Affinity Bancshares, Inc. AFBI US Equity☆

ITEM 1A.Risk Factors

Not applicable, as Affinity Bancshares, Inc. is a “smaller reporting company.”

ITEM 1B.Unresolved Staff Comments

None.

ITEM 2.Properties

As of December 31, 2022, the net book value of our office properties was $2.0 million, and the net book value of our furniture, fixtures and equipment was $2.3 million. Our properties include our main office and branch office in Covington and leased offices in Atlanta, Alpharetta, and Monroe. We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.

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ITEM 3. Legal Proceedings

Periodically, we are involved in claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

ITEM 4. Mine Safety Disclosures

Not applicable.

PART II

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

Our common stock is traded on the Nasdaq Capital Market under the symbol “AFBI.” As of March 20, 2023 we had 327 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 6,596,910 shares of common stock outstanding.

The payment and amount of any dividend payments will be subject to statutory and regulatory limitations, and will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; the Federal Reserve Board’s current regulations restricting the waiver of dividends by mutual holding companies; and general economic conditions.

The Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition. In addition, Affinity Bank’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by regulations and policies of the Federal Reserve Board and the Office of the Comptroller of the Currency, may be paid in addition to, or in lieu of, regular cash dividends.

There were no sales of unregistered securities during the quarter ended December 31, 2022.

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Shares of the Company’s common stock totaling 372,315 were repurchased during the year ended December 31, 2022 as outlined below:

ITEM 6. [Reserved]

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.

Overview

Total assets increased $3.2 million, or 0.4%, to $791.3 million at December 31, 2022 from $788.1 million at December 31, 2021. The increase was due primarily to increases in net loans ($61.1 million, or 10.6%) and investment securities held to maturity ($26.5 million, or 100%), partially offset by a decrease in cash and cash equivalents of $85.5 million, or 76.5%.

Net income decreased $439,000, or 5.8%, to $7.1 million for the year ended December 31, 2022, compared to $7.6 million for the year ended December 31, 2021. An increase in non-interest expenses as well as decreases in interest income and non-interest income were partially offset by decreases in interest expense, the provision for loan losses and income tax expense. Interest income decreased $319,000, or 1.0%, to $32.1 million for the year ended December 31, 2022 from $32.5 million for the year ended December 31, 2021. The decrease was due to a $1.4 million, or 4.6%, decrease in interest income on loans, which included a decrease of $5.5 million of interest and fee income on PPP loans. Interest expense decreased $798,000, or 25.1%, to $2.4 million for the year ended December 31, 2022 compared to $3.2 million for the year ended December 31, 2021, due to a decrease in interest expense on Federal Home Loan Bank advances and other borrowings. Noninterest expenses increased $1.2 million, or 5.5%, to $22.1 million for the year ended December 31, 2022, from $21.0 million for the year ended December 31, 2021.

Summary of Significant Accounting Policies

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

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

The following represent our significant accounting policies:

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

The allocation methodology applied by Affinity Bank is designed to assess the appropriateness of the allowance for loan losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of

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loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for loan losses was appropriate at December 31, 2022 and 2021. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for loan losses. As a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is the responsibility of Affinity Bank and any increase or decrease in the allowance is the responsibility of management.

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

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

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

Total assets increased $3.2 million, or 0.4%, to $791.3 million at December 31, 2022 from $788.1 million at December 31, 2021. The increase was due primarily to increases in net loans ($61.1 million, or 10.6%) and investment securities held to maturity ($26.5 million, or 100%), partially offset by a decrease in cash and cash equivalents of $85.5 million, or 76.5%.

Cash and cash equivalents decreased $85.5 million, or 76.5%, to $26.3 million at December 31, 2022 from $111.8 million at December 31, 2021, as excess liquidity was utilized to pay off Federal Home Loan Bank advances and fund loan growth.

Loans increased $61.1 million, or 10.6%, to $636.9 million at December 31, 2022 from $575.8 million at December 31, 2021, including Paycheck Protection Program (PPP) loans of $5,000 and $17.9 million at December 31, 2022 and 2021 respectively. Non-owner occupied commercial real estate loans increased $31.7 million, or 30.4%, to $135.7 million at December 31, 2022 from $104.0 million at December 31, 2021, and consumer loans increased $39.7 million, or 55.4%, to $111.3 million at December 31, 2022 from $71.6 million at December 31, 2021. The increase in consumer loans resulted from our continued growth in our indirect automobile loans. In addition, construction loans increased $20.8 million to $37.2 million at December 31, 2022 from $16.3 million at December 31, 2021, as we have been successful with our strategic initiative to increase construction lending to continue to diversify our loan portfolio. We experienced a decrease in commercial and industrial loans of $22.9 million, or 13.4%, to $147.8 million at December 31, 2022 from $170.7 million at December 31, 2021, as a result of forgiveness of PPP loans by SBA. One- to four-family residential real estate loans decreased $11.7 million, or 18.6%, to $51.3 million at December 31, 2022 from $63.1 million at December 31, 2021, as mortgage loans were refinanced at lower rates than we offered during the early part of the year. Our January 2020 acquisition of ABB Financial and Affinity Bank shifted the composition of the loan portfolio towards increased commercial and industrial lending and commercial real estate lending, and away from one- to four-family mortgage lending.

Securities held-to-maturity increased to $26.5 million at December 31, 2022, from $0 at December 31, 2021, as we began to classify new purchases as held-to-maturity and utilized a portion of our excess liquidity to invest in securities in an effort to increase yield. Securities available-for-sale remained relatively flat, totaling $46.2 million at December 31, 2022 and $48.6 million at December 31, 2021.

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Total deposits increased $44.4 million, or 7.2%, to $657.2 million at December 31, 2022 from $612.8 million at December 31, 2021. Certificates of deposit increased $29.2 million, or 30.2%, to $126.0 million at December 31, 2022 from $96.8 million at December 31, 2021. We believe that customers have shifted deposits to longer-term instruments as market interest rates have increased. In addition, savings accounts increased $14.9 million, or 17.2%, to $101.6 million at December 31, 2022 from $86.7 million at December 31, 2021, as a result of increases in all of our markets but most particularly from an increase in Fitness Bank savings accounts of $7.9 million as we continue to grow our online account products. The loan-to-deposit ratio at December 31, 2022 was 96.9%, as compared to 94.0% at December 31, 2021.

We had $10.0 million of Federal Home Loan Bank advances and $25,000 in Federal Funds Purchased at December 31, 2022, compared to $49.0 million of Federal Home Loan Bank advances at December 31, 2021. Borrowings were decreased during the year ended December 31, 2022 as we repaid acquired Federal Home Loan Bank borrowings, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances. Prepayment penalties in the amount of $647,000 were also recognized with the repayment of these acquired advances for the year ended December 31, 2022 .

