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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the Fiscal Year Ended December 31, 2021

 

OR

 

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

For the transition period from to

 

Commission File Number: 001-39914

 

Affinity Bancshares, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Maryland

 

86-1339773

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

3175 Highway 278, Covington, Georgia

 

30014

(Address of principal executive offices)

 

(Zip code)

 

(770) 786-7088

(Registrant’s telephone number including area code)

 

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

 

         Title of each class Trading Symbols

Name of exchange on which registered

Common Stock, par value $0.01 per share AFBI

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes ☐ No ☒

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

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

 

 

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

 

Large accelerated filer

 

☐

 

Accelerated filer

 

☐

Non-accelerated filer

 

☒

 

Smaller reporting company

 

☒

Emerging growth company

 

☒

 

 

 

 

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

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

 

The aggregate value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock of $12.97 as of June 30, 2021, was $89.1 million.

 

As of March 16, 2022 there were 6,636,093 shares outstanding of the registrant’s common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

1. Portions of the Proxy Statement for the 2022 Annual Meeting of Stockholders. (Part III)

 

 

 

TABLE OF CONTENTS

 

 

 

PAGE

 

 

 

PART I

 

2

 

 

 

ITEM 1.

Business

2

 

 

 

ITEM 1A.

Risk Factors

28

 

 

 

ITEM 1B.

Unresolved Staff Comments

28

 

 

 

ITEM 2.

Properties

29

 

 

 

ITEM 3.

Legal Proceedings

30

 

 

 

ITEM 4.

Mine Safety Disclosures

30

 

 

 

PART II

 

30

 

 

 

ITEM 5.

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

30

 

 

 

ITEM 6.

[Reserved]

30

 

 

 

ITEM 7.

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

33

 

 

 

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

ITEM 8.

Financial Statements and Supplementary Data

F-1

 

 

 

ITEM 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

45

 

 

 

ITEM 9A.

Controls and Procedures

45

 

 

 

ITEM 9B.

 

ITEM 9C.

Other Information

 

Disclosure Regarding Foreign Jurisdictions That Prevent Inspections

45

 

 

 

 

 

PART III

 

46

 

 

 

ITEM 10.

Directors, Executive Officers and Corporate Governance

46

 

 

 

ITEM 11.

Executive Compensation

46

 

 

 

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

46

 

 

 

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

47

 

 

 

ITEM 14.

Principal Accountant Fees and Services

47

 

 

 

PART IV

 

47

 

 

 

ITEM 15.

Exhibits and Financial Statement Schedules

47

 

 

 

ITEM 16.

Form 10-K Summary

48

 

 

 

SIGNATURES

 

49

 

 

 

1

 

PART I

ITEM 1. Business

Forward Looking Statements

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

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

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

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

•
conditions relating to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;
•
general economic conditions, either nationally or in our market areas, that are worse than expected;
•
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
•
our ability to access cost-effective funding;
•
fluctuations in real estate values and both residential and commercial real estate market conditions;
•
demand for loans and deposits in our market area;
•
our ability to implement and change our business strategies;
•
competition among depository and other financial institutions;
•
inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
•
adverse changes in the securities or secondary mortgage markets;
•
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
•
changes in tax laws;
•
the effects of any Federal government shutdown;
•
changes in the quality or composition of our loan or investment portfolios;

2

 

•
technological changes that may be more difficult or expensive than expected;
•
failure or breaches of information technology security systems;
•
the inability of third-party providers to perform as expected;
•
a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
•
our ability to manage market risk, credit risk and operational risk in the current economic environment;
•
our ability to introduce new products and services, enter new markets successfully and capitalize on growth opportunities;
•
our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we have acquired or may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
•
changes in consumer spending, borrowing and savings habits;
•
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
•
our ability to retain key employees;
•
our compensation expense associated with equity allocated or awarded to our employees;
•
the effects of climate change and societal, investor and governmental responses to climate change;
•
the effects of social and governance change and societal and investor sentiment and governmental responses to social and governance matters;
•
the effects of domestic and international hostilities, including terrorism;
•
changes in the financial condition, results of operations or future prospects of issuers of securities that we own; and
•
the effects of any pandemic disease, natural disaster, war, act of terrorism, accident, or similar action or event.

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

3

 

•
demand for products and services may decline, making it difficult to grow assets and income;
•
loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
•
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
•
the allowance for loan losses has been and may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;
•
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;
•
cyber-security risks are increased as the result of an increase in the number of employees working remotely;
•
we rely on third-party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
•
FDIC premiums may increase if the agency experiences additional resolution costs.

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

Affinity Bancshares, Inc.

Affinity Bancshares, Inc. (“Affinity Bancshares”) is a Maryland corporation that 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 Affinity Bank (formerly named Newton Federal Bank). Prior to completion of the Conversion, approximately 54% of the shares of common stock of Community First Bancshares, Inc. were owned by Community First Bancshares, MHC. In conjunction with the Conversion, Community First Bancshares, Inc. was merged into Affinity Bancshares, Inc. (and ceased to exist) and Affinity Bancshares, Inc. became its successor holding company for Affinity Bank.

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

Affinity Bancshares, Inc. conducts its operations primarily through its wholly owned subsidiary, Affinity Bank, a federally chartered savings bank. Affinity Bancshares, Inc. manages its operations as one unit, and thus does not have separate operating segments. At December 31, 2021, Affinity Bancshares, Inc. had total assets of $788.1 million, loans of $575.8 million, deposits of $614.8 million, and stockholders’ equity of $121.0 million.

The executive offices of Affinity Bancshares, Inc. are located at 3175 Highway 278, Covington, Georgia 30014, and its telephone number is (770) 786-7088. Affinity Bancshares, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Affinity Bank

Affinity Bank is a federally chartered stock savings association headquartered in Covington, Georgia. Affinity Bank changed its name from Newton Federal Bank in connection with the conversion. Newton Federal Bank was originally chartered in 1928 as a Georgia-chartered mutual building and loan association under the name Newton County Building and Loan Association, and we continue to operate under the name “Newton Federal Bank, a Division of Affinity Bank” in Newton Federal Bank’s legacy market area.

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in commercial real estate loans, commercial and industrial loans and residential real estate loans and, to a lesser extent, construction and land loans and consumer loans. We also invest in securities, which have historically consisted primarily of mortgage-backed securities and obligations issued by U.S. government sponsored enterprises and Federal Home Loan

4

 

Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. In addition, we gather deposits nationwide through our virtual bank, FitnessBank, which accepts deposits and provides higher interest rates based on customers meeting certain fitness goals. We have also used Federal Home Loan Bank borrowings to fund our operations.

Affinity Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Affinity Bank is a member of the Federal Home Loan Bank system. We use three website addresses: www.myaffinitybank.com, www.newtonfederal.com, and FitnessBank.fit. Information on our websites is not considered a part of this report.

Acquisition

On January 10, 2020, Community First Bancshares, Inc. and Newton Federal Bank completed their acquisition of ABB Financial Group, Inc. (“ABB”) and its wholly owned subsidiary, Affinity Bank. At the effective time of the acquisition, each outstanding share of ABB common stock was converted into the right to receive $7.50 in cash. Including consideration received by holders of options to purchase ABB common stock, the aggregate consideration paid in the transaction was approximately $40.3 million. In addition, $5.9 million of preferred stock that had been issued by ABB were redeemed, and $1.4 million of trust preferred securities issued by a subsidiary of ABB were acquired by Community First Bancshares, Inc. and canceled. All accrued but unpaid dividends and interest have been paid on the preferred stock and trust preferred securities.

Market Area

 

We conduct our operations from our main office and one additional branch office in Covington, Georgia, which is located in Newton County, Georgia, and one branch office in Atlanta, Georgia, which is located in Cobb County, as well as a commercial loan production office located in Alpharetta, Georgia, which is in Fulton County. Our indirect automobile lending division, Affinity Bank Dealer Select (formerly “Community First Auto”), operates out of an office in Monroe, Georgia. In addition, we gather deposits nationwide through our virtual bank, FitnessBank.

 

Covington, Georgia is located 35 miles east of Atlanta, Georgia and 47 miles south of Athens, Georgia. In Newton County, services are the largest employment sector and represent 22% of the non-farm, non-government labor force. Other significant employer industries in the county include education/healthcare/social services, wholesale/retail trade, finance/insurance/real estate and construction. There are approximately 1,500 businesses operating in Newton County. Newton County’s total population was estimated at 115,789 as of January 1, 2022 and grew 9.9% from 2012 to 2022, while the population of the state of Georgia grew 9.5% during that same period. Newton County’s population is projected to grow 5.7% between 2022 and 2027, compared to 4.4% for the State of Georgia. As of January 1, 2022, the median household income in Newton County was approximately $61,967, which was lower than the Georgia state median of $68,363 and lower than the national median household income of $72,465.

 

Cobb County, with a total estimated population of 771,192 as of January 1, 2022, grew 10.1% between 2012 and 2022, and is projected to grow another 4.3% by 2027. In Cobb County, the services sector represents 32% of the non-farm, non-government labor force. Cobb County has approximately 21,000 businesses, with other significant employee representation including retail trade, health care and social assistance. The median household income in Cobb County was approximately $88,159, which is higher than the Georgia and national medians.

 

Fulton County, with a total population of 1,098,764 as of January 1, 2022, grew 16.7% since 2012, and is projected to grow another 5.7% by 2027. It has approximately 38,000 businesses, with the most significant employee representation in professional, scientific, and technical services, health care and social assistance and retail trade.

 

The following table provides information with respect to unemployment rates for our market areas, the State of Georgia and the United States as a whole:

 

 

 

Unemployment Rate

 

 

Region

 

December 2021

 

December 2020

 

Change

 

 

 

 

 

 

 

United States

 

3.70%

 

6.50%

 

(2.80)%

Georgia

 

2.90%

 

5.10%

 

(2.20)%

Cobb County, Georgia

 

2.00%

 

4.80%

 

(2.80)%

Fulton County, Georgia

 

2.70%

 

6.90%

 

(4.20)%

Newton County, Georgia

 

2.60%

 

6.40%

 

(3.80)%

 

5

 

Unemployment rates were significantly impacted by the COVID-19 pandemic, but they have improved significantly from last year and for all counties where we have a physical branch office or loan production office, the unemployment rate was below both the national and State of Georgia unemployment rate for December 2021.

We believe that we have developed products and services that will meet the financial needs of our current and future customer base, and we continually plan to enhance our products and services to meet the changing needs of customers. Marketing strategies focus on the strength of our knowledge of local consumer and small business markets, our understanding of the dental practice market and indirect automobile lending, as well as expanding relationships with current customers and reaching out to develop new, profitable business relationships.

Competition

We face competition within our local market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from savings institutions, mortgage banking firms, consumer finance companies and credit unions and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2021 (the most recent date for which data is available), our market share of deposits represented 22.81% of Federal Deposit Insurance Corporation-insured deposits in Newton County and 1.46% in Cobb County, ranking us second and 13th, respectively, in market share of deposits out of eight institutions operating in Newton County and 23 institutions operating in Cobb County.

Lending Activities

General. Our historical lending activity consists of originating commercial real estate loans, commercial and industrial loans and residential real estate loans and, to a lesser extent, construction and land loans and consumer loans. We initiated indirect automobile lending in 2018. As a result of our acquisition of the former Affinity Bank, we have a specialized expertise in lending to dentists and dental practices, with loans to the dental industry totaling $179.8 million, or 30.6% of our loan portfolio, as of December 31, 2021. Of this amount, 68% consisted of commercial business loans and 32% consisted of commercial real estate loans, with the remaining amount being unsecured loans.

 

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. In addition to the loans included in the table below, at December 31, 2021, we had no loans held for sale, $59,000 of loans in process, $958,000 of deferred loan fees (including $243,000 of PPP deferred loan fees), and $1.8 million in indirect auto dealer reserve costs.

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential (1)

 

$

63,065

 

 

 

10.80

%

 

$

91,777

 

 

 

15.33

%

Commercial (2)

 

 

262,704

 

 

 

44.95

%

 

 

178,571

 

 

 

29.83

%

Construction and land

 

 

16,317

 

 

 

2.79

%

 

 

23,571

 

 

 

3.94

%

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

 

      Commercial and industrial loans

 

 

152,835

 

 

 

26.15

%

 

 

155,554

 

 

 

25.99

%

      Paycheck Protection Program loans

 

 

17,883

 

 

 

3.06

%

 

 

101,749

 

 

 

17.00

%

Consumer loans

 

 

71,580

 

 

 

12.25

%

 

 

47,393

 

 

 

7.91

%

 

 

 

584,384

 

 

 

100.00

%

 

 

598,615

 

 

 

100.00

%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for losses

 

 

8,559

 

 

 

 

 

 

6,361

 

 

 

 

Total loans

 

$

575,825

 

 

 

 

 

$

592,254

 

 

 

 

 

(1) Includes home equity loans and lines of credit, which totaled $2.7 million and $2.3 million for the years ending December

31, 2021 and 2020, respectively.

(2) Includes multi-family residential real estate loans, which totaled $5.8 million for both years ending December 31, 2021 and

2020.

 

 

6

 

 

Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at December 31, 2021. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments. Actual maturities may differ.

 

December 31, 2021

 

One- to
Four-Family
Residential
Real Estate

 

 

Commercial
Real Estate

 

 

Construction
and Land

 

 

 

(In thousands)

 

Amounts due in:

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

1,395

 

 

$

16,580

 

 

$

9,412

 

After one through five years

 

 

5,141

 

 

 

98,136

 

 

 

5,719

 

After five through 15 years

 

 

28,694

 

 

 

130,406

 

 

 

1,186

 

After 15 years

 

 

27,835

 

 

 

17,582

 

 

 

—

 

Total

 

$

63,065

 

 

$

262,704

 

 

$

16,317

 

 

December 31, 2021

 

Commercial
and
Industrial

 

 

Paycheck Protection Program

 

 

Consumer

 

 

Total

 

 

 

(In thousands)

 

Amounts due in:

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

3,541

 

 

$

252

 

 

$

206

 

 

$

31,386

 

After one through five years

 

 

33,019

 

 

 

17,631

 

 

 

38,787

 

 

 

198,433

 

After five through 15 years

 

 

114,497

 

 

 

—

 

 

 

32,587

 

 

 

307,370

 

After 15 years

 

 

1,778

 

 

 

—

 

 

 

 

 

 

47,195

 

Total

 

$

152,835

 

 

$

17,883

 

 

$

71,580

 

 

$

584,384

 

 

The following table sets forth our fixed and adjustable-rate loans at December 31, 2021 that are contractually due after December 31, 2022.

 

 

 

Due After December 31, 2022

 

 

 

Fixed

 

 

Adjustable

 

 

Total

 

 

 

(In thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

54,532

 

 

$

7,138

 

 

$

61,670

 

Commercial

 

 

214,883

 

 

 

31,241

 

 

 

246,124

 

Construction and land

 

 

5,852

 

 

 

1,053

 

 

 

6,905

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

      Commercial and industrial loans

 

 

139,125

 

 

 

10,169

 

 

 

149,294

 

      Paycheck Protection Program loans

 

 

17,631

 

 

 

—

 

 

 

17,631

 

Consumer loans

 

 

70,808

 

 

 

566

 

 

 

71,374

 

Total loans

 

$

502,831

 

 

$

50,167

 

 

$

552,998

 

 

(1)
Consists of home equity loans and lines of credit.

 

 

Commercial and Industrial Loans. We make commercial and industrial loans, primarily in our market area, to a variety of professionals, sole proprietorships and small businesses, including dental loans, which are originated throughout the Southeastern United States. These loans are generally secured by business assets, and we may support this collateral with junior liens on real property. At December 31, 2021, commercial and industrial loans were $152.8 million, or 26.2% of our gross loans. This total excludes $17.9 million of loans originated under the PPP, which are described below. As part of our relationship driven focus, we encourage our commercial borrowers to maintain their primary deposit accounts with us, which enhances our interest rate spread and net interest margin.

Commercial lending products include term loans and revolving lines of credit. Commercial loans and lines of credit are made with either adjustable or fixed rates of interest. Adjustable rates and fixed rates are based on the prime rate as published in The Wall Street Journal, plus a margin. We are focusing our efforts on experienced, growing small- to medium-sized, privately-held companies with solid historical and projected cash flows that operate in our market areas.

7

 

When making commercial and industrial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities and global cash flows of the borrower and other guarantors, the projected cash flows of the business and the value of the collateral, accounts receivable, inventory and equipment. Depending on the collateral used to secure the loans, commercial and industrial loans are made in amounts of up to 80% of the value of the collateral securing the loan.

 

Our commercial business loans to dental professionals totaled $179.8 million at December 31, 2021. The significant majority of these loans are secured by practice assets with the goodwill of each practice providing the value for lending. We consider numerous factors when underwriting dental loans, including transactional risk related to the selling doctor in a practice purchase, if applicable, procedures performed, insurance taken and the good standing of the dentist by state boards. We lend across all dental specialties: general, cosmetic, orthodontist, endodontist, periodontist, pediatric, and oral surgery. The majority of our dental loans are originated to professionals and practices located in the State of Georgia, with the remainder originated through the contiguous states. We target dental practice loans with principal balances between $250,000 and $750,000, although we will originate dental practice loans with principal balances in excess of $750,000. The significant majority of our dental loans are to solo practitioners or small practices with two professionals. We remain knowledgeable of trends in the dental industry through regular contact with our borrowers as well as through our participation in dental managers associations and our dental advisory board.

The CARES Act established the PPP through the SBA, which allowed us to lend money to small businesses to maintain employee payrolls through the COVID-19 crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meet certain other requirements. PPP loans have a fixed interest rate of 1.00% and a maturity date of either two or five years. Such loans totaled $17.9 million at December 31, 2021.

Our largest commercial and industrial loan at December 31, 2021 totaled $2.5 million, was originated in 2016 and is secured by accounts receivable. At December 31, 2021, this loan was performing in accordance with its terms.

Commercial Real Estate Loans. Our commercial real estate loans (which includes multi-family residential loans) are secured primarily by dental/medical professional properties, church campuses and other small businesses. At December 31, 2021, we had $262.7 million in commercial real estate loans, representing 45.0% of our total loan portfolio. At that date, $159.2 million, or 60.6% of our commercial real estate loans, were secured by owner-occupied properties. This amount included $60.7 million of dental loans, $22.2 million of church loans and $5.8 million of multi-family residential real estate loans. At December 31, 2021, our commercial real estate loans had an average balance of $579,000.

Most of our commercial real estate loans are balloon loans with a five-year initial term and a 20-year amortization period. The maximum loan-to-value ratio of our commercial real estate loans is generally 80%. All of our commercial real estate loans are subject to our underwriting procedures and guidelines. At December 31, 2021, our largest commercial real estate loan totaled $7.5 million and is secured by a well-established, anchored, retail shopping center. At December 31, 2021, this loan was performing in accordance with its terms.

We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). The significant majority of our commercial real estate loans are appraised by outside independent appraisers approved by the board of directors, although we are only required to obtain independent appraisals on commercial real estate loans in amounts of $500,000 or greater. Personal guarantees are generally obtained from the principals of commercial real estate borrowers.

One- to Four-Family Residential Real Estate Lending. At December 31, 2021, we had $63.1 million of loans secured by one- to four-family real estate, representing 10.8% of our total loan portfolio. We currently originate adjustable-rate and fixed-rate one- to four-family residential real estate loans, although our ability to originate adjustable-rate residential mortgage loans is significantly limited in the current interest rate environment. We historically originated fixed-rate one- to four-family residential real estate loans with balloon terms, but recently began originating adjustable-rate one- to four-family residential real estate loans. At December 31, 2021, $7.1 million, or 11.3%, of our one- to four-family residential real estate loans were adjustable-rate loans.

Our one- to four-family residential real estate loans are generally underwritten to internal guidelines, although we generally follow the documentation practices of Fannie Mae guidelines. We generally originate one- to four-family residential real estate loans in amounts up to $150,000, although we will originate loans above this amount. The significant majority of our one- to four-family residential real estate loans are secured by properties located in our primary market area.

8

 

We generally limit the loan-to-value ratios of our one- to four-family residential mortgage loans to 89.9% of the purchase price or appraised value, whichever is lower.

We currently offer one- to four-family residential real estate loans with terms of up to 15 years. Our adjustable-rate one- to four-family residential real estate loans have a five or seven year initial fixed rate.

We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not currently offer “subprime loans” on one- to four-family residential real estate loans (i.e., generally loans to borrowers with credit scores less than 620).

Construction and Land Loans. We make construction loans, primarily to individuals for the construction of their primary residences and to contractors and builders of single-family homes. We also make a limited amount of land loans to complement our construction lending activities, as such loans are generally secured by lots that will be used for residential development. Land loans also include loans secured by land purchased for investment purposes. At December 31, 2021, our residential construction loans totaled $16.3 million, representing 2.8% of our total loan portfolio, and included $1.8 million of land loans. At December 31, 2021, $263,000 of our single-family construction loans were to individuals and $5.8 million were to contractors and builders. In addition, we had $8.4 million of commercial construction and development loans as of December 31, 2021, which included $5.4 million of commercial development and land loans.

While we may originate loans to contractors and builders whether or not the collateral property underlying the loan is under contract for sale, we consider each project carefully in light of current residential real estate market conditions. We actively monitor the number of unsold homes in our construction loan portfolio and local housing markets to attempt to maintain an appropriate balance between home sales and new loan originations. We generally will limit the maximum number of speculative units (units that are not pre-sold) approved for each builder. We have attempted to diversify the risk associated with speculative construction lending by doing business with experienced small and mid-sized builders within our market area.

We also originate construction loans for commercial development projects, including retail buildings, houses of worship, small industrial projects, hotels and office buildings. Most of our construction loans are interest-only loans that provide for the payment of interest during the construction phase, which is usually up to 12 months. At the end of the construction phase, the loan may convert to a permanent mortgage loan or the loan may be paid in full.

Construction loans generally can be made with a maximum loan-to-value ratio of 75% of the estimated appraised market value upon completion of the project. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also generally require inspections of the property before disbursements of funds during the term of the construction loan.

At December 31, 2021, our largest construction and land loan was for $4.5 million, of which $4.4 million was outstanding. This loan was originated in 2019 to construct a new branded hotel and is secured by land and improvements. This loan was performing according to its terms at December 31, 2021.

Consumer Loans. We offer a limited range of consumer loans, principally to customers residing in our primary market area with other relationships with us and with acceptable credit ratings. Our consumer loans generally consist of indirect loans on new and used automobiles, loans secured by deposit accounts and unsecured personal loans. At December 31, 2021, consumer and other loans were $71.6 million, or 12.2% of gross loans.

In 2018, we established our indirect automobile lending division, Affinity Bank Dealer Select (“ABDS”, and formerly named Community First Auto), which currently operates from an office in Monroe, Georgia. This division has an experienced manager and sales team to operate this line of business. At December 31, 2021, we had $69.1 million in indirect automobile loans, and our internal policies limit such loans to 200% of capital and 25% of our loan portfolio.

ABDS purchases retail installment sales contracts from dealerships in the states of Alabama, Georgia, Florida, Tennessee, North Carolina, South Carolina, Kentucky and Virginia. A dealership submits credit applications to ABDS for consideration. ABDS fully underwrites each loan for creditworthiness, vehicle valuation, debt ratios and the consumer’s stability. ABDS underwrites each loan to ensure all credit policy guidelines are followed. Applications that are approved and counter-offered are submitted to ABDS for verification and funding.

All dealerships that submit retail installment contracts to ABDS sign a separate retail dealer agreement that makes representations and warranties to ABDS with respect to our security interest and the accuracy and validity of all information provided during the credit application and contract process. Borrowers are responsible for carrying full coverage insurance during the life of

9

 

the loan, but ABDS has a blanket Vendor Single Interest policy in place to cover all loans in case of lapse of coverage, skip or confiscation.

Loan Underwriting Risks

Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans. The primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors to provide quarterly, semi-annual or annual financial statements, depending on the size of the loan, on commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have an aggregate debt service ratio, including the guarantor’s cash flows and the borrower’s other projects, of at least 1.20x. An environmental phase one report is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.

If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.

Commercial and Industrial Loans. Unlike residential real estate loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business and the collateral securing these loans may fluctuate in value. Our commercial and industrial loans are originated primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. With respect to dental practice loans, the goodwill of a practice provides the value for lending. Most often, collateral for commercial and industrial loans consists of accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself.

Construction and Land Loans. Our construction loans are based upon estimates of costs and values associated with the completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations.

Construction lending involves additional risks when compared with permanent lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. In addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.

Balloon Loans. Although balloon mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they reprice at the end of the term, the ability of the borrower to renew or repay the loan and the marketability of the underlying collateral may be adversely affected if real estate values decline prior to the expiration of the term of the loan or in a rising interest rate environment.

Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, an increased monthly payment required of adjustable-rate loan borrowers in a rising

10

 

interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying collateral also may be adversely affected in a high interest rate environment.

Consumer Loans. Consumer loans may entail greater risk than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Indirect automobile loans are inherently risky as they are often secured by assets that may be difficult to locate and can depreciate rapidly. In some cases, repossessed collateral for a defaulted automobile loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency may not warrant further substantial collection efforts against the borrower. Automobile loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers.

Originations, Purchases and Sales of Loans

Lending activities are conducted by our salaried loan personnel operating at our main and branch office locations and our loan production office. All loans originated by us are underwritten pursuant to our policies and procedures. We originate fixed-rate loans and adjustable-rate loans. Our ability to originate fixed-rate loans or adjustable-rate loans depends on relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.

We sometimes purchase whole loans from third parties to supplement our loan production. These loans generally consist of loans to health care professionals and loans secured by manufactured housing. At December 31, 2021, we had $1.6 million of whole loans that we purchased. The majority of our purchased loans are to borrowers who are not located in our primary market area.

In addition, from time to time, we may purchase or sell participation interests in loans. We underwrite our participation interest in the loan that we are purchasing according to our own underwriting criteria and procedures. At December 31, 2021, we had $3.9 million of committed funds for loan participation interests that we purchased, and at that date, we had $16.3 million of loans for which we had sold participation interests.

We do not originate significant amounts of loans for sale, but we occasionally sell loans, primarily to generate fee income. We currently broker loan sales through Quicken Loans and receive fees related to such sales. For the year ended December 31, 2021, we received $255,000 in fee income. At December 31, 2021, we had no loans held for sale.

Loan Approval Procedures and Authority

Pursuant to federal law, the aggregate amount of loans that Affinity Bank is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Affinity Bank’s unimpaired capital and surplus. At December 31, 2021, based on the 15% limitation, Affinity Bank’s loans-to-one-borrower limit was approximately $15.5 million. On the same date, Affinity Bank had no borrowers with outstanding balances in excess of this amount. At December 31, 2021, our largest loan relationship with one borrower was for $10.7 million, which was for several loans secured by convenience stores, and the underlying loan was performing in accordance with their terms on that date.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns.

All loan approval amounts are based on the aggregate loans (total credit exposure), including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. Our Chief Executive Officer and our Chief Credit Officer each has individual authorization to approve loans up to $1.0 million, and, combined, can approve loans up to $3.5 million. Two Senior Credit Managers and the President can approve loans up to $500,000 each, or any two of these individuals can approve

11

 

loans up to $1.0 million combined. No individual loan officer has approval authority in excess of $300,000 individually, and such authority cannot be combined with other officers. Loans in excess of $3.5 million require the approval of our full board of directors.

Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.

Delinquencies and Asset Quality

Delinquency Procedures. When a loan payment becomes 15 days past due, we contact the customer by mailing a late notice, and loan officers may contact their customers. If a loan payment becomes 30 days past due, we mail an additional late notice and a loan-specific letter written by a collection representative, and we also place telephone calls to the borrower. These loan collection efforts continue until a loan becomes 90 days past due, at which point we would refer the loan for foreclosure proceedings unless management determines that it is in the best interest of Affinity Bank to work further with the borrower to arrange a workout plan. The foreclosure process would begin when a loan becomes 120 days delinquent. From time to time we may accept deeds in lieu of foreclosure.

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.

Under the CARES Act, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from troubled debt restructuring classification under U.S. GAAP. In addition, the bank regulatory agencies have issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) for loans that were current as of the loan modification program implementation date are not troubled debt restructurings. For the years ended December 31, 2020 and 2021, we have granted short-term deferrals on 744 loans that were otherwise performing, totaling approximately $189.6 million. As of December 31, 2021, all of these loans but one had returned to normal payment status. This loan is in non accrual status.

12

 

Delinquent Loans. The following tables set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated. We had no PPP loans delinquent at December 31, 2021.

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

 

30-59
Days
Past
Due

 

 

60-89
Days
Past
Due

 

 

90
Days
or
More
Past
Due

 

 

30-59
Days
Past
Due

 

 

60-89
Days
Past
Due

 

 

90
Days
or
More
Past
Due

 

 

 

(In thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family
   residential

 

$

4,094

 

 

$

1,711

 

 

$

321

 

 

$

4,308

 

 

$

1,094

 

 

$

1,444

 

Commercial

 

 

—

 

 

 

—

 

 

 

3,200

 

 

 

3,386

 

 

 

—

 

 

 

1,136

 

Construction and land

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,392

 

 

 

—

 

 

 

—

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Commercial and industrial loans

 

 

338

 

 

 

—

 

 

 

813

 

 

 

29

 

 

 

—

 

 

 

1,085

 

      Paycheck Protection Program loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Consumer loans

 

 

289

 

 

 

45

 

 

 

—

 

 

 

78

 

 

 

—

 

 

 

73

 

Total

 

$

4,721

 

 

$

1,756

 

 

$

4,334

 

 

$

9,193

 

 

$

1,094

 

 

$

3,738

 

 

Non-Performing Assets. The following table sets forth information regarding our non-performing assets. Non-accrual loans include non-accruing troubled debt restructurings of $0 and $241,000 for the years ending December 31, 2021 and 2020, respectively. No PPP loans were considered non-performing at December 31, 2021.

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands)

 

Non-accrual loans:

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

One- to four-family residential

 

$

2,873

 

 

$

2,587

 

Commercial

 

 

3,200

 

 

 

1,157

 

Construction and land

 

 

—

 

 

 

—

 

Commercial and industrial loans

 

 

813

 

 

 

1,085

 

Paycheck Protection Program loans

 

 

—

 

 

 

—

 

Consumer loans

 

 

125

 

 

 

73

 

Total non-accrual loans

 

$

7,011

 

 

$

4,902

 

Accruing loans past due 90 days or more

 

 

—

 

 

 

—

 

Real estate owned:

 

 

 

 

 

 

One- to four-family residential

 

 

—

 

 

 

320

 

Commercial

 

 

3,538

 

 

 

972

 

Construction and land

 

 

—

 

 

 

—

 

Commercial and industrial loans

 

 

—

 

 

 

—

 

Consumer loans

 

 

—

 

 

 

—

 

Total real estate owned

 

 

3,538

 

 

 

1,292

 

Total non-performing assets

 

$

10,549

 

 

$

6,194

 

Total accruing troubled debt restructured loans

 

$

1,056

 

 

$

3,286

 

Total non-performing loans to total loans (1)

 

 

1.20

%

 

 

0.82

%

Total non-performing assets to total assets (2)

 

 

1.34

%

 

 

0.73

%

 

(1) The increase in this ratio was due to one non-performing hotel loan in the amount of $3.2 million.

(2) The increase in this ratio was due to our listing for sale our former operations building, resulting in the property being moved to OREO.

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Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

In connection with the filing of our periodic reports with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

On the basis of this review of our assets, our classified and special mention assets at the dates indicated were as follows:

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Substandard assets

 

$

8,398

 

 

$

6,280

 

Doubtful assets

 

 

—

 

 

 

—

 

Loss assets

 

 

—

 

 

 

—

 

Total classified assets

 

$

8,398

 

 

$

6,280

 

Special mention assets

 

$

3,054

 

 

$

847

 

 

Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on various 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.

As an integral part of their examination process, the Office of the Comptroller of the Currency 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 for 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.

14

 

The following table sets forth activity in our allowance for loan losses for the periods indicated. We have not provided for loan losses on Paycheck Protection Program loans due to the government guarantee associated with such loans.

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands)

 

Allowance at beginning of period

 

$

6,361

 

 

$

4,134

 

Provision for loan losses

 

 

1,075

 

 

 

2,000

 

Charge offs:

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

One- to four-family residential

 

 

—

 

 

 

(126

)

Commercial

 

 

—

 

 

 

(30

)

Construction and land

 

 

—

 

 

 

—

 

Commercial and industrial loans

 

 

(234

)

 

 

—

 

Paycheck Protection Program loans

 

 

—

 

 

 

—

 

Consumer loans

 

 

(76

)

 

 

(29

)

Total charge-offs

 

 

(310

)

 

 

(185

)

Recoveries:

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

One- to four-family residential

 

 

73

 

 

 

100

 

Commercial

 

 

1,307

 

 

 

246

 

Construction and land

 

 

—

 

 

 

—

 

Commercial and industrial loans

 

 

37

 

 

 

36

 

Paycheck Protection Program loans

 

 

—

 

 

 

—

 

Consumer loans

 

 

16

 

 

 

30

 

Total recoveries

 

 

1,433

 

 

 

412

 

Net (charge-offs) recoveries

 

 

1,123

 

 

 

227

 

Allowance at end of period

 

$

8,559

 

 

$

6,361

 

Allowance to non-performing loans (1)

 

 

122.08

%

 

 

129.79

%

Allowance to total loans outstanding at the end of
   the period (1)

 

 

1.46

%

 

 

1.06

%

Net (charge-offs) recoveries to average loans
   outstanding during the period

 

 

0.19

%

 

 

0.04

%

 

(1) The decrease in this ratio was due to one non-performing hotel loan in the amount of $3.2 million.

(2) The increase in this ratio was due to a significant recovery of a previously charged off loan and the increase in provision.

(3) The increase in this ratio was largely due to a significant recovery of a previously charged off loan.

 

The following table sets forth information with respect to charge-offs and recoveries by loan category.

