeptemberJune 30, 20222023 from $262.7$135.7 million at December 31, 2021, while construction2022. Construction loans increased $26.6$4.9 million, or 162.8%13.1%, to $42.9$42.0 million at SeptemberJune 30, 20222023 from $16.3$37.2 million at December 31, 2021, as we have been successful with2022. There were no other material changes in any of our strategic initiative to increase construction lending to continue to diversifyloan categories during the loan portfolio. In addition, consumer loanssix months.

Total investment securities increased $34.6$11.3 million, or 48.4%15.6%, to $106.2$84.1 million at SeptemberJune 30, 20222023, from $71.6$72.7 million at December 31, 2021,2022, as we continuecontinued to experience growthinvest excess cash in our indirect automobile loans. These increases weresecurities in an effort to increase yield.

25


Total deposits increased $73.9 million, or 11.2%, to $731.0 million at June 30, 2023 from $657.2 million at December 31, 2022, reflecting an increase in certificates of deposit. Certificates of deposit increased $109.9 million, or 87.3%, to $235.9 million at June 30, 2023 from $126.0 million at December 31, 2022. This was partially offset by a decrease in PPP loans, which decreased $17.9non-time deposits of $36.1 million, or 99.8% to $27,000 at September 30, 2022 from $17.9 million at December 31, 20216.8%, as a resultwe believe customers increased deposits in higher-yielding accounts during the current interest rate environment. The certificates of continued forgivenessdeposits increase included brokered deposits totaling $81.6 million. Brokered deposits have an average life of loans by SBA, a decrease in one-to-four family residential real estate loans of $10.2 million, or 16.1%, to $52.9 million at September 30, 2022 from $63.1 million at December 31, 2021, as mortgage loans continue to be refinanced at lower rates than we offer, and a decrease in commercial and industrial loans of $2.9 million, or 1.9%, to $149.9 million at September 30, 2022 from $152.8 million at December 31, 2021.

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

25


Total deposits increased $31.2 million, or 5.1%, to $646.0 million at September 30, 2022 from $614.8 million at December 31, 2021, reflecting increases in all categories of deposits. We recorded an increase in non-interest-bearing checking accounts of $10.8 million, or 5.6%, an increase in interest-bearing checking accounts of $1.8 million, or 2.02%, an increase in market-rate checking accounts of $14.4 million, or 9.9%,2.7 years and an increase in savings accountsaverage interest rate of $2.1 million, or 2.4%, due to our continued focus on growing core deposits to fund our loan growth.4.90%. The loan-to-deposit ratio at SeptemberJune 30, 20222023 was 99.2%90.7%, as compared to 93.7%98.3% at December 31, 2021.2022.

We had a $10.0$20.0 million of FHLB advance and no other borrowings at SeptemberJune 30, 2022,2023, compared to $49.0$10.0 million of Federal Home Loan Bank advances at December 31, 2021. Borrowings were decreased2022. We increased borrowings during the nine months ended September 30, 2022 as we repaid acquiredfirst quarter of 2023 to increase our liquidity position in response to recent market events, including the closures of Signature Bank and Silicon Valley Bank. During the second quarter, $15.0 million of FHLB borrowings recognizing $1.0matured, and an additional $20.0 million of FHLB borrowings was prepaid that was issued in accretion from the fair value adjustments on acquired advances. Prepayment penalties in the amountfirst quarter of $647,000 were also recognized with the repayment of these acquired advances for the nine months ended September 30, 2022.2023.

Stockholders’ equity decreasedincreased by $5.7 million,$836,000, or 4.8%0.7% to $115.2$117.9 million at SeptemberJune 30, 20222023 compared to $121.0$117.1 million at December 31, 2021,2022, primarily due to $6.9net income of $3.3 million in accumulated other comprehensive loss related to our investment portfolio, as well asduring the first six months of 2023, partially offset by a decrease in additional paid in capital from the repurchase of 343,632192,571 shares of our common stock totaling $5.3$2.7 million withat an average price per share of $15.39. Accumulated other comprehensive loss increased by $6.6 million at September 30, 2022 from $358,000 at December 31, 2021.$13.78.

26


Average Balance Sheets

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

 

For the Three Months Ended September 30,

 

 

For the Three Months Ended June 30,

 

 

2022

 

 

2021

 

 

2023

 

 

2022

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

(Dollars in thousands)

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

639,115

 

 

$

7,734

 

 

 

4.80

%

 

$

568,442

 

 

$

7,332

 

 

 

5.12

%

 

$

665,921

 

 

$

8,727

 

 

 

5.26

%

 

$

613,396

 

 

$

7,283

 

 

 

4.76

%

Securities

 

 

44,690

 

 

 

289

 

 

 

2.56

%

 

 

40,569

 

 

 

216

 

 

 

2.13

%

Interest-earning deposits

 

 

39,384

 

 

 

189

 

 

 

1.91

%

 

 

115,330

 

 

 

53

 

 

 

0.18

%

Investment securities held-to-maturity

 

 

34,131

 

 

 

521

 

 

 

6.13

%

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

50,758

 

 

 

428

 

 

 

3.38

%

 

 

46,461

 

 

 

279

 

 

 

2.40

%

Interest-earning deposits and federal funds

 

 

93,116

 

 

 

1,150

 

 

 

4.95

%

 

 

41,856

 

 

 

79

 

 

 

0.76

%

Other investments

 

 

1,163

 

 

 

12

 

 

 

4.19

%

 

 

2,476

 

 

 

21

 

 

 

3.37

%

 

 

2,167

 

 

 

37

 

 

 

6.90

%

 

 

1,187

 

 

 

12

 

 

 

3.95

%

Total interest-earning assets

 

 

724,352

 

 

 

8,224

 

 

 

4.50

%

 

 

726,817

 

 

 

7,622

 

 

 

4.19

%

 

 

846,093

 

 

 

10,863

 

 

 

5.15

%

 

 

702,900

 

 

 

7,653

 

 

 

4.36

%

Non-interest-earning assets

 

 

49,770

 

 

 

 

 

 

 

64,408

 

 

 

 

 

 

 

 

52,023

 

 

 

 

 

 

 

51,662

 

 

 

 

 

 

Total assets

 

$

774,122

 

 

 

 

 

 

$

791,225

 

 

 

 

 

 

 

$

898,116

 

 

 

 

 

 

$

754,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking accounts

 

$

98,473

 

 

$

47

 

 

 

0.19

%

 

$

83,519

 

 

$

43

 

 

 

0.21

%

 

$

95,317

 

 

$

56

 

 

 

0.23

%

 

$

97,618

 

 

$

45

 

 

 

0.19

%

Market rate checking accounts

 

 

159,478

 

 

 

100

 

 

 

0.25

%

 

 

136,984

 

 

 

117

 

 

 

0.34

%

Money market accounts

 

 

137,306

 

 

 

825

 

 

 

2.41

%

 

 

150,863

 

 

 

93

 

 

 

0.25

%

Savings accounts

 

 

83,484

 

 

 

187

 

 

 

0.89

%

 

 

93,717

 

 

 

100

 

 

 

0.43

%

 

 

88,152

 

 

 

558

 

 

 

2.54

%

 

 

82,478

 

 

 

87

 

 

 

0.42

%

Certificates of deposit

 

 

89,871

 

 

 

291

 

 

 

1.28

%

 

 

105,285

 

 

 

369

 

 