Stockholders’ equity decreased $3.9 million or 3.2%, to $117.1 million at December 31, 2022 from $121.0 million at December 31, 2021. We experienced $6.3 million in accumulated other comprehensive loss related to our investment portfolio due to increasing interest rates. We also experienced a decrease in additional paid in capital from the repurchase of 372,315 shares of our common stock totaling $5.7 million with an average price per share of $15.32. These decreases were offset by net income of $7.1 million for the year ended December 31, 2022 .

Average Balance Sheets

The following tables set forth average balance sheets, average yields and costs, and certain other information for the years indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial.All average balances are monthly average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Interest on loans includes the following fees: PPP loan fees of $243,000 and $5.0 million for the years ending December 31, 2022 and 2021, respectively; loan origination fees of $1.4 million and $1.0 million for the years ending December 31, 2022 and 2021, respectively; net accretion of purchased loan marks of $587,000 and $437,000 for the years ending December 31, 2022 and 2021, respectively; prepayment penalties of $0 and $79,000 for the years ending December 31, 2022 and 2021, respectively; and indirect auto fees of $279,000 and $228,000 for the years ending December 31, 2022 and 2021, respectively.

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For the Year Ended December 31,

(Dollars in thousands)

Interest-earning assets:

Investment securities held-to-maturity 2,220 130 5.86 % — — —

Interest-bearing liabilities:

Total liabilities and stockholders' equity $ 770,820 $ 788,336

Net interest rate spread 3.94 % 3.81 %

Net interest margin 4.14 % 4.04 %

Rate/Volume Analysis

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

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allocated proportionately based on the changes due to rate and the changes due to volume. No out-of-period item adjustments have been included in the following table.

Increase (Decrease) Due to Total

Increase

Volume Rate (Decrease)

(In thousands)

Interest-earning assets:

Investment securities held-to-maturity 123 7 130

Investment securities available-for-sale 432 9 441

Interest-earning deposits and federal funds (774 ) 1,365 591

Other investments (48 ) 6 (42 )

Interest-bearing liabilities:

Interest-bearing checking accounts 42 (51 ) (9 )

Market rate checking accounts 280 3 283

Total interest-bearing deposits (317 ) 871 553

Total interest-bearing liabilities (1,631 ) 835 (798 )

Comparison of Operating Results for the Years Ended December 31, 2022 and 2021

General. Net income decreased $439,000, or 5.8%, to $7.1 million for the year ended December 31, 2022, compared to $7.6 million for the year ended December 31, 2021. An increase in non-interest expenses as well as decreases in interest income and non-interest income were partially offset by decreases in interest expense, the provision for loan losses and income tax expense.

Interest Income. Interest income decreased $319,000, or 1.0%, to $32.1 million for the year ended December 31, 2022 from $32.5 million for the year ended December 31, 2021. Our average yield on loans decreased 54 basis points to 4.81% for the year ended December 31, 2022 from 5.35% for the year ended December 31, 2021. The decrease in interest income on loans and associated yield was a result of a decrease of $5.5 million of interest and fee income on PPP loans. Our average balance of loans increased $35.9 million, or 6.1%, to $624.9 million for the year ended December 31, 2022 from $589.0 million for the year ended December 31, 2021, as we continued to acquire talent to assist with our strategic initiatives to both increase and diversify the loan portfolio.

Interest income on securities available for sale increased $441,000 to $1.2 million for the year ended December 31, 2022 from $709,000 for the year ended December 31, 2021. Our average balance of securities increased $12.7 million, or 36.2%, to $47.8 million for the year ended December 31, 2022 from $35.1 million for the year ended December 31, 2021, due to our using excess cash from PPP loan repayments and cash previously held in interest-bearing deposit accounts to invest in securities to increase the yield of our interest-earning assets. The average rate earned on securities available for sale and held to maturity increased 66 basis points during 2022, to 2.68% from 2.02%.

Interest income on interest-earning deposits and federal funds increased $591,000 to $771,000 for the year ended December 31, 2022 from $180,000 for the year ended December 31, 2021. The increase in interest income on interest-earning deposits was due to a 151 basis point increase in yield, while the average balance of interest-earning deposits decreased $52.9 million, or 53.7%, to $45.7 million for the year ended December 31, 2022 from $98.6 million for the year ended December 31, 2021, as excess funds have been deployed into securities and loans.

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Interest Expense. Interest expense decreased $798,000, or 25.1%, to $2.4 million for the year ended December 31, 2022 compared to $3.2 million for the year ended December 31, 2021, due to a decrease in interest expense on Federal Home Loan Bank advances and other borrowings. Interest expense on borrowings decreased to $(854,000) for the year ended December 31, 2022 compared to $497,000 for the year ended December 31, 2021, as we repaid acquired Federal Home Loan Bank borrowings, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances. Prepayment penalties in the amount of $647,000 were also recognized with the repayment of these acquired advances for the year ended December 31, 2022.

Interest expense on deposits increased $553,000, or 20.6%, to $3.2 million for the year ended December 31, 2022 from $2.7 million for the year ended December 31, 2021. We recorded increases in interest expense on savings accounts ($453,000, or $112.4%) and money market accounts ($283,000, or 60.3%), as increases in market interest rates increased the rates we paid on these types of deposits by 53 basis points to 0.96%, and 14 basis points to 0.49%, respectively. In addition, the average balance of money market accounts increased $20.4 million, or 15.2%, to $154.2 million for the year ended December 31, 2022 compared to $133.8 million for the year ended December 31, 2021, as a result of an increase in the average balance of money market accounts in our Atlanta office of $15.6 million.Interest expense on certificates of deposit decreased by $174,000, or 10.7%, to $1.4 million for the year ended December 31, 2022 from $1.6 million for the year ended December 31, 2021. The decrease in expense on certificates of deposit was the result of a $12.8 million, or 11.6%, decrease in the average balance of certificates of deposit to $97.9 million for the year ended December 31, 2022 from $110.7 million for the year ended December 31, 2021. The average rate we paid on certificates of deposit remained relatively flat between the years.

Net Interest Income. Net interest income before provision for loan losses increased by $479,000, or 1.6%, to $29.8 million for the year ended December 31, 2022 from $29.3 million for the year ended December 31, 2021. Our average net interest-earning assets increased by $17.8 million, or 7.0%, to $271.4 million for the year ended December 31, 2022 from $253.6 million for the year ended December 31, 2021, while our net interest rate spread increased by 13 basis points to 3.94% for the year ended December 31, 2022 from 3.81% for the year ended December 31, 2021, reflecting a 14 basis point decrease in the average rate paid on interest-bearing liabilities. Our net interest margin was 4.14% for the year ended December 31, 2022 compared to 4.04% for the year ended December 31, 2021.

