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CFB Annual Report 2018

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Celebrating a Record-Setting Performance

COMMUNITY FIRST

BANCORPORATION

2018 Annual Report

Record-Setting Performance



President’s Report to the Shareholders of

Community First Bancorporation

I am pleased to report a record-breaking year for the Company and the Bank. This past year

we continued building on a strong foundation laid by our people, our products, and our

services. The results of these efforts provided the Company and the Bank with a record-setting

performance in 2018.

In 2018, our net income was $4,440,000, which represented an increase of $3,553,000 or 401%

over earnings of $887,000 recognized in 2017. This significant increase in earnings was the

result of the Bank’s ability to recapture $3,600,000 in Deferred Tax Assets (DTA) held by the

Bank over the last several years.

DTA are recorded when a company experiences significant losses such as those we experienced

in 2010 - 2014. Companies can recognize an asset that represents the future tax deductibility

of losses when it appears likely that the company will be able to utilize the previous losses to

offset taxable income. In 2018, the Company was able to demonstrate that it can generate the

income necessary to utilize the DTA.

Excluding the net effect of one-time charges in late 2018, we were on track to have a solid year

for the Company and the Bank with an increase in core earnings of over 100% above the 2017

numbers.

The Company continued to experience sound growth in 2018 with year-end assets totaling

$382,019,000, compared to $354,460,000 one year ago. The Company’s net loans were

$275,305,000 as of December 31, 2018, an increase of 10.1% over 2017 loans of $249,939,000.

The Company’s deposits were $329,369,000 as of December 31, 2018, compared to

$317,688,000, an increase of $11,681,000 or 3.7%.

Ultimately every organization must move beyond its initial footprint in order to grow and

prosper. Historically, Community First Bank was focused on growing deposit relationships,

with a heavy emphasis on time deposits, in Anderson and Oconee Counties. While remaining

highly competitive in this sector, our current and future strategy focuses on other types of

core deposits and deposit customers. We will continue to expand the deposit base to keep pace

with the loan growth.

In 2016, we recognized the need to look beyond our home markets to new markets that would

provide additional opportunities for loans and deposits, and we responded by opening loan

production offices (LPOs). The revenue generated by our growth has been the driving force

behind our return to profitability. For 15 out of the last 16 quarters the Company has been

profitable, has significantly reduced nonperforming assets, and has offered additional products

and services.

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In 2018, we continued reducing our nonperforming assets, comprising non-accrual loans and

foreclosed assets. These nonperforming assets declined to $1,208,000 as of December 31,

2018, compared to $1,977,000 at year-end 2017. Our overall loan quality remains excellent,

as demonstrated by a year-end past-due ratio of .61%, which is well below the industry standard

of 1.0%.

We took another big step forward in the 4th quarter of 2018 and the early part of the 1st

quarter 2019 with the payment in full of all previously accrued dividends due on the preferred

shares. Those shares were offered in 2009. In 2013, the Bank was placed under a consent order

by the regulators. At the time the Bank went under the order, it was allowed to accrue for the

dividends but was forbidden to pay them as part of the regulatory agreement. With our earnings

in 2018, we were able to pay $354,375 in December 2018 and the remaining $354,375 in

early January to bring our preferred obligations current.

We continued to follow our strategic plan during 2018. Ours is a dual strategy. We will maintain

our focus on strong, profitable, organic growth within our core South Carolina and North

Carolina markets while increasing the Company’s Return on Assets (ROA) to a level commensurate

with that of a group of high performing peer institutions. We will also evaluate market

opportunities that arise to improve the Company’s strategic position.

Continuing with our strategic plan, we expect to branch into markets currently served by our

LPOs opened in 2016 and 2017, and we are moving forward as indicated below:

• In June 2018, the Bank purchased a future branch site located at 210 Brendan Way,

Greenville, South Carolina. The Bank has received approval from our regulators to open

this branch, and we expect to open a full-service branch on April 15, 2019, to serve

our customers in the Greenville market.

• In December 2018, the Company and the Bank received the approval of its regulators

to acquire two future branch locations in North Carolina, and we have completed the

purchase of 800 East Arrowood Road in Charlotte, along with 202 West Trade Street

in Dallas.

We believe both of these markets will provide the Bank with robust deposit and loan

opportunities.

• We intend to consolidate our Charlotte and Fort Mill LPOs into the new Charlotte

location, given its proximity to both existing LPO locations. We are targeting a 3rd

quarter opening for the Charlotte location and a 4th quarter opening for Dallas, subject

to approval of our regulators.

As we turn our attention to 2019, we are coming off a great year of income and earnings with

an ROA of 1.20%, ROE of 13.70%, and an increase in our tangible book value to $8.02. In 2019

and beyond we will continue our focus on safely growing our Bank and our income organically

or through strategic opportunities.

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We believe we are properly positioned to continue sound growth as we concentrate our efforts in

the right growth markets with the proper lines of business, staffed by an excellent talent pool of

associates driven to be successful. At Community First Bank we have core values that epitomize

the manner in which the Board of Directors, management, and employees go about doing

business, and I want to share those with you.

CUSTOMER COMMITTMENT – We develop strong relationships that make a positive impact on

our customer’s lives and businesses.

TEAMWORK – We work together, across all boundaries, to meet the needs of our customers and

to help the Company win.

INTEGRITY – We uphold the highest standards of integrity in all of our actions.

RESPECT FOR OUR TEAM MEMBERS – We value our team members and the contributions they

make to our organization every day! We encourage and promote their development, and we reward

performance.

GOOD CITIZENS OF OUR COMMUNITY – We are good citizens in the communities in which we

live and work.

SUCCESS – We expect to be successful in the marketplace and in every aspect of our business.

PERSONAL ACCOUNTABILITY – We are personally accountable for delivering on our commitments.

In closing, I wish to thank each of you for your continued support. Together, we have come a great

distance over the last four years, and I believe the best is yet to come for both the Company and

the Bank. I’m very excited about our organization and our possibilities in the future. It is certainly

my honor and privilege to be your President and Chief Executive Officer.

I encourage you to further honor your investment in the Company by allowing us to earn your

business. Remember, at Community First Bank, We know what matters.