 

 

For the Year Ended December 31,

 

 

2021

 

 

2020

 

 

Average Balance

 

 

Net (Recoveries) / Charge-offs

 

 

% of Net (Recoveries) / Charge-offs to Average Balance

 

 

Average Balance

 

 

Net (Recoveries) / Charge-offs

 

 

% of Net (Recoveries) / Charge-offs to Average Balance

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

$

73,391

 

 

$

(73

)

 

 

(0.10

)%

 

$

96,859

 

 

$

26

 

 

 

0.03

%

Commercial

 

225,340

 

 

 

(1,307

)

 

 

(0.58

)%

 

 

186,653

 

 

 

(216

)

 

 

(0.12

)%

Construction and land

 

15,023

 

 

0

 

 

 

—

 

 

 

30,411

 

 

0

 

 

 

—

 

Commercial and industrial loans

 

225,207

 

 

 

197

 

 

 

0.09

%

 

 

229,408

 

 

 

(36

)

 

 

(0.02

)%

Consumer loans

 

57,599

 

 

 

60

 

 

 

0.10

%

 

 

38,468

 

 

 

(1

)

 

 

(0.00

)%

Total gross loans

 

596,560

 

 

$

(1,123

)

 

 

(0.19

)%

 

 

581,799

 

 

$

(227

)

 

 

(0.04

)%

Deferred loan fees, net

 

958

 

 

 

 

 

 

 

 

 

1,980

 

 

 

 

 

 

 

Total loans outstanding at end of year

$

595,602

 

 

 

 

 

 

(0.19

)%

 

$

579,819

 

 

 

 

 

 

(0.04

)%

 

15

 

 

 

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

 

Allowance
for
Loan
Losses

 

 

Percent
of
Allowance
in Each
Category
to Total
Allocated
Allowance

 

 

Percent
of Loans
in Each
Category
to Total
Loans

 

 

Allowance
for
Loan
Losses

 

 

Percent
of
Allowance
in Each
Category
to Total
Allocated
Allowance

 

 

Percent
of Loans
in Each
Category
to Total
Loans

 

 

 

(Dollars in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

502

 

 

 

5.87

%

 

 

10.80

%

 

$

970

 

 

 

15.36

%

 

 

15.33

%

Commercial

 

 

4,681

 

 

 

54.71

%

 

 

44.95

%

 

 

3,084

 

 

 

48.83

%

 

 

29.83

%

Construction and land

 

 

162

 

 

 

1.89

%

 

 

2.79

%

 

 

224

 

 

 

3.55

%

 

 

3.94

%

Commercial and industrial loans

 

 

2,242

 

 

 

26.21

%

 

 

26.15

%

 

 

1,320

 

 

 

20.91

%

 

 

25.99

%

Paycheck Protection Program loans

 

 

—

 

 

 

—

 

 

 

3.06

%

 

 

—

 

 

 

—

 

 

 

17.00

%

Consumer loans

 

 

969

 

 

 

11.32

%

 

 

12.25

%

 

 

719

 

 

 

11.37

%

 

 

7.91

%

Total allocated allowance

 

 

8,556

 

 

 

100.00

%

 

 

100.00

%

 

 

6,317

 

 

 

100.00

%

 

 

100.00

%

Unallocated

 

 

3

 

 

 

 

 

 

 

 

 

44

 

 

 

 

 

 

 

Total

 

$

8,559

 

 

 

 

 

 

 

 

$

6,361

 

 

 

 

 

 

 

 

Investment Activities

General. The goals of our investment policy are to provide liquidity, meet pledging requirements, generate a reasonable rate of return, and minimize risk. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity. We have invested a substantial portion of the proceeds of the offering in short-term and other investments, including U.S. government securities.

Our investment policy was adopted by the board of directors and is reviewed annually by the board of directors. All investment decisions are made by our Asset/Liability Management Committee, consisting of our President and Chief Executive Officer, the Chairman of the Board, another member of the board of directors, and other members of senior management. The Chief Financial Officer provides an investment schedule detailing the investment portfolio, which is reviewed at least monthly by the board of directors.

At December 31, 2021, our investment portfolio consisted of U.S. Treasury securities, securities and obligations issued by U.S. government-sponsored enterprises, securities issued by municipal governments as well as corporate securities.

Our current investment policy permits, with certain limitations, investments in: U.S. Treasury securities; securities issued by the U.S. government and its agencies or government sponsored enterprises including mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Ginnie Mae and Freddie Mac; corporate and municipal bonds; certificates of deposit in other financial institutions; federal funds and money market funds.

At December 31, 2021, our investment portfolio consisted of U.S. Treasury securities, securities and obligations issued by U.S. government-sponsored enterprises and the Federal Home Loan Bank of Atlanta, municipal securities and corporate securities. At December 31, 2021, we owned $2.2 million of Federal Home Loan Bank of Atlanta stock. As a member of Federal Home Loan Bank of Atlanta, we are required to purchase stock in the Federal Home Loan Bank of Atlanta, which stock is carried at cost and classified as restricted equity securities. In addition, at December 31, 2021, we owned $250,000 of First National Bankers Bank stock. We purchased the stock of First National Bankers Bank in connection with a $5.0 million loan from First National Bankers Bank to Community First Bancshares, Inc., which was repaid in January 2021.

 

As of December 31, 2021, there were no securities with an amortized cost or estimated fair value that exceeded 10% of our total equity.

16

 

 

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2021, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. There were no held-to-maturity securities at December 31, 2021. Weighted average yield of investment securities is calculated by taking the amortized cost of each security multiplied by its yield and then taking the sum of those and dividing by the total amortized cost. Following is a maturity schedule at December 31, 2021 for available-for-sale securities.

 

 

One Year or Less

 

 

More than One
Year through Five
Years

 

 

More than Five
Years through Ten
Years

 

 

More than Ten
Years

 

 

Total

 

 

Amortized
Cost

 

 

Weighted
 Average
Yield

 

 

Amortized
 Cost

 

 

Weighted
Average
Yield

 

 

Amortized
 Cost

 

 

Weighted
Average
Yield

 

 

Amortized
Cost

 

 

Weighted
Average
Yield

 

 

Amortized
Cost

 

 

Fair
Value

 

 

Weighted
Average
Yield

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

—

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

5,068

 

 

 

1.49

%

 

$

—

 

 

 

—

 

 

$

5,068

 

 

$

5,050

 

 

 

1.49

%

Municipal securities – tax exempt

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

540

 

 

 

1.99

%

 

 

540

 

 

 

536

 

 

 

1.99

%

Municipal securities – taxable

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

796

 

 

 

1.82

%

 

 

796

 

 

 

790

 

 

 

1.82

%

U.S. Government sponsored enterprises

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

11,837

 

 

 

2.31

%

 

 

11,837

 

 

 

11,542

 

 

 

2.31

%

Government agency mortgage-backed securities

 

—

 

 

 

—

 

 

 

5,344

 

 

 

2.45

%

 

 

11,709

 

 

 

1.50

%

 

 

4,318

 

 

 

1.77

%

 

 

21,371

 

 

 

21,339

 

 

 

1.79

%

Corporate securities

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

8,925

 

 

 

3.22

%

 

 

500

 

 

 

3.50

%

 

 

9,425

 

 

 

9,300

 

 

 

3.23

%

Total

$

—

 

 

 

—

 

 

$

5,344

 

 

 

2.45

%

 

$

25,702

 

 

 

2.09

%

 

$

17,990

 

 

 

2.18

%

 

$

49,037

 

 

$

48,557

 

 

 

2.17

%

 

Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also may use borrowings to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from our primary market area. We also generate deposits nationwide through our virtual bank, FitnessBank, which accepts deposits and provides higher interest rates based on customers meeting certain fitness goals. We offer a selection of deposit accounts, including savings accounts, checking accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have the authority to accept brokered deposits but had no such deposits as of December 31, 2021. We also offer a Kasasa (rewards) deposit program, which promotes free checking accounts with either attractive interest rates or cash-back rewards.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of Affinity Bank in the community to attract and retain deposits. We also seek to obtain deposits from our commercial loan customers.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions.

17

 

The following table sets forth the distribution of total deposits by account type at the dates indicated.

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

 

Amount

 

 

Percent

 

 

Average
Rate

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

Noninterest-bearing checking
   accounts

 

$

193,940

 

 

 

31.55

%

 

 

—

 

 

$

160,819

 

 

 

25.12

%

Savings accounts

 

 

86,745

 

 

 

14.11

%

 

 

0.43

%

 

 

96,591

 

 

 

15.09

%

Interest-bearing checking
   accounts

 

 

91,387

 

 

 

14.86

%

 

 

0.21

%

 

 

129,813

 

 

 

20.28

%

Market rate checking accounts

 

 

145,969

 

 

 

23.74

%

 

 

0.35

%

 

 

121,317

 

 

 

18.95

%

Certificates of deposits

 

 

96,758

 

 

 

15.74

%

 

 

1.47

%

 

 

131,625

 

 

 

20.56

%

Total

 

$

614,799

 

 

 

100.00

%

 

 

0.41

%

 

$

640,165

 

 

 

100.00

%

 

As of December 31, 2021, the aggregate amount of all our certificates of deposit in amounts greater than or equal to $250,000 was approximately $22.6 million. The following table sets forth the maturity of these certificates as of December 31, 2021 and 2020.

 

 

 

 

At
December 31,
2021

 

 

At
December 31,
2020

 

 

 

(In thousands)

 

Maturity Period:

 

 

 

 

 

 

Three months or less

 

$

4,751

 

 

$

3,443

 

Over three through six months

 

 

3,418

 

 

 

8,474

 

Over six through twelve months

 

 

6,436

 

 

 

9,095

 

Over twelve months

 

 

7,965

 

 

 

11,847

 

Total

 

$

22,570

 

 

$

32,859

 

 

At December 31, 2021 and 2020, we had $317.7 million and $259.3 million of deposits in excess of $250,000, respectively, which is the federal deposit insurance limit. As of those dates, we had no deposits that were uninsured for any other reason.

 

Borrowings. As of December 31, 2021, we had $44.7 million available on our line of credit with the Federal Home Loan Bank of Atlanta. The balances outstanding in FHLB advances were $49.0 million and $19.1 million at December 31, 2021 and 2020, respectively. The weighted average rate was 1.36% and 2.46% at December 31, 2021 and 2020, respectively.

In addition to the Federal Home Loan Bank of Atlanta line of credit, we have two unsecured federal funds lines of credit, in the amounts of $7.5 million and $5.0 million. No amount was outstanding on these lines of credit at December 31, 2021 or 2020, or during the years ended December 31, 2021 or 2020, except for amounts required for annual testing.

 

During the year ended December 31, 2020, Affinity Bank borrowed $100.8 million from the Federal Reserve Bank of Atlanta under the Paycheck Protection Program Liquidity Facility to fund PPP loans under the CARES Act. These borrowings were secured by Paycheck Protection Program loans totaling $101.7 million originated during the year ended December 31, 2020. These borrowings had a fixed interest rate of 0.35% and a maturity date equal to the maturity date of the related PPP loans, with the PPP loans maturing either two or five years from the origination date of the PPP loan. In January 2021, we repaid the Federal Reserve Bank PPP Liquidity Facility loans. No amount was outstanding for December 31, 2021.

 

On June 30, 2020, Community First Bancshares, Inc, borrowed $5.0 million from another financial institution. The loan was secured by the stock of Affinity Bank. The loan had a ten-year term with a floating interest rate equal to the Wall Street Journal Prime Rate. The initial interest payment was due September 30, 2020 and the initial principal payment is due June 29, 2021. The loan was repaid January 2021. There was no prepayment penalty.

Subsidiary Activities

Affinity Bancshares, Inc. has no subsidiaries other than Affinity Bank.

18

 

Personnel

As of December 31, 2021, we had 90 full-time employees and six part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relations with our employees.

TAXATION

Affinity Bancshares Inc. and Affinity Bank are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize material income tax matters and is not a comprehensive description of the tax rules applicable to Affinity Bancshares, Inc. and Affinity Bank.

Our federal and state tax returns have not been audited for the past five years.

Federal Taxation

Method of Accounting. Affinity Bancshares, Inc. and Affinity Bank currently report income and expenses on the accrual method of accounting and use a tax year ending December 31 for filing their federal income tax returns. Affinity Bancshares, Inc. and Affinity Bank file a consolidated federal income tax return. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for income taxes on bad debt reserves by savings institutions. For taxable years beginning after 1995, Affinity Bank has been subject to the same bad debt reserve rules as commercial banks. It currently utilizes the specific charge-off method under Section 582(a) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).

Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, less an exemption amount, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent tax computed this way exceeds tax computed by applying the regular tax rates to regular taxable income. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Tax Cuts and Jobs Act repealed the alternative minimum tax for income generated after January 1, 2018. At December 31, 2021 and 2020, Affinity Bancshares, Inc. had no minimum tax credit carryovers.

Net Operating Loss Carryovers. As a result of the Tax Cuts and Jobs Act generally, a financial institution may carry net operating losses forward indefinitely. At December 31, 2021 and 2020, Affinity Bancshares, Inc. had no federal net operating loss carryforwards.

Capital Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which it is carried and is used to offset any capital gains. Any undeducted loss remaining after the five-year carryover period is not deductible. At December 31, 2021 and 2020, Affinity Bancshares, Inc. had no capital loss carryovers.

Corporate Dividends. Affinity Bancshares, Inc. may generally exclude from its income 100% of dividends received from Affinity Bank as a member of the same affiliated group of corporations.

State Taxation

Affinity Bank is treated as a financial institution under Georgia state income tax law. The state of Georgia subjects financial institutions to all state and local taxes in the same manner and to the same extent as other business corporations in Georgia. Additionally, depository financial institutions are subject to local business license taxes and a special occupation tax.

Consolidated Group Return. Georgia is not a unitary business state. Affiliated corporations that file a consolidated federal income tax return must file separate income tax returns unless they have prior approval or have been requested to file a consolidated return by the Commissioner of the Georgia Department of Revenue. For state income tax purposes, Affinity Bancshares, Inc. and Affinity Bank file a consolidated federal income tax return.

Net Operating Loss Carryovers. Generally, Georgia law conforms to federal law and a financial institution may carry back Georgia net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2021 and 2020, Affinity Bank had no Georgia net operating loss carryforwards.

19

 

Bank Tax Credit. All financial depositary institutions that conduct business or own property in Georgia are required to file a Georgia Financial Institutions Business Occupation Tax based on Georgia gross receipts. Any local license tax and state occupation tax paid a depository financial institution is credited dollar for dollar against any state corporate income tax liability of such institution for the tax year during which any such tax is paid. Any unused credits may be carried forward for five years. All bank tax credits were utilized in 2021, so there are no bank tax credits remaining at December 31, 2021. At December 31, 2020, Affinity Bank had $453,000 of bank tax credits available for future use.

Maryland State Taxation. As a Maryland business corporation, Affinity Bancshares is required to file an annual report with and pay franchise taxes to the State of Maryland.

SUPERVISION AND REGULATION

General

As a federal savings association, Affinity Bank is subject to examination and regulation by the Office of the Comptroller of the Currency, and is also subject to examination by the Federal Deposit Insurance Corporation. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Affinity Bank may engage and is intended primarily for the protection of depositors and the Federal Deposit Insurance Corporation’s Deposit Insurance Fund. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors, and not for the protection of security holders. Affinity Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the 11 regional banks in the Federal Home Loan Bank System.

Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as Affinity Bank or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.

In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.

As a savings and loan holding company, Affinity Bancshares, Inc. is required to comply with the rules and regulations of the Federal Reserve Board. It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal Reserve Board. Affinity Bancshares, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in applicable laws or regulations, whether by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Securities and Exchange Commission or Congress, could have a material adverse impact on the operations and financial performance of Affinity Bancshares, Inc. and Affinity Bank.

Set forth below is a brief description of material regulatory requirements that are or will be applicable to Affinity Bank and Affinity Bancshares, Inc. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Affinity Bank and Affinity Bancshares, Inc.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)

The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus (COVID-19) and stimulate the economy. The law had several provisions relevant to depository institutions, including:

•
Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes;

20

 

•
Temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%;
•
The ability of a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic, to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency. Such a forbearance could be granted for up to 180 days, subject to extension for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the borrower’s account. Except for vacant or abandoned property, the servicer of a federally-backed mortgage was prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day period beginning March 18, 2020, extended by federal mortgage-backing agencies several times by administrative action; and
•
The ability of a borrower of a multi-family federally-backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the COVID-19 emergency. A forbearance would be granted for up to 30 days, which could be extended for up to two additional 30-day periods upon the request of the borrower. Later extensions were made available, for a total of six months, for certain federally-backed multi-family mortgage loans. During the time of the forbearance, the multi-family borrower could not evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment of rent. Additionally, a multi-family borrower that received a forbearance could not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provided the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.

The Paycheck Protection Program

The Paycheck Protection Program (“PPP”), established as part of the CARES Act provided 100% federally guaranteed loans to eligible small businesses through the Small Business Administration’s (“SBA”) 7(a) loan guaranty program for amounts up to 2.5 times the average monthly “payroll costs” of the business. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible for PPP loan forgiveness so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses, including, but not limited to, mortgage interest, rent and utilities. In May 2021, the SBA announced that PPP funding has been exhausted and the SBA stopped accepting new PPP loan applications.

Federal Banking Regulation

 

Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Affinity Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts. Affinity Bank may also establish, subject to specified investment limits, service corporation subsidiaries that may engage in certain activities not otherwise permissible for Affinity Bank, including real estate investment and securities and insurance brokerage. Federal savings associations are also subject to a “Qualified Thrift Lender Test,” or “QTL Test,” which generally requires that a specified percentage of overall assets be residential mortgages and related investments. However, these limitations do not apply to Affinity Bank, as described below.

Effective July 1, 2019, the Office of the Comptroller of the Currency issued a final rule, pursuant to a provision of the Economic Growth Regulatory Relief and Consumer Protection Act (“EGRRCPA”), that permits a federal savings association to elect to exercise national bank powers without converting to a national bank charter. The election is available to federal savings associations that had total consolidated assets of $20 billion or less as of December 31, 2017. Affinity Bank exercised the covered savings association election effective May 1, 2020.

 

The effect of the “covered savings association” election is that a federal savings association generally has the same rights and privileges as a national bank that has its main office in the same location as the home office of the covered savings association. The covered savings association is also subject to the same duties, restrictions, liabilities and limitations applicable to a national bank. A covered savings association retains its federal savings association charter and continues to be subject to the corporate governance laws

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and regulations applicable to such associations, including as to its bylaws, board of directors and stockholders, capital distributions and mergers.

 

A covered savings association may make loans to its customers without regard to the lending restrictions applicable to federal savings associations, such as the percentage of capital or assets limits on various types of loans and the QTL Test. However, federal savings associations that have made such an election are subject to the narrower authority of national banks in certain areas such as branching and subsidiary activities in certain respects. A covered savings association may generally not retain any assets, subsidiaries or activities not permitted for national banks.

Applicable regulations authorize a federal association that has exercised the covered savings association election to terminate the election and thereby again operate as a federal savings association that has not made a covered savings association election. Affinity Bank has no current plans to terminate its election.

 

Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.

In determining the amount of risk-weighted assets for calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the Office of the Comptroller of the Currency takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.

EGRRCPA required the federal banking agencies, including the Office of the Comptroller of the Currency, to establish a “community bank leverage ratio” of between 8% and 10% for institutions with assets of less than $10 billion. Institutions with capital complying with the ratio and otherwise meeting the specified requirements and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The community bank leverage ratio was established at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two quarter grace period to regain compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable regulatory capital requirements.

Affinity Bank did not opt in to the community bank leverage ratio framework.

At December 31, 2021 and 2020, Affinity Bank’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings association, including a covered savings association, may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the excess is secured by readily marketable collateral, which generally does not include real estate. At December 31, 2021 and 2020, Affinity Bank was in compliance with the loans-to-one borrower limitations.

 

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Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application with the Office of the Comptroller of the Currency for approval of a capital distribution if:

 

•
the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;

 

•
the savings association would not be at least adequately capitalized following the distribution;

 

•
the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

 

•
the savings association is not eligible for expedited treatment of its filings, generally due to an unsatisfactory CAMELS rating or being subject to a cease and desist order or formal written agreement that requires action to improve the institution’s financial condition.

 

Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as Affinity Bank, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

 

A notice or application related to a capital distribution may be disapproved if:

 

•
the federal savings association would be undercapitalized following the distribution;

 

•
the proposed capital distribution raises safety and soundness concerns; or

 

•
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

 

In addition, the Federal Deposit Insurance Act generally provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.

Community Reinvestment Act and Fair Lending Laws. All insured depository institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. The Office of the Comptroller of the Currency is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice.

 

The Community Reinvestment Act requires all institutions insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. Affinity Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

 

Transactions with Related Parties. An insured depository institution’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with, an insured depository institution such as Affinity Bank. Affinity Bancshares will be an affiliate of Affinity Bank because of its control of Affinity Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.

 

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Affinity Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

 

•
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

•
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Affinity Bank’s capital.

 

In addition, extensions of credit in excess of certain limits must be approved by Affinity Bank’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. The maximum penalties that can be assessed are generally based on the type and severity of the violation, unsafe and unsound practice or other action, and are adjusted annually for inflation. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular federal savings association. If such action is not taken, the Federal Deposit Insurance Corporation has authority to take the action under specified circumstances.

 

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Branching. A federal savings association that has elected covered savings association status is subject to the laws and regulations governing the establishment of branches by national banks. Generally, intrastate and interstate branching is authorized to the extent that the law of the state involved authorizes branching for banks that it charters. Such authority is subject to Office of the Comptroller of the Currency approval for new branches.

Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under applicable regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on the payment of

24

 

dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including a regulatory order to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, ceasing receipt of deposits from correspondent banks, dismissal of directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital framework provides that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that framework will be considered “well-capitalized” for purposes of prompt corrective action.

At December 31, 2021 and 2020, Affinity Bank met the criteria for being considered “well capitalized.”

 

Insurance of Deposit Accounts. The Deposit Insurance Fund of the Federal Deposit Insurance Corporation insures deposits at Federal Deposit Insurance Corporation-insured financial institutions such as Affinity Bank, generally up to a maximum of $250,000 per separately insured depositor. The Federal Deposit Insurance Corporation charges insured depository institutions premiums to maintain the Deposit Insurance Fund.

 

Under the Federal Deposit Insurance Corporation’s risk-based assessment system, institutions deemed less risky of failure pay lower assessments. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution's failure within three years. The current assessment range (inclusive of possible adjustments) for insured institutions of less than $10 billion of total assets is 1.5 basis points.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Affinity Bank. We cannot predict what assessment rates will be in the future.

 

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.

 

Privacy Regulations. Federal regulations generally require that Affinity Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Affinity Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Affinity Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

USA PATRIOT Act. Affinity Bank is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.

Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

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Other Regulations

Interest and other charges collected or contracted for by Affinity Bank are subject to state usury laws and federal laws concerning interest rates. Affinity Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
•
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
•
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
•
Truth in Savings Act; and
•
rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Affinity Bank also are subject to the:

•
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
•
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
•
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
•
The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
•
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

Affinity Bancshares is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over Affinity Bancshares and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Affinity Bank.

 

The business activities of savings and loan holding companies are generally limited to those activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations, unless the holding company has elected

26

 

“financial holding company” status. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. Affinity Bancshares has not elected financial holding company status. Federal law generally prohibits the acquisition of more than 5% of a class of voting stock of a company engaged in impermissible activities.

 

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such factors as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.

 

Savings and loan holding companies with less than $3 billion in consolidated assets are exempt from consolidated regulatory capital requirements, unless the Federal Reserve Board determines otherwise in particular cases.

 

The Federal Reserve Board has promulgated regulations implementing the “source of strength” doctrine that require holding companies, including savings and loan holding companies, to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

 

The Federal Reserve Board has issued supervisory policies regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of capital distributions previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The guidance also provides for prior consultation with supervisory staff for material increases in the amount of a company’s common stock dividend. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the Federal Reserve Board supervisory staff before redeeming or repurchasing common stock or perpetual preferred stock , to provide opportunity for supervisory review and possible objection, if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Affinity Bancshares to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company, such as Affinity Bancshares, unless the FRB has been given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under the Change in Bank Control Act, means ownership, control of or the power to vote 25% or more of any class of voting stock. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with Affinity Bancshares, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

Federal Securities Laws

Affinity Bancshares, Inc. common stock is registered with the Securities and Exchange Commission. Affinity Bancshares, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in Affinity Bancshares, Inc.’s public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of Affinity Bancshares, Inc. may be resold without registration. Shares purchased by an affiliate of Affinity Bancshares, Inc. are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If Affinity Bancshares, Inc. meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Affinity Bancshares, Inc. that complies with the other

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conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Affinity Bancshares, Inc., or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, Affinity Bancshares, Inc. may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Emerging Growth Company Status

Affinity Bancshares, Inc. is an emerging growth company under the JOBS Act. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the completion of our initial stock offering, (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We expect to lose our status as an emerging growth company effective December 31, 2022, which is the end of the fifth year after the completion of our initial stock offering. An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, Affinity Bancshares, Inc. will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally a company with less than $250 million of voting and non-voting common equity held by non-affiliates). Finally, an emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. Affinity Bancshares, Inc. has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

ITEM 1A. Risk Factors

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

ITEM 1B. Unresolved Staff Comments

None.

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ITEM 2. Properties

As of December 31, 2021, the net book value of our office properties was $2.0 million, and the net book value of our furniture, fixtures and equipment was $1.7 million. The following table sets forth information regarding our offices.

 

Location

 

Leased or
Owned

 

Year Acquired
or Leased

 

Net Book Value
of Real
Property

 

 

 

 

 

 

 

(In thousands)

 

Main Office:

 

 

 

 

 

 

 

3175 Highway 278

 

Owned

 

1974

 

$

1,439

 

Covington, Georgia 30014

 

 

 

 

 

 

 

Other Properties:

 

 

 

 

 

 

 

Eastside Branch

 

Owned

 

2000

 

 

601

 

8278 Highway 278

 

 

 

 

 

 

 

Covington, Georgia 30014

 

 

 

 

 

 

 

Former Southside Branch

 

Building

 

2006

 

 

—

 

Bypass Road & Highway 36

 

Owned/Land

 

 

 

 

 

10131 Carlin Avenue

 

Leased

 

 

 

 

 

Covington, Georgia 30014

 

 

 

 

 

 

 

Affinity Bank Office:

 

Leased

 

2017

 

N/A

 

400 Galleria Parkway SE

 

 

 

 

 

 

 

Suite 900

 

 

 

 

 

 

 

Atlanta, Georgia 30339

 

 

 

 

 

 

 

Loan Production Office

 

Leased

 

2019

 

N/A

 

5755 North Point Parkway

 

 

 

 

 

 

 

Suite 91

 

 

 

 

 

 

 

Alpharetta, Georgia 30022

 

 

 

 

 

 

 

Affinity Bank Dealer Select Office

 

Leased

 

2021

 

N/A

 

310 North Broad Street

 

 

 

 

 

 

 

Monroe, Georgia 30655

 

 

 

 

 

 

 

 

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 15, 2022 we had 335 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 6,636,093 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, 2021.

There were no repurchases of shares of the Company’s common stock during the three months Ended December 31, 2021.

ITEM 6. [Reserved]

 

 

30

 

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 decreased $62.5 million, or 7.4%, to $788.1 million at December 31, 2021 from $850.6 million at December 31, 2020. The decrease was due primarily to a decrease in cash and cash equivalents of $66.5 million, or 37.3%, due to our no longer using the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) for funding as well as the return of excess cash from our oversubscribed January 2021 stock offering, and a decrease in net loans of $16.4 million, or 2.8%, in 2021.

Net income increased $4.5 million, or 145.2%, to $7.6 million for the year ended December 31, 2021, compared to $3.1 million for the year ended December 31, 2020. The increase was due primarily to a decrease in interest expense on deposits of $2.1 million, or 43.6%, due to the continued low interest rate environment, and an increase in interest income on loans of $1.6 million, or 5.2%. Net interest income before provision for loan losses increased $4.1 million, or 16.4%. The provision for loan losses decreased $925,000 to $1.1 million for the year ended December 31, 2021 compared to $2.0 million for the year ended December 31, 2020. Noninterest income increased $522,000, or 24.3%, to $2.7 million for the year ended December 31, 2021 from $2.2 million for the year ended December 31, 2020, primarily as a result of increases in service charges on deposits accounts, interchange income, and secondary market fee income. Noninterest expenses decreased $450,000, or 2.1%, to $21.0 million for the year ended December 31, 2021, from $21.4 million for the year ended December 31, 2020, primarily as a result of decreases in legal and accounting fees and salary and employee expense, which were higher in 2020 due to the merger. Income tax expense increased by $1.5 million for the year ended December 31, 2021, as a result of increased income before income taxes.

The Federal Open Market Committee of the Federal Reserve has indicated that it expects to raise market interest rates in 2022. A rise in interest rates will present us with a slight challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates rise. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. As described in “—Management of Market Risk,” our net interest income and our net economic value would decrease as a result of an instantaneous increase in interest rates. To help manage interest rate risk, we promote core deposit products, we continue to diversify our loan portfolio by adding more commercial-related loans, and we proactively manage the liability-side of the balance sheet by adjusting rates offered on our interest-bearing accounts and reviewing long-term funding options to help minimize the compression on our net interest margin. See “—Management of Market Risk.”

Selected Financial Data

The summary information presented below at each date or for each of the periods presented is derived in part from the financial statements of Community First Bancshares, Inc. and Affinity Bank. The financial condition data at December 31, 2021, 2020 and 2019, and the operating data for the years ended December 31, 2021, 2020 and 2019, were derived from the audited consolidated financial statements of Community First Bancshares, Inc. included elsewhere in this annual report. The following information is only a summary, and should be read in conjunction with our consolidated financial statements and notes included in this annual report.

31

 

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Selected Financial Condition Data:

 

 

 

 

 

 

 

 

 

Total assets

 

$

788,088

 

 

$

850,628

 

 

$

319,294

 

Cash and cash equivalents

 

 

111,776

 

 

 

178,253

 

 

 

48,117

 

Securities held-to-maturity

 

 

—

 

 

 

—

 

 

 

—

 

Securities available-for-sale

 

 

48,557

 

 

 

24,005

 

 

 

3,818

 

Other investments

 

 

2,476

 

 

 

1,596

 

 

 

278

 

Loans receivable, net

 

 

575,825

 

 

 

592,254

 

 

 

247,956

 

Other real estate owned

 

 

3,538

 

 

 

1,292

 

 

 

140

 

Premises and equipment, net

 

 

3,783

 

 

 

8,617

 

 

 

8,513

 

Deposits

 

 

614,799

 

 

 

640,165

 

 

 

238,181

 

FHLB advances

 

 

48,988

 

 

 

19,117

 

 

 

—

 

Paycheck Protection Program Liquidity Facility borrowings

 

 

—

 

 

 

100,813

 

 

 

—

 

Other borrowings

 

 

—

 

 

 

5,000

 

 

 

—

 

Stockholders' equity

 

 

120,968

 

 

 

80,785

 

 

 

77,167

 

 

 

 

For the Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Selected Operating Data:

 

 

 

 

 

 

 

 

 

Interest income

 

$

32,453

 

 

$

30,632

 

 

$

14,997

 

Interest expense

 

 

3,177

 

 

 

5,490

 

 

 

2,312

 

Net interest income

 

 

29,276

 

 

 

25,142

 

 

 

12,685

 

Provision for loan losses

 

 

1,075

 

 

 

2,000

 

 

 

—

 

Net interest income after provision for loan losses

 

 

28,201

 

 

 

23,142

 

 

 

12,685

 

Noninterest income

 

 

2,678

 

 

 

2,156

 

 

 

1,645

 

Noninterest expenses

 

 

20,968

 

 

 

21,418

 

 

 

14,004

 

Income before income tax benefit (expense)

 

 

9,911

 

 

 

3,880

 

 

 

326

 

Income tax benefit (expense)

 

 

(2,338

)

 

 

(792

)

 

 

29

 

Net income

 

$

7,573

 

 

$

3,088

 

 

$

355

 

Basic earnings per share (1)

 

$

1.10

 

 

$

0.41

 

 

$

0.05

 

Diluted earnings per share (1)

 

 

1.09

 

 

 

0.41

 

 

 

0.05

 

 

32

 

 

 

At or For the Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.96

%

 

 

0.42

%

 

 

0.11

%

Return on average equity

 

 

6.52

%

 

 

3.97

%

 

 

0.46

%

Interest rate spread (2)

 

 

3.81

%

 

 

3.49

%

 

 

4.17

%

Net interest margin (3)

 

 

4.04

%

 

 

3.77

%

 

 

4.51

%

Noninterest expense to average assets

 

 

2.66

%

 

 

2.94

%

 

 

4.53

%

Efficiency ratio (4)

 

 

65.62

%

 

 

78.46

%

 

 

97.73

%

Average interest-earning assets to average
   interest-bearing liabilities

 

 

153.80

%

 

 

133.67

%

 

 

141.27

%

Capital Ratios:

 

 

 

 

 

 

 

 

 

Average equity to average assets

 

 

14.74

%

 

 

10.70

%

 

 

24.77

%

Total capital to risk weighted assets

 

 

15.00

%

 

 

13.00

%

 

 

29.00

%

Tier 1 capital to risk weighted assets

 

 

13.00

%

 

 

12.00

%

 

 

27.00

%

Common equity tier 1 capital to risk weighted
   assets

 

 

13.00

%

 

 

12.00

%

 

 

27.00

%

Tier 1 capital to average assets

 

 

11.00

%

 

 

10.00

%

 

 

20.00

%

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a percentage of total
   loans

 

 

1.46

%

 

 

1.06

%

 

 

1.64

%

Allowance for loan losses as a percentage of
   non-performing loans

 

 

122.08

%

 

 

129.79

%

 

 

161.07

%

Net (charge-offs) recoveries to average outstanding
   loans during the year

 

 

0.19

%

 

 

0.04

%

 

 

0.05

%

Non-performing loans as a percentage of total
   loans

 

 

1.20

%

 

 

0.82

%

 

 

1.02

%

Non-performing loans as a percentage of total
   assets

 

 

0.89

%

 

 

0.58

%

 

 

0.80

%

Total non-performing assets as a percentage of
   total assets

 

 

1.34

%

 

 

0.73

%

 

 

0.85

%

Other:

 

 

 

 

 

 

 

 

 

Number of offices

 

 

3

 

 

 

3

 

 

 

2

 

Number of full-time employees

 

 

90

 

 

 

79

 

 

 

80

 

Number of part-time employees

 

 

6

 

 

 

4

 

 

 

1

 

 

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

(2) Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3) Represents net interest income as a percentage of average interest-earning assets.