 

1.40

%

 

 

240,954

 

 

 

2,346

 

 

 

3.91

%

 

 

90,194

 

 

 

259

 

 

 

1.15

%

Total interest-bearing deposits

 

 

431,306

 

 

 

625

 

 

 

0.57

%

 

 

419,505

 

 

 

629

 

 

 

0.60

%

 

 

561,729

 

 

 

3,785

 

 

 

2.70

%

 

 

421,153

 

 

 

484

 

 

 

0.46

%

FHLB advances

 

 

13,696

 

 

 

73

 

 

 

2.12

%

 

 

49,039

 

 

 

132

 

 

 

1.07

%

FHLB advances and other borrowings

 

 

35,495

 

 

 

385

 

 

 

4.35

%

 

 

14,478

 

 

 

28

 

 

 

0.78

%

Total interest-bearing liabilities

 

 

445,002

 

 

 

698

 

 

 

0.62

%

 

 

468,544

 

 

 

761

 

 

 

0.65

%

 

 

597,224

 

 

 

4,170

 

 

 

2.80

%

 

 

435,631

 

 

 

512

 

 

 

0.47

%

Non-interest-bearing liabilities

 

 

211,986

 

 

 

 

 

 

 

203,336

 

 

 

 

 

 

 

 

182,140

 

 

 

 

 

 

 

202,296

 

 

 

 

 

 

 

Total liabilities

 

 

656,988

 

 

 

 

 

 

 

671,880

 

 

 

 

 

 

 

 

779,364

 

 

 

 

 

 

 

637,927

 

 

 

 

 

 

Total stockholders' equity

 

 

117,134

 

 

 

 

 

 

 

119,345

 

 

 

 

 

 

 

 

118,752

 

 

 

 

 

 

 

116,635

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

774,122

 

 

 

 

 

 

$

791,225

 

 

 

 

 

 

 

$

898,116

 

 

 

 

 

 

$

754,562

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

3.88

%

 

 

 

 

 

 

 

3.54

%

 

 

 

 

 

 

2.35

%

 

 

 

 

 

 

3.89

%

Net interest income

 

 

 

$

7,526

 

 

 

 

 

 

$

6,861

 

 

 

 

 

 

 

$

6,693

 

 

 

 

 

 

$

7,141

 

 

 

 

Net interest-earning assets

 

$

279,350

 

 

 

 

 

 

$

258,273

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

4.12

%

 

 

 

 

 

 

3.78

%

 

 

 

 

 

 

3.17

%

 

 

 

 

 

 

4.06

%

(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.

27


 

 

For the Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

658,887

 

 

$

17,018

 

 

 

5.21

%

 

$

604,464

 

 

$

14,279

 

 

 

4.76

%

Investment securities held-to-maturity

 

 

33,518

 

 

 

1,025

 

 

 

6.17

%

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

49,806

 

 

 

838

 

 

 

3.39

%

 

 

47,549

 

 

 

539

 

 

 

2.26

%

Interest-earning deposits and federal funds

 

 

69,568

 

 

 

1,638

 

 

 

4.75

%

 

 

45,026

 

 

 

97

 

 

 

0.43

%

Other investments

 

 

2,403

 

 

 

72

 

 

 

6.07

%

 

 

1,094

 

 

 

17

 

 

 

3.21

%

Total interest-earning assets

 

 

814,182

 

 

 

20,591

 

 

 

5.10

%

 

 

698,133

 

 

 

14,932

 

 

 

4.28

%

Non-interest-earning assets

 

 

51,524

 

 

 

 

 

 

 

 

 

52,661

 

 

 

 

 

 

 

Total assets

 

$

865,706

 

 

 

 

 

 

 

 

$

750,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking accounts

 

$

93,596

 

 

$

100

 

 

 

0.22

%

 

$

96,949

 

 

$

87

 

 

 

0.18

%

Money market accounts

 

 

138,394

 

 

 

1,486

 

 

 

2.17

%

 

 

147,677

 

 

 

182

 

 

 

0.25

%

Savings accounts

 

 

92,003

 

 

 

1,110

 

 

 

2.43

%

 

 

84,326

 

 

 

169

 

 

 

0.40

%

Certificates of deposit

 

 

195,260

 

 

 

3,403

 

 

 

3.51

%

 

 

92,318

 

 

 

549

 

 

 

1.19

%

Total interest-bearing deposits

 

 

519,253

 

 

 

6,099

 

 

 

2.37

%

 

 

421,270

 

 

 

987

 

 

 

0.47

%

FHLB advances and other borrowings

 

 

41,078

 

 

 

901

 

 

 

4.42

%

 

 

11,665

 

 

 

(947

)

 

 

-16.37

%

Total interest-bearing liabilities

 

 

560,331

 

 

 

7,000

 

 

 

2.52

%

 

 

432,935

 

 

 

40

 

 

 

0.02

%

Non-interest-bearing liabilities

 

 

186,874

 

 

 

 

 

 

 

 

 

198,680

 

 

 

 

 

 

 

Total liabilities

 

 

747,205

 

 

 

 

 

 

 

 

 

631,615

 

 

 

 

 

 

 

Total stockholders' equity

 

 

118,501

 

 

 

 

 

 

 

 

 

119,179

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

865,706

 

 

 

 

 

 

 

 

$

750,794

 

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

 

2.58

%

 

 

 

 

 

 

 

 

4.26

%

Net interest income

 

 

 

 

$

13,591

 

 

 

 

 

 

 

 

$

14,892

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

3.37

%

 

 

 

 

 

 

 

 

4.27

%

 

 

For the Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

616,141

 

 

$

22,013

 

 

 

4.78

%

 

$

596,024

 

 

$

24,424

 

 

 

5.48

%

Securities

 

 

46,585

 

 

 

827

 

 

 

2.37

%

 

 

31,374

 

 

 

472

 

 

 

2.01

%

Interest-earning deposits

 

 

43,125

 

 

 

286

 

 

 

0.89

%

 

 

92,880

 

 

 

134

 

 

 

0.19

%

Other investments

 

 

1,117

 

 

 

30

 

 

 

3.57

%

 

 

2,273

 

 

 

57

 

 

 

3.32

%

Total interest-earning assets

 

 

706,968

 

 

 

23,156

 

 

 

4.38

%

 

 

722,551

 

 

 

25,087

 

 

 

4.63

%

Non-interest-earning assets

 

 

51,687

 

 

 

 

 

 

 

 

 

63,028

 

 

 

 

 

 

 

Total assets

 

$

758,655

 

 

 

 

 

 

 

 

$

785,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking accounts

 

$

97,463

 

 

$

134

 

 

 

0.18

%

 

$

88,154

 

 

$

138

 

 

 

0.21

%

Market rate checking accounts

 

 

151,654

 

 

 

282

 

 

 

0.25

%

 

 

130,933

 

 

 

378

 

 

 

0.39

%

Savings accounts

 

 

84,042

 

 

 

356

 

 

 

0.57

%

 

 

93,823

 

 

 

310

 

 

 

0.44

%

Certificates of deposit

 

 

91,493

 

 

 

840

 

 

 

1.23

%

 

 

114,623

 

 

 

1,284

 

 

 

1.49

%

Total interest-bearing deposits

 

 

424,652

 

 

 

1,612

 

 

 

0.51

%

 

 

427,533

 

 

 

2,110

 

 

 

0.66

%

FHLB advances

 