Thank you again for your support and confidence.

Respectfully,

Richard D. Burleson, Jr.

President and Chief Executive Officer

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Business of the Company

Community First Bancorporation (the “Company”) is a South Carolina corporation and a bank holding

company incorporated on May 23, 1997. The Company commenced operations on October 16, 1997, upon

effectiveness of the acquisition of Community First Bank (the “Bank”) as a wholly owned subsidiary.

The principal business of the Company is ownership and operation of the Bank. In November 2011, the

Company acquired Bank of Westminster (“Westminster”), Westminster, South Carolina, in an all cash

transaction pursuant to the merger of Westminster with and into the Bank.

Business of the Bank

The Bank is a South Carolina state bank which was incorporated in December 1988, and commenced

operations as a commercial bank in March 1990. The Bank operates from its offices in Walhalla, Seneca,

Anderson, Westminster and Williamston, South Carolina. As of December 31, 2018, the Bank also operates

loan production offices (“LPOs”) in Greenville and Fort Mill, South Carolina and in Charlotte and Concord,

North Carolina. In 2019, the Greenville LPO is scheduled to open as a full-service location, and the Fort

Mill LPO is scheduled to be consolidated into the Charlotte LPO. In 2017, the Bank established Community

First Financial Services, which works through a trusted partner to offer online pricing options for

various types of insurance products. To date, Community First Financial Services has engaged in limited

operations.

Deposits

The Bank offers a full range of deposit services, including checking accounts, NOW accounts, retirement

accounts (including Individual Retirement Accounts), time deposits and savings accounts of various types,

ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts

and time certificates are tailored to the principal market area at rates competitive with those offered

by other institutions in the area. All deposit accounts are insured by the Federal Deposit Insurance

Corporation (“FDIC”) up to the maximum amount permitted by law. The Bank solicits these accounts from

individuals, businesses, associations and organizations, and government authorities. The Bank does not

offer trust services.

Lending Activities

The Bank offers a range of lending services, including commercial loans, consumer loans, and real estate

mortgage loans. The Bank offers secured and unsecured, short-to-intermediate term loans, with floating

and fixed interest rates for commercial and consumer purposes. Consumer loans generally include car and

boat loans, home equity improvement loans (secured by first and second mortgages), personal expenditure

loans, education loans, and overdraft lines of credit. Commercial loans generally include short term

unsecured loans, short and intermediate term real estate mortgage loans, loans secured by listed stocks,

loans secured by equipment, inventory, and accounts receivable. Management believes that the credit

staff possesses knowledge of the community and lending skills appropriate to enable the Bank to maintain

a sufficient volume of high quality loans.

To address the risks inherent in making loans, management maintains an allowance for loan losses based

on, among other things, an evaluation of the Bank’s loan loss experience, management’s experience at

other financial institutions in the market area, peer data, the amount of and trends in past due and

nonperforming loans, current economic conditions and the values of loan collateral.

Other Services

The Bank participates in a network of automated teller machines that may be used by Bank customers

throughout the United States and the world. The Bank offers credit and debit cards together with related

lines of credit. The lines of credit may be used for overdraft protection as well as pre-authorized credit for

personal purchases and expenses. The Bank also provides direct deposit of payroll and social security

benefits, and automatic drafts for various accounts. The Bank offers foreign payments and currency

exchange through a correspondent bank. The Bank offers an internet banking product accessible via the

Bank’s website at www.C1stbank.com. The interactive banking product includes an electronic bill payment

service that allows customers to make scheduled and/or recurring bill payments electronically. The Bank

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also offers mobile banking as a component of internet banking. Additionally, the Bank offers remote check

deposit services, merchant services, and other related services to commercial and small business customers.

Managements Discussion of Financial

Condition and Results of Operations

The following information describes various financial aspects of the Bank's business. This information

should be read in conjunction with the consolidated financial statements of the Company, which appear

elsewhere in this document.

Effect of Economic Trends

The current outlook for the Company’s market areas and for the national economy in the United States

(“U.S.”) is optimistic. The Company expects a growing economy in 2019 in its market areas. As of December

31, 2018, employment options are plentiful in the Company’s market areas.

Earnings Performance

The Company reported net income of $4,440,000 in 2018 compared to $887,000 in 2017 and $924,000

in 2016. After adjusting for dividends allocated to preferred shares, the net income per common share was

$1.02 for 2018, $0.18 for 2017 and $0.18 for 2016. Fully diluted net income per share was $1.01 for 2018.

Stock based compensation in the form of vested options has the potential to create a difference between

basic and fully diluted earnings per common share. In 2018, the effect of vested options on earnings

per common share was minimal. In 2017 and 2016, there was no dilutive effect. Net income increased

significantly in 2018 relative to 2017 due to the reversal of the Company’s deferred tax asset valuation

allowance in 2018 and significant investments in 2017 for conversion of the Bank’s core processing system.

The Company’s net interest income (the difference between interest earned on interest earning assets and

interest paid on interest bearing liabilities) after provision for loan losses increased to $13,145,000 in

2018 from $12,043,000 and $10,197,000 in 2017 and 2016, respectively. The Company had noninterest

income of $2,273,000 in 2018 following $2,683,000 in 2017 and $2,780,000 in 2016. Noninterest income

for 2018 included losses on the sale of investments of $50,000 and gains on the sale of investments of

$11,000, and $309,000 in 2017 and 2016, respectively. The Company recorded a provision to the allowance

for loan losses of $148,000 in 2018, $0 in 2017, and $50,000 in 2016. The Company had other operating

expenses of $14,791,000, $13,837,000, and $12,045,000, in 2018, 2017, and 2016, respectively.

Net Interest Income

Net interest income is the amount of interest earned on interest earning assets (loans, investment

securities, deposits in other banks and federal funds sold), less the interest expenses incurred on interest

bearing liabilities (interest bearing deposits and borrowed money), and is the principal source of the Bank's

earnings. Net interest income is affected by the level of interest rates, volume and mix of interest earning

assets and the relative funding of these assets. Due to the fact that the Bank’s and therefore, the Company’s,

assets are largely monetary in nature, material changes in interest rates can have a material impact on the

Bank’s net interest income.