(4) Represents noninterest expenses divided by the sum of net interest income and noninterest income.

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.

33

 

The following represent our significant accounting policies:

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

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

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

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

Allowance for Loan Losses. The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for loan losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis 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 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, 2021 and 2020. 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.

34

 

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.

Impact of COVID-19 Outbreak

Beginning in 2020, the COVID-19 pandemic has affected economic activity in our markets. In response to the pandemic, state and local governments have from time to time imposed restrictions on individual and business activities. These and other measures increased unemployment in the United States and negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers. During 2021, global financial markets continued to experience volatility resulting from the spread of COVID-19 and the emergence of new variants.

To address the economic impact in the United States, the CARES Act was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”). The CARES Act also established the PPP through the SBA, which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meet certain other requirements. During the year ended December 31, 2020, we received SBA authorization for 1,171 PPP loans totaling $130.3 million. We had $101.7 million in PPP loans outstanding as of December 31, 2020. During the year ended December 31, 2021, we received SBA authorization for 730 PPP loans totaling $66.1 million. We had $17.9 million in PPP loans outstanding as of December 31, 2021.

In addition, beginning in 2020, the Federal Reserve took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero. Interest rates remained low in 2021. The Federal Reserve has indicated that it expects to increase interest rates in 2022.

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

•
Operating our branches under a drive-through model with appointment-only lobby service for a period of time, leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home.
•
Offering assistance to our customers affected by the COVID-19 pandemic, which includes payment deferrals, waiving certain fees, suspending property foreclosures, and participating in the CARES Act and lending programs for businesses, including the PPP.

We implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act, which expired on January 1, 2022, COVID-19 related modifications to loans that were current as of December 31, 2019 were exempt from TDR classification under U.S. GAAP. In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., nine months or less) granted for loans that were current as of the loan modification program implementation date are not TDRs. During the year ended December 31, 2020, we granted short-term deferrals on 737 loans totaling $186.9 million that were otherwise performing. As of December 31, 2020, all of these loans had returned to normal payment status. During the year ended December 31, 2021, we granted short-term deferrals on seven loans totaling $2.7 million that were otherwise performing. As of December 31, 2021, all but one of these loans had returned to normal payment status. That one loan is currently in nonaccrual status.

35

 

Given the uncertainty and evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact of COVID-19 on our business, results of operations and financial condition remain uncertain. Adverse economic conditions could have an adverse effect on our business and results of operations, which could include, but not be limited to, decreased demand for our products and services, protracted periods of lower interest rates, increased noninterest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.

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

Total assets decreased $62.5 million, or 7.4%, to $788.1 million at December 31, 2021 from $850.6 million at December 31, 2020. The decrease was primarily due to a decrease in cash and cash equivalents of $66.5 million, or 37.3%, due to our no longer using the PPPLF for funding as well as the return of excess cash from our oversubscribed January 2021 stock offering, and a decrease in net loans of $16.4 million, or 2.8%, in 2021.

Cash and cash equivalents decreased $66.5 million, or 37.3%, to $111.8 million at December 31, 2021 from $178.3 million at December 31, 2020, as the PPPLF was not used for funding during 2021 and excess cash from our oversubscribed January 2021 stock offering was returned to subscribers.

Loans decreased $16.4 million, or 2.8%, to $575.8 million at December 31, 2021 from $592.3 million at December 31, 2020. Commercial and industrial loans, excluding PPP loans, decreased $2.7 million, or 1.7%, to $152.8 million at December 31, 2021 from $155.6 million at December 31, 2020. PPP loans decreased $83.9 million, or 82.4%, to $17.9 million at December 31, 2021 from $101.7 million at December 31, 2020, as a result of forgiveness of loans by the SBA. Construction loans decreased $7.3 million, or 30.8%, to $16.3 million at December 31, 2021 from $23.6 million at December 31, 2020, as construction loans transitioned to permanent loans and new construction loans were not fully drawn. One- to four-family residential real estate loans decreased $28.7 million, or 31.3%, to $63.1 million at December 31, 2021 from $91.8 million at December 31, 2020, as mortgage loans continue to be refinanced at lower rates than we offer. These decreases were partially offset by increases in commercial real estate loans of $84.1 million, or 47.1%, to $262.7 million at December 31, 2021 from $178.6 million at December 31, 2020, and in consumer loans of $24.2 million, or 51.0%, to $71.6 million at December 31, 2021 from $47.4 million at December 31, 2020. 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 available-for-sale increased to $48.6 million at December 31, 2021, from $24.0 million at December 31, 2020, due to our using excess cash from loan repayments and prepayments to invest in securities.

Total deposits decreased $25.4 million, or 4.0%, to $614.8 million at December 31, 2021 from $640.2 million at December 31, 2020. The decrease in total deposits included decreases of $38.4 million, or 29.6%, in interest-bearing checking accounts, as we completed our second step conversion and stock offering in January 2021 and subscriptions for our common stock were either fulfilled or returned; $34.9 million, or 26.5%, in certificates of deposit, as a decreasing interest rate environment resulted in customers keeping funds in more liquid deposits; and $9.8 million, or 10.2%, in savings accounts. These decreases were partially offset by increases of $33.1 million, or 20.6%, in noninterest-bearing checking accounts and $24.7 million, 20.3%, in market rate checking accounts. The loan-to-deposit ratio at December 31, 2021 was 95.1%, as compared to 93.5% at December 31, 2020.

We had $49.0 million of Federal Home Loan Bank advances at December 31, 2021, compared to $19.1 million of Federal Home Loan Bank advances, $100.8 million in PPPLF funds, and $5.0 million of other borrowings at December 31, 2020. In January 2021, we repaid PPPLF borrowings that we had obtained to fund first-round PPP loans. We increased FHLB borrowings during 2021 to benefit from low interest rates and address the uncertainty of current liquidity levels as a result of the second round of PPP loans.

Stockholders’ equity increased $40.2 million or 49.7%, to $121.0 million at December 31, 2021 from $80.8 million at December 31, 2020, primarily due to the completion of our stock offering in January 2021. We sold 3,701,509 shares of common stock at $10.00 per share and raised gross proceeds of $37.1 million in the offering.

Average Balance Sheets

The following tables set forth average balance sheets, average yields and costs, and certain other information for the 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 $5.0 million and $3.2 million for the years ending December 31, 2021 and 2020, respectively; loan origination fees of $1.0 million and $635,000 for the years ending December 31, 2021 and 2020, respectively; net accretion of purchased loan marks of $437,000 and $554,000 for the years ending December 31, 2021 and 2020, respectively;

36

 

prepayment penalties of $79,000 and $54,000 for the years ending December 31, 2021 and 2020, respectively; and indirect auto fees of $228,000 and $151,000 for the years ending December 31, 2021 and 2020, respectively.

 

 

 

For the Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

Average
Outstanding
Balance

 

 

Interest

 

 

Average
Yield/Rate

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

588,976

 

 

$

31,484

 

 

 

5.35

%

 

$

575,548

 

 

$

29,933

 

 

 

5.20

%

Securities

 

 

35,109

 

 

 

709

 

 

 

2.02

%

 

 

19,917

 

 

 

380

 

 

 

1.91

%

Interest-earning deposits and federal funds

 

 

98,554

 

 

 

180

 

 

 

0.18

%

 

 

69,137

 

 

 

212

 

 

 

0.31

%

Other investments

 

 

2,324

 

 

 

80

 

 

 

3.43

%

 

 

2,523

 

 

 

107

 

 

 

4.24

%

Total interest-earning assets

 

 

724,963

 

 

 

32,453

 

 

 

4.48

%

 

 

667,125

 

 

 

30,632

 

 

 

4.59

%

Noninterest-earning assets

 

 

63,373

 

 

 

 

 

 

 

 

 

60,601

 

 

 

 

 

 

 

Total assets

 

$

788,336

 

 

 

 

 

 

 

 

$

727,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

93,113

 

 

 

403

 

 

 

0.43

%

 

$

88,425

 

 

 

878

 

 

 

0.99

%

Interest-bearing checking accounts

 

 

88,852

 

 

 

185

 

 

 

0.21

%

 

 

70,678

 

 

 

286

 

 

 

0.40

%

Money market checking accounts

 

 

133,835

 

 

 

469

 

 

 

0.35

%

 

 

112,863

 

 

 

965

 

 

 

0.86

%

Certificates of deposit

 

 

110,742

 

 

 

1,623

 

 

 

1.47

%

 

 

154,020

 

 

 

2,623

 

 

 

1.70

%

Total interest-bearing deposits

 

 

426,542

 

 

 

2,680

 

 

 

0.63

%

 

 

425,986

 

 

 

4,752

 

 

 

1.12

%

Federal Home Loan Bank advances

 

 

43,370

 

 

 

482

 

 

 

1.11

%

 

 

44,574

 

 

 

569

 

 

 

1.28

%

Paycheck Protection Program Liquidity Facility borrowings

 

 

1,023

 

 

 

4

 

 

 

0.35

%

 

 

20,324

 

 

 

72

 

 

 

0.35

%

Other borrowings

 

 

418

 

 

 

11

 

 

 

2.59

%

 

 

8,184

 

 

 

97

 

 

 

1.18

%

Total interest-bearing liabilities

 

 

471,353

 

 

 

3,177

 

 

 

0.67

%

 

 

499,068

 

 

 

5,490

 

 

 

1.10

%

Noninterest-bearing liabilities

 

 

200,756

 

 

 

 

 

 

 

 

 

150,781

 

 

 

 

 

 

 

Total liabilities

 

 

672,109

 

 

 

 

 

 

 

 

 

649,849

 

 

 

 

 

 

 

Total stockholders' equity

 

$

116,227

 

 

 

 

 

 

 

 

$

77,877

 

 

 

 

 

 

 

Total liabilities and retained earnings

 

$

788,336

 

 

 

 

 

 

 

 

$

727,726

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

29,276

 

 

 

 

 

 

 

 

$

25,142

 

 

 

 

Net interest rate spread (1)

 

 

 

 

 

 

 

 

3.81

%

 

 

 

 

 

 

 

 

3.49

%

Net interest-earning assets (2)

 

$

253,610

 

 

 

 

 

 

 

 

$

168,057

 

 

 

 

 

 

 

Net interest margin (3)

 

 

 

 

 

 

 

 

4.04

%

 

 

 

 

 

 

 

 

3.77

%

Average interest-earning assets to interest- bearing liabilities

 

 

153.80

%

 

 

 

 

 

 

 

 

133.67

%

 

 

 

 

 

 

 

(1)
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest margin represents net interest income divided by average total interest-earning assets.

 

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the 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

37

 

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.

 

 

 

Year Ended December 31, 2021 vs. 2020

 

 

 

Increase (Decrease)
Due to

 

 

Total
Increase

 

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

 

(In thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

Loans

 

$

694

 

 

$

857

 

 

$

1,551

 

Securities

 

 

306

 

 

 

23

 

 

 

329

 

Interest-earning deposits and federal funds

 

 

74

 

 

 

(106

)

 

 

(32

)

Other investments

 

 

(8

)

 

 

(19

)

 

 

(27

)

Total interest-earning assets

 

 

1,066

 

 

 

755

 

 

 

1,821

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

44

 

 

 

(519

)

 

 

(475

)

Interest-bearing checking accounts

 

 

59

 

 

 

(160

)

 

 

(101

)

Money market checking accounts

 

 

156

 

 

 

(652

)

 

 

(496

)

Certificates of deposit

 

 

(675

)

 

 

(325

)

 

 

(1,000

)

Total deposits

 

 

(416

)

 

 

(1,656

)

 

 

(2,072

)

Federal Home Loan Bank advances

 

 

(15

)

 

 

(72

)

 

 

(87

)

Paycheck Protection Program Liquidity Facility borrowings

 

 

(68

)

 

 

—

 

 

 

(68

)

Other borrowings

 

 

(140

)

 

 

54

 

 

 

(86

)

Total interest-bearing liabilities

 

 

(639

)

 

 

(1,674

)

 

 

(2,313

)

Change in net interest income

 

$

1,705

 

 

$

2,429

 

 

$

4,134

 

 

Comparison of Operating Results for the Years Ended December 31, 2021 and 2020

General. Net income increased $4.5 million, or 145.2%, to $7.6 million for the year ended December 31, 2021, compared to $3.1 million for the year ended December 31, 2020. The increase was due primarily to a decrease in interest expense on deposits of $2.1 million, or 43.6%, due to the continued low interest rate environment, and an increase in interest income on loans of $1.6 million, or 5.2%, as well as a decrease in the provision for loan losses, an increase in noninterest income, and a decrease in noninterest expenses.

Interest Income. Interest income increased $1.8 million, or 5.9%, to $32.5 million for the year ended December 31, 2021 from $30.6 million for the year ended December 31, 2020. The increase was due primarily to a $1.6 million, or 5.2%, increase in interest income on loans, which included $5.8 million of interest and fee income on PPP loans. Our average balance of loans, including PPP loans, increased $13.4 million, or 2.3%, to $589.0 million for the year ended December 31, 2021 from $575.5 million for the year ended December 31, 2020. Our average yield on loans increased 15 basis points to 5.35% for the year ended December 31, 2021 from 5.20% for the year ended December 31, 2020.

Interest income on securities (excluding Federal Home Loan Bank stock) increased $329,000 to $709,000 for the year ended December 31, 2021 from $380,000 for the year ended December 31, 2020. Our average balance of securities increased $15.2 million, or 76.3%, to $35.1 million for the year ended December 31, 2021 from $19.9 million for the year ended December 31, 2020, due to our using excess cash from loan repayments and prepayments to invest in securities. The average rate earned on securities increased 11 basis points during 2021, to 2.02% from 1.91%.

Interest income on interest-earning deposits decreased $32,000, or 15.1%, to $180,000 for the year ended December 31, 2021 from $212,000 for the year ended December 31, 2020. The decrease in interest income on interest-earning deposits was due to a 13 basis point decrease in yield, while the average balance of interest-earning deposits increased $29.4 million, or 42.5%, to $98.6 million for the year ended December 31, 2021 from $69.1 million for the year ended December 31, 2020, as excess funds have been deployed into securities and loans.

38

 

 

Interest Expense. Interest expense decreased $2.3 million, or 42.1%, to $3.2 million for the year ended December 31, 2021 compared to $5.5 million for the year ended December 31, 2020, due to decreases of $2.1 million in interest expense on deposits and $241,000 in interest expense on borrowings. Interest expense on certificates of deposit decreased by $1.0 million, or 38.1%, to $1.6 million for the year ended December 31, 2021 from $2.6 million for the year ended December 31, 2020. The decrease in expense on certificates of deposit was the result of a $43.3 million decrease in the average balance of certificates of deposit during the year ended December 31, 2021 and a 23 basis point decrease in the average rate paid on certificates of deposit, as we have lowered rates. Interest expense on market rate checking accounts decreased $496,000, to $469,000 for the year ended December 31, 2021 from $965,000 for the year ended December 31, 2020. The average balance of market rate checking accounts increased by $21.0 million during the year ended December 31, 2021, while the average rate we paid on market rate checking accounts decreased by 51 basis points. Interest expense on statement savings accounts decreased by $475,000, to $403,000 for the year ended December 31, 2021 from $878,000 for the year ended December 31, 2020. The average balance of statement savings accounts increased by $4.7 million during the year ended December 31, 2021, while the average rate we paid on statement savings accounts decreased by 56 basis points. Interest expense on interest-bearing checking accounts decreased by $101,000, to $185,000 for the year ended December 31, 2021 from $286,000 for the year ended December 31, 2020. The average balance of interest-bearing checking accounts increased by $18.2 million during the year ended December 31, 2021, while the average rate we paid on interest-bearing checking accounts decreased by 19 basis points. The decreases in interest expense on market rate checking accounts, statement savings accounts and interest-bearing checking accounts were primarily due to continued decreases in market rates, and were partially offset by increases in the average balances of such accounts.

Interest expense on borrowings decreased to $497,000 for the year ended December 31, 2021 compared to $738,000 for the year ended December 31, 2020, as the average balance of borrowings decreased to $44.8 million for 2021 from $73.1 million for 2020, primarily due to the repayment of PPPLF borrowings in January 2021.

Net Interest Income. Net interest income before provision for loan losses increased by $4.1 million, or 16.4%, to $29.3 million for the year ended December 31, 2021 from $25.1 million for the year ended December 31, 2020. Our average net interest-earning assets increased by $85.6 million, or 50.9%, to $253.6 million for the year ended December 31, 2021 from $168.1 million for the year ended December 31, 2020, while our net interest rate spread increased by 32 basis points to 3.81% for the year ended December 31, 2021 from 3.49% for the year ended December 31, 2020, reflecting a 43 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by an 11 basis point decrease in the weighted average yield on interest-earnings assets during 2021. Our net interest margin was 4.04% for the year ended December 31, 2021 compared to 3.77% for the year ended December 31, 2020.

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

After an evaluation of these factors, we recorded a provision for loan losses of $1.1 million for the year ended December 31, 2021, compared to $2.0 million for the year ended December 31, 2020. The higher provision in 2020 related primarily to the initial onset of the COVID-19 pandemic and related economic uncertainty. Our allowance for loan losses was $8.6 million at December 31, 2021 compared to $6.4 million at December 31, 2020. The allowance for loan losses to total loans was 1.46% at December 31, 2021 compared to 1.06% at December 31, 2020, while the allowance for loan losses to non-performing loans was 122.09% at December 31, 2021 compared to 129.79% at December 31, 2020. We had charge-offs of $310,000 and recoveries of $1.4 million during the year ended December 31, 2021. To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 31, 2021. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, 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 expect to adopt 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

39

 

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 increased $522,000, or 24.2%, to $2.7 million for the year ended December 31, 2021 from $2.2 million for the year ended December 31, 2020. The increase resulted primarily from increases in other noninterest income of $395,000, to $1.2 million for the year ended December 31, 2021 from $777,000 for the year ended December 31, 2020, as interchange income and secondary market fee income increased. In addition, service charges on deposit accounts increased $147,000, to $1.5 million for the year ended December 31, 2021 from $1.4 million for the year ended December 31, 2020.

Noninterest Expenses. Noninterest expenses information is as follows.

 

 

 

Year Ended
December 31,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

Salaries and employee benefits

 

$

10,415

 

 

$

10,969

 

 

$

(554

)

 

 

(5.0

)%

Deferred compensation

 

 

248

 

 

 

279

 

 

 

(31

)

 

 

(11.1

)%

Occupancy

 

 

2,935

 

 

 

2,820

 

 

 

115

 

 

 

4.1

%

Advertising

 

 

339

 

 

 

200

 

 

 

139

 

 

 

69.7

%

Data processing

 

 

1,975

 

 

 

2,343

 

 

 

(368

)

 

 

(15.7

)%

Other real estate owned

 

 

18

 

 

 

20

 

 

 

(2

)

 

 

(10.0

)%

Net loss (gain) on write down of other real estate owned

 

 

(127

)

 

 

289

 

 

 

(416

)

 

 

(144.0

)%

Legal and accounting

 

 

827

 

 

 

1,447

 

 

 

(620

)

 

 

(42.8

)%

Organizational dues and subscriptions

 

 

363

 

 

 

306

 

 

 

57

 

 

 

18.6

%

Director compensation

 

 

198

 

 

 

203

 

 

 

(5

)

 

 

(2.4

)%

Federal deposit insurance premiums

 

 

260

 

 

 

401

 

 

 

(141

)

 

 

(35.1

)%

Other

 

 

3,517

 

 

 

2,141

 

 

 

1,376

 

 

 

64.3

%

Total noninterest expenses

 

$

20,968

 

 

$

21,418

 

 

$

(450

)

 

 

(2.1

)%

 

Noninterest expenses decreased $450,000, or 2.1%, to $21.0 million for the year ended December 31, 2021, from $21.4 million for the year ended December 31, 2020. Legal and accounting, salaries and employee benefits, and data processing expenses decreased in 2021 as we incurred higher expenses in 2020 related to our acquisition of ABB and Affinity Bank. Partially offsetting these decreases, other noninterest expenses increased by $1.4 million due to writedown of premises and equipment and occupancy expense, due to facilities consolidation.

Income Tax Expense. We recorded income tax expense of $2.3 million for the year ended December 31, 2021 compared to $792,000 for the year ended December 31, 2020. The increase in income tax expense was due to increased income before income taxes in the 2021 period.

Management of Market Risk

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

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

•
limiting our reliance on non-core/wholesale funding sources;
•
growing our volume of transaction deposit accounts;
•
increasing our investment securities portfolio, with an average maturity of less than 15 years;

40

 

•
diversifying our loan portfolio by adding more commercial-related loans, which typically have shorter maturities and/or balloon payments; and
•
continuing to price our one- to four-family residential real estate loan products in a way that encourages borrowers to select our 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.

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, 2021, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

 

Change in Interest Rates
(basis points) (1)

 

Net Interest Income
Year 1 Forecast

 

 

Year 1 Change
from Level

 

 

 

(Dollars in thousands)

 

 

 

 

+400

 

$

25,782

 

 

 

3.98

%

+200

 

 

25,387

 

 

 

2.38

%

Level

 

 

24,796

 

 

—

 

-200

 

 

23,995

 

 

 

(3.23

)%

-400

 

 

23,649

 

 

 

(4.62

)%

 

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

The table above indicates that at December 31, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 2.38% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 3.23% decrease in net interest income. At December 31, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 1.09% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced an 3.16% decrease in net interest income.

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

The table below sets forth, as of December 31, 2021, the calculation of the estimated changes in our NEV that would result from the designated immediate changes in the United States Treasury yield curve.

 

Change in Interest

 

 

 

 

Estimated Increase (Decrease) in NEV

 

 

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

 

Rates (basis
points) (1)

 

Estimated
NEV (2)

 

 

Amount

 

 

Percent

 

 

NEV
Ratio (4)

 

 

Increase (Decrease)
(basis points)

 

(Dollars in thousands)

 

+400

 

$

109,793

 

 

$

(12,409

)

 

 

(10.15

)%

 

 

15.20

%

 

 

(21

)

+200

 

 

115,896

 

 

 

(6,306

)

 

 

(5.16

)%

 

 

15.33

%

 

 

(8

)

—

 

 

122,202

 

 

—

 

 

—

 

 

 

15.41

%

 

—

 

-200

 

 

118,634

 

 

 

(3,568

)

 

 

(2.92

)%

 

 

14.64

%

 

 

(77

)

-400

 

 

118,465

 

 

 

(3,737

)

 

 

(3.06

)%

 

 

14.62

%

 

 

(79

)

 

41

 

 

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

The table above indicates that at December 31, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 5.16% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 2.92% decrease in net economic value. At December 31, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 3.89% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 3.34% decrease in net economic value.

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

The following table sets forth our interest-earning assets and our interest-bearing liabilities at December 31, 2021, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2021, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans. Amounts are based on a preliminary balance sheet as of December 31, 2021, and may not equal amounts included in our audited consolidated financial statements for the year ended December 31, 2021. However, we believe that there would be no material changes in the results of the gap analysis if audited financial results had been utilized.

 

 

 

Time to Repricing

 

 

 

 

 

 

Zero to 90 Days

 

 

Zero to 180 Days

 

 

Zero Days to
One Year

 

 

Zero Days to
Two Years

 

 

Zero Days to
Five Years

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

95,537

 

 

$

95,537

 

 

$

95,537

 

 

$

95,537

 

 

$

95,537

 

 

$

111,776

 

Investments

 

 

15,861

 

 

 

18,536

 

 

 

20,186

 

 

 

22,850

 

 

 

34,217

 

 

 

51,033

 

Net loans

 

 

73,293

 

 

 

104,755

 

 

 

158,561

 

 

 

251,928

 

 

 

459,320

 

 

 

575,833

 

Other assets

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

48,736

 

Total

 

$

184,691

 

 

$

218,828

 

 

$

274,284

 

 

$

370,315

 

 

$

589,074

 

 

$

787,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

$

169,237

 

 

$

184,997

 

 

$

216,518

 

 

$

277,180

 

 

$

423,178

 

 

$

529,207

 

Certificates of deposit

 

 

17,269

 

 

 

29,863

 

 

 

48,861

 

 

 

69,011

 

 

 

91,788

 

 

 

96,790

 

Borrowings

 

 

6,433

 

 

 

6,433

 

 

 

6,433

 

 

 

6,433

 

 

 

36,433

 

 

 

54,433

 

Other liabilities

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,779

 

Equity capital

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

103,169

 

Total

 

$

192,939

 

 

$

221,293

 

 

$

271,812

 

 

$

352,624

 

 

$

551,399

 

 

$

787,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset/liability gap

 

$

(8,248

)

 

$

(2,465

)

 

$

2,472

 

 

$

17,691

 

 

$

37,675

 

 

 

 

Gap/assets ratio (1)

 

 

(1.05

)%

 

 

(0.31

)%

 

 

0.31

%

 

 

2.25

%

 

 

4.78

%

 

 

 

 

(1) Gap/assets ratio equals the asset/liability gap for the period divided by total assets ($788.1 million).

 

At December 31, 2021, our asset/liability gap from zero days to one year was $2.5 million, resulting in a gap/assets ratio of .31%.

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

42

 

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, 2021, we had a $44.7 million line of credit with the Federal Home Loan Bank of Atlanta and had $49.0 million in borrowings and an $8.0 million letter of credit outstanding as of December 31, 2021, used to collateralize public deposits. In addition, at December 31, 2021, we had a $5.0 million unsecured federal funds line of credit and a $7.5 million unsecured federal funds line of credit. No amount was outstanding on these lines of credit at December 31, 2021. We also have a line of $62.0 million with the Federal Reserve Bank of Atlanta Discount Window secured by $115.2 million in loans. No amount was outstanding on the Discount Window at December 31, 2021.

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

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $11.9 million and $1.4 million for the years ended December 31, 2021 and 2020, respectively. Net cash used in investing activities was $9.6 million and $110.4 million for the years ended December 31, 2021 and 2020, 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, but also included $22.7 million net cash disbursed in connection with our acquisition of ABB and Affinity Bank during 2020. Net cash used in financing activities, which consists primarily of activity in deposit accounts and proceeds from or repayments of borrowings, was $68.7 million for the year ended December 31, 2021, compared to net cash provided by financing activities of $239.1 million for the year ended December 31, 2020.

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, 2021, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at December 31, 2021 and 2020. Management is not aware of any conditions or events since the most recent notification that would change our category.

43

 

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, 2021, we had outstanding commitments to originate loans of $69.6 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, 2021 totaled $48.6 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize 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”.

 

44

 

 

ITEM 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

F-1

 

 

Consolidated Balance Sheets as of December 31, 2021 and 2020

F-3

 

 

Consolidated Statements of Income for the Years Ended December 31, 2021 and 2020

F-4

 

 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021 and 2020

F-5

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2021 and 2020

F-6

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020

F-7

 

 

Notes to Consolidated Financial Statements

F-9

 

F-1

 

 

img258107453_0.jpg 

235 Peachtree Street NE

Suite 1800

Atlanta, GA 30303

404 588 4200

wipfli.com

 

 

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, 2021 and 2020, 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, 2021 and 2020, 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.

 

/s/ Wipfli LLP

 

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

 

Atlanta, Georgia

March 18, 2022

 

 

 

 

 

 

 

F-2

 

AFFINITY BANCSHARES, INC.

Consolidated Balance Sheets

 

 

 

December 31, 2021

 

 

December 31, 2020

 

 

 

(In thousands except share amounts)

 

Assets

 

 

 

 

 

 

Cash and due from banks, including reserve requirement of $0 at December 31, 2021 and 2020

 

$

16,239

 

 

 

5,552

 

Interest-earning deposits in other depository institutions

 

 

95,537

 

 

 

172,701

 

Cash and cash equivalents

 

 

111,776

 

 

 

178,253

 

Investment securities available-for-sale

 

 

48,557

 

 

 

24,005

 

Other investments

 

 

2,476

 

 

 

1,596

 

Loans, net

 

 

575,825

 

 

 

592,254

 

Other real estate owned

 

 

3,538

 

 

 

1,292

 

Premises and equipment, net

 

 

3,783

 

 

 

8,617

 

Bank owned life insurance

 

 

15,377

 

 

 

15,311

 

Intangible assets

 

 

18,749

 

 

 

18,940

 

Accrued interest receivable and other assets

 

 

8,007

 

 

 

10,360

 

Total assets

 

$

788,088

 

 

 

850,628

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Savings accounts

 

$

86,745

 

 

 

96,591

 

Interest-bearing checking

 

 

91,387

 

 

 

129,813

 

Market rate checking

 

 

145,969

 

 

 

121,317

 

Noninterest-bearing checking

 

 

193,940

 

 

 

160,819

 

Certificate of deposits

 

 

96,758

 

 

 

131,625

 

Total deposits

 

 

614,799

 

 

 

640,165

 

Federal Home Loan Bank (FHLB) advances

 

 

48,988

 

 

 

19,117

 

Paycheck Protection Program Liquidity Facility (PPPLF) borrowings

 

 

—

 

 

 

100,813

 

Other borrowings

 

 

—

 

 

 

5,000

 

Accrued interest payable and other liabilities

 

 

3,333

 

 

 

4,748

 

Total liabilities

 

 

667,120

 

 

 

769,843

 

Commitments

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock (par value $0.01 per share, 40,000,000 shares authorized,
   6,872,634 issued and outstanding at December 31, 2021 and 19,000,000 
   shares authorized, 6,968,469 issued and 6,865,653 outstanding at December 31, 2020) (1)

 

 

69

 

 

 

69

 

Preferred stock (1,000,000 shares authorized, no shares outstanding)

 

 

—

 

 

 

—

 

Additional paid in capital

 

 

68,038

 

 

 

33,628

 

Treasury stock, 0 shares at December 31, 2021 and 102,816 shares at December 31, 2020, at cost

 

 

—

 

 

 

(1,268

)

Unearned ESOP shares

 

 

(5,004

)

 

 

(2,453

)

Retained earnings

 

 

58,223

 

 

 

50,650

 

Accumulated other comprehensive (loss) income

 

 

(358

)

 

 

159

 

Total stockholders' equity

 

 

120,968

 

 

 

80,785

 

Total liabilities and stockholders' equity

 

$

788,088

 

 

 

850,628

 

 

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

 

See accompanying notes to consolidated financial statements.

F-1

 

AFFINITY BANCSHARES, INC.

Consolidated Statements of Income

 

 

 

For the Year Ended December 31,

 

 

For the Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands except per share amounts)

 

Interest income:

 

 

 

 

 

 

Loans, including fees

 

$

31,484

 

 

 

29,933

 

Investment securities, including dividends

 

 

789

 

 

 

487

 

Interest-earning deposits

 

 

180

 

 

 

212

 

Total interest income

 

 

32,453

 

 

 

30,632

 

Interest expense:

 

 

 

 

 

 

Deposits

 

 

2,680

 

 

 

4,752

 

Borrowings

 

 

497

 

 

 

738

 

Total interest expense

 

 

3,177

 

 

 

5,490

 

Net interest income before provision for loan losses

 

 

29,276

 

 

 

25,142

 

Provision for loan losses

 

 

1,075

 

 

 

2,000

 

Net interest income after provision for loan losses

 

 

28,201

 

 

 

23,142

 

Noninterest income:

 

 

 

 

 

 

Service charges on deposit accounts

 

 

1,506

 

 

 

1,359

 

Gain on sales of investment securities available-for-sale

 

 

—

 

 

 

20

 

Other

 

 

1,172

 

 

 

777

 

Total noninterest income

 

 

2,678

 

 

 

2,156

 

Noninterest expenses:

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,415

 

 

 

10,969

 

Deferred compensation

 

 

248

 

 

 

279

 

Occupancy

 

 

2,935

 

 

 

2,820

 

Advertising

 

 

339

 

 

 

200

 

Data processing

 

 

1,975

 

 

 

2,343

 

Other real estate owned

 

 

18

 

 

 

20

 

Net (gain) loss on sale and write-down of other real estate owned

 

 

(127

)

 

 

289

 

Legal and accounting

 

 

827

 

 

 

1,447

 

Organizational dues and subscriptions

 

 

363

 

 

 

306

 

Director compensation

 

 

198

 

 

 

203

 

Federal deposit insurance premiums

 

 

260

 

 

 

401

 

Other

 

 

3,517

 

 

 

2,141

 

Total noninterest expenses

 

 

20,968

 

 

 

21,418

 

Income before income taxes

 

 

9,911

 

 

 

3,880

 

Income tax expense

 

 

2,338

 

 

 

792

 

Net income

 

$

7,573

 

 

 

3,088

 

Basic earnings per share (1)

 

$

1.10

 

 

 

0.41

 

Diluted earnings per share (1)

 

$

1.09

 

 

 

0.41

 

 

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

 

See accompanying notes to consolidated financial statements.

F-2

 

AFFINITY BANCSHARES, INC.