 

12,304

 

 

 

(875

)

 

 

(9.50

)%

 

 

41,471

 

 

 

350

 

 

 

1.13

%

Other borrowings

 

 

46

 

 

 

1

 

 

 

3.43

%

 

 

1,927

 

 

 

15

 

 

 

1.01

%

Total interest-bearing liabilities

 

 

437,002

 

 

 

738

 

 

 

0.23

%

 

 

470,931

 

 

 

2,475

 

 

 

0.69

%

Non-interest-bearing liabilities

 

 

203,164

 

 

 

 

 

 

 

 

 

199,971

 

 

 

 

 

 

 

Total liabilities

 

 

640,166

 

 

 

 

 

 

 

 

 

670,902

 

 

 

 

 

 

 

Total stockholders' equity

 

 

118,489

 

 

 

 

 

 

 

 

 

114,677

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

758,655

 

 

 

 

 

 

 

 

$

785,579

 

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

 

4.15

%

 

 

 

 

 

 

 

 

3.94

%

Net interest income

 

 

 

 

$

22,418

 

 

 

 

 

 

 

 

$

22,612

 

 

 

 

Net interest-earning assets

 

$

269,966

 

 

 

 

 

 

 

 

$

251,620

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

4.24

%

 

 

 

 

 

 

 

 

4.17

%

Rate/Volume Analysis

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

28


 

Three Months Ended September 30,
2022 vs. 2021

 

 

Nine Months Ended September 30,
2022 vs. 2021

 

 

Three Months Ended June 30,
2023 vs. 2022

 

 

Six Months Ended June 30,
2023 vs. 2022

 

 

Increase (Decrease) Due to

 

 

Total

 

 

Increase (Decrease) Due to

 

 

Total

 

 

Increase (Decrease) Due to

 

 

Total

 

 

Increase (Decrease) Due to

 

 

Total

 

 

 

 

 

 

Increase

 

 

 

 

 

 

Increase

 

 

 

 

 

 

Increase

 

 

 

 

 

 

Increase

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

(In thousands)

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

2,671

 

 

$

(2,269

)

 

$

402

 

 

$

1,242

 

 

$

(3,653

)

 

$

(2,411

)

 

$

451,598

 

 

$

(450,154

)

 

$

1,444

 

 

$

2,599

 

 

$

140

 

 

$

2,739

 

Securities

 

 

23

 

 

 

50

 

 

 

73

 

 

 

260

 

 

 

95

 

 

 

355

 

Interest-earning deposits

 

 

(251

)

 

 

387

 

 

 

136

 

 

 

(147

)

 

 

299

 

 

 

152

 

Investment securities held-to-maturity

 

 

 

 

 

 

 

 

965

 

 

 

60

 

 

 

1,025

 

Investment securities available-for-sale

 

 

(3,291

)

 

 

(3,564

)

 

 

(6,855

)

 

 

240

 

 

 

59

 

 

 

299

 

Interest-earning deposits and federal funds

 

 

102,122

 

 

 

(101,006

)

 

 

1,116

 

 

 

1,373

 

 

 

168

 

 

 

1,541

 

Other investments

 

 

(35

)

 

 

26

 

 

 

(9

)

 

 

(34

)

 

 

7

 

 

 

(27

)

 

 

(4

)

 

 

(4

)

 

 

(8

)

 

 

52

 

 

 

3

 

 

 

55

 

Total interest-earning assets

 

 

2,408

 

 

 

(1,806

)

 

 

602

 

 

 

1,321

 

 

 

(3,252

)

 

 

(1,931

)

 

 

550,425

 

 

 

(554,728

)

 

 

(4,303

)

 

 

5,229

 

 

 

430

 

 

 

5,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning demand and savings

 

 

(72

)

 

 

159

 

 

 

87

 

 

 

(51

)

 

 

97

 

 

 

46

 

Interest-bearing checking accounts

 

 

22

 

 

 

(18

)

 

 

4

 

 

 

19

 

 

 

(23

)

 

 

(4

)

 

 

14,770

 

 

 

(14,298

)

 

 

472

 

 

 

(51

)

 

 

64

 

 

 

13

 

Market rate checking accounts

 

 

89

 

 

 

(106

)

 

 

(17

)

 

 

81

 

 

 

(177

)

 

 

(96

)

 

 

43,521

 

 

 

(43,725

)

 

 

(204

)

 

 

(3,112

)

 

 

4,416

 

 

 

1,304

 

Savings accounts

 

 

138

 

 

 

202

 

 

 

340

 

 

 

757

 

 

 

184

 

 

 

941

 

Certificates of deposit

 

 

(51

)

 

 

(27

)

 

 

(78

)

 

 

(234

)

 

 

(210

)

 

 

(444

)

 

 

75,106

 

 

 

(72,786

)

 

 

2,320

 

 

 

2,733

 

 

 

121

 

 

 

2,854

 

Total interest-bearing deposits

 

 

(12

)

 

 

8

 

 

 

(4

)

 

 

(185

)

 

 

(313

)

 

 

(498

)

 

 

133,535

 

 

 

(130,607

)

 

 

2,928

 

 

 

327

 

 

 

4,785

 

 

 

5,112

 

FHLB advances

 

 

(447

)

 

 

388

 

 

 

(59

)

 

 

(85

)

 

 

(1,140

)

 

 

(1,225

)

 

 

45,383

 

 

 

(45,027

)

 

 

356

 

 

 

1,432

 

 

 

416

 

 

 

1,848

 

Other borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

(14

)

Total interest-bearing liabilities

 

 

(459

)

 

 

396

 

 

 

(63

)

 

 

(270

)

 

 

(1,467

)

 

 

(1,737

)

 

 

178,918

 

 

 

(175,634

)

 

 

3,284

 

 

 

1,759

 

 

 

5,201

 

 

 

6,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net interest income

 

$

2,867

 

 

$

(2,202

)

 

$

665

 

 

$

1,591

 

 

$

(1,785

)

 

$

(194

)

 

$

371,507

 

 

$

(379,094

)

 

$

(7,587

)

 

$

3,470

 

 

$

(4,771

)

 

$

(1,301

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparison of Operating Results for the Three Months Ended SeptemberJune 30, 20222023 and 20212022

General. Net income increased by $56,000, or 3.1% to $1.9was $1.6 million for the three months ended SeptemberJune 30, 20222023 compared to $1.8 million for the three months ended SeptemberJune 30, 2021.2022. The increasedecrease was due primarily tocaused by an increase in interest income,expense offset partially offset by a decrease in noninterest income and an increase in noninterest expenses.interest income.

Interest Income. Interest income increased $602,000,$3.2 million, or 7.9%42.0%, to $8.2$10.9 million for the three months ended SeptemberJune 30, 20222023 from $7.6 million for the three months ended September 30, 2021. The increase was due primarily to an increase in interest income on loans, which increased $402,000 to $7.7 million for the three months ended SeptemberJune 30, 20222022. The increase was due to increases in all categories of interest-earning assets. Interest income on loans increased $1.4 million, or 19.8%, to $8.7 million for the three months ended June 30, 2023 from $7.3 million for the three months ended SeptemberJune 30, 2021. Interest income on loans increased as our2022. Our average balance of loans increased by $70.7$52.5 million, or 8.6%, to $639.1$665.9 million for the three months ended SeptemberJune 30, 20222023 from $568.4$613.4 million for the three months ended SeptemberJune 30, 2021.2022. The average balance of loans increased as we continuedue to acquire talent to assist with our strategic initiatives to both increase and diversify thesteady loan portfolio, while thedemand. The average yield on loans decreasedincreased 50 basis points to 4.80%5.26% for the current quarter, as compared to 5.12%4.76% for the prior year period, due to the continued changes in the interest rate environment.