For the years ended December 31, 2018, 2017, and 2016, net interest income was $13,293,000,

$12,043,000, and $10,247,000, respectively. The increase in net interest income in 2018 compared to 2017

and 2016 is primarily attributable to larger volumes of loans, the asset type with the highest yield for the

Bank. The increase in interest income was partially offset by increases in the Bank’s interest expense (see

“Rate/Volume Analysis of Net Interest Income” below). In 2018 the average balance of loans outstanding

increased $43,379,000 in comparison to 2017 average loan balances. Average yields on total loans increased

slightly to 5.04% from 5.01% in 2017. The increase in interest income attributable to loans was partially

offset by a decrease in interest income attributable to investments as those instruments amortized. Average

balances on investments securities declined by $13,416,000 in 2018 compared to 2017; however, yields

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on investments increased slightly at 2.25% in 2018 compared to 2.12% in 2017. Average yields on total

interest earning assets increased from 4.05% in 2017 to 4.38% in 2018.

The table, "Average Balances, Yields and Rates," provides a detailed analysis of the effective yields and rates

on the categories of interest earning assets and interest bearing liabilities for the Company for the years

ended December 31, 2018, compared to 2017.

Average Balances, Yields and Rates

(Dollars in thousands)

Year ended December 31, 2018 Year ended December 31, 2017

Interest Average

Interest Average

Average Income/ Yields/ Average Income/ Yields/

Balances(1) Expense Rates(2) Balances(1) Expense Rates(2)

Assets

Federal Funds Sold and other interest-earning $ 25,505 $ 412 1.62% $ 31,690 $ 322 1.02%

balances

Securities available-for-sale 50,385 1,135 2.25% 63,801 1,354 2.12%

Loans (3) 271,163 13,654 5.04% 227,784 11,418 5.01%

Other 666 34 5.08% 361 18 4.97%

Total interest earning assets 347,719 15,235 4.38% 323,636 13,112 4.05%

Non interest earning assets, net 22,965 24,185

Total assets $ 370,684 $ 347,821

Liabilities and shareholders' equity

Interest bearing liabilities:

Interest bearing transaction accounts $ 67,246 $ 41 .06% $ 58,191 $ 32 .06%

Savings and money market 64,796 122 .19% 62,410 97 .16%

Time deposits 129,879 1,603 1.23% 121,482 940 .77%

Borrowings 8,055 176 2.18% - - -%

Total interest bearing liabilities 269,976 1,942 .72% 242,083 1,069 .44%

Noninterest bearing demand deposits and other

Liabilities and equity 100,708 105,738

Total liabilities and shareholders' equity $ 370,684 $347,821

Interest rate spread (4) 3.66% 3.61%

Net interest income and net yield on earning

$13,293 3.82% $ 12,043 3.72%

assets (5)

Interest free funds supporting earning assets (6) $ 77,743 $ 81,553

(1) Average balances of interest-earning assets and interest-bearing liabilities calculated on a daily basis.

(2) Calculated based on the number of days in the year that each type of asset or liability was in existence. Yield calculated on a pre-tax

basis.

(3) Nonaccruing loans are included in the average loan balances and income on such loans is recognized on a cash basis.

(4) Total yield on interest earning assets less the ratepaidontotal interest bearingliabilities.

(5) Net interest income divided by total interest earning assets.

(6) Total interest earning assets less total interest bearing liabilities.

Rate/Volume Analysis of Net Interest Income

As discussed under the caption “Net Interest Income,” the Bank’s net income is largely dependent on net

interest income. The table below calculates the relative impact on net interest income caused by changes

in the average balances (volume) of interest sensitive assets and liabilities and the impact caused by changes

in interest rates earned or paid. Each table compares two years as indicated below. The effect of a change

in average balance has been determined by applying the average rate in the earlier year to the change in

average balance in the later year, as compared with the earlier year. The effect of a change in the average

rate has been determined by applying the average balance in the earlier year to the change in the average

rate in the later year, as compared with the earlier year.

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Year ended December 31, 2018 compared to 2017

Increase (Decrease) Due to

Rate Volume Rate/Volume(1) Change

Interest earned on:

(Dollars in thousands)

Securities (2) $ 83 $ (285) $ (17) $ (219)

Federal Funds sold and other interestearning

balances 190 (63) (37) 90

Loans 52 2,174 10 2,236

Other - 16 - 16

Total interest income 325 1,842 (44) 2,123

Interest paid on:

Deposits 577 78 42 697

Borrowings - - 176 176

Total interest expense 577 78 218 873

Change in Net Interest Income $ (252) $1,764 $ (262) $1,250

(1) Rate/Volume is calculated as the difference between the average balances for the periods multiplied by the difference between the

average rates for the periods.

(2) Income calculated on a pre-tax basis.

Interest Rate Sensitivity

Interest rate sensitivity measures the timing and magnitude of the repricing of assets compared with the

repricing of liabilities and is an important part of asset/liability management. The objective of interest

rate sensitivity management is to generate stable growth in net interest income, and to control the risks

associated with interest rate movements. Management constantly reviews interest rate risk exposure and

the expected interest rate environment so that adjustments in interest rate sensitivity can be made in a

timely manner.

When interest sensitive liabilities exceed interest sensitive assets for a specific repricing “horizon,” a

negative interest sensitivity gap results. The gap is positive when interest sensitive assets exceed interest

sensitive liabilities. For a bank with a negative gap, falling interest rates would be expected to have a positive

effect on net interest income and increasing rates would be expected to have the opposite effect. However,

if one or more assumptions prove incorrect, the margin may not be impacted in the manner expected. On

a cumulative basis, rate sensitive liabilities exceeded rate sensitive assets, resulting in a liability sensitive

position at the end of 2018 at the one-year time horizon, assuming that all assets and liabilities would

reprice at the earliest possible time. However, many instruments may not reprice in conjunction with final

maturities, and interest-bearing liabilities, in particular, may not reprice in conjunction with or by the

same magnitude as movements in market interest rates.