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

After an evaluation of these factors, we recorded a provision for loan losses of $704,000 for the year ended December 31, 2022, compared to $1.1 million for the year ended December 31, 2021. Our allowance for loan losses was $9.3 million at December 31, 2022 compared to $8.6 million at December 31, 2021. The allowance for loan losses to total loans was 1.44% at December 31, 2022 compared to 1.46% at December 31, 2021, while the allowance for loan losses to non-performing loans was138.8% at December 31, 2022 compared to 122.08% at December 31, 2021. We had charge-offs of $149,000 and recoveries of $211,000 during the year ended December 31, 2022. To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 31, 2022. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

We adopted a new accounting standard, referred to as Current Expected Credit Loss (“CECL”), effective January 1, 2023. CECL requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for loan losses. This will change our current method of recording allowances for loan losses that are probable, which may require us to increase our allowance for loan losses and to increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses.

Noninterest Income. Noninterest income decreased $276,000, or 10.3%, to $2.4 million for the year ended December 31, 2022 from $2.7 million for the year ended December 31, 2021. The decrease resulted primarily from a decrease in other noninterest income of $381,000, or 32.5%, to $791,000 for the year ended December 31, 2022 from $1.2 million for the year ended December 31, 2021, as 2021 included a gain on the sale of other real estate and BOLI income from a death benefit. This decrease was partially

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offset by the increase in service charges on deposit accounts of $105,000, to $1.6 million for the year ended December 31, 2022 from $1.5 million for the year ended December 31, 2021.

Noninterest Expenses. Noninterest expenses information is as follows.

Year EndedDecember 31, Change

(Dollars in thousands)

Write-down of premises and equipment — 1,176 (1,176 ) (100.0 )%

Noninterest expenses increased $1.2 million, or 5.5%, to $22.1 million for the year ended December 31, 2022, from $21.0 million for the year ended December 31, 2021. The increase in salaries and employee benefits was due to our strategic initiative to attract and retain talent. We recognized prepayment penalties on Federal Home Loan Bank advances during 2022 as described above. These increases were offset by a decrease in the writedown of premises and equipment and in occupancy expense, related primarily to cost savings from facilities consolidation during 2021.

Income Tax Expense. We recorded income tax expense of $2.2 million and $2.3 million for the years ended December 31, 2022 and 2021. The decrease in income tax expense was due to decreased income before income taxes in 2022.

Management of Market Risk

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

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

•

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

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growing our volume of transaction deposit accounts;

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

•

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

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

By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.

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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 December 31, 2022, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

(Dollars in thousands)

(1)

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

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income and NEV tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and NEV and will differ from actual results. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At December 31, 2022, we had a $81.8 million line of credit with the Federal Home Loan Bank of Atlanta with $10.0 million in borrowings and a $12.5 million letter of credit outstanding which is used to collateralize public deposits. In addition, at December 31, 2022, 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. Only $25,000 was outstanding on these lines of credit at December 31, 2022. We also have a line of $75 million with the Federal Reserve Bank of Atlanta Discount Window secured by $111.6 million in loans. No amount was outstanding on the Discount Window at December 31, 2022.

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

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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 $7.6 million and $11.9 million for the years ended December 31, 2022 and 2021, respectively. Net cash used in investing activities was $93.7 million and $9.6 million for the years ended December 31, 2022 and 2021, respectively. Net cash used in investing activities typically consists primarily of disbursements for loan originations and purchases of investment securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and paydowns on securities. Net cash provided by financing activities, which consists primarily of activity in deposit accounts and proceeds from or repayments of borrowings, was $701,000 for the year ended December 31, 2022, compared to net cash used in financing activities of $68.7 million for the year ended December 31, 2021.

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

At December 31, 2022, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at December 31, 2022 and 2021. Management is not aware of any conditions or events since the most recent notification that would change our category.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2022, we had outstanding commitments to originate loans of $90.3 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 December 31, 2022 totaled $43.8 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

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

Future Accounting Pronouncements

Please refer to Note 1 to the financial statements included as Item 8 in this Annual Report for a description of future accounting pronouncements that may affect our financial condition and results of operations.

Impact of Inflation and Changing Price

The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

For information regarding market risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

36

ITEM 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3

Notes to Consolidated Financial Statements F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Affinity Bancshares, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Affinity Bancshares, Inc. and subsidiary (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended and the related notes to the consolidated financial statements (the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Estimate of allowance for loan losses – reserves related to loans collectively evaluated for impairment

As described in Notes 1 and 3 to the financial statements, the Company’s allowance for loan losses (“ALL”) totaled $9,235,000 relating to loans collectively evaluated for impairment (general reserve). The Company estimated the general reserve using the historical loss method which utilizes historical loss rates of pools of loans with similar risk characteristics applied to the respective loan pool balances. These amounts are then adjusted for certain qualitative factors related to current economic and general conditions currently observed by management.

We identified the estimate of the general reserve portion of the ALL as a critical audit matter because auditing this portion of the ALL required significant auditor judgment and involved significant estimation uncertainty requiring industry knowledge and experience.

The primary audit procedures we performed to address this critical audit matter included:

F-2

•

We tested the completeness and accuracy of the data used by management to calculate historical loss rates.

•

We tested the completeness and accuracy of the data used by management in determining qualitative factor adjustments, including the reasonable and supportable factors, by agreeing them to internal and external information.

•

We analyzed the qualitative factors in comparison to historical periods to evaluate the directional consistency in relation to the Company’s loan portfolio and local economy.

/s/ Wipfli LLP

We have served as the Company’s auditor since 2004.

Atlanta, Georgia

March 23, 2023

F-3

AFFINITY BANCSHARES, INC.

Consolidated Balance Sheets

(In thousands except share amounts)

Assets

Interest-earning deposits in other depository institutions 23,396 95,537

Investment securities available-for-sale 46,200 48,557

Liabilities and Stockholders' Equity

Liabilities:

Federal Home Loan Bank advances and other borrowings 10,025 48,988

Accrued interest payable and other liabilities 6,983 5,336

Stockholders' equity:

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

Accumulated other comprehensive loss (6,655 ) (358 )

Total liabilities and stockholders' equity $ 791,283 $ 788,088

See accompanying notes to consolidated financial statements.

F-1

AFFINITY BANCSHARES, INC.

Consolidated Statements of Income

Year Ended December 31,

(In thousands except per share amounts)

Interest income:

Interest-earning deposits 771 180

Interest expense:

FHLB advances and other borrowings (854 ) 497

Net interest income before provision for loan losses 29,755 29,276

Net interest income after provision for loan losses 29,051 28,201

Noninterest income:

Service charges on deposit accounts 1,611 1,506

Noninterest expenses:

Write-down of premises and equipment — 1,176

FHLB prepayment penalties 647 —

Weighted average common shares outstanding

Basic earnings per share $ 1.07 $ 1.10

Diluted earnings per share $ 1.06 $ 1.09

See accompanying notes to consolidated financial statements.