Interest income on interest-earning deposits and federal funds increased $1.1 million to $1.2 million for the three months ended June 30, 2023 from $79,000 for the three months ended June 30, 2022. The average balance of interest-earning deposits and federal funds increased $51.3 million to $93.1 million for the three months ended June 30, 2023 compared to $41.9 million for the three months ended June 30, 2022, as we held excess cash to increase liquidity, as described above. In addition, the yields we received on these funds increased to 4.95% from 0.76% due to the continued changes in the interest rate environment.

Interest income on securities, excluding FHLB stock, increased $73,000$670,000 to $289,000$949,000 for the three months ended SeptemberJune 30, 20222023 from $216,000$279,000 for the three months ended SeptemberJune 30, 2021.2022. The average balance of held-to-maturity securities increased $4.1 million, or 10.2%, to $44.7was $34.1 million for the three months ended SeptemberJune 30, 2023 compared to zero for the three months ended June 30, 2022, from $40.6as we began to classify some new purchases as held-to-maturity.

29


Interest Expense. Interest expense increased $3.7 million to $4.2 million for the three months ended SeptemberJune 30, 2021, due2023, compared 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.

29


Interest Expense. Interest expense decreased $63,000, or 8.3%, to $698,000$512,000 for the three months ended SeptemberJune 30, 2022, compared to $761,000 for the three months ended September 30, 2021, due to decreasesincreases in interest expensethe average balances of interest-bearing liabilities as well as the rates paid on both deposits and borrowings.such liabilities.

We recorded decreases in interest expense in money rate checking and certificates of deposit andrecognized increases in interest expense in savings andall categories of interest-bearing checking for the three months ended September 30, 2022 . The decreases were caused by the general decrease in market rates that continued well into this year and a shift in our deposits from certificates of deposit to lower-rate deposit accounts, while the increases were causse by the more recent increase in some rates.liabilities. Interest expense on certificates of deposit decreased $78,000, or 21.1%,deposits increased to $291,000 for the three months ended September 30, 2022 from $369,000 for the three months ended September 30, 2021. The average balance of certificates of deposit decreased $15.4 million, or 14.6%, to $89.9$3.8 million for the three months ended SeptemberJune 30, 2022 compared2023 from $484,000 for the three months ended June 30, 2022. The largest increase was in interest expense on certificates of deposit, which increased $2.1 million to $105.3$2.3 million for the three months ended SeptemberJune 30, 2021, and the2023. The average rate we paid on certificates of deposit decreased 12increased 276 basis points to 1.28%3.91% for the three months ended SeptemberJune 30, 20222023 from 1.40%1.15% for the three months ended September 30, 2021. Interest expense on market rate checking accounts decreased $17,000, or 14.5%, despite an increase in average balance of $22.5 million, or 16.4%, as the rate we paid on these deposits decreased 9 basis points to 0.25% for the three months ended SeptemberJune 30, 2022, from 0.34% for the three months ended September 30, 2021 due to decreasesthe continued changes in market rates. Interest expense on savings accounts increased by $87,000, or 87.0%, asthe interest rate environment. In addition, the average balance of such accounts decreased $10.2certificates of deposit increased $150.8 million, or 10.9%, and the average rate paid on such accounts increased 46 basis points to 0.89% for the three months ended September 30, 2022 compared to 0.43% for the three months ended September 30, 2021. Interest expense on interest-bearing checking accounts increased $4,000, or 9.3%, to $47,000 for the three months ended September 30, 2022 compared to $43,000 for the three months ended September 30, 2021. The average balance of interest-bearing checking accounts increased by $15.0 million, or 17.9%, to $98.5$241.0 million for the three months ended SeptemberJune 30, 2022 compared to $83.52023 from $90.2 million for the three months ended SeptemberJune 30, 2021, while2022, as we believe customers increased deposits in higher-yielding accounts during the averagecurrent interest rate environment in addition to the brokered deposits we took out during the first quarter to enhance liquidity. We also experienced increases in interest expense on money market accounts $732,000 to $825,000 for the quarter ended June 30, 2023 and savings accounts $471,000 to $558,000 for the quarter ended June 30, 2023, due to increases in the rates we paid on suchthese accounts decreased to 0.19% from 0.21%.of 216 basis points and 212 basis points, respectively.

Interest expense on borrowings decreasedincreased to $73,000$385,000 for the three months ended SeptemberJune 30, 20222023 from $132,000$28,000 for the three months ended SeptemberJune 30, 2021, as we repaid acquired FHLB borrowings.2022. We increased borrowings during the first quarter of 2023 to increase our liquidity position in response to recent market events, including the closures of Signature Bank and Silicon Valley Bank.

Net Interest Income. Net interest income increased $665,000,decreased $448,000, or 9.7% and was $7.56.3%, to $6.7 million for the three months ended SeptemberJune 30, 20222023 compared to $6.9$7.1 million for the three months ended SeptemberJune 30, 2021.2022. Our net interest rate spread increaseddecreased to 3.88%2.35% for the three months ended SeptemberJune 30, 20222023 from 3.54%3.89% for the three months ended SeptemberJune 30, 2021, primarily reflecting an increase in interest income on loans, as described above, while2022, and our net interest margin was 4.12%decreased to 3.17% for the three months ended SeptemberJune 30, 2022 compared to 3.78%2023 from 4.06% for the three months ended September 30, 2021. For the three months ended SeptemberJune 30, 2022 as the cost of averagerates we paid on interest-bearing liabilities decreased to 0.62% from 0.65% forincreased faster than the three months ended September 30, 2021, primarilyyields we earned on our interest-earning assets, and as a result of payingwe paid off FHLB acquired advances and recognizingrecognized $1.0 million in accretion from fair value adjustments on acquired advances. The total cost of deposits was 0.57% forduring the three monthsquarter ended September 30, 2022, compared to 0.60% for the three months ended September 30, 2021.March 31, 2022. Our average net interest-earning assets increased to $279.4$248.9 million for the three months ended SeptemberJune 30, 20222023 compared to $258.3$267.6 million for the three months ended SeptemberJune 30, 2021.2022.

Provision for LoanCredit Losses. The provisions for credit losses consists of provisions for credit losses for loans and unfunded loan commitments, as well as held-to-maturity securities.

Provisions for loancredit losses for loans are charged to operations to establish an allowance for loancredit 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 loancredit losses for loans, 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.

Provisions for credit losses for unfunded commitments are charged to operations to establish an allowance for credit losses for contractual obligations to extend credit. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic factors.

Provisions for credit losses for held-to-maturity securities are also charged to operations to establish an allowance on a collective basis by major security type. The estimate of expected credit losses for held-to-maturity securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. See “—Summary of Significant Accounting Policies” for additional information.