Consolidated Statements of Comprehensive Income

 

 

 

For the Year Ended December 31,

 

 

For the Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Net income

 

$

7,573

 

 

$

3,088

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on available-for-sale securities, net of taxes of $(176) and $57

 

 

(517

)

 

 

165

 

 

 

 

 

 

 

 

      Reclassification adjustment for gain included in net income, net of taxes of $0 and $(5)

 

 

—

 

 

 

(15

)

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(517

)

 

 

150

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

7,056

 

 

$

3,238

 

 

 

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

 

Capital

 

Stock

 

ESOP Shares

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2019

 

$

69

 

 

$

33,366

 

 

$

(1,268

)

 

$

(2,571

)

 

$

47,562

 

 

$

9

 

 

$

77,167

 

Issuance of restricted stock awards

 

 

1

 

 

 

16

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17

 

ESOP loan payment and
   release of ESOP shares

 

 

(1

)

 

 

(35

)

 

 

—

 

 

 

118

 

 

 

—

 

 

 

—

 

 

 

82

 

Stock-based compensation

 

 

—

 

 

 

281

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

281

 

Purchase of treasury stock

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

150

 

 

 

150

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,088

 

 

 

—

 

 

 

3,088

 

Ending balance December 31, 2020

 

$

69

 

 

$

33,628

 

 

$

(1,268

)

 

$

(2,453

)

 

$

50,650

 

 

$

159

 

 

$

80,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2020

 

$

69

 

 

$

33,628

 

 

$

(1,268

)

 

$

(2,453

)

 

$

50,650

 

 

$

159

 

 

$

80,785

 

ESOP loan payment and
   release of ESOP shares

 

 

—

 

 

 

(141

)

 

 

—

 

 

 

410

 

 

 

—

 

 

 

—

 

 

 

269

 

Stock-based compensation

 

 

—

 

 

 

410

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

410

 

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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(517

)

 

 

(517

)

Corporate reorganization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Issuance of common stock (less
        stock offering expenses of $1,699)

 

 

—

 

 

 

32,448

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

32,448

 

   Issuance of shares and loan to ESOP

 

 

—

 

 

 

2,961

 

 

 

—

 

 

 

(2,961

)

 

 

—

 

 

 

—

 

 

 

—

 

   Treasury stock retired

 

 

—

 

 

 

(1,268

)

 

 

1,268

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,573

 

 

 

—

 

 

 

7,573

 

Ending balance December 31, 2021

 

$

69

 

 

$

68,038

 

 

$

—

 

 

$

(5,004

)

 

$

58,223

 

 

$

(358

)

 

$

120,968

 

 

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

 

See accompanying notes to consolidated financial statements.

F-4

 

AFFINITY BANCSHARES, INC.

Consolidated Statements of Cash Flows

 

 

For the Year Ended December 31,

 

 

For the Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

7,573

 

 

$

3,088

 

Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisition:

 

 

 

 

 

 

Depreciation and net amortization

 

 

674

 

 

 

697

 

Stock-based compensation expense

 

 

410

 

 

 

298

 

Deferred income tax

 

 

(227

)

 

 

(73

)

Provision for loan losses

 

 

1,075

 

 

 

2,000

 

ESOP expense

 

 

269

 

 

 

82

 

Net gain on sale of investment securities available-for-sale

 

 

—

 

 

 

(20

)

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

 

 

(127

)

 

 

29

 

Increase in cash surrender value of bank owned life insurance

 

 

(366

)

 

 

(397

)

Write-down on other real estate

 

 

—

 

 

 

260

 

Loss on writedown of premises and equipment

 

 

1,176

 

 

 

—

 

Change in:

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

2,757

 

 

 

(4,272

)

Accrued interest payable and other liabilities

 

 

(1,363

)

 

 

(321

)

Net cash provided by operating activities

 

 

11,851

 

 

 

1,371

 

Cash flows from investing activities, net of effects of acquisition:

 

 

 

 

 

 

Purchases of investment securities available-for-sale

 

 

(29,381

)

 

 

(13,934

)

Purchases of premises and equipment

 

 

(830

)

 

 

(451

)

Proceeds from disposal of premises and equipment

 

 

—

 

 

 

47

 

Proceeds from the sale of investment securities available-for-sale

 

 

—

 

 

 

1,676

 

Proceeds from paydowns and maturities of investment securities available-for-sale

 

 

3,958

 

 

 

8,430

 

Purchases of other investments

 

 

(1,413

)

 

 

(1,358

)

Proceeds from sales of other investments

 

 

533

 

 

 

1,700

 

Proceeds from bank owned life insurance death claim

 

 

300

 

 

 

—

 

Net change in loans

 

 

15,791

 

 

 

(83,855

)

Proceeds from sales of other real estate owned

 

 

1,419

 

 

 

111

 

Net cash paid in business combination

 

 

—

 

 

 

(22,749

)

Net cash used in investing activities

 

 

(9,623

)

 

 

(110,383

)

Cash flows from financing activities, net of effects of acquisition:

 

 

 

 

 

 

Net change in demand and savings deposits

 

 

(25,340

)

 

 

152,442

 

Proceeds from FHLB advances

 

 

35,000

 

 

 

45,000

 

Repayment of FHLB advances

 

 

(5,000

)

 

 

(60,000

)

Proceeds from PPPLF borrowings

 

 

—

 

 

 

100,813

 

Repayment of PPPLF borrowings

 

 

(100,813

)

 

 

—

 

Proceeds from holding company loan

 

 

—

 

 

 

5,000

 

Repayment of holding company loan

 

 

(5,000

)

 

 

 

Net change in repurchase agreements and other borrowings

 

 

—

 

 

 

(4,107

)

Proceeds from stock offering

 

 

37,108

 

 

 

—

 

Stock offering expenses

 

 

(1,699

)

 

 

—

 

Funding of ESOP

 

 

(2,961

)

 

 

—

 

Net cash (used in) provided by financing activities

 

 

(68,705

)

 

 

239,148

 

Net change in cash and cash equivalents

 

 

(66,477

)

 

 

130,136

 

Cash and cash equivalents at beginning of period

 

 

178,253

 

 

 

48,117

 

Cash and cash equivalents at end of period

 

$

111,776

 

 

$

178,253

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

3,385

 

 

$

5,252

 

Cash paid for income taxes

 

 

2,516

 

 

 

590

 

Bank property transferred to other real estate owned

 

 

3,538

 

 

 

460

 

Other real estate owned acquired through foreclosure

 

 

—

 

 

 

320

 

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

 

 

(517

)

 

 

150

 

 

F-5

 

 

 

 

 

 

 

 

Fair value of assets acquired

 

 

—

 

 

 

317,742

 

Fair value of liabilities assumed

 

 

—

 

 

 

288,732

 

Net assets acquired

 

 

—

 

 

 

29,010

 

 

See accompanying notes to consolidated financial statements.

F-6

 

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

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

Prior Reorganization

On October 31, 2016, the Board of Directors of the Bank adopted a Plan of Reorganization from a Mutual Savings Association to a Mutual Holding Company and Stock Issuance Plan (the “Plan”). The Plan was subject to the approval of the Board of Governors of the Federal Reserve System and the affirmative vote of at least a majority of the total votes eligible to be cast by the voting members of the Bank at a special meeting. Pursuant to the Plan, in April 2017 the Bank converted to a stock savings bank organized in the mutual holding company structure. The Bank issued all of its outstanding stock to a new holding company, Community First Bancshares, Inc., which sold 3,467,595 shares of common stock to the public at $10.00 per share, representing 46% of its outstanding shares of common stock. This amount included shares purchased by the ESOP, which purchased 3.92% of the common stock of the new holding company outstanding upon the completion of the reorganization and stock issuance. Community First Bancshares, Inc. was organized as a corporation under the laws of the United States. Community First Bancshares, MHC was organized as a mutual holding company under the laws of the United States and owned 54% of the outstanding common stock of Community First Bancshares, Inc.

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

F-7

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

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 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 6,873,466 for basic and 6,696,406 for diluted. Basic and diluted earnings per share for the year ended December 31, 2020 was $0.41. The net earnings for this period was $3,088,000 and the weighted average common shares outstanding were 7,570,797.

Emerging Growth Company Status

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as the Company is an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies. An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the Company is first required to file a registration statement. The Company has elected to use the extended transition period described above and intends to maintain its emerging growth company status as allowed under the JOBS Act.

Future Accounting Pronouncements

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 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. For emerging growth companies, this update will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The adoption of this ASU is expected to result in recording a right of use asset and a corresponding lease liability related to existing leases.

In April 2019, the FASB issued ASU 2019-04 (“ASU 2019-04”), Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 includes technical corrections relating to scope, held-to-maturity disclosures, measurement alternative and remeasurement of equity securities. The effective date is for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

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, and is working with the approved third-party vendor to develop the CECL model and evaluate its impact. ASU 2016-13 was originally to become effective for the Company for interim and annual periods beginning after December 15, 2019. In November 2019, the FASB issued Accounting Standards Update 2019 – 10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates (“ASU 2019–10”). ASU 2019-10 amends the effective date for certain entities, including the Company, for ASU 2016-13, Financial Instruments – Credit Losses. Because the Company is a smaller reporting company, ASU 2016-13 is now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

 

Business Combinations

 

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”). The Company recognizes the full fair value of the assets acquired and liabilities

F-8

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

assumed and immediately expenses transaction costs. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain (“bargain purchase gain”) is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Results of operations of the acquired business are included in the statements of income from the effective date of the acquisition. Additional information regarding the recent acquisition is provided in Note 2.

 

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 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

F-9

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

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.

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 auto 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 gradings 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.

F-10

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

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 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

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.

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.

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

F-11

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

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.

Risk and Uncertainties

The COVID-19 pandemic has disrupted and adversely affected the Company’s business and results of operations, and the ultimate impacts of the pandemic on the Company’s business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

(2) Acquisition

F-12

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

On January 10, 2020, Community First Bancshares, Inc. consummated its merger (the “Merger”) with ABB Financial Group, Inc. (“ABB”) pursuant to the Agreement and Plan of Merger by and between Community First Bancshares, Inc. and ABB dated August 19, 2019, (the “Merger Agreement”), whereby ABB was merged with and into Community First Bancshares, Inc., and Affinity Bank, ABB’s wholly owned commercial bank subsidiary serving Cobb County, Georgia and Fulton County, Georgia and surrounding counties, was merged with and into Newton Federal Bank. System integration was completed September 18, 2020. Affinity Bank operated one branch office in Cobb County, Georgia and one loan production office in Fulton County, Georgia.

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

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

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

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

 

 

As recorded by

 

Fair Value

 

As recorded by

 

 

ABB

 

Adjustments

 

CFBI

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and securities available-for-sale

$

41,561

 

$

—

 

$

41,561

 

Loans

 

264,176

 

 

(2,327

)

 

261,849

 

Other real estate owned

 

790

 

 

—

 

 

790

 

Core deposit intangible

 

—

 

 

1,913

 

 

1,913

 

Fixed assets and other assets

 

11,629

 

 

—

 

 

11,629

 

Total assets acquired

 

318,156

 

 

(414

)

 

317,742

 

 

 

 

 

 

 

 

Deposits

 

249,049

 

 

265

 

 

249,314

 

Borrowings and other liabilities

 

37,764

 

 

1,654

 

 

39,418

 

Total liabilities acquired

 

286,813

 

 

1,919

 

 

288,732

 

 

 

 

 

 

 

 

Excess of assets acquired over liabilities acquired

 

31,343

 

 

(2,333

)

 

29,010

 

 

 

 

 

 

 

 

Purchase price

 

 

 

 

 

40,338

 

Net assets acquired

 

 

 

 

 

29,010

 

Less preferred stock redeemed

 

 

 

 

 

(5,891

)

Net assets acquired less preferred stock

 

 

 

 

 

23,119

 

Goodwill

 

 

 

 

$

17,219

 

 

The following unaudited pro forma information presents the results of operations for the year ended December 31, 2021 and 2020, as if the acquisition had occurred January 1 of each period. These unaudited proforma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would

F-13

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

 

 

Year Ended December 31,

 

 

2021

 

 

2020

 

 

(In thousands except per share data)

 

 

 

 

 

 

 

Total revenues, net of interest expense

$

32,255

 

 

$

27,599

 

Net income

 

6,512

 

 

 

2,028

 

Diluted earnings per share

 

0.86

 

 

 

0.27

 

 

(3) Investment Securities

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

 

 

 

Amortized

 

 

Gross
Unrealized

 

 

Gross
Unrealized

 

 

Estimated

 

December 31, 2021

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Treasury securities

 

$

5,068

 

 

 

5

 

 

 

(23

)

 

 

5,050

 

Municipal securities - tax exempt

 

 

540

 

 

 

—

 

 

 

(4

)

 

 

536

 

Municipal securities - taxable

 

 

796

 

 

 

—

 

 

 

(6

)

 

 

790

 

U.S. Government sponsored enterprises

 

 

11,837

 

 

 

—

 

 

 

(295

)

 

 

11,542

 

Government agency mortgage-backed securities

 

 

21,371

 

 

 

200

 

 

 

(232

)

 

 

21,339

 

Corporate securities

 

 

9,425

 

 

 

20

 

 

 

(145

)

 

 

9,300

 

Total

 

$

49,037

 

 

 

225

 

 

 

(705

)

 

 

48,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored enterprises

 

$

11,870

 

 

 

1

 

 

 

(12

)

 

 

11,859

 

Government agency mortgage-backed securities

 

 

9,206

 

 

 

326

 

 

 

—

 

 

 

9,532

 

Corporate securities

 

 

2,715

 

 

 

—

 

 

 

(101

)

 

 

2,614

 

Total

 

$

23,791

 

 

 

327

 

 

 

(113

)

 

 

24,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There were 30 securities in an unrealized loss position totaling $574,000 as of December 31, 2021 for less than 12 months. There were two securities in an unrealized loss position totaling $131,000 greater than 12 months as of December 31, 2021. The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades and are reviewed regularly. Eight of the securities are U.S. Treasury or agency bonds that are direct obligations of the U.S. Government. Fourteen securities are mortgage-backed securities of U.S. Government sponsored agencies that have the implied backing of the U.S. Government. Two securities are municipal securities for while a credit analysis is performed annually and no credit problems have been identified. Eight 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-14

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

The amortized cost and estimated fair value of investment securities available-for-sale at December 31, 2021 and 2020, 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. Therefore, these securities are not included in the maturity categories. (in thousands)

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

$

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 1 to 5 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 5 to 10 years

 

 

5,068

 

 

 

5,050

 

 

 

—

 

 

 

—

 

Greater than 10 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

5,068

 

 

 

5,050

 

 

 

—

 

 

 

—

 

Municipal securities - tax exempt

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 1 to 5 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 5 to 10 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 10 years

 

 

540

 

 

 

536

 

 

 

—

 

 

 

—

 

 

 

 

540

 

 

 

536

 

 

 

—

 

 

 

—

 

Municipal securities - taxable

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 1 to 5 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 5 to 10 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 10 years

 

 

796

 

 

 

790

 

 

 

—

 

 

 

—

 

 

 

 

796

 

 

 

790

 

 

 

—

 

 

 

—

 

Government agency securities

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 1 to 5 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 5 to 10 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 10 years

 

 

11,837

 

 

 

11,542

 

 

 

11,870

 

 

 

11,859

 

 

 

 

11,837

 

 

 

11,542

 

 

 

11,870

 

 

 

11,859

 

Corporate securities

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 1 to 5 years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Greater than 5 to 10 years

 

 

8,925

 

 

 

8,875

 

 

 

2,215

 

 

 

2,189

 

Greater than 10 years

 

 

500

 

 

 

425

 

 

 

500

 

 

 

425

 

 

 

 

9,425

 

 

 

9,300

 

 

 

2,715

 

 

 

2,614

 

Government agency mortgage-backed securities

 

 

21,371

 

 

 

21,339

 

 

 

9,206

 

 

 

9,532

 

Total

 

$

49,037

 

 

 

48,557

 

 

$

23,791

 

 

 

24,005

 

 

There were no sales of investment securities available-for-sale in 2021. Proceeds from sales of investment securities available-for-sale during 2020 totaled approximately $1.7 million. Gross gains of $20,000 were realized on the sales during 2020.

Available-for-sale securities with a carrying value of approximately $2.8 million and $2.3 million were pledged to secure public deposits at December 31, 2021 and 2020, respectively.

F-15

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

(4) Loans and Allowance for Loan Losses

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

 

 

 

December 31, 2021

 

 

December 31, 2020

 

Commercial (secured by real estate)

 

$

262,704

 

 

 

178,571

 

Commercial and industrial

 

 

152,835

 

 

 

155,554

 

Paycheck Protection Program loans

 

 

17,883

 

 

 

101,749

 

Construction, land and acquisition & development

 

 

16,317

 

 

 

23,571

 

Residential mortgage 1-4 family

 

 

63,065

 

 

 

91,777

 

Consumer installment

 

 

71,580

 

 

 

47,393

 

 

 

 

584,384

 

 

 

598,615

 

Less allowance for loan losses

 

 

(8,559

)

 

 

(6,361

)

 

 

$

575,825

 

 

$

592,254

 

 

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in the Atlanta, Georgia MSA. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. The Bank has a specialized expertise in lending to dentists and dental practices, with dental practice loans totaling $179.8 million, or 30.6%, and $170.8 million, or 29.2% of our loan portfolio, as of December 31, 2021 and 2020, respectively. With the acquisition of Affinity Bank, the Bank is a premier lender within professional markets, with a primary focus on the dental industry in Georgia and adjoining states. The majority of these loans are commercial and industrial credits for practice acquisitions and equipment financing with the remainder being owner-occupied real estate.

 

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is an economic stimulus bill signed into law on March 27, 2020, in response to the economic fallout of the COVID-19 pandemic in the United States. The creation of the Paycheck Protection Program (PPP) enacted under the CARES Act provides forgivable loans to small businesses for payroll obligations, emergency grants to cover immediate operating costs, and a mechanism for loan forgiveness by the Small Business Administration should all criteria be met. The Bank received SBA authorization for 1,901 PPP loans totaling $196.4 million during 2021 and 2020. These loans are fully guaranteed by the Small Business Administration.

 

Qualifying loans in the amount of approximately $343.6 million and $309.9 million were pledged to secure the line of credit from the FHLB at December 31, 2021 and 2020, respectively.

 

 

 

 

 

 

 

 

 

 

F-16

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, 2021 and 2020: (in thousands)

 

December 31, 2021

 

Commercial
(Secured by Real
Estate)

 

 

Commercial
and Industrial

 

 

Paycheck Protection Program (1)

 

 

Construction,
Land and
Acquisition & Development

 

 

Residential
 Mortgage

 

 

Consumer
Installment

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,084

 

 

 

1,320

 

 

 

—

 

 

 

224

 

 

 

970

 

 

 

719

 

 

 

44

 

 

 

6,361

 

Provision

 

 

290

 

 

 

1,119

 

 

 

—

 

 

 

(62

)

 

 

(541

)

 

 

310

 

 

 

(41

)

 

 

1,075

 

Charge-offs

 

 

—

 

 

 

(234

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(76

)

 

 

—

 

 

 

(310

)

Recoveries

 

 

1,307

 

 

 

37

 

 

 

—

 

 

 

—

 

 

 

73

 

 

 

16

 

 

 

—

 

 

 

1,433

 

Ending balance

 

$

4,681

 

 

 

2,242

 

 

 

—

 

 

 

162

 

 

 

502

 

 

 

969

 

 

 

3

 

 

 

8,559

 

Ending allowance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

5

 

 

 

—

 

 

 

—

 

 

 

7

 

Collectively evaluated for impairment

 

 

4,680

 

 

 

2,241

 

 

 

—

 

 

 

162

 

 

 

497

 

 

 

969

 

 

 

3

 

 

 

8,552

 

Total ending allowance

 

$

4,681

 

 

$

2,242

 

 

$

—

 

 

$

162

 

 

$

502

 

 

$

969

 

 

$

3

 

 

$

8,559

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

3,482

 

 

 

753

 

 

 

—

 

 

 

—

 

 

 

2,992

 

 

 

1

 

 

 

—

 

 

 

7,228

 

Collectively evaluated for impairment

 

 

259,222

 

 

 

152,082

 

 

 

17,883

 

 

 

16,317

 

 

 

60,073

 

 

 

71,579

 

 

 

—

 

 

 

577,156

 

Total loans

 

$

262,704

 

 

 

152,835

 

 

 

17,883

 

 

 

16,317

 

 

 

63,065

 

 

 

71,580

 

 

 

—

 

 

 

584,384

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,661

 

 

 

1,478

 

 

 

—

 

 

 

153

 

 

 

369

 

 

 

466

 

 

 

7

 

 

 

4,134

 

Provision

 

 

1,207

 

 

 

(194

)

 

 

—

 

 

 

71

 

 

 

627

 

 

 

252

 

 

 

37

 

 

 

2,000

 

Charge-offs

 

 

(30

)

 

 

-

 

 

 

—

 

 

 

—

 

 

 

(126

)

 

 

(29

)

 

 

—

 

 

 

(185

)

Recoveries

 

 

246

 

 

 

36

 

 

 

—

 

 

 

—

 

 

 

100

 

 

 

30

 

 

 

—

 

 

 

412

 

Ending balance

 

$

3,084

 

 

 

1,320

 

 

 

—

 

 

 

224

 

 

 

970

 

 

 

719

 

 

 

44

 

 

 

6,361

 

Ending allowance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

2

 

 

 

35

 

 

 

—

 

 

 

—

 

 

 

14

 

 

 

—

 

 

 

—

 

 

 

51

 

Collectively evaluated for impairment

 

 

3,082

 

 

 

1,285

 

 

 

—

 

 

 

224

 

 

 

956

 

 

 

719

 

 

 

44

 

 

 

6,310

 

Total ending allowance

 

$

3,084

 

 

$

1,320

 

 

$

—

 

 

$

224

 

 

$

970

 

 

$

719

 

 

$

44

 

 

$

6,361

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

2,584

 

 

 

1,085

 

 

 

—

 

 

 

—

 

 

 

3,597

 

 

 

8

 

 

 

—

 

 

 

7,274

 

Collectively evaluated for impairment

 

 

175,987

 

 

 

154,469

 

 

 

101,749

 

 

 

23,571

 

 

 

88,180

 

 

 

47,385

 

 

 

—

 

 

 

591,341

 

Total loans

 

$

178,571

 

 

 

155,554

 

 

 

101,749

 

 

 

23,571

 

 

 

91,777

 

 

 

47,393

 

 

 

—

 

 

 

598,615

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

 

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

F-17

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

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

 

December 31, 2021

 

Recorded
Investment

 

 

Unpaid
Principal
Balance

 

 

Allocated
Related
Allowance

 

 

Average
Recorded
Investment

 

 

Interest
Income
Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate)

 

$

3,294

 

 

 

3,294

 

 

 

—

 

 

 

3,277

 

 

 

51

 

Commercial and industrial

 

 

388

 

 

 

421

 

 

 

—

 

 

 

458

 

 

 

—

 

Construction, land and acquisition & development

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Residential mortgage

 

 

2,052

 

 

 

2,052

 

 

 

—

 

 

 

2,110

 

 

 

31

 

Consumer installment

 

 

1

 

 

 

1

 

 

 

—

 

 

 

3

 

 

 

—

 

 

 

 

5,735

 

 

 

5,768

 

 

 

—

 

 

 

5,848

 

 

 

82

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate)

 

 

188

 

 

 

189

 

 

 

1

 

 

 

192

 

 

 

12

 

Commercial and industrial

 

 

365

 

 

 

365

 

 

 

1

 

 

 

379

 

 

 

—

 

Construction, land and acquisition & development

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Residential mortgage

 

 

940

 

 

 

941

 

 

 

5

 

 

 

960

 

 

 

60

 

Consumer installment

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

1,493

 

 

 

1,495

 

 

 

7

 

 

 

1,531

 

 

 

72

 

Total impaired loans

 

$

7,228

 

 

 

7,263

 

 

 

7

 

 

 

7,379

 

 

 

154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate)

 

$

1,136

 

 

 

2,232

 

 

 

—

 

 

 

1,138

 

 

 

42

 

Commercial and industrial

 

 

395

 

 

 

395

 

 

 

—

 

 

 

395

 

 

 

—

 

Construction, land and acquisition & development

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Residential mortgage

 

 

1,986

 

 

 

1,987

 

 

 

—

 

 

 

2,041

 

 

 

9

 

Consumer installment

 

 

8

 

 

 

8

 

 

 

—

 

 

 

9

 

 

 

1

 

 

 

 

3,525

 

 

 

4,622

 

 

 

—

 

 

 

3,583

 

 

 

52

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate)

 

 

1,448

 

 

 

1,449

 

 

 

2

 

 

 

—

 

 

 

91

 

Commercial and industrial

 

 

690

 

 

 

690

 

 

 

35

 

 

 

1,481

 

 

 

6

 

Construction, land and acquisition & development

 

 

—

 

 

 

—

 

 

 

—

 

 

 

727

 

 

 

—

 

Residential mortgage

 

 

1,611

 

 

 

1,613

 

 

 

14

 

 

 

—

 

 

 

73

 

Consumer installment

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,634

 

 

 

—

 

 

 

 

3,749

 

 

 

3,752

 

 

 

51

 

 

 

3,842

 

 

 

170

 

Total impaired loans

 

$

7,274

 

 

 

8,374

 

 

 

51

 

 

 

7,425

 

 

 

222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

F-18

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

 

December 31, 2021

 

30 -59
Days
 Past Due

 

 

60- 89
Days
 Past Due

 

 

90 Days or
Greater
Past Due

 

 

Total
Past Due

 

 

Current

 

 

Total

 

 

Nonaccrual

 

Commercial (secured by real estate)

 

$

—

 

 

 

—

 

 

 

3,200

 

 

 

3,200

 

 

 

259,504

 

 

 

262,704

 

 

 

3,200

 

Commercial and industrial

 

 

338

 

 

 

—

 

 

 

813

 

 

 

1,151

 

 

 

151,684

 

 

 

152,835

 

 

 

813

 

Paycheck Protection Program

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17,883

 

 

 

17,883

 

 

 

—

 

Construction, land and acquisition &
   development

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

16,317

 

 

 

16,317

 

 

 

—

 

Residential mortgage

 

 

4,094

 

 

 

1,711

 

 

 

321

 

 

 

6,126

 

 

 

56,939

 

 

 

63,065

 

 

 

2,873

 

Consumer installment

 

 

289

 

 

 

45

 

 

 

—

 

 

 

334

 

 

 

71,246

 

 

 

71,580

 

 

 

125

 

Total

 

$

4,721

 

 

 

1,756

 

 

 

4,334

 

 

 

10,811

 

 

 

573,573

 

 

 

584,384

 

 

 

7,011

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial (secured by real estate)

 

$

3,386

 

 

 

—

 

 

 

1,136

 

 

 

4,522

 

 

 

174,049

 

 

 

178,571

 

 

 

1,157

 

Commercial and industrial

 

 

29

 

 

 

—

 

 

 

1,085

 

 

 

1,114

 

 

 

154,440

 

 

 

155,554

 

 

 

1,085

 

Paycheck Protection Program

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

101,749

 

 

 

101,749

 

 

 

—

 

Construction, land and acquisition &
   development

 

 

1,392

 

 

 

—

 

 

 

—

 

 

 

1,392

 

 

 

22,179

 

 

 

23,571

 

 

 

—

 

Residential mortgage

 

 

4,308

 

 

 

1,094

 

 

 

1,444

 

 

 

6,846

 

 

 

84,931

 

 

 

91,777

 

 

 

2,587

 

Consumer installment

 

 

78

 

 

 

—

 

 

 

73

 

 

 

151

 

 

 

47,242

 

 

 

47,393

 

 

 

73

 

Total

 

$

9,193

 

 

 

1,094

 

 

 

3,738

 

 

 

14,025

 

 

 

584,590

 

 

 

598,615

 

 

 

4,902

 

 

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

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, 2021 and 2020. 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, 2021 and 2020: (in thousands)

 

 

 

 

 

 

Pre-
Modification
Outstanding

 

 

Post-
Modification
Outstanding

 

 

Troubled Debt
Restructurings that have
Subsequently Defaulted

 

December 31, 2021

 

Number of
Contracts

 

 

Recorded
Investment

 

 

Recorded
Investment

 

 

Number of
Contracts

 

 

Recorded
Investment

 

Residential mortgage

 

 

1

 

 

$

71

 

 

 

71

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

1

 

 

$

31

 

 

 

31

 

 

 

—

 

 

 

—

 

 

 

 

The Bank has allocated an allowance for loan losses of approximately $6,000 and $17,000 to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2021 and 2020, respectively.

 

The CARES Act provides temporary relief from accounting for certain pandemic-related loan modifications as a troubled debt restructuring. During the years ended December 31, 2020 and 2021 the Bank has granted short-term deferrals on 744 loans totaling $189.6 million that were otherwise performing. All of these loans but one has returned to normal performing status as of December 31, 2021. This loan is in nonaccrual status. There were no outstanding modifications that were excluded from TDR classification based on this law as of December 31, 2021.

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.

F-19

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

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

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

 

December 31, 2021

 

Pass

 

 

Special
Mention

 

 

Substandard

 

 

Doubtful/
Loss

 

 

Total

 

Commercial (secured by real estate)

 

$

256,541

 

 

 

2,742

 

 

 

3,421

 

 

 

—

 

 

 

262,704

 

Commercial and industrial

 

 

151,983

 

 

 

—

 

 

 

852

 

 

 

—

 

 

 

152,835

 

Paycheck Protection Program

 

 

17,883

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17,883

 

Construction, land and acquisition & development

 

 

16,005

 

 

 

312

 

 

 

—

 

 

 

—

 

 

 

16,317

 

Residential mortgage

 

 

59,080

 

 

 

—

 

 

 

3,985

 

 

 

—

 

 

 

63,065

 

Consumer installment

 

 

71,440

 

 

 

—

 

 

 

140

 

 

 

—

 

 

 

71,580

 

Total

 

$

572,932

 

 

 

3,054

 

 

 

8,398

 

 

 

—

 

 

 

584,384

 

 

December 31, 2020

 

Pass

 

 

Special
Mention

 

 

Substandard

 

 

Doubtful/
Loss

 

 

Total

 

Commercial (secured by real estate)

 

$

176,629

 

 

 

785

 

 

 

1,157

 

 

 

—

 

 

 

178,571

 

Commercial and industrial

 

 

154,469

 

 

 

—

 

 

 

1,085

 

 

 

—

 

 

 

155,554

 

Paycheck Protection Program

 

 

101,749

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

101,749

 

Construction, land and acquisition & development

 

 

23,571

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

23,571

 

Residential mortgage

 

 

87,738

 

 

 

62

 

 

 

3,977

 

 

 

—

 

 

 

91,777

 

Consumer installment

 

 

47,332

 

 

 

—

 

 

 

61

 

 

 

—

 

 

 

47,393

 

Total

 

$

591,488

 

 

 

847

 

 

 

6,280

 

 

 

—

 

 

 

598,615

 

 

 

 

(5) Premises and Equipment

Premises and equipment at December 31, 2021 and 2020 are summarized as follows: (in thousands)

 

 

 

December
31, 2021

 

 

December
31, 2020

 

Land

 

$

373

 

 

$

935

 

Buildings

 

 

4,280

 

 

 

9,165

 

Leasehold improvements

 

 

535

 

 

 

527

 

Equipment and furniture

 

 

2,755

 

 

 

5,334

 

Construction in process

 

 

291

 

 

 

158

 

Automobile

 

 

66

 

 

 

66

 

 

 

 

8,300

 

 

 

16,185

 

Less: Accumulated depreciation

 

 

4,517

 

 

 

7,568

 

 

 

$

3,783

 

 

$

8,617

 

 

F-20

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

Depreciation expense was approximately $950,000 and $957,000 for the years ended December 31, 2021 and 2020, respectively.

The Company is obligated under non-cancelable operating leases for certain of its facilities and related land. At December 31, 2021, the approximate minimum annual rentals under these non-cancelable agreements with remaining terms in excess of one year are as follows: (in thousands)

 

Years ending December 31,

 

 

 

2022

 

$

450

 

2023

 

 

588

 

2024

 

 

602

 

2025

 

 

618

 

2026

 

 

636

 

Thereafter

 

 

298

 

Total

 

$

3,192

 

 

Total rent expense for leased property approximated $663,000 and $381,000 for the year ended December 31, 2021 and 2020, respectively.

 

 

(6) Deposits

At December 31, 2021, contractual maturities of certificate of deposits are summarized as follows: (in thousands).

 

2022

 

$

48,581

 

2023

 

 

20,406

 

2024

 

 

9,647

 

2025

 

 

8,456

 

2026

 

 

4,677

 

Thereafter

 

 

4,991

 

 

 

$

96,758

 

 

The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $22,570,000 and $32,859,000 at December 31, 2021 and 2020, respectively.

The following is a summary of interest expense on deposits for the years ended December 31, 2021 and 2020: (in thousands)

 

 

 

Year Ended
December 31,
2021

 

 

Year Ended
December 31,
2020

 

Savings accounts

 

$

403

 

 

$

878

 

Interest-bearing checking accounts

 

 

185

 

 

 

286

 

Market rate checking accounts

 

 

469

 

 

 

965

 

Certificates of deposit

 

 

1,623

 

 

 

2,623

 

 

 

$

2,680

 

 

$

4,752

 

 

F-21

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

(7) Borrowings

At December 31, 2021 and 2020, the Bank had a line of credit totaling $44.7 million and $89.1 million, respectively, from the FHLB, which is reviewed annually by the FHLB. The following advances, which require monthly or quarterly interest payments, were outstanding at December 31, 2021:

 

Advance Date

 

Advance

 

 

Fair Value Adjustment

 

 

Interest Rate

 

 

Maturity

 

Rate

 

Call Feature

5/23/2019

 

$

8,000,000

 

 

$

395,312

 

 

 

2.40

%

 

5/23/2029

 

Convertible

 

5/23/2022

11/29/2019

 

 

5,000,000

 

 

 

320,713

 

 

 

2.66

%

 

10/25/2019

 

Convertible

 

11/29/2022

12/16/2019

 

 

5,000,000

 

 

 

271,837

 

 

 

2.37

%

 

12/17/2029

 

Convertible

 

3/17/2022

1/21/2021

 

 

10,000,000

 

 

 

—

 

 

 

0.68

%

 

1/21/2026

 

Fixed

 

N/A

3/8/2021

 

 

10,000,000

 

 

 

—

 

 

 

0.54

%

 

3/8/2024

 

Fixed

 

N/A

5/2/2021

 

 

10,000,000

 

 

 

—

 

 

 

0.76

%

 

5/2/2025

 

Fixed

 

N/A

 

 

$

48,000,000

 

 

$

987,862

 

 

 

 

 

 

 

 

 

 

 

Three of the advances above were acquired in connection with the acquisition of Affinity Bank during 2020. At December 31, 2021 and 2020, the FHLB advances were collateralized by certain loans which totaled approximately $343.6 million and $309.9 million at December 31, 2021 and 2020, respectively, and by the Company’s investment in FHLB stock which totaled approximately $2.2 million and $1.3 million at December 31, 2021 and 2020, respectively.