F-2

AFFINITY BANCSHARES, INC.

Consolidated Statements of Comprehensive Income

Year Ended December 31,

(In thousands)

Other comprehensive loss:

Total other comprehensive loss (6,297 ) (517 )

Total comprehensive income $ 837 $ 7,056

See accompanying notes to consolidated financial statements.

F-3

AFFINITY BANCSHARES, INC.

Consolidated Statements of Changes in Stockholders’ Equity

Accumulated

Additional Other

Common Paid In Treasury Unearned Retained Comprehensive

Stock (1) Capital Stock ESOP Shares Earnings Income (Loss) Total

(In thousands)

ESOP loan payment and release of ESOP shares — (141 ) — 410 — — 269

Stock-based compensation expense — 410 — — — — 410

Corporate reorganization

Issuance of shares and loan to ESOP — 2,961 — (2,961 ) — — —

Treasury stock retired — (1,268 ) 1,268 — — — —

ESOP loan payment and release of ESOP shares $ — $ 104 $ — $ 209 $ — $ — $ 313

Issuance of restricted stock awards 1 77 — — — — 78

Stock-based compensation expense — 616 — — — — 616

Common stock repurchase (4 ) (5,705 ) (5,709 )

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

See accompanying notes to consolidated financial statements.

F-4

AFFINITY BANCSHARES, INC.

Consolidated Statements of Cash Flows

Year Ended December 31,

(In thousands)

Cash flows from operating activities:

Depreciation and (accretion) amortization 338 674

Stock-based compensation expense 694 410

Deferred income tax expense (benefit) 280 (227 )

Net loss (gain) on sale and writedown of other real estate owned 105 (127 )

Increase in cash surrender value of bank owned life insurance (347 ) (366 )

Loss on writedown of premises and equipment — 1,176

Change in:

Accrued interest receivable and other assets (716 ) 2,757

Accrued interest payable and other liabilities (936 ) (1,363 )

Net cash provided by operating activities 7,569 11,851

Cash flows from investing activities:

Purchases of investment securities held-to-maturity (26,525 ) —

Purchases of investment securities available-for-sale (10,143 ) (29,381 )

Purchases of premises and equipment (1,394 ) (830 )

Proceeds from paydowns of investment securities available-for-sale 3,905 3,958

Proceeds from maturity of investment securities held-to-maturity 2 —

Purchases of other investments (1,563 ) (1,413 )

Proceeds from sales of other investments 2,957 533

Proceeds from bank owned life insurance death claim — 300

Proceeds from sales of other real estate owned 532 1,419

Net cash used in investing activities (93,722 ) (9,623 )

Cash flows from financing activities:

Stock repurchase (5,709 ) —

Proceeds from federal funds purchased 25 —

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 provided by (used in) financing activities 701 (68,705 )

Net change in cash and cash equivalents (85,452 ) (66,477 )

Cash and cash equivalents at beginning of period 111,776 178,253

Cash and cash equivalents at end of period $ 26,324 $ 111,776

Supplemental disclosures of cash flow information:

Cash paid for income taxes $ 2,149 $ 2,516

Lease liability arising from obtaining right-of-use asset 3,031 —

Bank property transferred to other real estate owned — 3,538

See accompanying notes to consolidated financial statements.

F-5

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

(1)

Summary of Significant Accounting Policies

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

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

On January 20, 2021, the Company completed the Conversion. References to the Company include Community First Bancshares, Inc. where indicated by the context.

Basis of Presentation

The accounting principles followed by the Company and the methods of applying these standards and principles conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ significantly from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of real estate acquired in connection with or in lieu of foreclosure on loans, and valuation allowances associated with deferred tax assets, the recognition of which are based on future taxable income.

Impaired loans and foreclosed real estate properties are carried at fair value less estimated selling costs, the determination of which requires significant assumptions, estimates and judgments. Fair values for foreclosed real estate properties and impaired loans collateralized by real estate are principally based on independent appraised values. Fair value is defined by GAAP as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. GAAP further defines an orderly transaction as a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets. An orderly transaction is not a forced transaction like a forced liquidation or distressed sale.

Basic and diluted earnings per share for 2022 was $1.07 and $1.06, respectively. The net earnings for this period was $7,134,000 and the weighted average common shares outstanding were 6,669,389 for basic and 6,761,771 for diluted. Basic and diluted earnings per share for the year ended December 31, 2021 was $1.10 and $1.09, respectively. The net earnings for this period was $7,573,000 and the weighted average common shares outstanding were 6,911,576 for basic and 6,969,402 for diluted.

Adopted Accounting Pronouncements

The Company recently adopted the following Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB). In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 provides certain targeted improvements to align lessor accounting with the lessee accounting model. It requires lessees to recognize the assets and liabilities on their balance

F-6

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing and uncertainty of cash flows arising from leases. Adoption of the leasing standard resulted in the recognition of an operating right-of-use asset and operating lease liability of approximately $2.7 million as of January 1, 2022. The prior year was not restated and continues to be presented under the previous accounting standards. Disclosures about the Company’s leasing activities are presented in Note 5: Leases.

New Accounting Pronouncements

Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), is intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The Company selected a third-party vendor to provide allowance for loan loss software as well as advisory services in developing a new methodology that would be compliant with ASU 2016-13. The Company adopted this ASU on January 1, 2023, and recorded a one time entry to retained earnings of $437,000, net of tax, primarily related to credit losses for unfunded commitments.

In March 2020, the FASB issued ASU No. 2020-04, Reference Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance was originally effective for all entities from March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The Company has been diligent in responding to reference rate reform and does not anticipate a significant impact to its financial statements as a result.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU provides guidance on eliminating the requirement for classification of and disclosures around troubled debt restructurings. The purpose of this guidance is to eliminate unnecessary and overly-complex disclosures of loans that are already incorporated into the allowance for credit losses and related disclosures. This ASU further requires the disclosure of current-period gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for all entities which have implemented ASU 2016-13. The Company has historically had very few credit relationships classified as troubled debt restructurings, and as such does not anticipate that the elimination of accounting for and disclosure of these types of credit relationships will have a significant impact to its financial statements upon implementation of ASU 2016-13 beginning with the first quarter of 2023.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks and interest-earning deposits in other depository institutions.

Investment Securities

The Company classifies its investment securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities for which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale.

Held-to-maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Transfers of securities between categories are recorded at fair value at the date of transfer.