Noninterest Income

Noninterest income, which consists primarily of service charges on deposit accounts, other fee income,

increases in the cash surrender value of bank owned life insurance contracts, and gains and losses on

securities sales, decreased by $410,000. The main reasons for the decrease relate to the decrease in gains

on sale of foreclosed assets, decrease in miscellaneous other income, and decrease in mortgage brokerage

income. There were no gains on the sale of foreclosed assets recognized in 2018 compared to $229,000

in gains on the sale of foreclosed assets in 2017 which were included in other noninterest income on the

accompanying statements of operations. Miscellaneous other income decreased to $3,000 in 2018

compared to $109,000 in 2017. Mortgage brokerage income decreased to $48,000 in 2018 compared to

$117,000 in 2017.

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Noninterest Expenses

Noninterest expenses, which consist primarily of salaries and employee benefits, occupancy costs, data

processing expenses, professional fees and FDIC insurance premiums, totaled $14,791,000 in 2018,

$13,837,000 in 2017, and $12,045,000 in 2016. Salaries and employee benefits increased in each of the

periods due to an increase in employees and personnel costs. Additionally, increases in 2018 were the

result of incentive compensation triggered by the Company’s net income and an additional accrual of

supplemental retirement benefits related to a former executive officer. Net occupancy and equipment

expenses declined slightly in 2018 compared to 2017. Data processing expenses declined in 2018 compared

to 2017. In 2017 the primary driver of the increase in data processing expenses was related to expenses

associated with the conversion of the Bank’s core processing system. Increases in training, printing,

software, and certain other conversion-related costs totaled $668,000 in 2017. The Company did not incur

similar costs in 2018. Other noninterest expense was $2,308,000 in 2018, $4,268,000 in 2017, and

$2,982,000 in 2016.

Income Taxes

In 2018 the Company recorded an income tax benefit of $3,813,000 as a result of reversing the valuation

allowance against its deferred tax asset, net of current income taxes. The valuation allowance was recorded

against the Company’s deferred tax asset in 2012 and 2011. A valuation allowance is recorded against a

deferred tax asset in situations where evidence regarding the ability to use the benefit in the near term

does not outweigh the likelihood that the benefit will not be available for use. In 2018 the Company was

able to demonstrate that evidence exists that the Company will be able to utilize the tax benefits in

the near term. The Company recorded income tax expense of $2,000 and $8,000 in 2017 and 2016,

respectively. Refer to Notes 1 and 12 to the Company’s consolidated financial statements contained

elsewhere herein for more information.

Liquidity

Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing

assets or the acquisition of additional liabilities. Adequate liquidity is necessary to meet the requirements

of customers for loans and deposit withdrawals in the most timely and economical manner. Some liquidity

is ensured by maintaining assets that may be immediately converted into cash at minimal cost (amounts

due from banks and federal funds sold). However, the most manageable sources of liquidity are composed

of liabilities, with the primary focus on liquidity management being on the ability to obtain deposits within

the Bank's service area. Core deposits (total deposits less time deposits $250,000 and greater) provide a

relatively stable funding base, and were equal to 81.9% and 87.2% of total assets at December 31, 2018

and 2017, respectively.

Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold,

unpledged securities, and funds from maturing loans. The Company had $29,194,000 in cash and cash

equivalents at December 31, 2018. The Bank has access to a line of credit with the Federal Home Loan

Bank of Atlanta (“FHLB”), which is subject to various conditions and may be terminated at the option of

the lender, as an additional source of liquidity funding. The line with the FHLB is equal to 25% of assets,

provided that adequate collateral is available for pledging. The line may be used for short or long term

funding needs and may be used on a fixed or variable-rate basis. As of December 31, 2018, the Bank had

$10,000,000 in borrowings from the FHLB. As of December 31, 2018, approximately $84,187,000 of additional

funds were available under the FHLB line provided that eligible collateral is available. The Bank

primarily uses loans to collateralize advances, but can also pledge bonds and mortgage- backed securities

issued by U.S. Government agencies as collateral. As of December 31, 2018 loans with a collateral value of

$15,128,000 were pledged as collateral to the FHLB for future borrowing capacity. Additional securities

with a market value of $40,256,000 were unpledged and could be used as collateral for borrowings should

the Company require additional funding. Management believes that the Bank's overall liquidity sources

are adequate to meet its operating needs in the ordinary course of its business.

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Off-Balance-Sheet Risk

The Company, through the operations of the Bank, makes contractual commitments to extend credit in

the ordinary course of its business activities. These commitments are legally binding agreements to lend

money to customers of the Bank at predetermined interest rates for a specified period of time. At December

31, 2018 and 2017, unfunded commitments to extend credit were $46,691,000 and $37,736,000,

respectively. Past experience indicates that many of these commitments to extend credit will expire unused

and it is unlikely that a large portion would be used in a short period of time. However, through its various

sources of liquidity discussed above, the Bank believes that it will have the necessary resources to meet

these obligations should the need arise.

In addition to commitments to extend credit, the Bank also issues standby letters of credit which are

assurances to a third party that it will not suffer a loss if the Bank's customer fails to meet its contractual

obligation to the third party. Standby letters of credit totaled approximately $1,011,000 at December 31,

2018. Past experience indicates that many of these standby letters of credit will expire unused. However,

through its various sources of liquidity discussed above, the Bank believes that it will have the necessary

resources to meet these obligations should the need arise.

Neither the Company nor the Bank is involved in other off-balance sheet contractual relationships,

unconsolidated related entities that have off-balance sheet arrangements or transactions that could result

in liquidity needs or other commitments or significantly impact earnings. The Company maintained

obligations under non-cancelable operating lease agreements of $5,000 at December 31, 2018. The

Company has approximately six years remaining on a seven-year contract with a company which provides

data and item processing and ATM network services. The monthly costs are approximately $61,000. Refer

to Note 14 to the Company’s consolidated financial statements for additional discussion on other

commitments and contingencies and financial instruments with off-balance sheet risk.