 

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

 

The Company borrowed $5.0 million from First National Bankers Bank during the year ended December 31, 2020. The loan had a ten-year term with a floating interest rate equal to the Wall Street Journal Prime Rate. Interest payments were due quarterly and the initial principal payment was due June 29, 2021. There was no prepayment penalty. The loan was secured by Bank stock. In January 2021, the loan was repaid.

The Company borrowed $100.8 million under the Federal Reserve Bank of Atlanta to fund PPP loans under the U.S. CARES Act (the Paycheck Protection Program Liquidity Facility). This was secured by PPP loans totaling $101.7 million made during the year ended December 31, 2020. These borrowings have a fixed interest rate of 0.35% and a maturity date equal to the maturity date of the related PPP loans, with the PPP loans maturing either two or five years from the origination date of the PPP loan. This loan was repaid in 2021.

At December 31, 2021 and 2020 the Bank had unsecured federal funds lines of credit of $12.5 million, for which no amounts were outstanding. The Bank also has a line of $62.0 million and $53.8 million with the Federal Reserve Bank of Atlanta Discount Window secured by $115.2 million and $99.5 million in loans as of December 31, 2021 and 2020, respectively. No amount was outstanding on the Discount Window as of December 31, 2021 or 2020.

 

(8) Income Taxes

The components of income tax expense for the years ended December 31, 2021 and 2020 are as follows: (in thousands)

 

 

 

Year Ended
December 31, 2021

 

 

Year Ended
December 31, 2020

 

Current

 

$

2,565

 

 

$

865

 

Deferred

 

 

(227

)

 

 

(73

)

 

 

$

2,338

 

 

$

792

 

 

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, 2021 and 2020 is as follows (in thousands):

 

F-22

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

 

 

Year Ended
December 31, 2021

 

 

Year Ended
December 31, 2020

 

Statutory Federal tax rate

 

 

21

%

 

 

21

%

Pretax income at statutory rate

 

$

2,082

 

 

$

815

 

State income tax, net of federal benefit

 

 

265

 

 

 

(95

)

Cash surrender value of life insurance

 

 

(117

)

 

 

(83

)

Permanent adjustments

 

 

41

 

 

 

26

 

Other

 

 

67

 

 

 

129

 

Actual tax expense 24% and 20%, respectively

 

$

2,338

 

 

$

792

 

 

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, 2021 and 2020: (in thousands)

 

 

 

Year Ended
December 31, 2021

 

 

Year Ended
December 31, 2020

 

Deferred income tax assets:

 

 

 

 

 

 

Allowance for loan losses

 

$

2,195

 

 

$

1,625

 

Deferred compensation

 

775

 

 

873

 

Net operating losses

 

 

1,849

 

 

 

1,683

 

Unrealized loss on investment securities available-for-sale

 

 

122

 

 

 

—

 

State tax credits

 

 

—

 

 

358

 

Fair value adjustments

 

 

522

 

 

 

673

 

Other

 

182

 

 

199

 

Total deferred income tax assets

 

 

5,645

 

 

 

5,411

 

Deferred income tax liabilities:

 

 

 

 

 

 

Core deposit intangible

 

 

391

 

 

 

440

 

Premises and equipment

 

498

 

 

533

 

Unrealized gain on investment securities available-for-sale

 

 

—

 

 

52

 

Other

 

123

 

 

154

 

Total deferred income tax liabilities

 

 

1,012

 

 

 

1,179

 

Net deferred income tax asset

 

$

4,633

 

 

$

4,232

 

 

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, 2021 and 2020, 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, 2020, 2019 and 2018 are open to audit under the statutes of limitations.

 

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, 2021 includes approximately $3,625,000 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.

 

On August 20, 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.

 

 

F-23

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

(9) Employee Stock Ownership Plan

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

In April 2017, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing shares of the Company’s common stock. A total of 295,499 shares were purchased with the loan proceeds as part of the Company’s initial stock offering. In January 2021, the ESOP borrowed $3.0 million payable to the Company for the purpose of purchasing additional shares of the Company’s common stock. A total of 225,721 shares were purchased with the loan proceeds as part of the Company’s stock offering. The balance of the note payable of the ESOP was $5.4 million and $2.6 million at December 31, 2021 and 2020, 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, 2021 and 2020, 59,000 shares and 47,200 shares have been released, respectively.

 

(10) 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, 2021 and 2020 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 $161,000 for the plan years ended December 31, 2021 and 2020.

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, 2021 and 2020 totaled approximately $2,442,000 and $2,830,000, 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) in place 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 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, 2021 and 2020 was approximately $459,000 and $439,000, respectively and is recorded in other liabilities. The related expense for the plan was approximately $20,000 and $410,000 in 2021 and 2020, respectively. The earnings from the increase in the value of the annuity for the years ending December 31, 2021 and 2020 was approximately $4,000 and $5,000, respectively. The carrying value of the annuity was approximately $956,000 and $952,000 as of December 31, 2021 and 2020, respectively and is recorded in other assets.

(11) 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 August 2018, with

F-24

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

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) (see Note 1).

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants were as follows.

 

December 31

 

 

 

2021

 

 

 

2020

 

 

 

 

 

 

 

Dividend yield

 

0.00

%

 

 

0.00

%

Expected volatility

 

36.62

%

 

 

25.40

%

Risk-free interest rate

 

1.04

%

 

 

0.53

%

Expected average life

 

7.5

 

 

 

7.5

 

Weighted average per share fair value

$

5.34

 

 

$

2.02

 

Stock options of 13,454 with a weighted average exercise price of $13.09 were granted during the year ended December 31, 2021. There were no restricted stock grants during the year ended December 31, 2021.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options

 

Option Shares Outstanding

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Life (Years)

 

 

Aggregate Intrinsic Value (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Outstanding - January 1, 2020

 

 

324,916

 

 

$

11.14

 

 

 

9.30

 

 

 

—

 

 Granted

 

 

130,588

 

 

 

7.77

 

 

 

 

 

 

 

Exercise of stock options*

 

 

—

 

 

—

 

 

 

 

 

 

 

 Forfeited

 

 

(133,988

)

 

 

—

 

 

 

 

 

 

 

 Outstanding - December 31, 2020

 

 

321,516

 

 

$

9.77

 

 

 

8.60

 

 

$

203

 

 Exercisable - December 31, 2020

 

 

38,186

 

 

$

11.14

 

 

 

8.20

 

 

$

—

 

 Granted

 

 

13,454

 

 

$

13.09

 

 

 

 

 

 

 

Exercise of stock options*

 

 

 

 

—

 

 

 

 

 

 

 

 Forfeited

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 Outstanding - December 31, 2021

 

 

334,970

 

 

$

9.90

 

 

 

7.80

 

 

$

676

 

 Exercisable - December 31, 2021

 

 

102,489

 

 

$

10.28

 

 

 

7.57

 

 

$

274

 

* 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.

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-25

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock

 

 

 

 

 

Weighted Average Grant Date Fair Value

 

 

Restricted Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 Outstanding - January 1, 2020

 

 

 

 

 

$

10.10

 

 

 

120,588

 

 Granted

 

 

 

 

 

 

7.05

 

 

 

64,666

 

Vested*

 

 

 

 

 

 

—

 

 

 

(13,865

)

 Forfeited

 

 

 

 

 

 

—

 

 

 

(51,266

)

 Outstanding - December 31, 2020

 

 

 

 

 

$

8.63

 

 

 

120,123

 

 Granted

 

 

 

 

 

$

—

 

 

 

—

 

Vested*

 

 

 

 

 

 

—

 

 

 

(26,787

)

 Forfeited

 

 

 

 

 

 

—

 

 

 

—

 

 Outstanding - December 31, 2021

 

 

 

 

 

$

8.63

 

 

 

93,336

 

*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, 2,641 shares were surrendered during the year ended December 31, 2021.

The Company recognized approximately $410,000 and $298,000 of stock-based compensation expense (included in salary and employee benefits on the consolidated statements of income) during 2021 and 2020, respectively, associated with its common stock awards granted to directors and officers.

As of December 31, 2021, there was approximately $1.2 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately 3.0 years.

 

(12) 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, 2021 and 2020, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2021 and 2020, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1 risk-based, total risk-based, Tier I risk-based and Tier I leverage ratios as set forth below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

F-26

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

The Bank’s actual capital amounts and ratios for December 31, 2021 and 2020 are presented in the table below (in thousands).

 

 

 

 

 

 

 

 

 

For Capital

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

 

Adequacy

 

 

Under Prompt Corrective

 

 

 

Actual

 

 

Purposes

 

 

Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of December 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

83,662

 

 

 

13

%

 

$

27,960

 

 

 

4.50

%

 

$

40,386

 

 

 

6.50

%

Total Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

91,438

 

 

 

15

%

 

$

49,706

 

 

 

8

%

 

$

62,133

 

 

 

10

%

Tier I Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

83,662

 

 

 

13

%

 

$

37,280

 

 

 

6

%

 

$

49,706

 

 

 

8

%

Tier I Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Average Assets)

 

$

83,662

 

 

 

11

%

 

$

31,070

 

 

 

4

%

 

$

38,837

 

 

 

5

%

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

61,290

 

 

 

12

%

 

$

23,531

 

 

 

4.50

%

 

$

33,989

 

 

 

6.50

%

Total Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

67,667

 

 

 

13

%

 

$

41,833

 

 

 

8

%

 

$

52,291

 

 

 

10

%

Tier I Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Risk Weighted Assets)

 

$

61,290

 

 

 

12

%

 

$

31,375

 

 

 

6

%

 

$

41,833

 

 

 

8

%

Tier I Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(to Average Assets)

 

$

61,290

 

 

 

10

%

 

$

24,661

 

 

 

4

%

 

$

30,826

 

 

 

5

%

 

A reconciliation of the Bank’s equity capital amounts under GAAP to tier 1 and total risk-based capital for December 31, 2021 and 2020 are presented in the table below (in thousands).

 

 

December 31,
2021

 

 

December 31,
2020

 

 

 

Regulatory capital:

 

 

 

 

 

 

 

 

Stockholders’ equity

 

$

103,187

 

 

 

82,003

 

 

 

Intangible assets

 

 

(18,749

)

 

 

(18,940

)

 

 

Disallowed deferred taxes

 

 

(776

)

 

 

(1,773

)

 

 

Tier 1 risk-based capital

 

 

83,662

 

 

 

61,290

 

 

 

Eligible allowance for loan losses

 

 

7,776

 

 

 

6,377

 

 

 

Total risk-based capital

 

$

91,438

 

 

 

67,667

 

 

 

 

(13) Related Party Transactions

The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interest, in the normal course of business. It is the policy of the Company that loan transactions with directors and executive officers be made on substantially the same terms as those prevailing at the time for comparable loans to other persons. The following is a summary of activity for related party loans: (in thousands).

 

 

 

For Year Ended
December 31, 2021

 

 

For Year Ended
December 31, 2020

 

Beginning balance

 

$

927

 

 

$

1,034

 

Loans advanced

 

3

 

 

 

206

 

Repayments

 

 

(603

)

 

 

(313

)

Ending balance

 

$

327

 

 

$

927

 

The aggregate amount of deposits from directors and executive officers and their affiliates amounted to approximately $2.4 million and $2.5 million at December 31, 2021 and 2020, respectively.

(14) Commitments

F-27

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments could include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

In most cases, the Bank requires collateral or other security to support financial instruments with credit risk.

 

 

 

Appropriate

 

 

 

Contract Amount

 

 

 

December 31,
2021

 

 

December 31,
2020

 

Financial instruments whose contract amounts
   represent credit risk: (in thousands)

 

 

 

 

 

 

Commitments to extend credit

 

$

69,582

 

 

$

63,485

 

 

The dollar amount and ranges of rates of commitments to fund fixed rate loans follows: (in thousands)

 

 

 

December 31,2021

 

December 31,2020

 

 

Amount

 

 

Interest
Rate
Range

 

Amount

 

 

Interest
Rate
Range

Commitments to extend credit

 

$

26,820

 

 

2.75%-6.95%

 

 

34,391

 

 

2.85%-6.95%

 

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation. Collateral held varies but may include unimproved and improved real estate, certificates of deposit, or personal property.

 

(15) Fair Value Measurements and Disclosures

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

Fair Value Hierarchy

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

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

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

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing

F-28

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

Cash and Cash Equivalents

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

Investment Securities Available-for-Sale

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

Other Investments

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

Loans

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

Other Real Estate Owned

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

Bank Owned Life Insurance

The carrying value of Bank Owned Life Insurance approximates fair value.

F-29

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

Deposits

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

FHLB Advances

Federal Home Loan Bank advances are carried at cost and the fair value is obtained from the Federal Home Loan Bank of Atlanta.

PPPLF and Other Borrowings

The carrying value of other borrowings reasonably approximates fair value. The Payroll Protection Program Liquidity Facility funding has a fixed rate of 0.35% for all participants; thus, the carrying value approximates the estimated fair value.

Commitments to Extend Credit

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

Assets Recorded at Fair Value on a Recurring Basis

The Company’s only assets recorded at fair value on a recurring basis are available-for-sale securities that had a fair value of $48.6 million and $24.0 million at December 31, 2021 and 2020, respectively. They are classified as Level 2.

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of December 31, 2021 and 2020 (in thousands).

 

December 31, 2021

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Other real estate owned

 

$

—

 

 

 

—

 

 

 

3,538

 

 

 

3,538

 

Impaired loans

 

 

—

 

 

 

—

 

 

 

7,221

 

 

 

7,221

 

Total assets at fair value

 

$

—

 

 

 

—

 

 

 

10,759

 

 

 

10,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Other real estate owned

 

$

—

 

 

 

—

 

 

 

1,292

 

 

 

1,292

 

Impaired loans

 

 

—

 

 

 

—

 

 

 

7,223

 

 

 

7,223

 

Total assets at fair value

 

$

—

 

 

 

—

 

 

 

8,515

 

 

 

8,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-30

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

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

 

 

 

December 31, 2021

 

 

December 31, 2020

 

 

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

 

 

Amount

 

 

Fair Value

 

 

Amount

 

 

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

111,776

 

 

 

111,776

 

 

 

178,253

 

 

 

178,253

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

available-for-sale

 

$

48,557

 

 

 

48,557

 

 

 

24,005

 

 

 

24,005

 

Other investments

 

$

2,476

 

 

 

2,476

 

 

 

1,596

 

 

 

1,596

 

Loans, net

 

$

575,825

 

 

 

581,541

 

 

 

592,254

 

 

 

611,625

 

Bank owned life insurance

 

$

15,377

 

 

 

15,377

 

 

 

15,311

 

 

 

15,311

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

614,799

 

 

 

601,036

 

 

 

640,165

 

 

 

639,269

 

FHLB advances

 

$

48,988

 

 

 

48,197

 

 

 

19,117

 

 

 

16,769

 

PPPLF borrowings

 

$

—

 

 

 

—

 

 

 

100,813

 

 

 

100,813

 

Other borrowings

 

$

—

 

 

 

—

 

 

 

5,000

 

 

 

5,000

 

 

Limitations

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

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

 

(16) Condensed Parent Company Only Financial Information

A condensed summary of Affinity Bancshares, Inc.’s financial information is shown.

F-31

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

Parent Only Condensed Balance Sheets

 

 

 

December 31,
2021

 

 

December 31,
2020

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash in bank subsidiary

 

$

11,222

 

 

$

364

 

Investment in subsidiary, at underlying equity

 

 

103,188

 

 

 

82,004

 

Loan receivable - ESOP

 

 

5,446

 

 

 

2,617

 

Other assets

 

 

1,279

 

 

 

857

 

Total assets

 

$

121,135

 

 

$

85,842

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities :

 

 

 

 

 

 

      Other borrowings

 

$

—

 

 

$

5,000

 

Other liabilities

 

 

167

 

 

 

57

 

Total liabilities

 

 

167

 

 

 

5,057

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Total stockholders' equity

 

 

120,968

 

 

 

80,785

 

Total liabilities and stockholders' equity

 

$

121,135

 

 

$

85,842

 

 

F-32

AFFINITY BANCSHARES, INC.

Notes to Consolidated Financial Statements

 

Parent Only Condensed Statements of Income

 

 

 

Year Ended
December 31,

 

 

Year Ended
December 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

Income on ESOP loan

 

$

177

 

 

$

120

 

Total interest income

 

 

177

 

 

 

120

 

Interest expense:

 

 

 

 

 

 

Interest expense on borrowings

 

 

10

 

 

 

82

 

Total interest expense

 

 

10

 

 

 

82

 

Net interest income

 

 

167

 

 

 

38

 

Noninterest expenses:

 

 

 

 

 

 

Other noninterest expense

 

 

537

 

 

 

565

 

Loss before income taxes

 

 

(370

)

 

 

(527

)

Income tax benefit

 

 

227

 

 

 

14

 

Loss before equity in undistributed earnings of Bank

 

 

(143

)

 

 

(513

)

Equity in undistributed earnings of Bank

 

 

7,716

 

 

 

3,601

 

Net income

 

$

7,573

 

 

$

3,088

 

 

 

Parent Only Condensed Statements of Cash Flows

 

 

 

Year Ended
December 31,

 

 

Year Ended
December 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

7,573

 

 

$

3,088

 

Adjustments to reconcile net income to net cash used in operating
   activities

 

 

 

 

 

 

Equity in undistributed earnings of Bank

 

 

(7,716

)

 

 

(3,601

)

Other

 

 

(311

)

 

 

(256

)

Net cash used in operating activities

 

 

(454

)

 

 

(769

)

Cash flows from investing activities:

 

 

 

 

 

 

Payments from ESOP loan

 

 

131

 

 

 

209

 

Cash paid in business combination

 

 

—

 

 

 

(40,388

)

Purchase ABB preferred stock

 

 

—

 

 

 

(10,848

)

Capital injection into the Bank

 

 

(16,267

)

 

 

(5,000

)

Net cash used in investing activities

 

 

(16,136

)

 

 

(56,236

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from stock offering

 

 

37,108

 

 

 

—

 

Stock offering expenses

 

 

(1,699

)

 

 

—

 

Funding of ESOP

 

 

(2,961

)

 

 

—

 

      Proceeds from other borrowings

 

 

—

 

 

 

5,000

 

      Repay other borrowings

 

 

(5,000

)

 

 

—

 

      Dividend from Bank

 

 

—

 

 

 

40,600

 

Net cash provided by financing activities

 

 

27,448

 

 

 

45,600

 

Net change in cash and cash equivalents

 

 

10,858

 

 

 

(11,405

)

Cash and cash equivalents at beginning of period

 

 

364

 

 

 

11,560

 

Cash and cash equivalents at end of period

 

$

11,222

 

 

$

364

 

 

 

 

 

 

 

F-33

 

ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

 

ITEM 9A. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.

 

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management, including the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting As of December 31, 2021, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework (2013).” Based on such assessment, management believes that, As of December 31, 2021, the Company’s internal control over financial reporting is effective, based on those criteria.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. As the Company is a non-accelerated filer, management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to provisions of the Dodd-Frank Act that permit the Company to provide only the management’s report in this annual report.

There were no changes made in our internal controls during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. Other Information

None.

45

 

PART III

ITEM 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections

Not applicable.

ITEM 10. Directors, Executive Officers and Corporate Governance

Affinity Bancshares, Inc. has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. A copy of the Code is available on Affinity Bancshares, Inc.’s website at www.newtonfederal.com under “About Us – Investor Relations – Governance – Governance Documents.”

The information contained under the sections captioned “Proposal I – Election of Directors” in the Company’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

ITEM 11. Executive Compensation

The information contained under the section captioned “Proposal I – Election of Directors – Executive Compensation” in the definitive Proxy Statement is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a)
Securities Authorized for Issuance under Stock-Based Compensation Plans

 

Set forth below is information as of December 31, 2021 with respect to compensation plans (other than our Employee Stock Ownership Plan) under which Company equity securities are authorized for issuance. Other than our Employee Stock Ownership Plan, we do not have any equity compensation plans that were not approved by our stockholders. Equity compensation plans approved by stockholders consist of the Community First Bancshares, Inc. 2018 Equity Incentive Plan.

 

Equity Compensation Plan Information

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

Weighted-average exercise price outstanding options, warrants and rights

 

 

Number of securities remaining available for future issuance under stock-based compensation plans (excluding securities reflected in first column)

 

Equity compensation plans approved by security holders

334,970

 

$8.86

 

0

 

Equity compensation plans not approved by security holders

0

 

N/A

 

0

 

 

Total

334,970

 

$8.86

 

0

 

(b) Security Ownership of Certain Beneficial Owners

The information required by this item is incorporated herein by reference to the section captioned “Voting Securities and Principal Holders” in the Proxy Statement.

(c) Security Ownership of Management

The information required by this item is incorporated herein by reference to the section captioned “Voting Securities and Principal Holders” in the Proxy Statement.

46

 

(d) Changes in Control

Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

The information required by this item is incorporated herein by reference to the sections captioned “Proposal I – Election of Directors – Transactions with Certain Related Persons,” “– Board Independence” and “– Meetings and Committees of the Board of Directors” of the Proxy Statement.

ITEM 14. Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to the section captioned “Proposal II – Ratification of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement.

 

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

 

3.1

Articles of Incorporation of Affinity Bancshares, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of Affinity Bancshares, Inc. (File No. 333-248745), initially filed with the Securities and Exchange Commission on September 11, 2020)

 

 

3.2

Bylaws of Affinity Bancshares, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 of Affinity Bancshares, Inc. (File No. 333-248745), initially filed with the Securities and Exchange Commission on September 11, 2020)

 

4.1

Form of Common Stock Certificate of Affinity Bancshares, Inc. (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 of Affinity Bancshares, Inc. (File No. 333-248745), initially filed with the Securities and Exchange Commission on September 11, 2020)

 

 

4.2

Description of Affinity Bancshares, Inc. Securities (incorporated by reference to Exhibit 4.2 to the annual report on 10-K (File No. 001-39914) filed with the Securities and Exchange Commission on April 1, 2021)

 

 

10.1

Directors Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 of Community First Bancshares, Inc. (File No. 333-215041), initially filed with the Securities and Exchange Commission on December 12, 2016) †

 

 

10.2

Community First Bancshares, Inc. 2018 Equity Incentive Plan (incorporated by reference to Appendix A to the Proxy Statement for the Annual Meeting of Stockholders of Community First Bancshares, Inc. (File No. 001-38074), filed with the Securities and Exchange Commission on July 18, 2018)†

 

 

10.3

Employment Agreement between Newton Federal Bank, Community First Bancshares, Inc. and Gregory J. Proffitt (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Affinity Bancshares, Inc. (File No. 001-38074), filed with the Securities and Exchange Commission on September 7, 2018)†

 

 

10.4

Employment Agreement between Newton Federal Bank, Community First Bancshares, Inc. and Tessa M. Nolan (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Affinity Bancshares, Inc. (File No. 001-38074), filed with the Securities and Exchange Commission on September 7, 2018)†

 

 

10.5

Employment Agreement by and among Community First Bancshares, Inc., Newton Federal Bank and Edward J. Cooney (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K of Community First Bancshares, Inc. (File No. 001-38074), filed with the Securities and Exchange Commission on March 30, 2020)†

 

 

10.6

Supplemental Executive Retirement Plan, dated January 2, 2019, between Affinity Bank and Edward J. Cooney (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K of Community First Bancshares, Inc. (File No. 001-38074), filed with the Securities and Exchange Commission on March 30, 2020)†

 

 

 

47

 

10.7

Amendment No. 1 to Employment Agreement by and between Newton Federal Bank, Community First Bancshares, Inc. and Gregory J. Proffitt (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Community First Bancshares, Inc. (File No. 001-38074), filed with the Securities and Exchange Commission on May 14, 2020)†

 

 

10.8

Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 of Community First Bancshares, Inc. (File No. 333-227212), initially filed with the Securities and Exchange Commission on September 6, 2018)†

 

10.9

Form of Incentive Stock Option Award Agreement (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-8 of Community First Bancshares, Inc. (File No. 333-227212), initially filed with the Securities and Exchange Commission on September 6, 2018)†

 

10.10

[intentionally omitted]

 

10.11

Form of Addendum to Non-Qualified Stock Option Award Agreement† (incorporated by reference to Exhibit 10.11 to the annual report on 10-K (File No. 001-39914) filed with the Securities and Exchange Commission on April 1, 2021)

 

 

10.12

Form of Addendum to Incentive Stock Option Award Agreement† (incorporated by reference to Exhibit 10.12 to the annual report on 10-K (File No. 001-39914) filed with the Securities and Exchange Commission on April 1, 2021)

 

 

10.13

Form of Addendum to Restricted Stock Award Agreement† (incorporated by reference to Exhibit 10.13 to the annual report on 10-K (File No. 001-39914) filed with the Securities and Exchange Commission on April 1, 2021)

 

 

10.14

Amendment No. 1 to Community First Bancshares, Inc. 2018 Equity Incentive Plan†  (incorporated by reference to Exhibit 10.14 to the annual report on 10-K (File No. 001-39914) filed with the Securities and Exchange Commission on April 1, 2021)

 

 

10.15

Employment Agreement with Clark Nelson

 

 

10.16

Employment Agreement with Elizabeth Glazka

 

 

21

Subsidiaries of Registrant

 

 

23

Consent of Wipfli LLP (U.S. PCAOB Auditor Firm ID 344)

 

 

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101

The following materials from the Company’s Annual Report on Form 10-K, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to the Consolidated Financial Statements

 

† Management contract or compensation plan or arrangement.

ITEM 16. Form 10-K Summary

Not applicable

 

 

48

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

AFFINITY BANCSHARES, INC.

 

 

 

 

Date: March 18, 2022

 

By:

/s/ Edward J. Cooney

 

 

 

Edward J. Cooney

 

 

 

Chief Executive Officer and Director

 

 

 

(Duly Authorized Representative)

 

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures

 

Title

 

Date

 

 

 

 

 

/s/ Edward J. Cooney

 

Chief Executive Officer

 

March 18, 2022

Edward J. Cooney

 

and Director (Principal Executive

 

 

 

 

Officer)

 

 

 

 

 

 

 

/s/ Tessa M. Nolan

 

Senior Vice President and Chief

 

March 18, 2022

Tessa M. Nolan

 

Financial Officer

 

 

 

 

(Principal Financial and

 

 

 

 

Accounting Officer)

 

 

 

 

 

 

 

/s/ William D. Fortson, Jr.

 

Chairman of the Board

 

March 18, 2022

William D. Fortson, Jr.

 

 

 

 

 

 

 

 

 

/s/ Marshall L. Ginn

 

Director

 

March 18, 2022

Marshall L. Ginn

 

 

 

 

 

 

 

 

 

/s/ Bob W. Richardson

 

Director

 

March 18, 2022

Bob W. Richardson

 

 

 

 

 

 

 

 

 

/s/ Howard G. Roberts

 

Director

 

March 18, 2022

Howard G. Roberts

 

 

 

 

 

 

 

 

 

/s/ Mark J. Ross

 

Director

 

March 18, 2022

Mark J. Ross

 

 

 

 

 

 

 

 

 

/s/ Edward P. Stone

 

Director

 

March 18, 2022

Edward P. Stone

 

 

 

 

 

 

 

 

 

/s/ Robin S. Reich

 

Director

 

March 18, 2022

Robin S. Reich

 

 

 

 

 

 

49

 

EXHIBIT 10.15

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of August 19, 2019 by and among Newton Federal Bank, a federally-chartered savings association organized under the laws of the United States of America (the “Bank”), Community First Bancshares, Inc., a federally-charted corporation organized under the laws of the United States of America (the “Company”), as a guarantor under the Agreement, and Clark Nelson, a resident of the State of Georgia (the “Executive”).

 

RECITALS:

 

WHEREAS, the Company, Community Interim Corporation and ABB Financial Group, Inc. (the parent company of Affinity Bank) have entered into an Agreement and Plan of Merger dated as of August 19, 2019 (the “Merger Agreement”); and

 

WHEREAS, the Executive recognizes the Company’s willingness to enter into the Merger Agreement is dependent on the Executive entering into this Agreement and, therefore, this Agreement is incident to the Merger Agreement; and

 

WHEREAS, the Executive wishes to serve in the employ of the Bank for the period and upon the terms and conditions provided for in this Agreement.

 

NOW THEREFORE, for the reasons set forth above and in consideration of the good and valuable consideration, the receipt, adequacy, and sufficiency of which are hereby acknowledged, the Bank, the Company and the Executive hereby agree as follows:

 

1.
Definitions.

 

Whenever used in this Agreement, the following terms and their variant forms shall have the meaning set forth below:

 

1.1 “Affiliate” shall mean any business entity which controls the Bank or is controlled by or is under common control with the Bank, including the Company.

 

1.2 “Agreement” shall mean this Agreement and any exhibits incorporated herein together with any amendments hereto made in the manner described in this Agreement.

 

1.3 “Area” shall mean any county in which the Bank maintains an office or has pending an application for regulatory approval to open an office.

 

1.4 “Average Monthly Compensation” shall mean the quotient determined by dividing the sum of the Executive’s then current Base Salary (as defined in Section 4.1 hereof) and the greater of the most recently paid Non-Equity Incentive Compensation (as defined in Section 4.2 hereof) or the average of Non-Equity Incentive Compensation paid over the three most recent years by twelve.

 

1.5 “Bank Information” means Confidential Information and Trade Secrets.

 

1.6 “Board of Directors” shall mean the Board of Directors of the Bank.

 

 

1.7 “Business of the Bank” shall mean the business conducted by the Bank and its Affiliates, which is the business of banking, including the solicitation of time and demand deposits and the making of residential, consumer, commercial and corporate loans.

 

1.8 “Cause” shall mean termination of employment because of, in the good faith determination of the Bank, the Executive’s:

(i) material act of dishonesty or fraud in performing the Executive’s duties on behalf of the Bank;

(ii) willful misconduct that in the judgment of the Board of Directors will likely cause economic damage to the Bank or its Affiliates or injury to the business reputation of the Bank or its Affiliates;

(iii) incompetence (in determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the banking industry);

(iv) breach of fiduciary duty involving personal profit;

(v) intentional failure to perform stated duties under this Agreement after written notice thereof from the Board of Directors;

(vi) willful violation of any law, rule or regulation (other than traffic violations or similar offenses which results only in a fine or other non-custodial penalty) that reflects adversely on the reputation of the Bank or its Affiliates, any felony conviction, any violation of law involving moral turpitude, or any violation of a final cease-and-desist order; or any violation of the policies and procedures of the Bank as outlined in the Bank’s employee handbook, which would result in termination of employees, as from time to time amended and incorporated herein by reference; or

(vii) material breach by the Executive of any provision of this Agreement.

Notwithstanding the foregoing, Cause shall not be deemed to exist unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors the Executive was guilty of conduct described above and specifying the particulars thereof. Prior to holding a meeting at which the Board of Directors is to make a final determination whether Cause exists, if the Board of Directors determines in good faith at a meeting of the Board of Directors, by not less than a majority of its entire membership, that there is probable cause for it to find that the Executive was guilty of conduct constituting Cause as described above, the Board of Directors may suspend the Executive from the Executive’s duties hereunder for a reasonable period of time not to exceed fourteen (14) days pending a further meeting at which the Executive shall be given the opportunity to be heard before the Board of Directors. Upon a finding of Cause, the Board of Directors shall deliver to the Executive a notice of termination, as provided for in Section 11 hereof.

1.9 “Change in Control” means any one of the following events occurring after the Effective Date:

 

(1)
Any one person or more than one person acting as a group acquires ownership of the stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company;

 

(2) A change in the effective control of the Bank or the Company occurs on either of the following dates: The date any one person or more than one person acting as a group acquires, either in a single transaction or series of transactions occurring within a twelve (12) month period, ownership of the stock possessing thirty

 

percent (30%) of the total voting power of the stock of the Company or the date a majority of the members of the Board of Directors (of either the Bank or the Company) is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors before the date of appointment or election; or

 

(3) A change in the ownership of a substantial portion of the Bank’s or the Company’s assets occurs on the date that any one person, or more than one person acting as a group, acquires assets of the Bank or the Company that has a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all assets of the Bank or the Company immediately before such acquisition or acquisitions over a twelve (12) month period.

 

Notwithstanding the foregoing, in no event shall a Change in Control, as defined hereunder, include any second-step conversion of Community First Bancshares, MHC, the mutual holding company parent of the Company.

 

1.10 “Confidential Information” means data and information relating to the Business of the Bank and its Affiliates (which does not rise to the status of a Trade Secret) which is or has been disclosed to the Executive or of which the Executive became aware as a consequence of or through the Executive’s relationship to the Bank and which has value to the Bank and is not generally known to its competitors. Without limiting the foregoing, Confidential Information shall include:

 

(a) Trade Secrets;

 

(b) the names, addresses and banking requirements of the customers of the Bank and its Affiliates and the nature and amount of business done with such customers;

 

(c) the names and addresses of employees and other business contacts of the Bank and its Affiliates;

 

(d) the particular names, methods and procedures utilized by the Bank and its Affiliates in the conduct and advertising of its business;

 

(e) application, operating system, communication and other computer software and derivatives thereof, including, without limitation, sources and object codes, flow charts, coding sheets, routines, sub-routing and related documentation and manuals of the Bank and its Affiliates; and

 

(f) marketing techniques, purchasing information, pricing policies, loan policies, quoting procedures, financial information, customer data and other materials or information relating to the Bank’s and its Affiliates’ manner of doing business.