Management evaluates investment securities for other-than-temporary impairment on an annual basis. A decline in the market value of any held-to-maturity investment below cost that is deemed other-than-temporary is charged to earnings for

F-7

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

the decline in value deemed to be credit related. The decline in value attributed to non-credit related factors is recognized in other comprehensive income and a new cost basis in the security is established.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the yield. Realized gains and losses for securities classified as held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Other Investments

The Federal Home Loan Bank (“FHLB”) stock is an investment that does not have a readily determinable fair value and is carried at cost.The Company is required to hold the FHLB stock as a member of the FHLB and transfer of the stock is substantially restricted.

The First National Bankers Bank (“FNBB”) stock is an investment that does not have a readily determinable fair value and is carried at cost.The Company acquired the stock when it borrowed funds at the holding company from FNBB.

Loans, Loan Fees and Interest Income on Loans

Loans are stated at the principal amount outstanding, net of the allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding.

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that collection of interest is doubtful. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged to interest income on loans. Generally, payments on nonaccrual loans are applied first to principal. Interest income is recorded after principal has been satisfied and as payments are received.

Loan fees, net of certain origination costs, are deferred and amortized over the lives of the respective loans as an adjustment to the yield.

A loan is impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price, or at the fair value of the collateral of the loan if the loan is collateral dependent. Estimated impairment losses for collateral dependent loans are set up as specific reserves. Interest income on impaired loans is recognized using the cash-basis method of accounting during the time the loans are impaired.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collection of the principal is unlikely. The allowance represents an amount, which in management’s judgment, will be adequate to absorb probable losses on existing loans that may become uncollectible.Management considers the following when assessing risk in the Company's loan portfolio segments:

Commercial (secured by real estate): Commercial real estate loans are dependent on the industries tied to these loans. Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, small retail shopping facilities and various special purpose properties, including hotels and restaurants. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service debt and is periodically updated during the life of the loan. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

F-8

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

Commercial and industrial: Commercial and industrial loans are primarily for working capital, physical asset expansion, asset acquisition loans and other. These loans are made based primarily on historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Financial information is obtained from the borrowers to evaluate cash flows sufficiency to service debt and are periodically updated during the life of the loan.

Construction, land and acquisition and development: Construction, land and acquisition and development loans are secured by vacant land and/or property that are in the process of improvement, including (a) land development preparatory to erecting vertical improvements or (b) the onsite construction of industrial, commercial, residential, or farm buildings. Repayment of these loans can be dependent on the sale of the property to third parties or the successful completion of the improvements by the builder for the end user. In the event a loan is made on property that is not yet improved for the planned development, there is the risk that necessary approvals will not be granted or will be delayed. Construction loans also run the risk that improvements will not be completed on time or in accordance with specifications and projected costs.

Residential mortgage 1-4 family: Residential real estate loans are affected by the local residential real estate market, the local economy, and, for variable rate mortgages, movement in indices tied to these loans. At the time of origination, the Company evaluates the borrower's repayment ability through a review of debt to income and credit scores. Appraisals are obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service debt at the time of origination.

Consumer installment: Consumer and other loans may take the form of automobile loans, installment loans, demand loans, or single payment loans and are extended to individuals for household, family, and other personal expenditures. At the time of origination, the Company evaluates the borrower's repayment ability through a review of debt to income and credit scores.

Management’s judgment in determining the adequacy of the allowance is based on evaluations of the probability of collection of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overall portfolio quality, and review of specific problem loans. Management uses an external independent loan reviewer to challenge and corroborate its loan grading and to provide additional analysis in determining the adequacy of the allowance for loan losses and necessary provisions to the allowance.

Management believes the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses, and as a result of these reviews the Bank may have to adjust or make additions to the allowance for loan losses as a part of management’s ongoing evaluation of its adequacy.

Other Real Estate Owned

Other real estate owned includes real estate acquired through foreclosure. Each other real estate property is initially recorded at its fair value less estimated costs to sell and is subsequently carried at fair value less estimated costs to sell. All foreclosed properties are actively marketed for sale. Fair value is principally based on independent appraisals performed by local credentialed appraisers. Any excess of the carrying value of the related loan over the fair value of the real estate at the date of foreclosure is charged against the allowance for loan losses. Properties in other real estate are re-evaluated annually. Any expense incurred in connection with holding such real estate or resulting from any write-downs in value subsequent to foreclosure is included in noninterest expense. When the other real estate property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in earnings for the period. The cost of maintenance and repairs that do not improve or extend the useful life of the respective asset is charged to

F-9

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

earnings as incurred, whereas significant renewals and improvements are capitalized. The range of estimated useful lives for premises and equipment are as follows:

Equipment and furniture 3 - 10 years

Buildings 40 years

Automobile 5 years

Leases

The lease liability is initially and subsequently recognized based on the present value of its future lease payments. Variable payments are included in the future lease payments when those variable payments depend on an index or a rate. Increases (decreases) to variable lease payments due to subsequent changes in an index or rate are recorded as variable lease expense (income) in the future period in which they are incurred.

The discount rate used is the implicit rate in the lease contract, if it is readily determinable, or the Company’s incremental borrowing rate. The implicit rates of our leases are not readily determinable and accordingly, the Company uses the incremental borrowing rate based on the information available at the commencement date for all leases. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an

amount equal to the lease payments under similar terms and in a similar economic environment.

The ROU asset for operating leases is subsequently measured throughout the lease term at the amount of the remeasured lease liability (i.e., present value of the remaining lease payments), plus unamortized initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received, and any impairment recognized. For operating leases with lease payments that fluctuate over the lease term, the total lease costs are recognized on a straight-line basis over the lease term.

For all underlying classes of assets, the Company has elected to not recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less at lease commencement and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Leases containing termination clauses in which either party may terminate the lease without cause and the notice period is less than 12 months are deemed short-term leases with

F-10

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

lease costs included in short-term lease expense. The Company recognizes short-term lease cost on a straight-line basis over the lease term.

Bank Owned Life Insurance

The Bank has purchased life insurance policies on certain key executives and members of management. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or other amounts due that are probable at settlement.

Intangible Assets

Intangible assets attributable to the value of core deposits are stated at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated lives of the assets. The excess of purchase price over fair value of net assets acquired (goodwill) is not amortized.

The Company evaluates whether goodwill and other intangible assets may be impaired at least annually and whenever events or changes in circumstances indicate it is more likely than not the fair value of the reporting unit or asset is less than its carrying amount.

Income Taxes

The Company uses the liability method of accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Additionally, this method requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realization of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

The Company currently evaluates income tax positions judged to be uncertain. A loss contingency reserve is accrued if it is probable that the tax position will be challenged, it is probable that the future resolution of the challenge will confirm that a loss has been incurred, and the amount of such loss can be reasonably estimated.

Stock Compensation Plans

Stock compensation awards are measured at the grant date based on the fair value of the awards and are recognized as compensation expense over the service period, which is also the vesting period.