Capital Resources

Total shareholders’ equity increased from $32,494,000 at December 31, 2017 to $36,614,000 at December

31, 2018. The increase was due to net income and items related to stock-based compensation, net of a

decrease in accumulated other comprehensive income related to changes in market values on the

Company’s available for sale securities. The Company may determine that additional capital is required to

support planned growth and expansion in the coming years. The Company’s internal policies require

maintenance of sufficient capital to remain classified as a Well Capitalized institution under the regulatory

capital guidelines.

The Company and the Bank are subject to regulatory capital adequacy standards. The Company’s and the

Bank’s regulatory capital requirements and positions are summarized in Note 10 to the consolidated

financial statements contained elsewhere herein.

9


Independent Auditor’s Report

To the Board of Directors

Community First Bancorporation and Subsidiaries

Walhalla, South Carolina

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Community First Bancorporation and its subsidiaries,

which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements

of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period

ended December 31, 2018, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance

with accounting principles generally accepted in the United States of America; this includes the design, implementation and

maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that

are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our

audits in accordance with auditing standards generally accepted in the United States of America. Those standards require

that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are

free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated

financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks

of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk

assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the

consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for

the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such

opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant

accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial

statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial

position of Community First Bancorporation and its subsidiaries as of December 31, 2018 and 2017, and the results of its

operations and its cash flows for each of the three years in the period ended December 31, 2018 in accordance with accounting

principles generally accepted in the United States of America.

Greenville, South Carolina

April 16, 2019

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Consolidated Balance Sheets

Community First Bancorporation and Subsidiaries

(Dollars in thousands, except share information)

December 31,

2018 2017

ASSETS

Cash and due from banks $ 3,475 $ 3,385

Interest-bearing deposits due from banks 25,719 22,109

Cash and cash equivalents 29,194 25,494

Debt securities available-for-sale 47,522 55,567

Equity securities available-for-sale 11 29

Federal home Loan Bank stock, at cost 744 353

Loans 278,881 253,293

Allowance for loan losses (3,576) (3,354)

Loans, net 275,305 249,939

Premises and equipment, net 10,233 7,663

Accrued interest receivable 957 870

Bank-owned life insurance 12,243 11,938

Foreclosed assets 646 1,232

Deferred income tax assets, net 4,346 -

Other assets 818 1,375

Total assets $ 382,019 $ 354,460

LIABILITIES

Deposits

Noninterest-bearing $ 58,557 $ 63,126

Interest-bearing 270,812 254,562

Total deposits 329,369 317,688

Federal Home Loan Bank advances payable 10,000 -

Accrued interest payable 732 558

Other liabilities 5,304 3,720

Total liabilities 345,405 321,966

Commitments and contingent liabilities (Note 14)

Shareholders’ equity

Preferred stock – Series A – non-voting 5% cumulative - $1,000 per

share liquidation preference; 5,000 shares authorized,

3,150 shares issued and outstanding 3,126 3,126

Preferred stock – no par value; 9,995,000 shares authorized, none

issued - -

Common stock – no par value; 10,000,000 shares authorized;

4,160,878 and 4,152,294 shares issued and outstanding

at December 31, 2018 and 2017, respectively 40,668 40,668

Additional paid-in capital 986 848

Retained deficit (6,937) (11,179)

Accumulated other comprehensive loss (1,229) (969)

Total shareholders’ equity 36,614 32,494

Total liabilities and shareholders’ equity $ 382,019 $ 354,460

The Notes to Consolidated Financial Statements are an integral part of these financial statements.

11


Consolidated Statements of Operations

Community First Bancorporation and Subsidiaries

(Dollars in thousands, except per common share information)

Year Ended December 31,

2018 2017 2016

Interest income

Interest and fees on loans $ 13,654 $ 11,418 $ 8,531

Interest on securities

Taxable 1,131 1,339 1,969

Tax-exempt 4 15 23

Interest-bearing deposits 412 322 207

Other 34 18 19

Total interest income 15,235 13,112 10,749

Interest expense

Interest on time deposits $100,000 and over 898 504 152

Interest on other deposits 868 565 350

Interest on advances from Federal Home Loan Bank 176 - -

Total interest expense 1,942 1,069 502

Net interest income 13,293 12,043 10,247

Provision for loan losses 148 - 50

Net interest income after provision for loan losses 13,145 12,043 10,197

NONINTEREST INCOME

Service charges on deposit accounts 949 989 1,056

Mortgage brokerage income 48 117 135

Net (loss) gain on sale of investment securities (50) 11 309

Increase in cash surrender value of life insurance contracts 305 317 326

Other 1,021 1,249 954

Total other income 2,273 2,683 2,780

NONINTEREST EXPENSES

Salaries and employee benefits 8,566 6,881 6,220

Net occupancy 829 794 867

Furniture and equipment 415 476 456

Legal and professional fees 1, 146 1,014 1,019

FDIC insurance 206 179 409

Expenses of foreclosed assets 263 134 47

Data processing 1,058 2,084 1,207

Other 2,308 2,275 1,820

Total other expenses 14,791 13,837 12,045

Income before income taxes 627 889 932

Income tax (benefit) expense (3,813) 2 8

Net income 4,440 887 924

Deductions for amounts not available to common shareholders:

Dividends declared or accumulated on preferred stock 198 157 157

Net income available to common shareholders $ 4,242 $ 730 $ 767

Per common share

Net income $ 1.02 $ 0.18 $ 0.18

Net income, assuming dilution $ 1.01 $ 0.18 $ 0.18

The Notes to Consolidated Financial Statements are an integral part of these financial statements.

12


Consolidated Statements of Comprehensive Income

Community First Bancorporation and Subsidiaries

(Dollars in thousands)

Year Ended December 31,

2018 2017 2016

Net income $ 4,440 $ 887 $ 924

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale

arising during the period, net (297) 293 (208)

Less: Reclassification adjustment for net losses (gains) included in

net income 50 (11) (309)

Related income tax expense (benefit) (13) 4 118

Other comprehensive income (loss) (260) 286 (399)

Comprehensive income $ 4,180 $ 1,173 $ 525

The Notes to Consolidated Financial Statements are an integral part of these financial statements.