 

Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by the Bank (except where such public disclosure has been made by the Executive without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means.

 

2.11
“Good Reason” shall mean:

 

(a) a material diminution in the powers, responsibilities, duties or Base Salary of the Executive by the Bank, which condition remains uncured after the expiration of thirty (30) days following the delivery of written notice of the condition to the Bank by the Executive;

 

 

(b) the failure of the Board of Directors to maintain the Executive’s appointment to the office of Executive Vice President - Chief Credit Officer of the Bank; or

 

(c) a relocation of the Executive’s principal office of employment by more than fifty (50) miles; or

 

(d) a material breach of the terms of this Agreement by the Bank, which breach remains uncured after the expiration of thirty (30) days following the delivery of written notice of such breach to the Bank by the Executive.

 

The Executive must provide written notice to the Bank of the existence of a condition described in subsections (a), (b), (c) or (d) within 90 days of the initial existence of the condition and the Bank shall have 30 days to remedy the condition before the Bank is required to pay severance under Section 3 or Section 4, as applicable.

 

1.12 “Permanent Disability” shall mean a condition for which benefits would be payable under any long-term disability coverage (without regard to the application of any elimination period requirement) then provided to the Executive by the Bank or, if no such coverage is then being provided, the inability of the Executive to perform the material aspects of the Executive’s duties under this Agreement for a period of at least one hundred eighty (180) consecutive days as certified by a physician chosen by the Executive and reasonably acceptable to the Bank. Notwithstanding the provisions in this Section 1.12, Permanent Disability for purposes of this Agreement must also be a disability within the meaning of Code Section 409A(a)(2)(A)(ii) and 409A(a)(2)(C) and Treas. Reg. Section 1.409A-3(a)(2).

 

1.13 “Term” shall mean that period of time set forth in Section 3.1.

 

1.14 “Trade Secrets” means information, without regard to form, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers which (a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

 

3.
Duties.

 

2.1 The Executive shall be employed as Executive Vice President - Chief Credit Officer of the Bank, subject to the direction of the Board of Directors or its designee(s). The Executive shall perform and discharge well and faithfully the authority, duties and responsibilities which may be assigned to the Executive from time to time by the Board of Directors in connection with the conduct of the Business of the Bank; provided, however, that in making its assignments, the Board of Directors shall assign only such authority, duties and responsibilities assigned to the Executive from time to time as are, in the aggregate, consistent with the duties and responsibilities as would be customarily assigned to a person occupying the position(s) held by the Executive pursuant to the terms of this Agreement.

 

2.2 In addition to the duties and responsibilities specifically assigned to the Executive pursuant to Section 2.1 hereof, the Executive shall:

 

(a) devote substantially all of the Executive’s time, energy and skill during regular business hours to the performance of the duties of the Executive’s employment (reasonable vacations and reasonable absences due to illness excepted) and faithfully and industriously perform such duties;

 

 

(b) diligently follow and implement all reasonable and lawful management policies and decisions communicated by the Board of Directors, which is consistent with this Agreement; and

 

(c) timely prepare and forward to the Board of Directors all reports and accounting as may be requested of the Executive.

 

2.3 The Executive shall devote the Executive’s entire business time, attention and energies to the business of the Bank and shall not during the Term be engaged (whether or not during normal business hours) in any other business or professional activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage; but this shall not be construed as preventing the Executive from:

 

(a) managing the Executive’s personal assets and investing the Executive’s personal assets in businesses, which (subject to clause (b) below) are not in competition with the Business of the Bank and which will not require any services on the part of the Executive in their operation or affairs and in which the Executive’s participation is solely that of an investor;

 

(b) purchasing securities or other interests in any entity provided that such purchase shall not result in the Executive’s collectively owning beneficially at any time five percent (5%) or more of the equity securities of any business in competition with the Business of the Bank;

 

(c) serving on the board of directors of other organizations (including those organizations with which the Executive serves as of the Effective Date) so long as such service does not materially interfere with the performance of the Executive’s duties under this Agreement and are not in competition with the Business of the Bank or result in the violation of any listing standard of any securities exchange on which the securities of the Company are traded or listed for trading; and

 

(d) participating in civic and professional affairs and organizations and conferences, preparing or publishing papers or books or teaching or serving on the board of directors of an entity; provided that the Chairman of the Board of Directors or its designee approves in writing of the Executive joining such entity as a member of its board of directors prior to the Executive joining such board of directors.

 

4.
Term and Termination.

 

3.1.1 Term and Annual Renewal. The initial term of this Agreement shall begin as of the date the Effective Time (as defined in the Merger Agreement) occurs (the “Effective Date”) and shall continue for thirty-six (36) months. Commencing on the first September 1 following the Effective Date (the “Renewal Date”) and continuing on each Renewal Date thereafter, the term of this Agreement shall renew for an additional year so that the remaining term of this Agreement is thirty-six (36) months; provided, however, that the disinterested members of the Boards of Directors must take the following actions within the time frames set forth below prior to each Renewal Date: (1) at least 30 days prior to each Renewal Date, conduct or review a comprehensive performance evaluation of the Executive for purposes of determining whether to extend this Agreement; and (2) affirmatively approve the renewal or non-renewal of this Agreement, which decision shall be included in the minutes of the meeting of the Board of Directors. If the decision of the disinterested members of the Board of Directors is not to renew this Agreement, then the Board of Directors shall provide the Executive with a written notice of non-renewal (the “Non-Renewal Notice”) prior to any Renewal Date, and the term of this Agreement shall terminate at the end of the then remaining term. Reference herein to the term of this Agreement shall refer to both the initial term and any extended terms. This Agreement shall be null and void and the parties will have no obligation hereunder if (a) the Merger Agreement is terminated in accordance with its terms, (b) the parties to the Merger Agreement fail to complete the transactions contemplated by the Merger Agreement for any reason or (c) the Executive terminates employment with Affinity Bank for any reason prior to the Effective Time.

 

 

3.1.2 Change in Control. Notwithstanding the foregoing, in the event the Bank or the Company has entered into an agreement to effect a transaction that would be considered a Change in Control, the term of this Agreement shall be extended automatically so that it is scheduled to expire no less than three (3) years beyond the effective date of the Change in Control, subject to extensions as set forth above.

 

3.1.3 Continued Employment Following Expiration of Term. Nothing in this Agreement shall mandate or prohibit a continuation of the Executive’s employment following the expiration of the term of this Agreement.

 

3.2 Termination. During the Term, the employment of the Executive under this Agreement may be terminated only as follows:

 

3.2.1 By the Bank:

 

(a) For Cause, following approval of such action by the Board of Directors and upon written notice to the Executive subject to compliance with Section 1.8 hereof, if applicable, in which event neither the Bank nor the Company shall have any further obligation to the Executive except for the payment of any amounts earned and unpaid and any vested benefits as of the effective date of termination; or

 

(b) Without Cause at any time, following approval of such action by the Board of Directors, in which event the Bank shall be required to meet its obligations to the Executive under Section 3.3.1 below.

 

3.2.2 By the Executive:

 

(a) For Good Reason, in which event the Bank shall be required to meet its obligations to the Executive under Section 3.3.1 below; or

 

(b) Without Good Reason, provided that the Executive shall give the Bank sixty (60) days’ prior written notice of the Executive’s intent to terminate, in which event neither the Bank nor the Company shall have any further obligation to the Executive except for payment of any amounts earned and unpaid and any vested benefits as of the effective date of the termination.

 

3.2.3 At any time upon mutual, written agreement of the parties, in which event neither the Bank nor the Company shall have any further obligation to the Executive except for the payment of any amounts earned and unpaid and any vested benefits as of the effective date of the termination.

 

3.2.4 Notwithstanding anything in this Agreement to the contrary, the Term shall expire automatically upon the Executive’s death or Permanent Disability, and if the reason for termination is the Executive’s death, neither the Bank nor the Company shall have any further obligation to the Executive except for the payment of any amounts earned and unpaid and any vested benefits as of the effective date of termination and, if the reason for termination is the Executive’s Permanent Disability, the Bank shall pay to the Executive an amount equal to the Average Monthly Compensation for each full month following such termination until the earlier of the month prior to the month for which the Executive’s long-term disability benefits become payable (and including such month) or six (6) full months commencing with the month following the month in which the date of termination occurs.

 

3.3 Termination Payments.

 

3.3.1 In the event the Executive’s employment is terminated under this Agreement prior to the expiration of the Term pursuant to Section 3.2.1(b) or Section 3.2.2(a), then subject to the requirements of Section 3.3.2, the Bank shall pay to the Executive, as severance pay and liquidated damages the equivalent of the greater of (i) the current Base Salary, or (ii) the Average Monthly Compensation, that would have been paid to the

 

Executive for the remaining term of this Agreement. The payment will be made in cash in a lump sum within five (5) days of the Executive’s termination. In addition, from the effective date of the termination pursuant to Section 3.2.1(b) or Section 3.2.2(a), the Bank shall pay monthly, by the fifth of each month, an amount, subject to applicable tax withholding, equal to what would be the Executive’s cost of COBRA health continuation coverage for the Executive and eligible dependents for the greater of twelve (12) months or the period during which the Executive and those eligible dependents are entitled to COBRA health continuation coverage from the Bank. The Executive shall also be entitled to any amount earned and unpaid and any vested benefits as of the effective date of termination.

 

3.3.2 Payments under this Section 3.3 above are conditioned upon the Executive entering into a Release and Separation Agreement in the form attached hereto as Exhibit A and shall be paid as a lump sum or commence (for non-lump sum payments) on the next payroll date following the sixtieth (60th) day after the date of the Executive’s date of termination of employment with any accrued but unpaid severance being paid on the date of the first payment; provided that the Executive’s Release and Separation Agreement is effective at such time (signed, returned and the revocation period has expired).

 

3.4 Effect on Status as a Director. In the event of Executive’s termination of employment under this Agreement for any reason, such termination shall also constitute Executive’s resignation as a director of the Bank or the Company, or any subsidiary or affiliate thereof, to the extent Executive is acting as a director of any of the aforementioned entities.

 

5.
Compensation.

 

The Executive shall receive the following salary and benefits during the Term:

 

4.1 Base Salary. The Executive shall be compensated at a base rate of TWO HUNDRED FORTY-FIVE THOUSAND DOLLARS ($245,000.00) per year, which may be increased from time to time in accordance with the immediately succeeding sentence (“Base Salary”). The Executive’s salary shall be reviewed annually, and the Executive shall be entitled to receive annually an increase in such amount, if any, as may be determined by the Bank based upon the performance of the Executive and the Bank and its compliance with regulatory standards. Any increase in Base Salary shall become the new Base Salary under this Agreement. Base Salary may not be decreased other than a decrease that is applicable to all senior officers of the Bank and in a percentage not in excess of the percentage decrease for other senior officers. Such salary shall be payable in accordance with the Bank’s normal payroll practices.

 

4.2 Incentive Compensation. During the Term and in addition to the aforesaid Base Salary, the Executive shall be entitled to such additional non-equity incentive compensation as may be awarded from time to time, in its discretion, by the Board of Directors (“Non-Equity Incentive Compensation”). It is understood that any Non-Equity Incentive Compensation to be awarded to the Executive may be based on the attainment by the Bank or its Affiliates of certain performance goals established by the Board of Directors in consultation with the Executive relating to factors, including but not limited to, asset quality, profitability and growth. Notwithstanding anything contained in this Agreement to the contrary, any increase to the Executive’s Base Salary and any Non-Equity Incentive Compensation paid to the Executive shall be (i) in compliance with regulations, pronouncements, directives, or order issued or promulgated by any governing regulatory agency and with any agreement by and between the Bank and such regulatory agencies, (ii) consistent with the safe and sound operation of the Bank, (iii) closely monitored by the Board of Directors, and (iv) comparable to such compensation paid to persons of similar responsibilities and duties in other insured institutions of similar size, in similar locations, and under similar circumstances including financial condition and profitability.

 

4.3 Equity Compensation. The Executive may participate in any equity incentive program and be eligible for the grant of stock options, restricted stock, and other awards thereunder or under any similar plan

 

adopted by the Bank or its Affiliates. Any options or similar awards shall be reflected by a separate written award and issued to the Executive.

 

4.4 Benefits. In addition to the benefits specifically described in this Agreement, the Executive shall be entitled to such benefits as may be available from time to time for senior executives of the Bank similarly situated to the Executive. All such benefits shall be awarded and administered in accordance with the Bank’s standard policies and practices. Such benefits may include, by way of example only, profit sharing plans, retirement or investment funds, dental, health and life insurance benefits and such other benefits as the Bank deems appropriate.

 

4.5 Reimbursement of Expenses; Provision of Business Development Expenses. The Bank shall pay or reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in the performance of his obligations and duties under this Agreement, as provided in the applicable policies of the Bank, as currently adopted or as may be adopted in the future by the Board of Directors. In addition to the foregoing, the Bank believes that its best interests will be more fully served if the Executive maintains active membership in or joins appropriate business or social clubs and other professional associations. Accordingly, upon prior approval of the Board of Directors, the Bank shall also reimburse the Executive for the dues and business-related expenditures associated with the Executive’s membership(s) in such appropriate business or social clubs and such other professional organizations which, in the sole discretion of the Bank, are commensurate with the Executive’s position. The Bank shall also reimburse reasonable expenditures associated with the Executive’s continuing professional education, as well as for the reasonable expenditures of the Executive’s spouse or partner to attend as appropriate, with expenditures for any calendar year in excess of $5,000 approved by the Board of Directors, with such $5,000 annual dollar limit to be reviewed not less frequently than annually by the Board of Directors.

 

 

 

4.6 Vacation. On a non-cumulative basis, the Executive shall be entitled to a number of vacation hours per calendar year as may be available from time to time for senior executives of the Bank similarly situated to the Executive, during which the Executive’s compensation shall be paid in full. Such paid time off shall be subject to the Bank’s policies related thereto as may be adopted from time to time.

 

4.7 Withholding. The Bank may deduct from each payment of compensation hereunder all amounts required to be deducted and withheld in accordance with applicable federal and state income tax, FICA and other withholding requirements.

 

4.8 Change in Control. In the event of the Executive’s termination of employment without Cause or with Good Reason during the Term upon or following a Change in Control, the Bank (or its successor) shall pay to the Executive an amount equal to the product of three (3) multiplied by the Executive’s average annual Base Salary, bonus and profit sharing paid by the Bank to the Executive, (the “Benefit”) as measured over the preceding three full fiscal years prior to the Change in Control (or the average annualized Base Salary and bonus paid to the Executive for such shorter period as the Executive has been employed by the Bank), but not less than his current Base Salary annualized plus bonus and profit sharing paid to the Executive in the prior calendar year immediately preceding such Change in Control. The Benefit shall be paid in cash in a lump sum within five (5) days following the effective date of the Executive’s termination of employment. The Bank shall be entitled to withhold appropriate employment and income taxes, if required by applicable law, should the Benefit become payable.

 

The Executive shall be entitled to and the Bank shall pay to the Executive the Benefit set forth above if, during the Term, there is a Proposed Transaction and the Executive’s employment is thereafter terminated by the Bank or its subsidiary other than for Cause or terminates for Good Reason, and the Proposed Transaction is consummated within one (1) year after the date of termination of the Executive’s employment, then a Change in

 

Control shall be deemed to have occurred during the Term and the termination of the Executive’s employment shall be deemed to have occurred following a Change in Control. For the purposes of this Section 4.9, a “Proposed Transaction” shall mean a public announcement of a proposal for a transaction that, if consummated, would constitute a Change in Control.

 

5. Bank and Affiliate Information.

 

5.1 Ownership of Information. All Bank Information received or developed by the Executive while employed by the Bank will remain the sole and exclusive property of the Bank.

 

5.2 Obligations of the Executive. The Executive agrees (a) to hold Bank Information in strictest confidence, and (b) not to use, duplicate, reproduce, distribute, disclose or otherwise disseminate Bank Information or any physical embodiments thereof and may in no event take any action causing or fail to take any action necessary in order to prevent any Bank Information from losing its character or ceasing to qualify as Confidential Information or a Trade Secret. In the event that the Executive is required by law to disclose any Bank Information, the Executive will not make such disclosure unless (and then only to the extent that) the Executive has been advised by independent legal counsel that such disclosure is required by law and then only after prior written notice is given to the Bank when the Executive becomes aware that such disclosure has been requested and is required by law. This Section 5 shall survive for a period of twelve (12) months following termination of this Agreement with respect to Confidential Information, and shall survive termination of this Agreement for so long as is permitted by the then-current Georgia Trade Secrets Act of 1990, O.C.G.A. §§ 10-1-760 to -767, with respect to Trade Secrets. Anything herein to the contrary notwithstanding, the Executive shall not be restricted from reporting possible violations of federal, state, or local law or regulation to any governmental agency or entity, or from making other disclosures that are protected under the whistleblower provisions of federal, state, or local law or regulation, and the Executive shall not need the prior authorization of the Bank to make any such reports or disclosures and shall not be required to notify the Bank that he has made such reports or disclosures.

 

5.3 Delivery upon Request or Termination. Upon request by the Bank, and in any event upon termination of the Executive’s employment with the Bank, the Executive will promptly deliver to the Bank all property belonging to the Bank, including without limitation all Bank Information then in the Executive’s possession or control.

 

6. Non-Competition.

 

The Executive agrees that during his employment by the Bank hereunder and, in the event of his termination other than by the Bank with or without Cause pursuant to Sections 3.2.1(a) or 3.2.1(b), or by the Executive for Good Reason pursuant to Section 3.2.2(a), for a period of twenty-four (24) months thereafter, the Executive will not (except on behalf of or with the prior written consent of the Bank), within the Area, either directly or indirectly, on his own behalf or in the service or on behalf of others, as an executive employee or in any other capacity which involves duties and responsibilities similar to those undertaken for the Bank, engage in any business which is the same as or essentially the same as the Business of the Bank. Notwithstanding the foregoing, the Bank agrees that the Executive may own up to 5% of the voting shares of any financial institution engaged in the Business of the Bank in the Area. Notwithstanding the foregoing, this provision shall not apply following a Change in Control. Nor shall this provision apply if the Board of Directors provides the Executive with a Non-Renewal Notice pursuant to Section 3.1.1 and the Executive subsequently terminates his employment with the Employer following the expiration of the tern of this Agreement.

 

7. Non-Solicitation of Customers.

 

 

The Executive agrees that during the Executive’s employment by the Bank hereunder and, in the event of the Executive’s termination other than by the Bank with or without Cause pursuant to Sections 3.2.1(a) or 3.2.1(b), or by the Executive for Good Reason pursuant to Section 3.2.2(a), for a period of twenty-four (24) months thereafter, the Executive will not (except on behalf of or with the prior written consent of the Bank), on the Executive’s own behalf or in the service or on behalf of others, solicit, divert or appropriate or attempt to solicit, divert or appropriate, directly or by assisting others, any business from any of the Bank’s or its Affiliate’s customers, including actively sought prospective customers, with whom the Executive has or had material contact during the last twelve (12) months of the Executive’s employment, for purposes of providing products or services that are competitive with those provided by the Bank or its Affiliates. Notwithstanding the foregoing, this provision shall not apply following a Change in Control.

 

8. Non-Solicitation of Employees.

 

The Executive agrees that during the Executive’s employment by the Bank hereunder and, in the event of the Executive’s termination other than by the Bank with or without Cause pursuant to Sections 3.2.1(a) or 3.2.1(b), or by the Executive for Good Reason pursuant to Section 3.2.2(a), for a period of twenty-four (24) months thereafter, the Executive will not on the Executive’s own behalf or in the service or on behalf of others, solicit, recruit or hire away or attempt to solicit, recruit or hire away, directly or by assisting others, any employee of the Bank or its Affiliates, whether or not such employee is a full-time employee or a temporary employee of the Bank or its Affiliates and whether or not such employment is pursuant to written agreement and whether or not such employment is for a determined period or is at will. Notwithstanding the foregoing, this provision shall not apply following a Change in Control.

 

9. Remedies.

 

The Executive agrees that the covenants contained in Sections 5 through 8 hereof are of the essence of this Agreement; that each of the covenants is reasonable and necessary to protect the business, interests and properties of the Bank; and that irreparable loss and damage will be suffered by the Bank should he breach any of the covenants. Therefore, the Executive agrees and consents that, in addition to all the remedies provided by law or in equity, the Bank shall be entitled to a temporary restraining order and temporary and permanent injunctions to prevent a breach or contemplated breach of any of the covenants. The Bank and the Executive agree that all remedies available to the Bank or the Executive, as applicable, shall be cumulative. In addition, in the event the Executive fails to comply with any of the covenants contained in Section 5 hereof and such failure shall not be cured to the reasonable satisfaction of the Bank within thirty (30) days after receipt of written notice thereof from the Bank, the Bank shall thereupon be relieved of liability for all obligations then remaining under Section 3.3 hereof.

 

10. Severability.

 

The parties agree that each of the provisions included in this Agreement is separate, distinct and severable from the other provisions of this Agreement and that the invalidity or unenforceability of any Agreement provision shall not affect the validity or enforceability of any other provision of this Agreement. Further, if any provision of this Agreement is ruled invalid or unenforceable by a court of competent jurisdiction because of a conflict between the provision and any applicable law or public policy, the provision shall be redrawn to make the provision consistent with and valid and enforceable under the law or public policy.

 

11. Notice.

 

All notices and other communications required or permitted under this Agreement shall be in writing and, if mailed by prepaid first-class mail or certified mail, return receipt requested, shall be deemed to have been received on the earlier of the date shown on the receipt or three (3) business days after the postmarked date thereof.

 

In addition, notices hereunder may be delivered by hand, facsimile transmission or overnight courier, in which event the notice shall be deemed effective when delivered or transmitted. All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses:

 

(a)
If to the Bank, to the Bank at:

 

Newton Federal Bank

Attn: Chairman of the Board

8460 Dr. ML King Ave.

Covington, GA 30014

 

(b) If to the Executive, addressed to the most recent address of the Executive set forth in the personnel records of the Bank.

 

12. Assignment.

 

The rights and obligations of the Bank under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Bank, as applicable, including without limitation, a purchaser of all or substantially all the assets of the Bank. If the Agreement is assigned pursuant to the foregoing sentence, the assignment shall be by novation and the Bank shall have no further liability hereunder, and the successor or assign, as applicable, shall become the “Bank” hereunder. No party hereto may assign or delegate this Agreement or any of its rights and obligations hereunder without the written consent of the other parties hereto.

 

13. Waiver.

 

A waiver by the Bank of any breach of this Agreement by the Executive shall not be effective unless in writing, and no waiver shall operate or be construed as a waiver of the same or another breach on a subsequent occasion.

 

14. Arbitration.

 

Except for any claim for injunctive relief, any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, which shall be conducted by a three-person arbitration panel, one of whom shall be selected by each party and the third of whom shall be selected jointly upon mutual agreement of both parties. The place of arbitration shall be Fulton County, Georgia and the Bank and the Executive agree that they will seek to enforce any arbitration award in the Superior Court of Fulton County. The decision of the arbitration panel shall be final and binding upon the parties and judgment upon the award rendered by the arbitration panel may be entered by any court having jurisdiction. The Bank agrees to pay the fees and expenses associated with the arbitration proceedings.

 

15. Attorneys’ Fees.

 

With respect to arbitration of disputes and if litigation ensues between the parties concerning the enforcement of an arbitration award, each party shall pay its own fees, costs and expenses; provided, however, the Bank shall advance to the Executive reasonable fees, costs and expenses incurred by the Executive in preparing for and in initiating or defending against any proceeding or suit brought to enforce rights or obligations set forth in this Agreement. Such advances shall be made within thirty (30) days after receiving copies of invoices presented by the Executive for such fees, costs and expenses. The Executive shall have the obligation to reimburse the Bank within sixty (60) days following the final disposition of the matter (including appeals) to the full extent

 

of the aggregate advances unless the panel of arbitrators or court, as the case may be, has ruled in favor of the Executive on the merits of the substantive issues in dispute.

 

16. Applicable Law.

 

This Agreement shall be construed and enforced under and in accordance with the laws of the State of Georgia, except to the extent governed by the laws of the United States of America in which case federal laws shall govern. The parties agree that the Superior Court of Fulton County, Georgia, shall have jurisdiction of any case or controversy arising under or in connection with this Agreement and shall be a proper forum in which to adjudicate such case or controversy. The parties consent to the jurisdiction of such courts.

 

17. Interpretation.

 

Words importing any gender include all genders. Words importing the singular form shall include the plural, and vice versa. The terms “herein,” “hereunder,” “hereby,” “hereto,” “hereof” and any similar terms refer to this Agreement. Any captions, titles or headings preceding the text of any article, section or subsection herein are solely for convenience of reference and shall not constitute part of this Agreement or affect its meaning, construction or effect.

 

18. Entire Agreement.

 

Effective as of the Effective Date, this Agreement embodies the entire and final agreement of the parties on the subject matter stated in the Agreement. No amendment or modification of this Agreement shall be valid or binding upon the Bank or the Executive unless made in writing and signed by all parties. All prior understandings and agreements relating to the subject matter of this Agreement, including the Employment Agreement entered into between Atlanta Business Bank and the Executive, dated June 16, 2005, as amended on November 27, 2007, are hereby expressly terminated to the extent such agreements were not terminated prior to the Effective Date.

 

19. Rights of Third Parties.

 

Nothing herein expressed is intended to or shall be construed to confer upon or give to any person, firm or other entity, other than the parties hereto and their permitted assigns, any rights or remedies under or by reason of this Agreement.

 

20. Survival.

 

The obligations of the Bank pursuant to Sections 3.2.4 and 3.3 and the obligations of the Executive pursuant to Sections 5, 6, 7 and 8 shall survive the termination of the employment of the Executive hereunder for the period designated under each of those respective sections.

 

21. Compliance with Regulatory Restrictions.

 

(a) The Bank may terminate the Executive’s employment at any time, but any termination by the Board of Directors other than termination for Cause shall not prejudice the Executive’s right to compensation or other benefits under this Agreement. The Executive shall have no right to receive compensation or other benefits for any period after termination for Cause.

 

(b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) [12 USC §1818(e)(3)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act (the “FDI Act”), the Bank’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice

 

are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended.

(c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) [12 USC §1818(e)(4)] or 8(g)(1) [12 USC §1818(g)(1)] of the FDI Act, all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

(d) If the Bank is in default as defined in Section 3(x)(1) [12 USC §1813(x)(1)] of the FDI Act, all obligations of the Bank under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.

(e) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank, (i) by the Director of the OCC or his or her designee, at the time the Federal Deposit Insurance Corporation (“FDIC”) enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) [12 USC §1823(c)] of the FDI Act; or (ii) by the Director or his or her designee at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.

(f) Notwithstanding anything herein contained to the contrary, any payments to the Executive, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the FDI Act, 12 U.S.C. Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359.

22. Section 409A of the Code.

 

For purposes of compliance with Code Section 409A:

 

(a) It is intended that this Agreement shall comply with the provisions of Code Section 409A and the Treasury regulations relating thereto, or an exemption to Code Section 409A. Any payments that qualify for the “short-term deferral” exception shall be considered as paid first, then any payments that qualify for the separation pay plan exception shall be considered as paid next, then payments that qualify for any other exception under Section Code 409A shall be paid under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under Code Section 409A, each payment of compensation under this Agreement shall be treated as a separate payment of compensation for purposes of applying the deferral election rules and the exclusion for certain short-term deferral amounts under Code Section 409A. All payments to be made upon a termination of employment under this Agreement that constitute non-qualified deferred compensation may only be made upon a “separation from service” under Section Code 409A. In no event may the Executive, directly or indirectly, designate the calendar year of any payment under this Agreement. To the extent permitted under Code Section 409A or any Internal Revenue Service (“IRS”) or Treasury rules or other guidance issued thereunder, the Bank may, in consultation with the Executive, modify the Agreement in order to cause the provisions of the Agreement to comply with the requirements of Code Section 409A, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Code Section 409A.

 

(b) Notwithstanding anything to the contrary in this Agreement, all reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Code Section 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during the Executive’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in- kind benefits to be provided, in any other calendar year, (iii) the

 

reimbursement of an eligible expense will be made no later than the last day of the calendar year following the year in which the expense is incurred and (iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.

 

(c) Notwithstanding any other provision of this Agreement to the contrary and if applicable, if the Executive is considered a “specified employee” for purposes of Code Section 409A (as determined in accordance with the methodology established by the Bank as in effect on the date of separation from service), (i) any payment or other benefit that constitutes nonqualified deferred compensation within the meaning of Code Section 409A that is otherwise due to the Executive under this Agreement during the six-month period following his separation from service (as determined in accordance with Code Section 409A) on account of his separation from service shall be accumulated and paid to the Executive on the first business day of the seventh month following his separation from service (the “Delayed Payment Date”). If the Executive dies during the postponement period, the amounts and entitlements delayed on account of Code Section 409A shall be paid to the personal representative of his estate on the first to occur of the Delayed Payment Date or 30 days after the date of the Executive’s death.

 

23. Source of Payments.

 

All payments provided for in this Agreement shall be timely paid from the general funds of the Bank. The Company, however, unconditionally guarantees payment and provision of all amounts and benefits due hereunder to the Executive and, if such amounts due from the Bank are not timely paid or provided by the Bank, such amounts shall be paid by the Company.

 

 

[SIGNATURES ON FOLLOWING PAGE]

 

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have hereunto executed this Agreement in accordance with the provisions hereof.

 

 

Executed this ___19th___ day of ___August________, 2019.

 

 

_/s/_Clark Nelson_____________________

CLARK NELSON

 

Executed this ____19th__ day of ___August________, 2019.

 

 

_/s/_William D. Fortson, Jr.________________

COMMUNITY FIRST BANCSHARES, INC.

(As Guarantor)

 

By: __William D. Fortson, Jr._______________

Title: __Chairman________________________

 

 

Executed this ___19th___ day of ____August_______, 2019.

 

 

_/s/_William D. Fortson, Jr.________________

NEWTON FEDERAL BANK

 

By: __William D. Fortson, Jr._______________

Title: __Chairman________________________

 

 

EXHIBIT A

 

RELEASE AND SEPARATION AGREEMENT

 

PLEASE READ CAREFULLY

 

This Release and Separation Agreement (this “Agreement”) is made and entered into by and between [INSERT NAME] (“Executive”), Community First Bancshares, Inc. (the “Company”), and Newton Federal Bank (the “Bank”), as well as any affiliated or related entities, subsidiaries, or divisions, and the shareholders, directors, officers, Executives, and agents thereof (collectively referred to as the “Bank and its Affiliates”).

THE PARTIES acknowledge the following:

WHEREAS, Executive's employment was terminated by the Bank effective as of [INSERT DATE] (the “Termination Date”); and

WHEREAS, Executive desires to receive severance benefits provided pursuant to this Agreement, and the Bank is willing to provide these benefits to Executive on the condition that Executive enters into this Agreement.

THEREFORE, in consideration of the mutual agreements and promises set forth within this Agreement, the receipt and sufficiency of which are hereby acknowledged, Executive and Bank and its Affiliates agree as follows:

1. Severance Benefits. In consideration for the Executive’s promises as set forth herein, the Bank shall pay Executive the following severance benefits:

a.
An amount equal to $[INSERT AMOUNT], less applicable deductions and withholdings, which shall be paid in equal monthly for a period of twelve (12) months. This severance payment will be made on the next payroll date following the sixtieth (60th) day after the date of Executive’s date of termination of employment, provided Executive has executed and not revoked this Agreement.
b.
[INSERT OTHER SEVERANCE AMOUNTS AS APPLICABLE]

2. Prior Wages, Salary, and Expenses. Executive acknowledges that on or about [INSERT DATE] he or she received his or her final salary payment of $[INSERT AMOUNT] plus any unused accrued vacation, less applicable deductions and withholdings.

3. Release. Executive hereby releases, acquits, and forever discharges the Bank, its parent companies, subsidiaries, divisions, affiliates and controlling persons (if any), their officers, directors, board members, Executives, representatives, attorneys, personal representatives, affiliated or unaffiliated benefit plans, third-party administrators, any and all of their successors and assigns, and all persons acting by, through, under, or in concert with any of them (collectively the “Bank and its Affiliates”) from any and all actions, causes of action, claims, demands, losses, claims for attorneys’ fees, claims for severance of any kind or origin and all other forms of civil damages, occurrences, and liabilities of any kind whatsoever, both known or unknown, arising out

{Clients/1622/00346554.DOCX/ } A-1

 

 

of any matter, happening, or thing, from the beginning of time to the date of this Agreement is signed by Executive, specifically including, but not limited to, any and all liability arising from, including amendments to and anti-retaliation provisions deriving from, the following:

·
Local, state, or federal common law, statute, regulation, or ordinance;
·
Title VII of the Civil Rights Act of 1964;
·
Section 1981 of the Civil Rights Act of 1866;
·
the Age Discrimination in Employment Act of 1967;
·
the Americans with Disabilities Act of 1990;
·
the Family and Medical Leave Act;
·
the Employee Retirement Income Security Act of 1974;
·
the Health Insurance Portability and Accountability Act;
·
the Occupational and Safety Health Act;
·
the Equal Pay Act;
·
the Uniformed Services Employment and Re-employment Act of 1994;
·
Executive Orders 11246 and 11141;
·
the Worker Adjustment and Retraining Notification Act;
·
the Rehabilitation Act of 1973;
·
the Medicare, Medicaid and SCHIP Extension Act of 2007;
·
state workers’ compensation laws;
·
state non-discrimination and/or human affairs laws;
·
state payment of wages laws, acts or regulations;
·
Executive’s employment relationship and/or affiliation with the Bank and its Affiliates.

 

This release also includes a release of any claims for wrongful termination, breach of express or implied contract, intentional or negligent infliction of emotional distress, libel slander, as well as any other claims, whether in tort, contract or equity, under federal or state statutory or common law.