Other Comprehensive Income

Other comprehensive income is shown on the consolidated statements of comprehensive income. Accumulated other

F-11

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

comprehensive loss consists of unrealized loss on securities available-for-sale, net of tax, and is shown on the consolidated statements of changes in stockholders’ equity.

Revenue Recognition

The core revenue recognition principle requires the Company to recognize revenue to depict the transfer of services or products to customers in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those services or products recognized as performance obligations are satisfied. The guidance includes a five-step model to apply to revenue recognition, consisting of the following: (1) identify the contract with a customer; (2) identify the performance obligation(s) within the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s) within the contract; and (5) recognize revenue when (or as) the performance obligation(s) are/is satisfied.

The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Since performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying revenue recognition that significantly affects the determination of the amount and timing of revenue from contracts with customers.

The following significant revenue-generating transactions are within the scope of ASC 606, which are presented in the consolidated statements of income as components of noninterest income:

Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services for which the Company earns a fee, including NSF and analysis charges, related to the deposit account. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.

Small Business Administration (SBA) loan fees: Origination fees on SBA loans are recognized into income up to the amount of the cost of making the loan as is done with other loans. The remainder is deferred and taken into income over the life of the loan. A portion of proceeds from the sale of SBA loans is taken into income while the remainder is deferred over the life of the loan.

ATM fee income: A contract between the Company, as a card-issuing bank, and its customers whereby the Company receives a transaction fee from the merchant’s bank whenever a customer uses a debit or credit card to make a purchase. These fees are earned as the service is provided (i.e., when the customer uses a debit or ATM card).

Other noninterest income: Other noninterest income includes several items, such as wire transfer income, check cashing fees, the increase in cash surrender value of life insurance and safe deposit box rental fees. This income is generally recognized at the time the service is provided and/or the income is earned.

Reclassification

Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on stockholders’ equity or net income.

F-12

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

(2) Investment Securities

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

Amortized Gross Unrealized Gross Unrealized Estimated

December 31, 2022 Cost Gains Losses Fair Value

Municipal securities - tax exempt 533 — (96 ) 437

Municipal securities - tax exempt 540 — (4 ) 536

Municipal securities - taxable 796 — (6 ) 790

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

Amortized Gross Unrealized Gross Unrealized Estimated

December 31, 2022 Cost Gains Losses Fair Value

U.S. Treasury securities $ 998 $ — $ — $ 998

Government agency mortgage-backed securities 837 — (13 ) 824

There were no held-to-maturity securities at December 31, 2021.

There were 31 securities in an unrealized loss position totaling $808,000 as of December 31, 2022 for less than 12 months. There were 36 securities in an unrealized loss position totaling $8.1 million greater than 12 months as of December 31, 2022. The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades and are reviewed regularly. Five of the securities are U.S. Treasury bonds that are direct obligations of the U.S. Government. Four of the securities are U.S. agency bonds that have the implied backing of the U.S. government. Thirty-seven securities are mortgage-backed securities of U.S. Government sponsored agencies that have the implied backing of the U.S. Government and two securities are mortgage-backed securities of a U.S. government agency. Four securities are municipal securities for which a credit analysis is performed annually and no credit problems have been identified. Fifteen are trust preferred securities or subordinated debentures of banks where the Bank performs a credit review quarterly and such reviews have raised no concerns. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis which may be at maturity.

F-13

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

There were nine held-to-maturity securities in an unrealized loss position totaling $280,000 as of December 31, 2022 for less than 12 months. There were no held-to-maturity securities in an unrealized loss position greater than 12 months as of December 31, 2022. The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades and are reviewed regularly. One security is a mortgage-backed security of a U.S. Government sponsored agency that has the implied backing of the U.S. Government. Eight are subordinated debentures of banks where the Bank performs a credit review quarterly and such reviews have raised no concerns. The Company intends to hold these securities to maturity at which time recovery of their amortized cost basis is expected to be received.

The amortized cost and estimated fair value of investment securities available-for-sale and held to maturity at December 31, 2022, by contractual maturity, are shown below. Maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties. (in thousands):

Available-for-Sale Held-to-Maturity

Amortized Estimated Amortized Estimated

Cost Fair Value Cost Fair Value

There were no sales of investment securities available-for-sale in 2022 or 2021.

Available-for-sale securities with a carrying value of approximately $4.7 million and $2.8 million were pledged to secure public deposits at December 31, 2022 and 2021, respectively.

(3) Loans and Allowance for Loan Losses

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

Commercial (secured by real estate - owner occupied) $ 162,989 $ 158,662

Commercial (secured by real estate - non-owner occupied) 135,720 104,042

Construction, land and acquisition & development 37,158 16,317

Less allowance for loan losses (9,325 ) (8,559 )

* Includes $5,000 and $17.9 million in PPP loans as of December 31, 2022 and 2021

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Atlanta, Georgia Metropolitan Statistical Area. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. The Bank has a specialized expertise in lending to dentists and dental practices, with dental practice loans totaling $185.1 million, or 28.6%, and $179.8 million, or 30.6% of our loan portfolio, as of December 31, 2022 and 2021, respectively. The majority of these loans are commercial and industrial credits for practice acquisitions and equipment financing with the remainder being owner-occupied real estate.

F-14

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

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

F-15

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

F-16

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

Allowance for loan losses:

Charge-offs — — (26 ) — — (123 ) — (149 )

Ending allowance attributable to loans:

Individually evaluated for impairment $ 85 $ 1 $ — $ — $ 4 $ — $ — $ 90

Loans:

Allowance for loan losses:

Charge-offs — — (234 ) — — (76 ) — (310 )

Ending allowance attributable to loans:

Individually evaluated for impairment $ — $ 1 $ 1 $ — $ 5 $ — $ — $ 7

F-17

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

Loans:

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

F-18

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

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

With no related allowance recorded:

Commercial (secured by real estate - owner occupied) $ — $ — $ — $ — $ —

Commercial (secured by real estate - non-owner occupied) 3,089 3,089 — 3,145 —

Commercial and industrial — — — — —

Construction, land and acquisition & development — — — — —

Consumer installment — — — — —

With an allowance recorded:

Commercial (secured by real estate - owner occupied) 85 85 85 90 4

Commercial (secured by real estate - non-owner occupied) 176 176 1 182 8

Commercial and industrial — — — — —

Construction, land and acquisition & development — — — — —

Consumer installment — — — — —

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

Construction, land and acquisition & development — — — — —

Consumer installment 1 1 — 3 —

With an allowance recorded:

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

Commercial (secured by real estate - non-owner occupied) 188 189 1 192 12

Construction, land and acquisition & development — — — — —

Consumer installment — — — — —

F-19

AFFINITY BANCSHARES, INC.