After an evaluation of these factors, we recorded ano provision for loancredit losses of $187,000 for the three months ended SeptemberJune 30, 2022,2023, compared to a provision of $225,000$217,000 for the three months ended SeptemberJune 30, 2021.2022. Our allowance for loancredit losses was $9.3 million at SeptemberJune 30, 2022 compared to $8.6 million2023 and at December 31, 20212022 and $7.6$9.0 million at SeptemberJune 30, 2021.2022. The allowance for loancredit losses to total loans was 1.43%1.40% at SeptemberJune 30, 20222023 compared to 1.46% at December 31, 20212022 and 1.33% at SeptemberJune 30, 2021. The allowance for loan losses to total loans is an “all-in” number, meaning it includes all originated and acquired loans.2022. This reduces the overall allowance for loancredit loss to total loans percentage. However, the acquired loans portfolio was marked to fair market value at acquisition and no carryover of the allowance was allowed. The allowance for loan loss to total loans with the total originated and acquired loans is 1.43% at September 30, 2022 compared to 1.46% at December 31, 2021. Excluding the acquired loans, the allowance to total loans is 1.85% at September 30, 2022 compared to 2.06% at December 31, 2021. The allowance for loancredit losses to non-performing loans was 132.84%150.0% at SeptemberJune 30, 20222023 compared to 122.09%138.8% at December 31, 20212022 and 122.76%128.4% at SeptemberJune 30, 2021.2022. Net recoveriescharge-offs were $133,000$73,000 for the three months ended SeptemberJune 30, 2022,2023, compared to net loan recoveries of $62,000 for the year ended December 31, 2022.

30


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

To the best of our knowledge, we have recorded all loancredit losses that are both probable and reasonable to estimate at SeptemberJune 30, 2022.2023. 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 loancredit losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loancredit losses, and as a result of such reviews, we may have to adjust our allowance for loancredit losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loancredit losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-interest Income. Non-interest income decreased $178,000,increased $30,000, or 23.1%4.6%, to $593,000$678,000 for the three months ended SeptemberJune 30, 20222023 from $771,000 for the three months ended September 30, 2021, as a result$648,000. There were no material changes in any categories of a decrease in other non-interest income, primarily due to nonrecurring income received in 2021 for a bank owned life insurance death benefit claim.income.

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

 

Three Months Ended
September 30,

 

 

Change

 

 

Three Months Ended June 30,

 

 

Change

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

 

2023

 

 

2022

 

 

Amount

 

 

Percent

 

 

(Dollars in thousands)

 

 

(Dollars in thousands)

 

Salaries and employee benefits

 

$

3,187

 

 

$

2,777

 

 

$

410

 

 

 

14.7

%

 

$

3,036

 

 

$

3,023

 

 

$

13

 

 

 

0.4

%

Occupancy

 

 

675

 

 

 

633

 

 

 

42

 

 

 

6.6

%

 

 

638

 

 

 

541

 

 

 

97

 

 

 

17.9

%

Advertising

 

 

128

 

 

 

116

 

 

 

12

 

 

 

10.3

%

 

 

82

 

 

 

118

 

 

 

(36

)

 

 

(30.8

)%

Data processing

 

 

486

 

 

 

520

 

 

 

(34

)

 

 

(6.4

)%

 

 

487

 

 

 

497

 

 

 

(10

)

 

 

(2.0

)%

Writedown of premises and equipment

 

 

 

 

 

14

 

 

 

(14

)

 

 

(100.0

)%

Other

 

 

1,014

 

 

 

967

 

 

 

47

 

 

 

4.9

%

 

 

1,041

 

 

 

1,058

 

 

 

(17

)

 

 

(1.6

)%

Total non-interest expenses

 

$

5,490

 

 

$

5,027

 

 

$

463

 

 

 

9.2

%

 

$

5,284

 

 

$

5,237

 

 

$

47

 

 

 

0.9

%

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

Income Tax Expense. We recorded income tax expense of $581,000$497,000 for the three months ended SeptemberJune 30, 20222023 compared to $575,000$552,000 for the three months ended SeptemberJune 30, 2021.2022. The effective tax rate was 23.79%23.8% and 23.6% for the three months ended September 30, 2022 compared to 24.16% for the three months ended September 30, 2021.respective periods.

Comparison of Operating Results for the NineSix Months Ended SeptemberJune 30, 20222023 and 20212022

General. Net income decreased $820,000 to $5.4was $3.3 million for the ninesix months ended SeptemberJune 30, 20222023 compared to $6.3$3.6 million for the ninesix months ended SeptemberJune 30, 2021.2022. The decrease was due primarily to a decrease in PPP loan-related interest and fee income from the receipt of forgiveness payments for these loans,caused by an increase in noninterest expensesinterest expense offset by an increase in interest income and a decrease in noninterest income, partially offset by decreases in interest expense and income tax expense.expenses.

Interest Income.Interest income decreased $1.9increased $5.7 million, or 7.7%37.9%, to $23.2$20.6 million for the ninesix months ended SeptemberJune 30, 20222023 from $25.1$14.9 million for the ninesix months ended SeptemberJune 30, 2021.2022. The decreaseincrease was due primarily to a decreaseincreases in interestall categories of interest-earning assets. Interest income on PPP loans which decreased $4.8increased $2.7 million, or 19.2%, to $611,000 for the nine months ended September 30, 2022 from $5.4$17.0 million for the ninesix months ended SeptemberJune 30, 2021.2023 from $14.3 million for the six months ended June 30, 2022. Our average balance of and our average yield on PPP loans both decreased significantly as a result of the forgiveness of loans by the SBA and the related acceleration of recognized fees.

Excluding PPP loans, interest income on loans increased $2.4by $54.4 million, or 12.7%9.0%, to $21.4$658.9 million for the ninesix months ended SeptemberJune 30, 20222023 from $19.0$604.5 million for the ninesix months ended SeptemberJune 30, 2021. Our2022. The average balance of non-PPP loans increased $107.4 million, or 21.3%,due to $610.7 million for the nine months ended September 30, 2022 from $503.4 million for the nine months ended September 30, 2021, as we continue to acquire talent to assist with our strategic initiatives to both increase and diversify thesteady loan portfolio. Ourdemand. The average yield on loans not including PPP loans, decreased 29increased 45 basis points to 4.70%5.21% for the nine months ended September 30, 2022 from 5.03%current quarter, as compared to 4.76% for the nine months ended September 30, 2021,prior year period, due to the continued changes in the interest rate environment.

Interest income on interest-earning deposits and federal funds increased $1.5 million to $1.6 million for the six months ended June 30, 2023 from $97,000 for the six months ended June 30, 2022. The average balance of interest-earning deposits and federal funds increased $24.5 million to $69.6 million for the six months ended June 30, 2023 compared to $45.0 million for the six months ended June 30, 2022, as we held excess cash to increase liquidity, as described above. In addition, the yields we received on these funds increased to 4.75% from 0.43% due to the continued changes in the interest rate environment.

31


Interest income on securities, excluding FHLB stock, increased $355,000$1.3 million to $827,000$1.9 million for the ninesix months ended SeptemberJune 30, 20222023 from $472,000$539,000 for the ninesix months ended SeptemberJune 30, 2021.2022. The average balance of held-to-maturity securities increased by $15.2 million, or 48.5%, to $46.6was $33.5 million for the ninesix months ended SeptemberJune 30, 2023 compared to zero for the six months ended June 30, 2022, from $31.4 million for the nine months ended September 30, 2021, dueas we began 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.purchase held-to-maturity securities.