Without waiving any prospective or retrospective rights under the Fair Labor Standards Act (“FLSA”), Executive admits that he or she has received from the Bank and its Affiliates all rights and benefits, if any, potentially due to him or her pursuant to the FLSA. Executive states that he or she is aware of no facts (including any injuries or illnesses) which might lead to his or her filing of a workers’ compensation claim against the Bank and its Affiliates. It is the parties’ intent to release all claims which can legally be released but no more than that.

4.
Covenant Not to Sue. Executive represents that he or she has no claims pending or filed with any local, state or federal agency (including the U.S. Equal Employment Opportunity Commission, the U.S. Department of Labor, and any comparable state or local administrative agency) or court against the Bank and its Affiliates as of the date this Agreement was signed by Executive. Executive further agrees that he or she will not file or participate in any lawsuit against the Bank and its Affiliates arising out of or in connection with the employment relationship previously existing between them or the termination of that relationship other than one based upon the alleged violation of this Agreement by the Bank and its Affiliates. The foregoing shall be construed as a covenant not to sue. This Agreement may be introduced as evidence at any legal

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proceeding as a complete defense to any claims existing as of the date of this Agreement ever asserted by Executive against the Bank and its Affiliates.
5.
Discrimination Charges; ADEA Challenges to this Agreement. Nothing in this Agreement shall be interpreted or applied in a manner that affects or limits Executive’s otherwise lawful ability to bring an administrative charge with, to participate in an investigation conducted by, or to participate in a proceeding involving the U.S. Equal Employment Opportunity Commission or other comparable state or local administrative agency. However, Executive specifically agrees that the consideration provided to him or her in this Agreement represents full and complete satisfaction of any monetary relief or award that could be sought or awarded to Executive in any administrative action (including any proceedings before the U.S. Equal Employment Opportunity Commission or any comparable state or local agency) arising from events related to his or her employment with the Bank or the termination thereof. Additionally, nothing in this Agreement shall be interpreted or applied in a manner that affects or limits Executive’s ability to challenge this Agreement’s compliance with notice and other requirements of the Age Discrimination in Employment Act (“ADEA”).
6.
No Prior Assignment. Executive further warrants and covenants, recognizing that the truth of this warranty and covenant is material to the above consideration having passed, that he or she has not assigned, transferred or conveyed at any time to any individual or entity any alleged rights, claims or causes of action against the Bank and its Affiliates.
7.
Medicare Benefits. Executive affirms, covenants, and warrants he or she is not a Medicare beneficiary and is not currently receiving, has not received in the past, will not have received at the time of payment pursuant to this Agreement, is not entitled to, is not eligible for, and has not applied for or sought Social Security or Medicare benefits. In the event any statement in the preceding sentence is incorrect (for example, but not limited to, if Executive is a Medicare beneficiary, etc.), the following sentences (i.e., the remaining sentences of this paragraph) apply: Executive affirms, covenants, and warrants he or she has made no claim against, nor is he or she aware of any facts supporting any claim against, the Bank and its Affiliates under which it could be liable for medical expenses incurred by the Executive before or after the execution of this Agreement. Furthermore, Executive is aware of no medical expenses which Medicare has paid and for which the Bank and its Affiliates is or could be liable. Executive agrees and affirms that, to the best of his or her knowledge, no liens of any governmental entities, including those for Medicare conditional payments, exist. Executive will indemnify, defend, and hold the Bank and its Affiliates harmless from Medicare claims, liens, damages, conditional payments, and rights to payment, if any, including attorneys’ fees, and Executive further agrees to waive any and all future private causes of action for damages pursuant to 42 U.S.C. § 1395y(b)(3)(A) et seq.
8.
Performance. The Bank’s obligation to perform under this Agreement is conditioned upon Executive’s agreements and promises to the Bank and its Affiliates as set forth herein. In the event Executive breaches any such agreements or promises or causes any such agreements or promises to be breached, the Bank’s obligations to perform under this Agreement shall automatically terminate and the Bank and its Affiliates shall have no further obligation to Executive. Further, the Bank and its Affiliates shall be entitled to seek, at its option, the return of all but $100.00 of the severance benefits paid to Executive pursuant to this Agreement.

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9.
Bank Information, Non-Solicitation of Customers and Non-Solicitation of Employees. Executive agrees that he or she will comply with the obligations provided in Sections 5 through 7 of the Employment Agreement by and among Executive, Community First Bancshares, Inc., and Newton Federal Bank dated [ ] (the “Employment Agreement”), related to confidential information of the Bank and its Affiliates, non-solicitation of customers and non-solicitation of Executives, for the terms stated in the Employment Agreement.
10.
Disparagement. Executive agrees and covenants that he or she will not in any way do or say anything at any time which disparages or derogates the Bank and its Affiliates, its business interests or reputation, or any of its individual directors, officers, Executives, or agents.
11.
No Admission of Liability. Nothing in this Agreement (or the Agreement itself) shall operate or be interpreted as an admission of liability as to any of the claims, charges, actions and lawsuits released hereby. The Bank and its Affiliates, and each of its individual directors, officers, Executives, agents and insurers, and their successors, individually and collectively, expressly denies any such liability.
12.
Arbitration. Any party claiming any violation of this Agreement or seeking any remedy or relief in any way relating to or affecting this Agreement, or any payments or benefits granted by it, must serve a written notice upon the other party describing the alleged violation, identifying all relevant provisions of this Agreement, and demanding arbitration. The notice and request must be served within thirty (30) calendar days of the incident (or the first date on which the party with reasonable diligence should have become aware of it) giving rise to the alleged violation. Failure to observe these time limits and procedures will be deemed a waiver of all right to any relief or remedy.

Any dispute arising out of or relating to this Agreement shall be resolved by final and binding arbitration in accordance with the Employment Arbitration Rules of the American Arbitration Association and will be submitted to a National Academy arbitrator selected in accordance with such rules. In consideration of this agreement to submit such disputes to final and binding arbitration, the parties expressly waive the right to submit any dispute arising under this Agreement to any court or government agency, provided, however, that this shall not prevent Executive and the Bank and its Affiliates from seeking injunctive relief in appropriate circumstances without first invoking and/or exhausting these procedures. The prevailing party (to be determined by the arbitrator) will be entitled to reimbursement of its reasonable costs and attorneys’ fees from the other party in any such arbitration proceeding, and the losing party shall also be responsible for the arbitrator’s and any separate arbitration and reporting fees.

Notwithstanding the above, Executive acknowledges and agrees that any violation of Section 9 of this Agreement will cause the Bank and its Affiliates irreparable harm as to which there may be no adequate legal remedy and therefore the Bank and its Affiliates shall be entitled to injunctive or other equitable relief in addition to any monetary damages deemed appropriate by the court, and that such action by the Bank and its Affiliates shall not be subject to arbitration.

Executive further acknowledges and agrees that in the event of any violation of Section 9, the Bank and its Affiliates shall cease to be obligated to provide any then-continuing benefit or payment to him or her under this Agreement and Executive further stipulates that the consideration

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as of then provided shall represent full and complete consideration for his or her obligations hereunder, including without limitation his or her full release of claims.

13.
Final and Binding/Entire Agreement. This Agreement and the Employment Agreement sets forth the entire agreement between the parties and is intended to be final and binding upon them. It fully supersedes any and all prior agreements or understandings on the subjects addressed herein. This Agreement may only be amended by a written document signed by the parties or their duly authorized representatives which specifically states that it was intended as an amendment.
14.
Notice. Any notice required or permitted to be given under this Agreement must be in writing and must be given in person or be sent by registered or certified mail to:
a)
Executive at the address he or she has designated for his or her personnel files or any subsequent address identified by Executive in writing; and
b)
Bank at: Attn: Chairman of the Board, 8460 Dr. ML King Ave., Covington, GA 30014
15.
Controlling Law. This Agreement will be interpreted and enforced according to the laws of the State of Georgia, except to the extent governed by the laws of the United States of America in which case federal laws shall govern.
16.
Severability. If any term, provision, covenant, or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the Agreement shall remain in full force and effect and shall be in no way affected, impaired or invalidated.
17.
Acknowledgements. Executive acknowledges that it is the mutual intent of the parties hereto that the full release contained in this Agreement fully complies with the Age Discrimination in Employment Act (“ADEA”) and the Older Workers Benefit Protection Act (“OWBPA”). Accordingly, this Agreement requires, and Executive acknowledges and agrees that: 1) the consideration provided to Executive under this Agreement exceeds the nature and scope of any consideration to which Executive would otherwise have been legally entitled to receive absent execution of this Agreement; 2) execution of this Agreement and the full release herein, which specifically includes a waiver of any claims under the ADEA, is Executive’s knowing and voluntary act; 3) Executive is hereby advised to consult with an attorney prior to executing this Agreement; 4) Executive has had at least twenty-one (21) calendar days within which to consider this Agreement and his/her signature on this Agreement prior to the expiration of this twenty-one (21) day period (should Executive choose not to take the full period offered) constitutes an irrevocable waiver of said period or its remainder; 5) in the event Executive signs this Agreement, Executive has another seven (7) calendar days to revoke it by delivering a written notice of revocation to the addressee identified in the Notice provision above (Section 14), and this Agreement does not become effective until the expiration of this seven (7) day period; 6) Executive has read and fully understands the terms of this Agreement; and 7) nothing contained in this Agreement purports to release any of Executive’s rights or claims under the ADEA that may arise from acts occurring after the date of the execution of this Agreement. The parties agree that

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changes, whether material or immaterial, do not restart the running of the 21-day period. To the extent that any provision of this Agreement is determined to be in violation of the OWBPA or ADEA, it should be severed or modified to comply with the OBWPA or ADEA, without affecting the validity or enforceability of any of the other terms or provisions of this Agreement.
18.
Compliance with Code Section 409A. To the extent applicable, it is intended that the payment of benefits described in this Agreement comply with Section 409A of the Internal Revenue of 1986, as amended (the “Code”), and all guidance or regulations thereunder (“Section 409A”), including compliance with all applicable exemptions from Section 409A (e.g., the short-term deferral exception and the “two times” pay exemption applicable to severance payments). This Agreement will at all times be construed in a manner to comply with Section 409A and should any provision be found not in compliance with Section 409A, the Executive hereby agrees to any changes to the terms of this Agreement deemed necessary and required by legal counsel to bring the Agreement into compliance with Section 409A, including any applicable exemptions. The Executive irrevocably waives any objections he or she may have to any further changes that may be required by Section 409A. In no event will any payment that becomes payable pursuant to this Agreement that is considered “deferred compensation” within the meaning of Section 409A, if any, and does not satisfy any of the applicable exemptions under Section 409A, be accelerated or delayed in violation of Section 409A. For purposes of this Agreement, the benefits described in Section 1 of this Agreement shall not be paid or commence until the Executive incurs a “separation from service” as defined in Section 409A.

 

PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. YOU AGREE THAT YOU RECEIVED VALUABLE CONSIDERATION IN EXCHANGE FOR ENTERING INTO THIS AGREEMENT AND THAT THE BANK ADVISED YOU IN WRITING TO CONSULT AN ATTORNEY PRIOR TO SIGNING THIS AGREEMENT. YOU PROMISE THAT NO REPRESENTATIONS OR INDUCEMENTS HAVE BEEN MADE TO YOU EXCEPT AS SET FORTH HEREIN, AND THAT YOU HAVE SIGNED THE SAME KNOWINGLY AND VOLUNTARILY.

YOU HAVE BEEN PROVIDED AT LEAST TWENTY-ONE (21) DAYS WITHIN WHICH TO

CONSIDER THIS AGREEMENT AND WAIVE AND RELEASE ALL CLAIMS AND RIGHTS

INCLUDING BUT NOT LIMITED TO THOSE ARISING UNDER THE AGE DISCRIMINATION

IN EMPLOYMENT ACT. YOU SHALL HAVE SEVEN (7) DAYS WITHIN WHICH TO REVOKE

THIS AGREEMENT AND THIS AGREEMENT SHALL NOT BECOME EFFECTIVE OR

ENFORCEABLE UNTIL THAT REVOCATION PERIOD HAS EXPIRED. ANY SUCH

REVOCATION MUST BE IN WRITING AND RECEIVED BY THE BANK,

IN ACCORDANCE WITH THE NOTICE PROVISIONS SET FORTH IN SECTION 14,

PRIOR TO THE END OF THE REVOCATION PERIOD.

 

 

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IN WITNESS WHEREOF, the parties have executed this Agreement:

 

Executed this __________ day of _________________, 20___.

 

 

______________________________________

CLARK NELSON

 

 

Executed this __________ day of _________________, 20___.

 

 

______________________________________

COMMUNITY FIRST BANCSHARES, INC.

 

By: ___________________________________

Title: __________________________________

 

 

 

Executed this __________ day of _________________, 2019.

 

 

______________________________________

NEWTON FEDERAL BANK

 

By: ___________________________________

Title: __________________________________

 

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EXHIBIT 10.16

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of August 19, 2019 by and among Newton Federal Bank, a federally-chartered savings association organized under the laws of the United States of America (the “Bank”), Community First Bancshares, Inc., a federally-charted corporation organized under the laws of the United States of America (the “Company”), as a guarantor under the Agreement, and Elizabeth Galazka, a resident of the State of Georgia (the “Executive”).

 

RECITALS:

 

WHEREAS, the Company, Community Interim Corporation and ABB Financial Group, Inc. (the parent company of Affinity Bank) have entered into an Agreement and Plan of Merger dated as of August 19, 2019 (the “Merger Agreement”); and

 

WHEREAS, the Executive recognizes the Company’s willingness to enter into the Merger Agreement is dependent on the Executive entering into this Agreement and, therefore, this Agreement is incident to the Merger Agreement; and

 

WHEREAS, the Executive wishes to serve in the employ of the Bank for the period and upon the terms and conditions provided for in this Agreement.

 

NOW THEREFORE, for the reasons set forth above and in consideration of the good and valuable consideration, the receipt, adequacy, and sufficiency of which are hereby acknowledged, the Bank, the Company and the Executive hereby agree as follows:

 

1.
Definitions.

 

Whenever used in this Agreement, the following terms and their variant forms shall have the meaning set forth below:

 

1.1 “Affiliate” shall mean any business entity which controls the Bank or is controlled by or is under common control with the Bank, including the Company.

 

1.2 “Agreement” shall mean this Agreement and any exhibits incorporated herein together with any amendments hereto made in the manner described in this Agreement.

 

1.3 “Area” shall mean any county in which the Bank maintains an office or has pending an application for regulatory approval to open an office.

 

1.4 “Average Monthly Compensation” shall mean the quotient determined by dividing the sum of the Executive’s then current Base Salary (as defined in Section 4.1 hereof) and the greater of the most recently paid Non-Equity Incentive Compensation (as defined in Section 4.2 hereof) or the average of Non-Equity Incentive Compensation paid over the three most recent years by twelve.

 

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1.5 “Bank Information” means Confidential Information and Trade Secrets.

 

1.6 “Board of Directors” shall mean the Board of Directors of the Bank.

 

1.7 “Business of the Bank” shall mean the business conducted by the Bank and its Affiliates, which is the business of banking, including the solicitation of time and demand deposits and the making of residential, consumer, commercial and corporate loans.

 

1.8 “Cause” shall mean termination of employment because of, in the good faith determination of the Bank, the Executive’s:

(i) material act of dishonesty or fraud in performing the Executive’s duties on behalf of the Bank;

(ii) willful misconduct that in the judgment of the Board of Directors will likely cause economic damage to the Bank or its Affiliates or injury to the business reputation of the Bank or its Affiliates;

(iii) incompetence (in determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the banking industry);

(iv) breach of fiduciary duty involving personal profit;

(v) intentional failure to perform stated duties under this Agreement after written notice thereof from the Board of Directors;

(vi) willful violation of any law, rule or regulation (other than traffic violations or similar offenses which results only in a fine or other non-custodial penalty) that reflects adversely on the reputation of the Bank or its Affiliates, any felony conviction, any violation of law involving moral turpitude, or any violation of a final cease-and-desist order; or any violation of the policies and procedures of the Bank as outlined in the Bank’s employee handbook, which would result in termination of employees, as from time to time amended and incorporated herein by reference; or

(vii) material breach by the Executive of any provision of this Agreement.

Notwithstanding the foregoing, Cause shall not be deemed to exist unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors the Executive was guilty of conduct described above and specifying the particulars thereof. Prior to holding a meeting at which the Board of Directors is to make a final determination whether Cause exists, if the Board of Directors determines in good faith at a meeting of the Board of Directors, by not less than a majority of its entire membership, that there is probable cause for it to find that the Executive was guilty of conduct constituting Cause as described above, the Board of Directors may suspend the Executive from the Executive’s duties hereunder for a reasonable period of time not to exceed fourteen (14) days pending a further meeting at which the Executive shall be given the opportunity to be heard before the Board of

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Directors. Upon a finding of Cause, the Board of Directors shall deliver to the Executive a notice of termination, as provided for in Section 11 hereof.

1.9 “Change in Control” means any one of the following events occurring after the Effective Date:

 

(1)
Any one person or more than one person acting as a group acquires ownership of the stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company;

 

(2) A change in the effective control of the Bank or the Company occurs on either of the following dates: The date any one person or more than one person acting as a group acquires, either in a single transaction or series of transactions occurring within a twelve (12) month period, ownership of the stock possessing thirty percent (30%) of the total voting power of the stock of the Company or the date a majority of the members of the Board of Directors (of either the Bank or the Company) is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors before the date of appointment or election; or

 

(3) A change in the ownership of a substantial portion of the Bank’s or the Company’s assets occurs on the date that any one person, or more than one person acting as a group, acquires assets of the Bank or the Company that has a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all assets of the Bank or the Company immediately before such acquisition or acquisitions over a twelve (12) month period.

 

Notwithstanding the foregoing, in no event shall a Change in Control, as defined hereunder, include any second-step conversion of Community First Bancshares, MHC, the mutual holding company parent of the Company.

 

1.10 “Confidential Information” means data and information relating to the Business of the Bank and its Affiliates (which does not rise to the status of a Trade Secret) which is or has been disclosed to the Executive or of which the Executive became aware as a consequence of or through the Executive’s relationship to the Bank and which has value to the Bank and is not generally known to its competitors. Without limiting the foregoing, Confidential Information shall include:

 

(a) Trade Secrets;

 

(b) the names, addresses and banking requirements of the customers of the Bank and its Affiliates and the nature and amount of business done with such customers;

 

(c) the names and addresses of employees and other business contacts of the Bank and its Affiliates;

 

(d) the particular names, methods and procedures utilized by the Bank and its Affiliates in the conduct and advertising of its business;

 

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(e) application, operating system, communication and other computer software and derivatives thereof, including, without limitation, sources and object codes, flow charts, coding sheets, routines, sub-routing and related documentation and manuals of the Bank and its Affiliates; and

 

(f) marketing techniques, purchasing information, pricing policies, loan policies, quoting procedures, financial information, customer data and other materials or information relating to the Bank’s and its Affiliates’ manner of doing business.

 

Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by the Bank (except where such public disclosure has been made by the Executive without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means.

 

2.11
“Good Reason” shall mean:

 

(a) a material diminution in the powers, responsibilities, duties or Base Salary of the Executive by the Bank, which condition remains uncured after the expiration of thirty (30) days following the delivery of written notice of the condition to the Bank by the Executive;

 

(b) the failure of the Board of Directors to maintain the Executive’s appointment to the office of an Executive as Executive Vice President - Lending of the Bank; or

 

(c) a relocation of the Executive’s principal office of employment by more than fifty (50) miles; or

 

(d) a material breach of the terms of this Agreement by the Bank, which breach remains uncured after the expiration of thirty (30) days following the delivery of written notice of such breach to the Bank by the Executive.

 

The Executive must provide written notice to the Bank of the existence of a condition described in subsections (a), (b), (c) or (d) within 90 days of the initial existence of the condition and the Bank shall have 30 days to remedy the condition before the Bank is required to pay severance under Section 3 or Section 4, as applicable.

 

1.12 “Permanent Disability” shall mean a condition for which benefits would be payable under any long-term disability coverage (without regard to the application of any elimination period requirement) then provided to the Executive by the Bank or, if no such coverage is then being provided, the inability of the Executive to perform the material aspects of the Executive’s duties under this Agreement for a period of at least one hundred eighty (180) consecutive days as certified by a physician chosen by the Executive and reasonably acceptable to the Bank. Notwithstanding the provisions in this Section 1.12, Permanent Disability for purposes of this Agreement must also be a disability within the meaning of Code Section 409A(a)(2)(A)(ii) and 409A(a)(2)(C) and Treas. Reg. Section 1.409A-3(a)(2).

 

1.13 “Term” shall mean that period of time set forth in Section 3.1.

 

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1.14 “Trade Secrets” means information, without regard to form, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers which (a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

 

3.
Duties.

 

2.1 The Executive shall be employed as an Executive Vice President - Lending of the Bank, subject to the direction of the Board of Directors or its designee(s). The Executive shall perform and discharge well and faithfully the authority, duties and responsibilities which may be assigned to the Executive from time to time by the Board of Directors in connection with the conduct of the Business of the Bank; provided, however, that in making its assignments, the Board of Directors shall assign only such authority, duties and responsibilities assigned to the Executive from time to time as are, in the aggregate, consistent with the duties and responsibilities as would be customarily assigned to a person occupying the position(s) held by the Executive pursuant to the terms of this Agreement.

 

2.2 In addition to the duties and responsibilities specifically assigned to the Executive pursuant to Section 2.1 hereof, the Executive shall:

 

(a) devote substantially all of the Executive’s time, energy and skill during regular business hours to the performance of the duties of the Executive’s employment (reasonable vacations and reasonable absences due to illness excepted) and faithfully and industriously perform such duties;

 

(b) diligently follow and implement all reasonable and lawful management policies and decisions communicated by the Board of Directors, which is consistent with this Agreement; and

 

(c) timely prepare and forward to the Board of Directors all reports and accounting as may be requested of the Executive.

 

2.3 The Executive shall devote the Executive’s entire business time, attention and energies to the business of the Bank and shall not during the Term be engaged (whether or not during normal business hours) in any other business or professional activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage; but this shall not be construed as preventing the Executive from:

 

(a) managing the Executive’s personal assets and investing the Executive’s personal assets in businesses, which (subject to clause (b) below) are not in competition with the Business of the Bank and which will not require any services on the part of the Executive in their operation or affairs and in which the Executive’s participation is solely that of an investor;

 

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(b) purchasing securities or other interests in any entity provided that such purchase shall not result in the Executive’s collectively owning beneficially at any time five percent (5%) or more of the equity securities of any business in competition with the Business of the Bank;

 

(c) serving on the board of directors of other organizations (including those organizations with which the Executive serves as of the Effective Date) so long as such service does not materially interfere with the performance of the Executive’s duties under this Agreement and are not in competition with the Business of the Bank or result in the violation of any listing standard of any securities exchange on which the securities of the Company are traded or listed for trading; and

 

(d) participating in civic and professional affairs and organizations and conferences, preparing or publishing papers or books or teaching or serving on the board of directors of an entity; provided that the Chairman of the Board of Directors or its designee approves in writing of the Executive joining such entity as a member of its board of directors prior to the Executive joining such board of directors.

 

4.
Term and Termination.

 

3.1.1 Term and Annual Renewal. The initial term of this Agreement shall begin as of the date the Effective Time (as defined in the Merger Agreement) occurs (the “Effective Date”) and shall continue for twenty-four (24) months. Commencing on the first September 1 following the Effective Date (the “Renewal Date”) and continuing on each Renewal Date thereafter, the term of this Agreement shall renew for an additional year so that the remaining term of this Agreement is twenty-four (24) months; provided, however, that the disinterested members of the Boards of Directors must take the following actions within the time frames set forth below prior to each Renewal Date: (1) at least 30 days prior to each Renewal Date, conduct or review a comprehensive performance evaluation of the Executive for purposes of determining whether to extend this Agreement; and (2) affirmatively approve the renewal or non-renewal of this Agreement, which decision shall be included in the minutes of the meeting of the Board of Directors. If the decision of the disinterested members of the Board of Directors is not to renew this Agreement, then the Board of Directors shall provide the Executive with a written notice of non-renewal (the “Non-Renewal Notice”) prior to any Renewal Date, and the term of this Agreement shall terminate at the end of the then remaining term. Reference herein to the term of this Agreement shall refer to both the initial term and any extended terms. This Agreement shall be null and void and the parties will have no obligation hereunder if (a) the Merger Agreement is terminated in accordance with its terms, (b) the parties to the Merger Agreement fail to complete the transactions contemplated by the Merger Agreement for any reason or (c) the Executive terminates employment with Affinity Bank for any reason prior to the Effective Time.

 

3.1.2 Change in Control. Notwithstanding the foregoing, in the event the Bank or the Company has entered into an agreement to effect a transaction that would be considered a Change in Control, the term of this Agreement shall be extended automatically so that it is scheduled to expire no less than two (2) years beyond the effective date of the Change in Control, subject to extensions as set forth above.

 

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3.1.3 Continued Employment Following Expiration of Term. Nothing in this Agreement shall mandate or prohibit a continuation of the Executive’s employment following the expiration of the term of this Agreement.

 

3.2 Termination. During the Term, the employment of the Executive under this Agreement may be terminated only as follows:

 

3.2.1 By the Bank:

 

(a) For Cause, following approval of such action by the Board of Directors and upon written notice to the Executive subject to compliance with Section 1.8 hereof, if applicable, in which event neither the Bank nor the Company shall have any further obligation to the Executive except for the payment of any amounts earned and unpaid and any vested benefits as of the effective date of termination; or

 

(b) Without Cause at any time, following approval of such action by the Board of Directors, in which event the Bank shall be required to meet its obligations to the Executive under Section 3.3.1 below.

 

3.2.2 By the Executive:

 

(a) For Good Reason, in which event the Bank shall be required to meet its obligations to the Executive under Section 3.3.1 below; or

 

(b) Without Good Reason, provided that the Executive shall give the Bank sixty (60) days’ prior written notice of the Executive’s intent to terminate, in which event neither the Bank nor the Company shall have any further obligation to the Executive except for payment of any amounts earned and unpaid and any vested benefits as of the effective date of the termination.

 

3.2.3 At any time upon mutual, written agreement of the parties, in which event neither the Bank nor the Company shall have any further obligation to the Executive except for the payment of any amounts earned and unpaid and any vested benefits as of the effective date of the termination.

 

3.2.4 Notwithstanding anything in this Agreement to the contrary, the Term shall expire automatically upon the Executive’s death or Permanent Disability, and if the reason for termination is the Executive’s death, neither the Bank nor the Company shall have any further obligation to the Executive except for the payment of any amounts earned and unpaid and any vested benefits as of the effective date of termination and, if the reason for termination is the Executive’s Permanent Disability, the Bank shall pay to the Executive an amount equal to the Average Monthly Compensation for each full month following such termination until the earlier of the month prior to the month for which the Executive’s long-term disability benefits become payable (and including such month) or six (6) full months commencing with the month following the month in which the date of termination occurs.

 

3.3 Termination Payments.

 

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3.3.1 In the event the Executive’s employment is terminated under this Agreement prior to the expiration of the Term pursuant to Section 3.2.1(b) or Section 3.2.2(a), then subject to the requirements of Section 3.3.2, the Bank shall pay to the Executive, as severance pay and liquidated damages the equivalent of the greater of (i) the current Base Salary, or (ii) the Average Monthly Compensation, that would have been paid to the Executive for the remaining term of this Agreement. The payment will be made in cash in a lump sum within five (5) days of the Executive’s termination. In addition, from the effective date of the termination pursuant to Section 3.2.1(b) or Section 3.2.2(a), the Bank shall pay monthly, by the fifth of each month, an amount, subject to applicable tax withholding, equal to what would be the Executive’s cost of COBRA health continuation coverage for the Executive and eligible dependents for the greater of twelve (12) months or the period during which the Executive and those eligible dependents are entitled to COBRA health continuation coverage from the Bank. The Executive shall also be entitled to any amount earned and unpaid and any vested benefits as of the effective date of termination.

 

3.3.2 Payments under this Section 3.3 above are conditioned upon the Executive entering into a Release and Separation Agreement in the form attached hereto as Exhibit A and shall be paid as a lump sum or commence (for non-lump sum payments) on the next payroll date following the sixtieth (60th) day after the date of the Executive’s date of termination of employment with any accrued but unpaid severance being paid on the date of the first payment; provided that the Executive’s Release and Separation Agreement is effective at such time (signed, returned and the revocation period has expired).

 

3.4 Effect on Status as a Director. In the event of Executive’s termination of employment under this Agreement for any reason, such termination shall also constitute Executive’s resignation as a director of the Bank or the Company, or any subsidiary or affiliate thereof, to the extent Executive is acting as a director of any of the aforementioned entities.

 

5.
Compensation.

 

The Executive shall receive the following salary and benefits during the Term:

 

4.1 Base Salary. The Executive shall be compensated at a base rate of TWO HUNDRED FORTY-FIVE THOUSAND DOLLARS ($245,000) per year, which may be increased from time to time in accordance with the immediately succeeding sentence (“Base Salary”). The Executive’s salary shall be reviewed annually, and the Executive shall be entitled to receive annually an increase in such amount, if any, as may be determined by the Bank based upon the performance of the Executive and the Bank and its compliance with regulatory standards. Any increase in Base Salary shall become the new Base Salary under this Agreement. Base Salary may not be decreased other than a decrease that is applicable to all senior officers of the Bank and in a percentage not in excess of the percentage decrease for other senior officers. Such salary shall be payable in accordance with the Bank’s normal payroll practices.

 

4.2 Incentive Compensation. During the Term and in addition to the aforesaid Base Salary, the Executive shall be entitled to such additional non-equity incentive compensation as may be awarded from time to time, in its discretion, by the Board of Directors (“Non-Equity Incentive Compensation”). It is understood that any Non-Equity Incentive Compensation to be awarded to the Executive may be based on the attainment by the Bank or its Affiliates of certain performance goals established by the Board of Directors in consultation with the Executive relating

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to factors, including but not limited to, asset quality, profitability and growth. Notwithstanding anything contained in this Agreement to the contrary, any increase to the Executive’s Base Salary and any Non-Equity Incentive Compensation paid to the Executive shall be (i) in compliance with regulations, pronouncements, directives, or order issued or promulgated by any governing regulatory agency and with any agreement by and between the Bank and such regulatory agencies, (ii) consistent with the safe and sound operation of the Bank, (iii) closely monitored by the Board of Directors, and (iv) comparable to such compensation paid to persons of similar responsibilities and duties in other insured institutions of similar size, in similar locations, and under similar circumstances including financial condition and profitability.

 

4.3 Equity Compensation. The Executive may participate in any equity incentive program and be eligible for the grant of stock options, restricted stock, and other awards thereunder or under any similar plan adopted by the Bank or its Affiliates. Any options or similar awards shall be reflected by a separate written award and issued to the Executive.

 

4.4 Benefits. In addition to the benefits specifically described in this Agreement, the Executive shall be entitled to such benefits as may be available from time to time for senior executives of the Bank similarly situated to the Executive. All such benefits shall be awarded and administered in accordance with the Bank’s standard policies and practices. Such benefits may include, by way of example only, profit sharing plans, retirement or investment funds, dental, health and life insurance benefits and such other benefits as the Bank deems appropriate.

 

4.5 Reimbursement of Expenses; Provision of Business Development Expenses. The Bank shall pay or reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in the performance of his obligations and duties under this Agreement, as provided in the applicable policies of the Bank, as currently adopted or as may be adopted in the future by the Board of Directors. In addition to the foregoing, the Bank believes that its best interests will be more fully served if the Executive maintains active membership in or joins appropriate business or social clubs and other professional associations. Accordingly, upon prior approval of the Board of Directors, the Bank shall also reimburse the Executive for the dues and business-related expenditures associated with the Executive’s membership(s) in such appropriate business or social clubs and such other professional organizations which, in the sole discretion of the Bank, are commensurate with the Executive’s position. The Bank shall also reimburse reasonable expenditures associated with the Executive’s continuing professional education, as well as for the reasonable expenditures of the Executive’s spouse or partner to attend as appropriate, with expenditures for any calendar year in excess of $5,000 approved by the Board of Directors, with such $5,000 annual dollar limit to be reviewed not less frequently than annually by the Board of Directors.

 

 

 

4.6 Vacation. On a non-cumulative basis, the Executive shall be entitled to a number of vacation hours per calendar year as may be available from time to time for senior executives of the Bank similarly situated to the Executive, during which the Executive’s compensation shall be paid in full. Such paid time off shall be subject to the Bank’s policies related thereto as may be adopted from time to time.

 

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4.7 Withholding. The Bank may deduct from each payment of compensation hereunder all amounts required to be deducted and withheld in accordance with applicable federal and state income tax, FICA and other withholding requirements.

 

4.8 Change in Control. In the event of the Executive’s termination of employment without Cause or with Good Reason during the Term upon or following a Change in Control, the Bank (or its successor) shall pay to the Executive an amount equal to the product of two (2) multiplied by the Executive’s average annual Base Salary, bonus and profit sharing paid by the Bank to the Executive, (the “Benefit”) as measured over the preceding three full fiscal years prior to the Change in Control (or the average annualized Base Salary and bonus paid to the Executive for such shorter period as the Executive has been employed by the Bank), but not less than his current Base Salary annualized plus bonus and profit sharing paid to the Executive in the prior calendar year immediately preceding such Change in Control. The Benefit shall be paid in cash in a lump sum within five (5) days following the effective date of the Executive’s termination of employment. The Bank shall be entitled to withhold appropriate employment and income taxes, if required by applicable law, should the Benefit become payable.

 

The Executive shall be entitled to and the Bank shall pay to the Executive the Benefit set forth above if, during the Term, there is a Proposed Transaction and the Executive’s employment is thereafter terminated by the Bank or its subsidiary other than for Cause or terminates for Good Reason, and the Proposed Transaction is consummated within one (1) year after the date of termination of the Executive’s employment, then a Change in Control shall be deemed to have occurred during the Term and the termination of the Executive’s employment shall be deemed to have occurred following a Change in Control. For the purposes of this Section 4.9, a “Proposed Transaction” shall mean a public announcement of a proposal for a transaction that, if consummated, would constitute a Change in Control.