Consolidated Statements of Changes in Shareholders’ Equity

Community First Bancorporation and Subsidiaries

(Dollars in thousands, except share information)

Preferred

Stock

Shares of

Common

Stock

Common

Stock

Additional

Paid-in

Capital

Retained

Deficit

Accumulated

Other

Comprehensive

Income (Loss)

Total

Balance, December 31, 2015 $ 3,126 4,152,294 $ 40,668 $ 748 $ (12,676) $ (856) $ 31,010

Net income - - - - 924 - 924

Other comprehensive loss - - - - - (399) (399)

Accrued dividends on preferred stock - - - - (157) - (157)

Balance, December 31, 2016 3,126 4,152,294 40,668 748 (11,909) (1,255) 31,378

Net income - - - - 887 - 887

Other comprehensive income - - - - - 286 286

Dividends accrued/paid on preferred

stock - - - - (157) - (157)

Stock based compensation - - - 100 - - 100

Balance, December 31, 2017 3,126 4,152,294 40,668 848 (11,179) (969) 32,494

Net income - - - - 4,440 - 4,440

Other comprehensive loss - - - - - (260) (260)

Dividends paid on preferred stock - - - - (198) - (198)

Proceeds from exercise of stock

options - 2,000 - 13 - - 13

Issuance of restricted stock - 6,584 - 24 - - 24

Stock based compensation - - - 101 - - 101

Balance, December 31, 2018 $ 3,126 4,160,878 $40,668 $ 986 $ (6,937) $ (1,229) $36,614

The Notes to Consolidated Financial Statements are an integral part of these financial statements.

13


Consolidated Statements of Cash Flows

Community First Bancorporation and Subsidiaries

(Dollars in thousands)

For the years ended December 31,

2018 2017 2016

OPERATING ACTIVITIES

Net income $ 4,440 $ 887 $ 924

Adjustments to reconcile net income to net cash

provided by operating activities

Provision for loan losses 148 - 50

Depreciation 404 437 521

Accretion of net loan fees and costs (421) (82) (104)

Securities accretion and premium amortization 428 576 768

Stock based compensation 125 100 -

Net losses (gains) realized on sales of available-for-sale securities 50 (11) (255)

Net gains realized on sales of held-to-maturity securities - - (54)

Increase in cash surrender value of life insurance (305) (317) (326)

Loss (gain) on sale of foreclosed assets 58 (176) (70)

Subsequent writedowns of foreclosed assets 18 120 50

(Increase) decrease in accrued interest receivable (87) (138) 28

Increase in interest payable 174 436 10

Net deferred income tax assets (4,346) - -

(Increase) decrease in prepaid expenses and other assets 957 404 538

Increase (decrease) in accrued expenses 1,938 (65) (67)

Net cash provided by operating activities 3,581 2,171 2,013

INVESTING ACTIVITIES

Purchases of available for sale securities (1,304) (5,042) (28,382)

Maturities, calls, and paydowns of available-for-sale securities 7,770 9,318 41,357

Proceeds from the sale of securities available for sale 459 11,133 21,689

Maturities, calls, and paydowns of held-to-maturity securities - - 78

Proceeds from sales of held-to-maturity securities - - 951

Purchases of Federal Home Loan Bank stock (391) - -

Proceeds from redemptions of Federal Home Loan Bank stock - 34 12

Net increase in loans made to customers (25,277) (53,571) (53,352)

Purchases of premises and equipment (2,974) (102) (117)

Proceeds from sale of foreclosed assets 694 661 1,043

Net cash used for investing activities (21,023) (37,569) (16,721)

FINANCING ACTIVITIES

Net increase (decrease) in non-maturing deposits 2,668 8,388 (29,779)

Net increase (decrease) in time deposits 9,013 26,854 (8,538)

Increase in advances from Federal Home Loan Bank 10,000 - -

Proceeds from exercise of stock options 13 - -

Payment of dividends on preferred stock (552) (118) -

Net cash provided by (used for) financing activities 21,142 35,124 (38,317)

Increase (decrease) in cash and cash equivalents 3,700 (274) (53,025)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,494 25,768 78,793

CASH AND CASH EQUIVALENTS, END OF YEAR $ 29,194 $ 25,494 $ 25,768

Supplemental Disclosure of Cash Flow Information

Cash paid during the period for

Interest $ 1,768 $ 633 $ 492

Income taxes 185 2 8

Noncash investing and financing activities

Transfer of loans to foreclosed assets 184 94 567

Unrealized gain (loss) on securities available-for-sale, net of tax (260) 286 (399)

Accrual of dividends on preferred stock - 39 157

The Notes to Consolidated Financial Statements are an integral part of these financial statements.

14


Notes to Consolidated Financial Statements

Community First Bancorporation and Subsidiaries

(Dollars in thousands, except per common share information)

NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization - Community First Bancorporation (the “Company,” “we” and other such terms), a bank holding company, and its

wholly-owned subsidiary, Community First Bank (the “Bank”), are engaged in providing domestic commercial banking services

from offices in Walhalla, Seneca, Anderson, Williamston and Westminster, South Carolina. The Bank has loan production offices

in Greenville and Fort Mill, South Carolina, and in Concord and Charlotte, North Carolina. The Company is a South Carolina

corporation and its banking subsidiary is a state chartered commercial bank with its deposits insured by the Federal Deposit

Insurance Corporation (the “FDIC”). Therefore, the Company and its bank subsidiary operate under the supervision, rules and

regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), FDIC and South Carolina State

Board of Financial Institutions. Community First Bank was organized on December 1, 1988 and received its charter and

commenced operations on March 12, 1990. The holding company was incorporated on May 23, 1997. In 2017, the Bank

established Community First Financials Services, which works through a trusted partner to offer online pricing options for

various types of insurance products. To date, Community First Financial Services has engaged in limited operations.

The Bank is a community-oriented institution offering a full range of traditional banking services, with the exception of trust

services. Substantially all of its loans are made to individuals and businesses within its local markets in South Carolina and

North Carolina, and substantially all of its deposits are acquired within its local market areas.