31


Interest Expense. Interest expense decreased $1.7 million, or 70.2%,increased to $738,000 for the nine months ended September 30, 2022, compared to $2.5$7.0 million for the ninesix months ended SeptemberJune 30, 2021,2023, compared to $40,000 for the six months ended June 30, 2022, due primarilyto our repaying acquired FHLB borrowings, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances in the previous period and increases in interest rate environment with respect to the current period.

We recognized increases in all categories of interest-bearing liabilities. Interest expense on deposits increased to $6.1 million for the six months ended June 30, 2023 from $987,000 for the six months ended June 30, 2022. The largest increase was in interest expense on certificates of deposit, which increased $2.9 million to $3.4 million for the six months ended June 30, 2023. The average rate we paid on certificates of deposit increased 232 basis points to 3.51% for the six months ended June 30, 2023 from 1.19% for the six months ended June 30, 2022, due to the continued changes in the interest rate environment. In addition, the average balance of certificates of deposit increased $102.9 million to $195.3 million for the six months ended June 30, 2023 from $92.3 million for the six months ended June 30, 2022, as we believe customers increased deposits in higher-yielding accounts during the current interest rate environment in addition to the brokered deposits we took out during the first quarter to enhance liquidity.We also experienced increases in interest expense on money market accounts, $1.3 million to $1.5 million for the six months ended June 30, 2023 and savings accounts, $941,000 to $1.1 million for the six months ended June 30, 2023, due to increases in the rates we paid on these accounts of 203 basis points and 192 basis points, respectively.

Interest expense on borrowings increased to $901,000 for the six months ended June 30, 2023 from negative $947,000 for the six months ended June 30, 2022, due to our repaying acquired FHLB borrowings, and recognizing $1.0 million in accretion from the fair value adjustments on acquired advances. Interest expense on depositsadvances in the previous period. We also decreased $498,000 or 23.6%.

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

We recognized a gain on borrowings of $874,000 for the nine months ended September 30, 2022 compared to interest expense on borrowings of $365,000 for the nine months ended September 30, 2021, as we repaid acquired FHLB borrowings during the current period, recognizing $1.0 millionfirst quarter of 2023 to increase our liquidity position in accretion fromresponse to recent market events, including the fair value adjustments on acquired advances.closures of Signature Bank and Silicon Valley Bank.

Net Interest Income.Net interest income was $22.4decreased $1.3 million, or 8.7%, to $13.6 million for the ninesix months ended SeptemberJune 30, 20222023 compared to $22.6$14.9 million for the ninesix months ended SeptemberJune 30, 2021.2022. Our net interest rate spread increaseddecreased to 4.15%2.58% for the ninesix months ended SeptemberJune 30, 2023 from 4.26% for the six months ended June 30, 2022, from 3.94% for the nine months ended September 30, 2021, primarily reflecting the repayment of FHLB borrowings, as described above, whileand our net interest margin was 4.24%decreased to 3.37% for the ninesix months ended SeptemberJune 30, 2023 from 4.27% for the six months ended June 30, 2022 compared to 4.17% foras the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the cost of averagerates we paid on interest-bearing liabilities decreased to 0.23% from 0.69% forincreased faster than the nine months ended September 30, 2021, primarilyyields we earned on our interest-earning assets, and as a result of payingwe paid off FHLB acquired advances and recognizingrecognized $1.0 million in accretion from fair value adjustments on acquired advances. The total costduring the first quarter of deposits was 0.51% for the nine months ended September 30, 2022, compared to 0.66% for the nine months ended September 30, 2021, due to decreases in market rates and in the average balance of higher cost-certificates of deposit.2022. Our average net interest-earning assets increased by $18.3 million, or 7.3%,decreased to $270.0$253.9 million for the ninesix months ended SeptemberJune 30, 2022 from $251.62023 compared to $265.2 million for the ninesix months ended SeptemberJune 30, 2021.2022.

Provision for LoanCredit Losses. The provisions for credit losses consists of provisions for credit losses for loans and unfunded loan commitments, as well as held-to-maturity securities.

Provisions for loancredit losses for loans are charged to operations to establish an allowance for loancredit 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 loancredit losses for loans, 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.

Provisions for credit losses for unfunded commitments are charged to operations to establish an allowance for credit losses for contractual obligations to extend credit. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic factors.

Provisions for credit losses for held-to-maturity securities are also charged to operations to establish an allowance on a collective basis by major security type. The estimate of expected credit losses for held-to-maturity securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. See “—Summary of Significant Accounting Policies” for additional information.

After an evaluation of these factors, we recorded a provision for loancredit losses of $654,000$7,000 for the ninesix months ended SeptemberJune 30, 2022,2023, compared to a provision of $975,000$467,000 for the ninesix months ended SeptemberJune 30, 2021. Our provision expense was higher in 2021 due to the ongoing uncertainty related to the COVID-19 pandemic. We continue to assess current economic conditions when determining the level of provision expense.2022. Our allowance for loancredit losses was $9.3 million at SeptemberJune 30, 2022 compared to $8.6 million at2023 and December 31, 20212022 and $7.6$9.0 millionat SeptemberJune 30, 2021.2022. The allowance for loancredit losses to total loans was 1.43%1.40% at June 30, 2023 compared to 1.46% at December 31, 2022 and June 30, 2022. This reduces the overall allowance for credit loss to total loans percentage. The allowance for credit losses to non-performing loans was 150.0% at June 30, 2023 compared to 138.8% at

32


SeptemberDecember 31, 2022 and 128.4% at June 30, 20222022. Net charge-offs were $55,000 for the six months ended June 30, 2023, compared to 1.46% atnet loan recoveries of $62,000 for the year ended December 31, 2021 and 1.33% at September 30, 2021. The allowance for loan losses to total loans is an “all-in” number, meaning it includes all originated and acquired loans. This reduces the overall allowance for loan loss to total loans percentage. However, the acquired loans portfolio was marked to fair market value at acquisition and no carryover of the allowance was allowed. The allowance for loan loss to total loans with the total originated and acquired loans is 1.43% at September 30, 2022 compared to 1.46% at December 31, 2021. Excluding the acquired loans, the allowance to total loans is 1.85%at September 30, 2022 compared to 2.06% at December 31, 2021. The allowance for loan losses to non-performing loans was 132.84% at September 30, 2022 compared to 122.09% at December 31, 2021 and 122.76% at September 30, 2021. Net loan recoveries were $108,000for the nine months ended September 30, 2022, as compared to $295,000 for the nine months ended September 30, 2021.2022.

To the best of our knowledge, we have recorded all loancredit losses that are both probable and reasonable to estimate at SeptemberJune 30, 2022.2023. 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 loancredit losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loancredit losses, and as a result of such reviews, we may have to adjust our allowance for loancredit losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loancredit losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-interest Income. Non-interest income decreased $270,000, or 12.8%, to $1.8$13,000 and was $1.2 million for each of the ninesix months ended SeptemberJune 30, 2022 from $2.1 million for the nine months ended September 30, 2021. This was a result of the decrease in other non-interest income, primarily due to nonrecurring income received in 2021 for a bank owned life insurance death benefit claim.2023 and 2022.