 

5. Bank and Affiliate Information.

 

5.1 Ownership of Information. All Bank Information received or developed by the Executive while employed by the Bank will remain the sole and exclusive property of the Bank.

 

5.2 Obligations of the Executive. The Executive agrees (a) to hold Bank Information in strictest confidence, and (b) not to use, duplicate, reproduce, distribute, disclose or otherwise disseminate Bank Information or any physical embodiments thereof and may in no event take any action causing or fail to take any action necessary in order to prevent any Bank Information from losing its character or ceasing to qualify as Confidential Information or a Trade Secret. In the event that the Executive is required by law to disclose any Bank Information, the Executive will not make such disclosure unless (and then only to the extent that) the Executive has been advised by independent legal counsel that such disclosure is required by law and then only after prior written notice is given to the Bank when the Executive becomes aware that such disclosure has been requested and is required by law. This Section 5 shall survive for a period of twelve (12) months following termination of this Agreement with respect to Confidential Information, and shall survive termination of this Agreement for so long as is permitted by the then-current Georgia Trade Secrets Act of 1990, O.C.G.A. §§ 10-1-760 to -767, with respect to Trade Secrets. Anything herein to the contrary notwithstanding, the Executive shall not be restricted from reporting possible violations of federal, state, or local law or regulation to any governmental agency or entity, or from making other disclosures that are protected under the whistleblower provisions of federal, state, or

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local law or regulation, and the Executive shall not need the prior authorization of the Bank to make any such reports or disclosures and shall not be required to notify the Bank that he has made such reports or disclosures.

 

5.3 Delivery upon Request or Termination. Upon request by the Bank, and in any event upon termination of the Executive’s employment with the Bank, the Executive will promptly deliver to the Bank all property belonging to the Bank, including without limitation all Bank Information then in the Executive’s possession or control.

 

6. Non-Competition.

 

The Executive agrees that during his employment by the Bank hereunder and, in the event of his termination other than by the Bank with or without Cause pursuant to Sections 3.2.1(a) or 3.2.1(b), or by the Executive for Good Reason pursuant to Section 3.2.2(a), for a period of twenty-four (24) months thereafter, the Executive will not (except on behalf of or with the prior written consent of the Bank), within the Area, either directly or indirectly, on his own behalf or in the service or on behalf of others, as an executive employee or in any other capacity which involves duties and responsibilities similar to those undertaken for the Bank, engage in any business which is the same as or essentially the same as the Business of the Bank. Notwithstanding the foregoing, the Bank agrees that the Executive may own up to 5% of the voting shares of any financial institution engaged in the Business of the Bank in the Area. Notwithstanding the foregoing, this provision shall not apply following a Change in Control. Nor shall this provision apply if the Board of Directors provides the Executive with a Non-Renewal Notice pursuant to Section 3.1.1 and the Executive subsequently terminates his employment with the Employer following the expiration of the tern of this Agreement.

 

7. Non-Solicitation of Customers.

 

The Executive agrees that during the Executive’s employment by the Bank hereunder and, in the event of the Executive’s termination other than by the Bank with or without Cause pursuant to Sections 3.2.1(a) or 3.2.1(b), or by the Executive for Good Reason pursuant to Section 3.2.2(a), for a period of twenty-four (24) months thereafter, the Executive will not (except on behalf of or with the prior written consent of the Bank), on the Executive’s own behalf or in the service or on behalf of others, solicit, divert or appropriate or attempt to solicit, divert or appropriate, directly or by assisting others, any business from any of the Bank’s or its Affiliate’s customers, including actively sought prospective customers, with whom the Executive has or had material contact during the last twelve (12) months of the Executive’s employment, for purposes of providing products or services that are competitive with those provided by the Bank or its Affiliates. Notwithstanding the foregoing, this provision shall not apply following a Change in Control.

 

8. Non-Solicitation of Employees.

 

The Executive agrees that during the Executive’s employment by the Bank hereunder and, in the event of the Executive’s termination other than by the Bank with or without Cause pursuant to Sections 3.2.1(a) or 3.2.1(b), or by the Executive for Good Reason pursuant to Section 3.2.2(a), for a period of twenty-four (24) months thereafter, the Executive will not on the Executive’s own behalf or in the service or on behalf of others, solicit, recruit or hire away or attempt to solicit, recruit or hire away, directly or by assisting others, any employee of the Bank or its Affiliates,

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whether or not such employee is a full-time employee or a temporary employee of the Bank or its Affiliates and whether or not such employment is pursuant to written agreement and whether or not such employment is for a determined period or is at will. Notwithstanding the foregoing, this provision shall not apply following a Change in Control.

 

9. Remedies.

 

The Executive agrees that the covenants contained in Sections 5 through 8 hereof are of the essence of this Agreement; that each of the covenants is reasonable and necessary to protect the business, interests and properties of the Bank; and that irreparable loss and damage will be suffered by the Bank should he breach any of the covenants. Therefore, the Executive agrees and consents that, in addition to all the remedies provided by law or in equity, the Bank shall be entitled to a temporary restraining order and temporary and permanent injunctions to prevent a breach or contemplated breach of any of the covenants. The Bank and the Executive agree that all remedies available to the Bank or the Executive, as applicable, shall be cumulative. In addition, in the event the Executive fails to comply with any of the covenants contained in Section 5 hereof and such failure shall not be cured to the reasonable satisfaction of the Bank within thirty (30) days after receipt of written notice thereof from the Bank, the Bank shall thereupon be relieved of liability for all obligations then remaining under Section 3.3 hereof.

 

10. Severability.

 

The parties agree that each of the provisions included in this Agreement is separate, distinct and severable from the other provisions of this Agreement and that the invalidity or unenforceability of any Agreement provision shall not affect the validity or enforceability of any other provision of this Agreement. Further, if any provision of this Agreement is ruled invalid or unenforceable by a court of competent jurisdiction because of a conflict between the provision and any applicable law or public policy, the provision shall be redrawn to make the provision consistent with and valid and enforceable under the law or public policy.

 

11. Notice.

 

All notices and other communications required or permitted under this Agreement shall be in writing and, if mailed by prepaid first-class mail or certified mail, return receipt requested, shall be deemed to have been received on the earlier of the date shown on the receipt or three (3) business days after the postmarked date thereof. In addition, notices hereunder may be delivered by hand, facsimile transmission or overnight courier, in which event the notice shall be deemed effective when delivered or transmitted. All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses:

 

(a)
If to the Bank, to the Bank at:

 

Newton Federal Bank

Attn: Chairman of the Board

8460 Dr. ML King Ave.

Covington, GA 30014

 

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(b) If to the Executive, addressed to the most recent address of the Executive set forth in the personnel records of the Bank.

 

12. Assignment.

 

The rights and obligations of the Bank under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Bank, as applicable, including without limitation, a purchaser of all or substantially all the assets of the Bank. If the Agreement is assigned pursuant to the foregoing sentence, the assignment shall be by novation and the Bank shall have no further liability hereunder, and the successor or assign, as applicable, shall become the “Bank” hereunder. No party hereto may assign or delegate this Agreement or any of its rights and obligations hereunder without the written consent of the other parties hereto.

 

13. Waiver.

 

A waiver by the Bank of any breach of this Agreement by the Executive shall not be effective unless in writing, and no waiver shall operate or be construed as a waiver of the same or another breach on a subsequent occasion.

 

14. Arbitration.

 

Except for any claim for injunctive relief, any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, which shall be conducted by a three-person arbitration panel, one of whom shall be selected by each party and the third of whom shall be selected jointly upon mutual agreement of both parties. The place of arbitration shall be Fulton County, Georgia and the Bank and the Executive agree that they will seek to enforce any arbitration award in the Superior Court of Fulton County. The decision of the arbitration panel shall be final and binding upon the parties and judgment upon the award rendered by the arbitration panel may be entered by any court having jurisdiction. The Bank agrees to pay the fees and expenses associated with the arbitration proceedings.

 

15. Attorneys’ Fees.

 

With respect to arbitration of disputes and if litigation ensues between the parties concerning the enforcement of an arbitration award, each party shall pay its own fees, costs and expenses; provided, however, the Bank shall advance to the Executive reasonable fees, costs and expenses incurred by the Executive in preparing for and in initiating or defending against any proceeding or suit brought to enforce rights or obligations set forth in this Agreement. Such advances shall be made within thirty (30) days after receiving copies of invoices presented by the Executive for such fees, costs and expenses. The Executive shall have the obligation to reimburse the Bank within sixty (60) days following the final disposition of the matter (including appeals) to the full extent of the aggregate advances unless the panel of arbitrators or court, as the case may be, has ruled in favor of the Executive on the merits of the substantive issues in dispute.

 

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16. Applicable Law.

 

This Agreement shall be construed and enforced under and in accordance with the laws of the State of Georgia, except to the extent governed by the laws of the United States of America in which case federal laws shall govern. The parties agree that the Superior Court of Fulton County, Georgia, shall have jurisdiction of any case or controversy arising under or in connection with this Agreement and shall be a proper forum in which to adjudicate such case or controversy. The parties consent to the jurisdiction of such courts.

 

17. Interpretation.

 

Words importing any gender include all genders. Words importing the singular form shall include the plural, and vice versa. The terms “herein,” “hereunder,” “hereby,” “hereto,” “hereof” and any similar terms refer to this Agreement. Any captions, titles or headings preceding the text of any article, section or subsection herein are solely for convenience of reference and shall not constitute part of this Agreement or affect its meaning, construction or effect.

 

18. Entire Agreement.

 

Effective as of the Effective Date, this Agreement embodies the entire and final agreement of the parties on the subject matter stated in the Agreement. No amendment or modification of this Agreement shall be valid or binding upon the Bank or the Executive unless made in writing and signed by all parties. All prior understandings and agreements relating to the subject matter of this Agreement, including the Employment Agreement entered into between Atlanta Business Bank and the Executive, dated January 29, 2008, as amended, are hereby expressly terminated to the extent such agreements were not terminated prior to the Effective Date.

 

19. Rights of Third Parties.

 

Nothing herein expressed is intended to or shall be construed to confer upon or give to any person, firm or other entity, other than the parties hereto and their permitted assigns, any rights or remedies under or by reason of this Agreement.

 

20. Survival.

 

The obligations of the Bank pursuant to Sections 3.2.4 and 3.3 and the obligations of the Executive pursuant to Sections 5, 6, 7 and 8 shall survive the termination of the employment of the Executive hereunder for the period designated under each of those respective sections.

 

21. Compliance with Regulatory Restrictions.

 

(a) The Bank may terminate the Executive’s employment at any time, but any termination by the Board of Directors other than termination for Cause shall not prejudice the Executive’s right to compensation or other benefits under this Agreement. The Executive shall have no right to receive compensation or other benefits for any period after termination for Cause.

 

(b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) [12 USC

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§1818(e)(3)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act (the “FDI Act”), the Bank’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended.

(c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) [12 USC §1818(e)(4)] or 8(g)(1) [12 USC §1818(g)(1)] of the FDI Act, all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

(d) If the Bank is in default as defined in Section 3(x)(1) [12 USC §1813(x)(1)] of the FDI Act, all obligations of the Bank under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.

(e) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank, (i) by the Director of the OCC or his or her designee, at the time the Federal Deposit Insurance Corporation (“FDIC”) enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) [12 USC §1823(c)] of the FDI Act; or (ii) by the Director or his or her designee at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.

(f) Notwithstanding anything herein contained to the contrary, any payments to the Executive, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the FDI Act, 12 U.S.C. Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359.

22. Section 409A of the Code.

 

For purposes of compliance with Code Section 409A:

 

(a) It is intended that this Agreement shall comply with the provisions of Code Section 409A and the Treasury regulations relating thereto, or an exemption to Code Section 409A. Any payments that qualify for the “short-term deferral” exception shall be considered as paid first, then any payments that qualify for the separation pay plan exception shall be considered as paid next, then payments that qualify for any other exception under Section Code 409A shall be paid under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under Code Section 409A, each payment of compensation under this Agreement shall be treated as a separate payment of compensation for purposes of applying the deferral election rules and the exclusion for certain short-term deferral amounts under Code Section 409A. All payments to be made upon a termination of employment under this Agreement that constitute non-qualified deferred compensation may only be made upon a “separation from service” under Section Code 409A. In no event may the Executive, directly or indirectly, designate the calendar year of any payment under this Agreement. To the extent permitted under Code Section 409A or any Internal

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Revenue Service (“IRS”) or Treasury rules or other guidance issued thereunder, the Bank may, in consultation with the Executive, modify the Agreement in order to cause the provisions of the Agreement to comply with the requirements of Code Section 409A, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Code Section 409A.

 

(b) Notwithstanding anything to the contrary in this Agreement, all reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Code Section 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during the Executive’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in- kind benefits to be provided, in any other calendar year, (iii) the reimbursement of an eligible expense will be made no later than the last day of the calendar year following the year in which the expense is incurred and (iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.

 

(c) Notwithstanding any other provision of this Agreement to the contrary and if applicable, if the Executive is considered a “specified employee” for purposes of Code Section 409A (as determined in accordance with the methodology established by the Bank as in effect on the date of separation from service), (i) any payment or other benefit that constitutes nonqualified deferred compensation within the meaning of Code Section 409A that is otherwise due to the Executive under this Agreement during the six-month period following his separation from service (as determined in accordance with Code Section 409A) on account of his separation from service shall be accumulated and paid to the Executive on the first business day of the seventh month following his separation from service (the “Delayed Payment Date”). If the Executive dies during the postponement period, the amounts and entitlements delayed on account of Code Section 409A shall be paid to the personal representative of his estate on the first to occur of the Delayed Payment Date or 30 days after the date of the Executive’s death.

 

23. Source of Payments.

 

All payments provided for in this Agreement shall be timely paid from the general funds of the Bank. The Company, however, unconditionally guarantees payment and provision of all amounts and benefits due hereunder to the Executive and, if such amounts due from the Bank are not timely paid or provided by the Bank, such amounts shall be paid by the Company.

 

 

[SIGNATURES ON FOLLOWING PAGE]

 

 

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IN WITNESS WHEREOF, the parties hereto have hereunto executed this Agreement in accordance with the provisions hereof.

 

 

Executed this ___19th___ day of ____August_______, 2019.

 

 

_/s/_Elizabeth Galaska____________________

ELIZABETH GALAZKA

 

Executed this ___19th___ day of ___August________, 2019.

 

 

_/s/_William D. Fortson, Jr._______________

COMMUNITY FIRST BANCSHARES, INC.

(As Guarantor)

 

By: ___William D. Fortson, Jr.______________

Title: __Chairman________________________

 

 

Executed this ___19th___ day of ____August_______, 2019.

 

 

_/s/_William D. Fortson, Jr._______________

NEWTON FEDERAL BANK

 

By: ___William D. Fortson, Jr.______________

Title: __Chairman________________________

 

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EXHIBIT A

 

RELEASE AND SEPARATION AGREEMENT

 

PLEASE READ CAREFULLY

 

This Release and Separation Agreement (this “Agreement”) is made and entered into by and between [INSERT NAME] (“Executive”), Community First Bancshares, Inc. (the “Company”), and Newton Federal Bank (the “Bank”), as well as any affiliated or related entities, subsidiaries, or divisions, and the shareholders, directors, officers, Executives, and agents thereof (collectively referred to as the “Bank and its Affiliates”).

THE PARTIES acknowledge the following:

WHEREAS, Executive's employment was terminated by the Bank effective as of [INSERT DATE] (the “Termination Date”); and

WHEREAS, Executive desires to receive severance benefits provided pursuant to this Agreement, and the Bank is willing to provide these benefits to Executive on the condition that Executive enters into this Agreement.

THEREFORE, in consideration of the mutual agreements and promises set forth within this Agreement, the receipt and sufficiency of which are hereby acknowledged, Executive and Bank and its Affiliates agree as follows:

1. Severance Benefits. In consideration for the Executive’s promises as set forth herein, the Bank shall pay Executive the following severance benefits:

a.
An amount equal to $[INSERT AMOUNT], less applicable deductions and withholdings, which shall be paid in equal monthly for a period of twelve (12) months. This severance payment will be made on the next payroll date following the sixtieth (60th) day after the date of Executive’s date of termination of employment, provided Executive has executed and not revoked this Agreement.
b.
[INSERT OTHER SEVERANCE AMOUNTS AS APPLICABLE]

2. Prior Wages, Salary, and Expenses. Executive acknowledges that on or about [INSERT DATE] he or she received his or her final salary payment of $[INSERT AMOUNT] plus any unused accrued vacation, less applicable deductions and withholdings.

3. Release. Executive hereby releases, acquits, and forever discharges the Bank, its parent companies, subsidiaries, divisions, affiliates and controlling persons (if any), their officers, directors, board members, Executives, representatives, attorneys, personal representatives, affiliated or unaffiliated benefit plans, third-party administrators, any and all of their successors and assigns, and all persons acting by, through, under, or in concert with any of them (collectively the “Bank and its Affiliates”) from any and all actions, causes of action, claims, demands, losses, claims for attorneys’ fees, claims for severance of any kind or origin and all other forms of civil damages, occurrences, and liabilities of any kind whatsoever, both known or unknown, arising out

{Clients/1622/00346556.DOCX/ } A-1

 

 

of any matter, happening, or thing, from the beginning of time to the date of this Agreement is signed by Executive, specifically including, but not limited to, any and all liability arising from, including amendments to and anti-retaliation provisions deriving from, the following:

·
Local, state, or federal common law, statute, regulation, or ordinance;
·
Title VII of the Civil Rights Act of 1964;
·
Section 1981 of the Civil Rights Act of 1866;
·
the Age Discrimination in Employment Act of 1967;
·
the Americans with Disabilities Act of 1990;
·
the Family and Medical Leave Act;
·
the Employee Retirement Income Security Act of 1974;
·
the Health Insurance Portability and Accountability Act;
·
the Occupational and Safety Health Act;
·
the Equal Pay Act;
·
the Uniformed Services Employment and Re-employment Act of 1994;
·
Executive Orders 11246 and 11141;
·
the Worker Adjustment and Retraining Notification Act;
·
the Rehabilitation Act of 1973;
·
the Medicare, Medicaid and SCHIP Extension Act of 2007;
·
state workers’ compensation laws;
·
state non-discrimination and/or human affairs laws;
·
state payment of wages laws, acts or regulations;
·
Executive’s employment relationship and/or affiliation with the Bank and its Affiliates.

 

This release also includes a release of any claims for wrongful termination, breach of express or implied contract, intentional or negligent infliction of emotional distress, libel slander, as well as any other claims, whether in tort, contract or equity, under federal or state statutory or common law.

Without waiving any prospective or retrospective rights under the Fair Labor Standards Act (“FLSA”), Executive admits that he or she has received from the Bank and its Affiliates all rights and benefits, if any, potentially due to him or her pursuant to the FLSA. Executive states that he or she is aware of no facts (including any injuries or illnesses) which might lead to his or her filing of a workers’ compensation claim against the Bank and its Affiliates. It is the parties’ intent to release all claims which can legally be released but no more than that.

4.
Covenant Not to Sue. Executive represents that he or she has no claims pending or filed with any local, state or federal agency (including the U.S. Equal Employment Opportunity Commission, the U.S. Department of Labor, and any comparable state or local administrative agency) or court against the Bank and its Affiliates as of the date this Agreement was signed by Executive. Executive further agrees that he or she will not file or participate in any lawsuit against the Bank and its Affiliates arising out of or in connection with the employment relationship previously existing between them or the termination of that relationship other than one based upon the alleged violation of this Agreement by the Bank and its Affiliates. The foregoing shall be construed as a covenant not to sue. This Agreement may be introduced as evidence at any legal

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proceeding as a complete defense to any claims existing as of the date of this Agreement ever asserted by Executive against the Bank and its Affiliates.
5.
Discrimination Charges; ADEA Challenges to this Agreement. Nothing in this Agreement shall be interpreted or applied in a manner that affects or limits Executive’s otherwise lawful ability to bring an administrative charge with, to participate in an investigation conducted by, or to participate in a proceeding involving the U.S. Equal Employment Opportunity Commission or other comparable state or local administrative agency. However, Executive specifically agrees that the consideration provided to him or her in this Agreement represents full and complete satisfaction of any monetary relief or award that could be sought or awarded to Executive in any administrative action (including any proceedings before the U.S. Equal Employment Opportunity Commission or any comparable state or local agency) arising from events related to his or her employment with the Bank or the termination thereof. Additionally, nothing in this Agreement shall be interpreted or applied in a manner that affects or limits Executive’s ability to challenge this Agreement’s compliance with notice and other requirements of the Age Discrimination in Employment Act (“ADEA”).
6.
No Prior Assignment. Executive further warrants and covenants, recognizing that the truth of this warranty and covenant is material to the above consideration having passed, that he or she has not assigned, transferred or conveyed at any time to any individual or entity any alleged rights, claims or causes of action against the Bank and its Affiliates.
7.
Medicare Benefits. Executive affirms, covenants, and warrants he or she is not a Medicare beneficiary and is not currently receiving, has not received in the past, will not have received at the time of payment pursuant to this Agreement, is not entitled to, is not eligible for, and has not applied for or sought Social Security or Medicare benefits. In the event any statement in the preceding sentence is incorrect (for example, but not limited to, if Executive is a Medicare beneficiary, etc.), the following sentences (i.e., the remaining sentences of this paragraph) apply: Executive affirms, covenants, and warrants he or she has made no claim against, nor is he or she aware of any facts supporting any claim against, the Bank and its Affiliates under which it could be liable for medical expenses incurred by the Executive before or after the execution of this Agreement. Furthermore, Executive is aware of no medical expenses which Medicare has paid and for which the Bank and its Affiliates is or could be liable. Executive agrees and affirms that, to the best of his or her knowledge, no liens of any governmental entities, including those for Medicare conditional payments, exist. Executive will indemnify, defend, and hold the Bank and its Affiliates harmless from Medicare claims, liens, damages, conditional payments, and rights to payment, if any, including attorneys’ fees, and Executive further agrees to waive any and all future private causes of action for damages pursuant to 42 U.S.C. § 1395y(b)(3)(A) et seq.
8.
Performance. The Bank’s obligation to perform under this Agreement is conditioned upon Executive’s agreements and promises to the Bank and its Affiliates as set forth herein. In the event Executive breaches any such agreements or promises or causes any such agreements or promises to be breached, the Bank’s obligations to perform under this Agreement shall automatically terminate and the Bank and its Affiliates shall have no further obligation to Executive. Further, the Bank and its Affiliates shall be entitled to seek, at its option, the return of all but $100.00 of the severance benefits paid to Executive pursuant to this Agreement.

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9.
Bank Information, Non-Solicitation of Customers and Non-Solicitation of Employees. Executive agrees that he or she will comply with the obligations provided in Sections 5 through 7 of the Employment Agreement by and among Executive, Community First Bancshares, Inc., and Newton Federal Bank dated [ ] (the “Employment Agreement”), related to confidential information of the Bank and its Affiliates, non-solicitation of customers and non-solicitation of Executives, for the terms stated in the Employment Agreement.
10.
Disparagement. Executive agrees and covenants that he or she will not in any way do or say anything at any time which disparages or derogates the Bank and its Affiliates, its business interests or reputation, or any of its individual directors, officers, Executives, or agents.
11.
No Admission of Liability. Nothing in this Agreement (or the Agreement itself) shall operate or be interpreted as an admission of liability as to any of the claims, charges, actions and lawsuits released hereby. The Bank and its Affiliates, and each of its individual directors, officers, Executives, agents and insurers, and their successors, individually and collectively, expressly denies any such liability.
12.
Arbitration. Any party claiming any violation of this Agreement or seeking any remedy or relief in any way relating to or affecting this Agreement, or any payments or benefits granted by it, must serve a written notice upon the other party describing the alleged violation, identifying all relevant provisions of this Agreement, and demanding arbitration. The notice and request must be served within thirty (30) calendar days of the incident (or the first date on which the party with reasonable diligence should have become aware of it) giving rise to the alleged violation. Failure to observe these time limits and procedures will be deemed a waiver of all right to any relief or remedy.

Any dispute arising out of or relating to this Agreement shall be resolved by final and binding arbitration in accordance with the Employment Arbitration Rules of the American Arbitration Association and will be submitted to a National Academy arbitrator selected in accordance with such rules. In consideration of this agreement to submit such disputes to final and binding arbitration, the parties expressly waive the right to submit any dispute arising under this Agreement to any court or government agency, provided, however, that this shall not prevent Executive and the Bank and its Affiliates from seeking injunctive relief in appropriate circumstances without first invoking and/or exhausting these procedures. The prevailing party (to be determined by the arbitrator) will be entitled to reimbursement of its reasonable costs and attorneys’ fees from the other party in any such arbitration proceeding, and the losing party shall also be responsible for the arbitrator’s and any separate arbitration and reporting fees.

Notwithstanding the above, Executive acknowledges and agrees that any violation of Section 9 of this Agreement will cause the Bank and its Affiliates irreparable harm as to which there may be no adequate legal remedy and therefore the Bank and its Affiliates shall be entitled to injunctive or other equitable relief in addition to any monetary damages deemed appropriate by the court, and that such action by the Bank and its Affiliates shall not be subject to arbitration.

Executive further acknowledges and agrees that in the event of any violation of Section 9, the Bank and its Affiliates shall cease to be obligated to provide any then-continuing benefit or payment to him or her under this Agreement and Executive further stipulates that the consideration

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as of then provided shall represent full and complete consideration for his or her obligations hereunder, including without limitation his or her full release of claims.

13.
Final and Binding/Entire Agreement. This Agreement and the Employment Agreement sets forth the entire agreement between the parties and is intended to be final and binding upon them. It fully supersedes any and all prior agreements or understandings on the subjects addressed herein. This Agreement may only be amended by a written document signed by the parties or their duly authorized representatives which specifically states that it was intended as an amendment.
14.
Notice. Any notice required or permitted to be given under this Agreement must be in writing and must be given in person or be sent by registered or certified mail to:
a)
Executive at the address he or she has designated for his or her personnel files or any subsequent address identified by Executive in writing; and
b)
Bank at: Attn: Chairman of the Board, 8460 Dr. ML King Ave., Covington, GA 30014
15.
Controlling Law. This Agreement will be interpreted and enforced according to the laws of the State of Georgia, except to the extent governed by the laws of the United States of America in which case federal laws shall govern.
16.
Severability. If any term, provision, covenant, or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the Agreement shall remain in full force and effect and shall be in no way affected, impaired or invalidated.
17.
Acknowledgements. Executive acknowledges that it is the mutual intent of the parties hereto that the full release contained in this Agreement fully complies with the Age Discrimination in Employment Act (“ADEA”) and the Older Workers Benefit Protection Act (“OWBPA”). Accordingly, this Agreement requires, and Executive acknowledges and agrees that: 1) the consideration provided to Executive under this Agreement exceeds the nature and scope of any consideration to which Executive would otherwise have been legally entitled to receive absent execution of this Agreement; 2) execution of this Agreement and the full release herein, which specifically includes a waiver of any claims under the ADEA, is Executive’s knowing and voluntary act; 3) Executive is hereby advised to consult with an attorney prior to executing this Agreement; 4) Executive has had at least twenty-one (21) calendar days within which to consider this Agreement and his/her signature on this Agreement prior to the expiration of this twenty-one (21) day period (should Executive choose not to take the full period offered) constitutes an irrevocable waiver of said period or its remainder; 5) in the event Executive signs this Agreement, Executive has another seven (7) calendar days to revoke it by delivering a written notice of revocation to the addressee identified in the Notice provision above (Section 14), and this Agreement does not become effective until the expiration of this seven (7) day period; 6) Executive has read and fully understands the terms of this Agreement; and 7) nothing contained in this Agreement purports to release any of Executive’s rights or claims under the ADEA that may arise from acts occurring after the date of the execution of this Agreement. The parties agree that

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changes, whether material or immaterial, do not restart the running of the 21-day period. To the extent that any provision of this Agreement is determined to be in violation of the OWBPA or ADEA, it should be severed or modified to comply with the OBWPA or ADEA, without affecting the validity or enforceability of any of the other terms or provisions of this Agreement.
18.
Compliance with Code Section 409A. To the extent applicable, it is intended that the payment of benefits described in this Agreement comply with Section 409A of the Internal Revenue of 1986, as amended (the “Code”), and all guidance or regulations thereunder (“Section 409A”), including compliance with all applicable exemptions from Section 409A (e.g., the short-term deferral exception and the “two times” pay exemption applicable to severance payments). This Agreement will at all times be construed in a manner to comply with Section 409A and should any provision be found not in compliance with Section 409A, the Executive hereby agrees to any changes to the terms of this Agreement deemed necessary and required by legal counsel to bring the Agreement into compliance with Section 409A, including any applicable exemptions. The Executive irrevocably waives any objections he or she may have to any further changes that may be required by Section 409A. In no event will any payment that becomes payable pursuant to this Agreement that is considered “deferred compensation” within the meaning of Section 409A, if any, and does not satisfy any of the applicable exemptions under Section 409A, be accelerated or delayed in violation of Section 409A. For purposes of this Agreement, the benefits described in Section 1 of this Agreement shall not be paid or commence until the Executive incurs a “separation from service” as defined in Section 409A.

 

PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. YOU AGREE THAT YOU RECEIVED VALUABLE CONSIDERATION IN EXCHANGE FOR ENTERING INTO THIS AGREEMENT AND THAT THE BANK ADVISED YOU IN WRITING TO CONSULT AN ATTORNEY PRIOR TO SIGNING THIS AGREEMENT. YOU PROMISE THAT NO REPRESENTATIONS OR INDUCEMENTS HAVE BEEN MADE TO YOU EXCEPT AS SET FORTH HEREIN, AND THAT YOU HAVE SIGNED THE SAME KNOWINGLY AND VOLUNTARILY.

YOU HAVE BEEN PROVIDED AT LEAST TWENTY-ONE (21) DAYS WITHIN WHICH TO

CONSIDER THIS AGREEMENT AND WAIVE AND RELEASE ALL CLAIMS AND RIGHTS

INCLUDING BUT NOT LIMITED TO THOSE ARISING UNDER THE AGE DISCRIMINATION

IN EMPLOYMENT ACT. YOU SHALL HAVE SEVEN (7) DAYS WITHIN WHICH TO REVOKE

THIS AGREEMENT AND THIS AGREEMENT SHALL NOT BECOME EFFECTIVE OR

ENFORCEABLE UNTIL THAT REVOCATION PERIOD HAS EXPIRED. ANY SUCH

REVOCATION MUST BE IN WRITING AND RECEIVED BY THE BANK,

IN ACCORDANCE WITH THE NOTICE PROVISIONS SET FORTH IN SECTION 14,

PRIOR TO THE END OF THE REVOCATION PERIOD.

 

 

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IN WITNESS WHEREOF, the parties have executed this Agreement:

 

Executed this __________ day of _________________, 2019.

 

 

______________________________________

ELIZABETH GALAZKA

 

 

Executed this __________ day of _________________, 2019.

 

 

______________________________________

COMMUNITY FIRST BANCSHARES, INC.

 

By: ___________________________________

Title: __________________________________

 

 

 

Executed this __________ day of _________________, 2019.

 

 

______________________________________

NEWTON FEDERAL BANK

 

By: ___________________________________

Title: __________________________________

 

{Clients/1622/00346556.DOCX/ } A-7

 

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

 

Name

State of Incorporation

Ownership Percentage

 

 

 

Affinity Bank

Federal

100%

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

 

We consent to the incorporation by reference in the Registration Statement (No. 333-252401) on Form S-8 of Affinity Bancshares, Inc. of our report dated March 18, 2022, relating to the consolidated financial statements of Affinity Bancshares, Inc., appearing in this Annual Report on Form 10-K of Affinity Bancshares, Inc. for the year ended December 31, 2021.

 

/s/ Wipfli LLP

 

Atlanta, Georgia

March 18, 2022

 

 

 

Exhibit 31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Edward J. Cooney, certify that:

 

 

1.

I have reviewed this annual report on Form 10-K of Affinity Bancshares, Inc.;

 

 

2.

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

 

 

3.

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

 

 

4.

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

 

 

a)

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

 

 

 

b)

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

 

 

c)

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

 

 

d)

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

 

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

 

a)

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

 

 

b)

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

 

Date:

March 18, 2022

/s/ Edward J. Cooney

 

 

 

Edward J. Cooney

 

 

 

Chief Executive Officer

 

 

 

Exhibit 31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Tessa M. Nolan, certify that:

 

 

1.

I have reviewed this annual report on Form 10-K of Affinity Bancshares, Inc.;

 

 

2.

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

 

 

3.

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

 

 

4.

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

 

 

a)

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

 

 

 

b)

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

 

 

c)

 

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

 

 

d)

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

 

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

 

a)

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

 

 

b)

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

 

Date:

March 18, 2022

/s/ Tessa M. Nolan

 

 

 

Tessa M. Nolan

 

 

 

Senior Vice President and Chief Financial Officer

 

 

 

Exhibit 32

Certification of Chief Executive Officer and Chief Financial Officer

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

Edward J. Cooney, Chief Executive Officer of Affinity Bancshares, Inc., (the “Company”) and Tessa M. Nolan, Senior Vice President and Chief Financial Officer of the Company, each certify in his or her capacity as an officer of the Company that they have reviewed the annual report on Form 10-K for the year ended December 31, 2021 (the “Report”) and that to the best of their knowledge:

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

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

 

Date:

 March 18, 2022

/s/ Edward J. Cooney

 

 

 

Edward J. Cooney

 

 

 

President and Chief Executive Officer

 

 

Date:

 March 18, 2022

/s/ Tessa M. Nolan

 

 

 

Tessa M. Nolan

 

 

 

Senior Vice President and Chief Financial Officer

 

 

The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002.

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