Order of the FDIC and the South Carolina Board of Financial Institutions and Memorandum of Understanding with the Federal

Reserve Bank – Community First Bank agreed to the entry of a Consent Order (the “Order”) by the FDIC and the South

Carolina Board of Financial Institutions (the “Supervisory Authorities”) effective December 4, 2012. The Board of Directors

and management worked aggressively to address each article set forth in the Order, and as a result, effective January 11,

2016, the Order was replaced by a Memorandum of Understanding. All practices and procedures necessary to correct all remaining

deficiencies were corrected in 2016, and effective November 23, 2016, the Memorandum of Understanding was

lifted. During the first quarter of 2015, Community First Bank agreed to the entry of an IT Consent Order by the FDIC and

the South Carolina Board of Financial Institutions effective January 15, 2015. The IT Consent Order sought to enhance the

Bank’s existing practices and procedures in the area of information technology. The Board of Directors and management

worked aggressively to address each article set forth in the IT Consent Order, and as a result, effective January 11, 2016, the

IT Consent Order was decreased to a Memorandum of Understanding. All practices and procedures necessary to correct

all remaining deficiencies were corrected in 2016, and effective November 23, 2016, the Memorandum of Understanding

was terminated.

Community First Bancorporation entered into a Memorandum of Understanding (the “MOU”) with the Federal Reserve Bank

(“the FRB”) that, among other things, restricted the Company’s ability to pay dividends on its common and preferred stock

or make other capital distributions. Effective February 1, 2017, the Memorandum of Understanding was terminated.

Principles of Consolidation and Basis of Presentation - The consolidated financial statements include the accounts of the

parent company and its subsidiaries after elimination of all significant intercompany balances and transactions. The accounting

and reporting policies of the Company and its subsidiaries are in conformity with generally accepted accounting principles

and general practices within the banking industry.

Accounting Estimates - In preparing financial statements in conformity with generally accepted accounting principles,

management is required to make estimates and assumptions that affect the reported amounts of revenues and expenses

during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are

particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses

and valuation of deferred tax assets. In connection with the determination of the allowance for loan losses, management has

identified specific loans and adopted a policy of providing amounts for loan valuation purposes which are not identified with

any specific loan but are derived from actual loss experience ratios, loan types, loan volume, economic conditions and industry

standards. Management believes that 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 banking subsidiary’s

allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information

available to them at the time of their examination.

15


Concentrations of Credit Risk – Most of the Company’s, and its banking subsidiary’s, activities are with customers located

within the Company’s local market areas. See Note 4 for a discussion of the types of lending the Bank is engaged in. The

ability of borrowers to comply with the terms of their loan contracts is largely dependent upon local real estate and general

economic conditions in our market areas. We do not have any significant concentrations to any single industry or customer

nor do we engage in originating, holding, guaranteeing, servicing or investing in loans where the terms of the loan give rise

to a concentration of credit risk.

Securities – The majority of the securities invested in by the Company and the Bank are considered to have low levels of credit

risk. Equity securities that have readily determinable fair values and all debt securities are classified generally at the time of

purchase into one of three categories: held-to-maturity, trading, or available-for-sale. Debt securities that we have the positive

intent and ability to hold until ultimate maturity are classified as held-to-maturity and are accounted for at amortized cost.

Debt and equity securities bought and held primarily for sale in the near term would be classified as trading, and accounted

for on an estimated fair value basis, with unrealized gains and losses included in other income; however, we have never held

any securities for trading purposes. Securities not classified as either held-to-maturity or trading are classified as availablefor-sale

and are accounted for at estimated fair value. Unrealized holding gains and losses on available-for-sale securities are

excluded from net income and recorded as other comprehensive income, net of applicable income tax effects. Dividend and

interest income, including amortization of any premium or accretion of discount arising at acquisition, are included in earnings

for all three categories of securities. Realized gains and losses on all categories of securities are included in other operating

income, based on the amortized cost of the specific security on a trade date basis.

Federal Home Loan Bank Stock –The Bank is a member of the Federal Home Loan Bank of Atlanta (“FHLB”) and, accordingly,

is required to own restricted stock in that institution in amounts that may vary from time to time. Because of the restrictions

imposed, the stock may not be sold to other parties, but is redeemable by the FHLB at the same price as that at which it was

acquired by the Bank. We evaluate this security for impairment based on the probability of ultimate recoverability of the par

value of the investment. No impairment has been recognized based on this evaluation.

Loans and Interest Income – The recorded investment in a loan is generally its principal amount outstanding, increased or

reduced by net deferred loan costs or fees. Interest income on loans is recognized using the interest method based upon the

principal amounts outstanding. Loan origination and commitment fees and certain direct loan origination costs are deferred

and amortized as an adjustment of the related loan’s yield. Generally, these amounts are amortized over the contractual life

of the related loans or commitments.

We determine past due status according to the loan’s contractual terms. A scheduled payment is considered to have been

made only if all amounts due, including principal and interest, have been received. Any payments received in amounts

exceeding the contractual amount due do not extend the next due date. Instead, any such payments are treated as curtailments

and deducted from the last scheduled payment.

A loan is considered to be impaired when, in management’s judgment based on current information and events, it is probable

that the obligation’s principal or interest will not be collectible in accordance with the terms of the original loan agreement.

Impaired loans include nonaccrual loans and loans past due according to their contractual terms 90 days or more with respect

to interest or principal payments and other loans where, based on current information and events, it is probable that we will

be unable to collect principal and interest payments according to the contractual terms of the loan agreements. A loan is not

considered to be impaired, however, if any periods of delay or shortfalls of amounts expected to be collected are insignificant

or if we expect that we will collect all amounts due including accrued interest at the contractual interest rate during the period

of delay. Impaired loans that have been evaluated individually under our normal loan review process are carried in the balance

sheet at the lowest of (1) the present value of expected future cash flows discounted at the loan’s effective interest rate, which

is the contractual interest rate adjusted for any deferred loan fees or costs, premium or discount existing at the inception or

acquisition of the loan, (2) a value not to exceed its observable market price or the fair value of the collateral if repayment of

the loan is expected to be provided solely by the underlying collateral, or (3) its recorded amount. Generally, the accrual of

interest is discontinued on nonaccrual loans and any previously accrued interest on such loans is reversed against current

income. Any subsequent interest income is recognized on a cash basis when received unless collectability of a significant

amount of principal is in serious doubt. In such cases, collections are credited first to the remaining principal balance on

a cost recovery basis. A nonaccrual loan is not returned to accrual status unless principal and interest are current and the

borrower has demonstrated the ability to continue making payments as agreed.