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

Construction, land and acquisition & development 85 — — 85 — 37,073 37,158

Construction, land and acquisition & development — — — — — 16,317 16,317

There was one residential mortgage loan with a balance of $249,000 that was past due over 90 days and still accruing interest as of December 31, 2022. This loan subsequently paid off in January 2023. There were no loans past due over 90 days and still accruing interest as of December 31, 2021.

The table below presents information on troubled debt restructurings including the number of loan contracts restructured and the pre- and post-modification recorded investment that have occurred during the years ended December 31, 2022 and 2021. Also included in the table are the number of contracts and the recorded investment for those trouble debt restructurings that have subsequently defaulted during the years ended December 31, 2022 and 2021: (in thousands)

Residential mortgage — $ — $ — $ — $ —

Residential mortgage 1 $ 71 $ 71 $ — $ —

The Bank allocated an allowance for loan losses of approximately $90,000 and $6,000 to customers whose loan terms had been modified in troubled debt restructurings as of December 31, 2022 and 2021.

F-20

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

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

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

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

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

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

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

December 31, 2022 Pass SpecialMention Substandard Doubtful/Loss Total

Construction, land and acquisition & development 37,158 — — — 37,158

December 31, 2021 Pass SpecialMention Substandard Doubtful/Loss Total

Construction, land and acquisition & development 16,005 312 — — 16,317

F-21

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

(4) Premises and Equipment

Premises and equipment at year ended December 31, 2022 and 2021 are summarized as follows: (in thousands)

December December

Construction in process 286 291

Less: Accumulated depreciation 5,379 4,517

Depreciation expense was approximately $905,000 and $950,000 for the years ended December 31, 2022 and 2021, respectively.

(5) Intangible Assets

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. The core deposit premium intangible asset had a gross carrying amount of $1.9 million and accumulated amortization of $383,000 at December 31, 2021. Aggregate amortization expense for the years ended was $191,000 during 2022 and 2021.

The following table shows the estimated future amortization of the core deposit premium intangible asset for the next five years (in thousands). The projections of amortization expense are based on existing asset balances as of December 31, 2022.

Years ending December 31,  

Thereafter   384

Goodwill acquired through acquisition was $17.2 million at December 31, 2022 and 2021. The Company tested for impairment during the year and determined there was no impairment of goodwill during 2022 and 2021. No impairment loss was recognized during 2022 and 2021.

(6) Leases

Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through 2027. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease arrangements are required to be

F-22

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability. The following table represents the consolidated balance sheet classification of the Company’s ROU assets and liabilities.

Classification December 31, 2022

Assets

Operating lease right-of-use assets Other assets $ 2,216

Liabilities

Operating lease liabilities Other liabilities 2,697

The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet.

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2022, the rate for the remaining lease term as of January 1, 2022 was used.

For the year ended December 31, 2022, operating lease cost was $531,000. As of December 31, 2022, the weighted average remaining lease term was 4.54 years and the weighted average discount rate was 1.88%. The following table represents the future maturities of the Company’s operating lease liabilities and other lease information.

(dollars in thousands)

Years ending December 31, Lease Liability

Total lease payments 2,819

Less: interest 122

Present value of lease liabilities $ 2,697

Supplemental Lease Information: December 31, 2022

Operating cash flows from operating leases (cash payments) $ 427

The Company’s leasing information for the year ended December 31, 2021, is presented under FASB ASC 840, Leases.

Total rent expense for leased property approximated $663,000 for the year ended December 31, 2021.

F-23

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

(7) Deposits

At December 31, 2022, contractual maturities of certificate of deposits are summarized as follows: (in thousands).

Years ending December 31,  

The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $26.4 million and $22.6 million at December 31, 2022 and 2021, respectively. 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 total $34.9 million at December 31, 2022 and had a weighted average rate of 4.50% and a weighted average maturity of 34 months. There were no brokered CDs at December 31, 2021.

(8) Borrowings

At December 31, 2022 and 2021, the Bank had a line of credit totaling $81.8 millionand $44.7 million, respectively, from the FHLB, which is reviewed annually by the FHLB. The following advance was outstanding at December 31, 2022: $10.0 million fixed rate advance, borrowed December 30, 2022, maturing January 30, 2023 at a rate of 4.23%.

At December 31, 2021 there were six advances outstanding: $8.0 million convertible rate advance with a call feature on May 23, 2022, borrowed May 23, 2019, maturing May 23, 2029 at a rate of 2.40%; $5.0 million convertible rate advance with a call feature on November 29, 2022, borrowed November 29, 2019, maturing October 25, 2029 at a rate of 2.66%; $5.0 million convertible rate advance with a call feature on March 17, 2022, borrowed December 16, 2019, maturing December 17, 2029 at a rate of 2.37%; $10.0 million fixed rate advance, borrowed January 21, 2021, maturing January 21, 2026 at a rate of 0.68%; $10.0 million fixed rate advance, borrowed March 8, 2021, maturing March 8, 2024 at a rate of 0.54%; and $10.0 million fixed rate advance, borrowed May 2, 2021, maturing May 2, 2025 at a rate of 0.76%. These advances had a fair value adjustment of $1.0 million. All of these advances were repaid in January 2022, and we were able to accrete to income the remaining $1.0 million fair value adjustment associated with these acquired advances. The Bank also paid $647,000 in prepayment penalties on these borrowings.

At December 31, 2022 and 2021, the FHLB advances were collateralized by certain loans which totaled approximately $384.4 million and $343.6 million at December 31, 2022 and 2021, respectively, and by the Company’s investment in FHLB stock which totaled approximately $832,000 and $2.2 million at December 31, 2022 and 2021, respectively.

The Company had one FHLB letter of credit of $12.5 millionand $8.0 million, used to collateralize public deposits, outstanding at December 31, 2022 and 2021, respectively.

At December 31, 2022 and 2021 the Bank had unsecured federal funds lines of credit of $32.5 million, for which $25,000 was outstanding. The Bank also has a line of $75.0 million and $62.0 million with the Federal Reserve Bank of Atlanta Discount Window secured by $111.6 million and $115.2 million in loans as of December 31, 2022 and 2021, respectively. No amount was outstanding on the Discount Window as of December 31, 2022 or 2021.