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

 

Nine Months Ended
September 30,

 

 

Change

 

 

Six Months Ended
June 30,

 

 

Change

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

 

2023

 

 

2022

 

 

Amount

 

 

Percent

 

 

(Dollars in thousands)

 

 

(Dollars in thousands)

 

Salaries and employee benefits

 

$

9,219

 

 

$

7,797

 

 

$

1,422

 

 

 

18.2

%

 

$

6,040

 

 

$

6,032

 

 

$

8

 

 

 

0.1

%

Occupancy

 

 

1,798

 

 

 

2,329

 

 

 

(531

)

 

 

(22.8

)%

 

 

1,282

 

 

 

1,123

 

 

 

159

 

 

 

14.1

%

Advertising

 

 

326

 

 

 

296

 

 

 

30

 

 

 

10.1

%

 

 

179

 

 

 

198

 

 

 

(19

)

 

 

(9.6

)%

Data processing

 

 

1,476

 

 

 

1,518

 

 

 

(42

)

 

 

(2.8

)%

 

 

980

 

 

 

990

 

 

 

(10

)

 

 

(1.1

)%

Writedown of premises and equipment

 

 

 

 

 

888

 

 

 

(888

)

 

 

(100.0

)%

FHLB prepayment penalties

 

 

647

 

 

 

 

 

 

647

 

 

 

100.0

%

 

 

 

 

 

647

 

 

 

(647

)

 

 

(100.0

)%

Other

 

 

3,019

 

 

 

2,764

 

 

 

255

 

 

 

9.2

%

 

 

1,997

 

 

 

2,005

 

 

 

(8

)

 

 

(0.4

)%

Total non-interest expenses

 

$

16,485

 

 

$

15,592

 

 

$

893

 

 

 

5.7

%

 

$

10,478

 

 

$

10,995

 

 

$

(517

)

 

 

(4.7

)%

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

Income Tax Expense.We recorded income tax expense of $1.7$1.0 million for the ninesix months ended SeptemberJune 30, 20222023 compared to $1.9$1.1 million for the ninesix months ended SeptemberJune 30, 2021. The lower tax expense for the 2022 period was primarily due to lower pretax income.2022. The effective tax rate was 23.61%23.6% and 23.5% for the nine months ended September 30, 2022 compared to 23.26% for the nine months ended September 30, 2021.respective periods.

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.

33


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.

33


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 SeptemberJune 30, 2022,2023, 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

 

 

Net Interest Income
Year 1 Forecast

 

 

Year 1 Change
from Level

 

 

(Dollars in thousands)

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

+400

 

$

29,424

 

 

 

(3.90

)%

 

$

30,973

 

 

 

1.41

%

+200

 

 

30,048

 

 

 

(1.86

)%

 

 

30,806

 

 

 

0.87

%

Level

 

 

30,619

 

 

 

 

 

30,541

 

 

 

-200

 

 

28,377

 

 

 

(7.32

)%

 

 

29,257

 

 

 

(4.20

)%

-400

 

 

25,579

 

 

 

(16.46

)%

 

 

26,225

 

 

 

(14.13

)%

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

The table above indicates that at SeptemberJune 30, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a0.87% increasein net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 4.20% decrease in net interest income. At June 30, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 1.86%2.10% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 7.32%9.28% decrease in net interest income. At September 30, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 3.96% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 1.76% decrease in net interest income.

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

34


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

Change in Interest

 

 

 

 

Estimated Increase (Decrease) in NEV

 

 

NEV as a Percentage of Present
Value of Assets (3)

 

Rates (basis
points) (1)

 

Estimated
NEV (2)

 

 

Amount

 

 

Percent

 

 

NEV
Ratio (4)

 

 

Increase (Decrease)
(basis points)

 

(Dollars in thousands)

 

+400

 

$

111,014

 

 

$

(19,128

)

 

 

(14.70

)%

 

 

16.28

%

 

 

(111

)

+200

 

 

119,991

 

 

 

(10,151

)

 

 

(7.80

)%

 

 

16.82

%

 

 

(57

)

 

 

130,142

 

 

 

 

 

 

 

17.39

%

 

 

-200

 

 

129,973

 

 

 

(169

)

 

 

(0.13

)%

 

 

16.56

%

 

 

(83

)

-400

 

 

124,226

 

 

 

(5,916

)

 

 

(4.55

)%

 

 

15.26

%

 

 

(213

)

(1)
Assumes an immediate uniform change in interest rates at all maturities.
(2)
NEV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
NEV Ratio represents NEV divided by the present value of assets.

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

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

35


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

 

 

Time to Repricing

 

 

 

 

 

 

Zero to 90 Days

 

 

Zero to 180 Days

 

 

Zero Days to
One Year

 

 

Zero Days to
Two Years

 

 

Zero Days to
Five Years

 

 

Total

 

 

 

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

33,619

 

 

$

33,619

 

 

$

33,619

 

 

$

33,619

 

 

$

33,619

 

 

$

40,507

 

Investments

 

 

4,480

 

 

 

5,005

 

 

 

6,024

 

 

 

7,945

 

 

 

20,517

 

 

 

42,902

 

Net loans

 

 

91,734

 

 

 

121,004

 

 

 

177,594

 

 

 

288,585

 

 

 

504,346

 

 

 

641,071

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,667

 

Total

 

$

129,833

 

 

 

159,628

 

 

 

217,237

 

 

 

330,149

 

 

 

558,482

 

 

$

776,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

$

176,838

 

 

 

191,304

 

 

 

220,236

 

 

 

278,094

 

 

 

432,096

 

 

$

552,818

 

Certificates of deposit

 

 

8,935

 

 

 

19,104

 

 

 

41,442

 

 

 

55,987

 

 

 

93,223

 

 

 

98,816

 

Borrowings

 

 

15,446

 

 

 

15,446

 

 

 

15,446

 

 

 

15,446

 

 

 

15,446

 

 

 

15,446

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,059

 

Equity capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96,008

 

Total (1)

 

$

201,219

 

 

 

225,854

 

 

 

277,124

 

 

 

349,527

 

 

 

540,765

 

 

$

776,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset/liability gap

 

$

(71,386

)

 

 

(66,226

)

 

 

(59,887

)

 

 

(19,378

)

 

 

17,717

 

 

 

 

Gap/assets ratio (2)

 

 

(9.20

)%

 

 

(8.53

)%

 

 

(7.72

)%

 

 

(2.50

)%

 

 

2.28

%

 

 

 

(1) Amounts do not foot due to rounding.

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

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

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements.measurement. 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 tablestable presented assumeassumes 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 providetable provides 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.

3634


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 SeptemberJune 30, 2022,2023, we had a $191.6$233.1 millionline of credit with the Federal Home Loan Bank of Atlanta, with advances of $10.0$20.0 million outstanding and a $5.0$12.5 million letter of credit outstanding, and we had a $5.0 million unsecured federal funds line of credit, a $7.5 million unsecured federal funds line of credit, and a $20.0 million unsecured federal funds line of credit. We also have a line of $79.4$73.9 million with the Federal Reserve Bank of Atlanta Discount Window secured by $118.3$109.3 million in loans. No amount was outstanding on the unsecured lines of credit or the Discount Window at SeptemberJune 30, 2022.2023.