F-24

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

(9) Income Taxes

The components of income tax expense for the years ended December 31, 2022 and 2021 are as follows: (in thousands)

Year Ended Year Ended

Deferred expense (benefit) 280 (227 )

The difference between income tax expense and the amount computed by applying the statutory federal income tax rate to income before taxes for the years ended December 31, 2022 and 2021 is as follows (in thousands):

Year Ended Year Ended

Statutory Federal tax rate 21 % 21 %

Pretax income at statutory rate $ 1,959 $ 2,082

State income tax, net of federal benefit 257 265

Cash surrender value of life insurance (73 ) (117 )

Permanent adjustments 13 41

The following summarizes the sources and expected tax consequences of future deductions or income for income tax purposes which comprised the net deferred taxes at December 31, 2022 and 2021: (in thousands)

Year Ended Year Ended

Deferred income tax assets:

Allowance for loan losses $ 2,382 $ 2,195

Unrealized loss on investment securities available-for-sale 2,254 122

Right-of -use liability 689 —

Total deferred income tax assets 8,078 5,645

Deferred income tax liabilities:

Core deposit intangible 342 391

Right-of -use asset 649 —

Total deferred income tax liabilities 1,593 1,012

Net deferred income tax asset $ 6,485 $ 4,633

The Company establishes a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2022 and 2021, the Company believes that it will have sufficient earnings to realize its deferred tax asset and has not provided an allowance.

The Company is subject to federal income tax and income tax of state taxing authorities. The Company's federal and state income tax returns for the years ended December 31, 2021, 2020 and 2019 are open to audit under the statutes of limitations.

F-25

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

Prior to January 1, 1996, the Bank was permitted under the Internal Revenue Code (the “Code”) a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. The provisions of the Code permitted the Bank to deduct from taxable income an allowance for bad debts based on the greater of a percentage of taxable income before such deduction or actual loss experience. Retained earnings at December 31, 2022 includes approximately $3.6 million for which no deferred Federal income tax liability has been recognized. The amounts represent an allocation of income for bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate.

In 1996, legislation was passed which eliminated the percentage of taxable income bad debt deduction for thrift institutions for tax years beginning after December 31, 1995. This legislation also requires a thrift to generally recapture the excess of its current tax reserves over its 1987 base year reserves whereas the base year reserves are frozen from taxation. No additional financial statement tax expense resulted from this legislation as the Bank had previously provided deferred taxes on this recaptured amount.

(10) Employee Stock Ownership Plan

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

In 2017, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing shares of the Company’s common stock. A total of 295,499 shares were purchased with the loan proceeds as part of the Company’s initial stock offering. In January 2021, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing additional shares of the Company’s common stock. A total of 225,721 shares were purchased with the loan proceeds as part of the Company’s stock offering. The balance of the note payable of the ESOP was $5.3 million and $5.4 million at December 31, 2022 and 2021, respectively. Because the source of the loan payments are contributions received by the ESOP from the Company, the related notes receivable is shown as a reduction of stockholders’ equity. As of December 31, 2022 and 2021, 80,000 shares and 59,000 shares have been released, respectively.

(11) Benefit Plans

The Company has a profit sharing plan to provide retirement benefits for all employees. Contributions have been paid in the past to a trust fund annually by the Company in an amount determined by the Board of Directors. No contributions were made to the plan for the plan years ended December 31, 2022 and 2021 as the Board of Directors adopted an incentive program and paid cash bonuses rather than having contributions made to the profit sharing plan.

In 2014, the Company added a 401(k) feature to the profit sharing plan that covers substantially all employees. Under the terms of the feature, the Company may make matching contributions to the plan and the employees can contribute up to the maximum amounts allowed by IRS guidelines. The contribution expense related to the 401(k) feature totaled $183,000 and $161,000for the plan years ended December 31, 2022 and 2021, respectively.

The Company sponsors a deferred compensation plan for directors. Under this plan, participating directors may defer their Board fees and receive the deferred amounts plus interest upon completion of their time as a director or at their election. The cumulative deferred contributions for the directors in the plan and earnings thereon at December 31, 2022 and 2021 totaled approximately $2.0 millionand $2.4 million, respectively. These amounts are included in other liabilities in the accompanying consolidated balance sheets. No contributions have been made to the plan since 2015 as the plan was frozen as of June 30, 2015.

The Company has a supplemental executive retirement plan (SERP) for one of its executives. This normal retirement benefit consists of a monthly benefit payment equal to the amount that is paid from the annuity contract designated under the SERP. The normal retirement benefit will commence on the first day of the second month following the date of the executive’s

F-26

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

separation from service, payable monthly and continuing for the executive’s lifetime. The monthly benefit equals $8,333. If the executive dies after benefit payments have commenced but before receiving a total of 180 monthly payments, the Company shall pay to the executive’s beneficiary the greater of (i) the account balance or (ii) the present value of the remaining payments to satisfy a total of 180 monthly payments. Such death benefit shall be payable in a lump sum no later than 60 days from the date of death. If the executive dies after receiving 180 or more benefit payments, the SERP will terminate and no additional payments will be made. The accrued liability for the plan at December 31, 2022 and 2021 was approximately $480,000 and $459,000, respectively and is recorded in other liabilities. The related expense for the plan was approximately $21,000and $20,000 in 2022 and 2021, respectively. The earnings from the increase in the value of the annuityfor the years ending December 31, 2022 and 2021 was approximately $0 and $4,000, respectively, net of related expenses. The carrying value of the annuity was approximately $956,000 for the years ended December 31, 2022 and 2021 and is recorded in other assets.

(12) Stock-Based Compensation Plans

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors. In 2018, with subsequent shareholder approval, the 2018 Equity Incentive Plan was approved up to 133,987 share of common stock and up to 334,970 stock 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).

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 2022 were as follows: dividend yield of 0%, expected volatility of 32.12%, risk-free interest rate of 2.84%, expected average life of 7.32, and weighted average per share fair value of options of $6.04. The weighted average assumptions used during 2021 were as follows: dividend yield of 0%, expected volatility of 36.62%, risk-free interest rate of 1.04%, expected average life of 7.50, and weighted average per share fair value of options of $5.34.

Stock options of 221,500 shares with a weighted average exercise price of $14.86 were granted during the year ended December 31, 2022. Restricted stock of 114,000 shares at a weighted average grant date fair value of $14.85 were also granted during the year ended December 31, 2022.

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

Exercise of stock options — —

Forfeited — —

* 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 2022 exercises of stock options were exercised in this manner.

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

F-27

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

* The terms of the restricted stock agreements permit the surrender of shares of the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 3,070 shares were surrendered during the year ended December 31, 2022.

The Company recognized approximately $742,000 and $410,000 of stock-based compensation expense (included in salary and employee benefits on the consolidated statements of income) during 2022 and 2021, respectively, associated with its common stock awards granted to directors and officers. This expense is net of approximately $48,000 and $34,000 during the years ended December 31, 2022 and 2021 for shares surrendered to satisfy applicable tax withholding requirements.

As of December 31, 2022, there was approximately $3.3 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately 2.93 years.

(13)Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Total and Tier I Capital to Risk-Weighted Assets and of Tier I Capital to Average Assets. Management believes, as of December 31, 2022 and 2021, that the Bank meets all capital adequacy requirements to which it is subject.