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

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $8.2$4.3 million for the ninesix months ended SeptemberJune 30, 2022,2023, compared to $13.2$5.9 million for the ninesix months ended SeptemberJune 30, 2021.2022. Net cash used in investing activities was $67.4$28.9 million for the ninesix months ended SeptemberJune 30, 2022,2023, compared to net cash provided by investing activities of $7.8$40.8 million for the ninesix months ended SeptemberJune 30, 2021.2022. Net cash used in investing activities typically consists primarily of disbursements for loan originations and purchases of investment securities. Net cash used inprovided by financing activities, which consists primarily of activity in deposit accounts and proceeds/repayments of FHLB advances, and beginning in 2022, a stock repurchase program, was $12.1$81.2 million for the ninesix months ended SeptemberJune 30, 20222023 which included repaying $143.0$55.0 million of FHLB borrowings, borrowing $105.0$65.0 million in FHLB advances and repurchasing stock of $5.3$2.7 million, compared to $68.3net cash used in financing activities of $21.4 million for the ninesix months ended SeptemberJune 30, 2021,2022, which included a capital injectionrepaying $103.0 million of $35.4FHLB borrowings, borrowing $75.0 million following ourin FHLB advances and repurchasing stock offering in January 2021.of $4.8 million.

We are committed to maintaining a strong liquidity position. In the first quarter, in order to further enhance liquidity, we issued $85.6 million of brokered deposits and borrowed $45.0 million in advances from the FHLB. During the second quarter, $4.0 million of brokered deposits matured, $15.0 million of FHLB borrowings matured, and an additional $20.0 million of FHLB borrowings was prepaid that was issued in first quarter of 2023. 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.

37


At SeptemberJune 30, 2022,2023, 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 SeptemberJune 30, 20222023 and December 31, 20212022 are presented in the table below (in thousands).

 

 

 

 

 

 

 

 

For Capital

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

 

Adequacy

 

 

Under Prompt Corrective

 

 

 

Actual

 

 

Purposes

 

 

Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of September 30, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

90,090

 

 

 

13

%

 

$

32,174

 

 

 

4.50

%

 

$

46,473

 

 

 

6.50

%

Total Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

99,032

 

 

 

14

%

 

$

57,197

 

 

 

8

%

 

$

71,497

 

 

 

10

%

Tier I Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

90,090

 

 

 

13

%

 

$

42,898

 

 

 

6

%

 

$

57,197

 

 

 

8

%

Tier I Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Average Assets)

 

$

90,090

 

 

 

12

%

 

$

30,412

 

 

 

4

%

 

$

38,016

 

 

 

5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

83,662

 

 

 

13

%

 

$

27,960

 

 

 

4.50

%

 

$

40,386

 

 

 

6.50

%

Total Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

91,438

 

 

 

15

%

 

$

49,706

 

 

 

8

%

 

$

62,133

 

 

 

10

%

Tier I Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

83,662

 

 

 

13

%

 

$

37,280

 

 

 

6

%

 

$

49,706

 

 

 

8

%

Tier I Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Average Assets)

 

$

83,662

 

 

 

11

%

 

$

31,070

 

 

 

4

%

 

$

38,837

 

 

 

5

%

 

 

 

 

 

 

 

 

For Capital

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

 

Adequacy

 

 

Under Prompt Corrective

 

 

 

Actual

 

 

Purposes

 

 

Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of June 30, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk Weighted Assets)

 

$

91,153

 

 

 

11.96

%

 

$

34,301

 

 

 

4.50

%

 

$

49,547

 

 

 

6.50

%

Total Capital (to Risk Weighted Assets)

 

 

100,685

 

 

 

13.21

%

 

 

60,980

 

 

 

8.00

%

 

 

76,225

 

 

 

10.00

%

Tier I Capital (to Risk Weighted Assets)

 

 

91,153

 

 

 

11.96

%

 

 

45,735

 

 

 

6.00

%

 

 

60,980

 

 

 

8.00

%

Tier I Capital (to Average Assets)

 

 

91,153

 

 

 

10.28

%

 

 

35,471

 

 

 

4.00

%

 

 

44,339

 

 

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk Weighted Assets)

 

$

87,397

 

 

 

11.86

%

 

$

33,170

 

 

 

4.50

%

 

$

47,913

 

 

 

6.50

%

Total Capital (to Risk Weighted Assets)

 

 

96,612

 

 

 

13.11

%

 

 

58,970

 

 

 

8.00

%

 

 

73,712

 

 

 

10.00

%

Tier I Capital (to Risk Weighted Assets)

 

 

87,397

 

 

 

11.86

%

 

 

44,227

 

 

 

6.00

%

 

 

58,970

 

 

 

8.00

%

Tier I Capital (to Average Assets)

 

 

87,397

 

 

 

10.97

%

 

 

31,865

 

 

 

4.00

%

 

 

39,832

 

 

 

5.00

%

35


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 SeptemberJune 30, 2022,2023, we had outstanding commitments to originate loans of $101.0$67.3 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 SeptemberJune 30, 20222023 totaled $41.4$76.7 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.”

38


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 SeptemberJune 30, 2022.2023. 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 SeptemberJune 30, 2022,2023, 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.

3936


PART II – OTHER INFORMATION

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 SeptemberJune 30, 2022,2023, 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 SeptemberJune 30, 2022:2023:

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

 

 

Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 July 1, 2022 through July 31, 2022

 

 

 

 

 

 

 

 

 

 

 

35,030

 

 August 1, 2022 through August 31, 2022

 

 

35,030

 

 

 

14.63

 

 

 

35,030

 

 

 

 

 September 1, 2022 through September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,030

 

 

$

14.63

 

 

 

35,030

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 April 1, 2023 through April 30, 2023

 

 

28,513

 

 

 

14.86

 

 

 

28,513

 

 

 

215,086

 

 May 1, 2023 through May 31, 2023

 

 

95,296

 

 

 

13.19

 

 

 

95,296

 

 

 

119,790

 

 June 1, 2023 through June 30, 2023

 

 

9,047

 

 

 

12.03

 

 

 

9,047

 

 

 

110,743

 

 

 

132,856

 

 

$

13.47

 

 

 

132,856

 

 

 

110,743

 

(1) The Board of Directors approved a stock repurchase program on January 27,October 31, 2022, which authorized the repurchase of up to 343,632331,997 shares (approximately 5.0% of the then-outstanding shares). The total number of shares purchased as part of the publicly announced plan totaled 343,632221,254 as of SeptemberJune 30, 2022, which2023. There is no expiration date for the full amount authorized under thisstock repurchase program.plan.

4037


Item 6. Exhibits

Exhibit

Number

Description

3.1

Charter of Affinity Bancshares, Inc. (1)

3.2

Bylaws of Affinity Bancshares, Inc. (2)

3.3

Amendment to Bylaws of Affinity Bancshares, Inc. (3)

10.1

Employment Agreement, dated as of May 24, 2021, by and among Affinity Bancshares, Inc., Affinity Bank and Brandi Pajot (4)

10.2

Amendment 1 to Employment Agreement, dated as of August 2, 2022, by and among Affinity Bancshares, Inc., Affinity Bank and Brandi Pajot (5)

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.0

The following materials for the quarter ended SeptemberJune 30, 2022,2023, formatted in inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive (Loss) Income, (iv) Statements of Changes in Stockholders’ Equity, (v) Statements of Cash Flows, and (vi) Notes to Financial Statements

104.0

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

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

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

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

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

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

4138


SIGNATURES

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

AFFINITY BANCSHARES, INC.

Date:

November 10, 2022

August 11, 2023

/s/ Edward J. Cooney

Edward J. Cooney

President and Chief Executive Officer and Director

Date:

November 10, 2022

August 11, 2023

/s/ Brandi Pajot

Brandi Pajot

Senior Vice President and Chief Financial Officer

4239