16


Allowance for Loan Losses - An allowance for loan losses is maintained at a level estimated by management to provide

adequately for probable losses we believe are inherent in the loan portfolio. The allowance for loan losses is established

through a provision for loan losses charged to expense. If we determine that a loss has been incurred, the estimated amount

of the loss is charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously

charged off are added to the allowance. Changes in the estimated allowance for loan losses which are deemed necessary due

to the occurrence of new events or because more information is obtained are accounted for as changes in accounting estimates

in the accounting period in which the changes occur. Assessing the adequacy of the allowance for loan losses requires the

exercise of considerable judgment about the collectability of loans, the quality, mix and size of the overall loan portfolio,

economic conditions that may affect the loan portfolio generally or an individual borrower’s ability to repay, collateral values,

and historical losses.

When management determines that a loan will not perform substantially as agreed, a review of the loan is initiated to ascertain

whether it is more likely than not that a loss has occurred. Loans identified as impaired loans may be carried in the balance

sheet at the lowest of their recorded amount, the present value of expected cash flows, or, in the case of collateral dependent

impaired loans, the fair value of any underlying collateral less estimated costs of sale or other disposal. To account for an

impaired loan that is not collateral dependent, a specific allowance may be included in the allowance for loan losses. For an

impaired loan that is considered to be collateral dependent, any shortfall of the fair value of the collateral compared with the

recorded investment in the loan is generally charged off against the allowance and the amount of any expected costs to sell

or otherwise dispose of the property is maintained in the allowance for loan losses as a specific reserve.

In addition to the specific allowances previously described, the allowance for loan losses also is composed of general and

unallocated amounts. General amounts are provided for loans, excluding those for which specific amounts were determined,

by applying estimated loss percentages to the portfolio categorized using risk grades. The unallocated portion of the allowance

consists of an amount deemed appropriate to provide for the elements of imprecision and estimation risk inherent in the

specific and general amounts, and is determined based on management’s evaluation of various conditions that are not directly

measured by the other components of the allowance. This evaluation includes consideration of general national and local

economic and business conditions affecting key lending market areas, credit quality trends, collateral values, loan volumes,

portfolio seasoning, and any identified credit concentrations. The findings of internal credit reviews and results from external

audits and regulatory examinations are also considered.

We utilize our risk grading system for all loans held in the portfolio. This system involves our lending officers’ assigning a

risk grade, on a loan-by-loan basis, considering information about the borrower’s capacity to repay, collateral, payment history,

and other known factors. Assigned risk grades are updated monthly for any known changes in circumstances affecting

the borrower or the loan. The risk grading system is monitored on a continuing basis by management and an external credit

reviewer who is independent of the lending function.

We estimate losses related to off-balance-sheet credit exposures such as loan commitments, standby letters of credit, and

any unrecognized liabilities under recourse provisions related to certain mortgage loans that are originated by the Bank’s

personnel, but are funded by another financial institution, based on historical experience and by monitoring any large

positions individually. When management determines that a loss on such a position has been incurred, a charge is made

against earnings and a liability for off-balance-sheet positions is recorded.

Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed

using the straight-line method. Rates of depreciation are generally based on the following estimated useful lives: buildings

- 40 years; land improvements - 15 years; furniture and equipment - 5 to 25 years. The cost of assets sold or otherwise disposed

of and the related accumulated depreciation are eliminated from the accounts and the resulting gains or losses are reflected

in the consolidated statement of operations. Maintenance and repairs are charged to current expense as incurred and the

costs of major renewals and improvements are capitalized.

Foreclosed Assets - Assets (primarily real estate and vehicles) acquired through, or in lieu of, foreclosure are held for sale and

are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure, establishing a new cost basis. Losses

determined as of the date a collateral is acquired are charged against the allowance for loan losses. Subsequent to foreclosure

or acquisition, valuations are periodically obtained from independent appraisers and the assets are carried at the lower of the

new cost basis or fair value, less estimated costs to sell. Revenues and expenses from operations and changes in any subsequent

valuation allowance are included in expenses of foreclosed assets.

Bank-Owned Life Insurance – In connection with the supplemental retirement benefits described in Note 13, the Bank has

purchased life insurance policies on certain key executives and employees. The 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 charges or other amounts due that are probable at settlement.

17


Transfers of Financial Assets - Transfers of financial assets are accounted for as sales when control over the assets has been

surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from us, (2)

the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange

the transferred assets, and (3) we do not maintain effective control over the transferred assets through an agreement to

repurchase them before their maturity.

Advertising - We expense advertising and promotion costs as they are incurred. See Note 11.

Retirement Plans – We have a salary reduction profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code

as more fully described in Note 13. We do not sponsor any other postretirement or postemployment benefits, except with

respect to the former Chief Executive Officer. In 2007, the Company’s Board of Directors approved supplemental benefits

for the former Chief Executive Officer as more fully described in Note 13.

Deferred Income Taxes - We use an asset and liability approach for financial accounting and reporting of deferred income

taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and income

tax bases of assets and liabilities as measured by the currently enacted tax rates, which are assumed will be in effect when

these differences reverse. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a

valuation allowance is recognized. Deferred income tax expense or credit is the result of changes in deferred tax assets and

liabilities. See Note 12 for more information.

Net Income Per Common Share - Net income per common share is calculated by dividing net income available to common

shareholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Net

income per common share, assuming dilution, is calculated by dividing net income available to common shareholders by the

total of the weighted average number of shares outstanding during the period and the weighted average number of any dilutive

potential common shares and stock options that would have been outstanding if the dilutive potential shares and stock options

had been issued. In computing the number of dilutive potential common shares, it is assumed that all dilutive stock options

are exercised at the beginning of each year and that the proceeds are used to purchase shares of the Company’s common stock

at the average market price during the year. See Note 9.

Comprehensive Income - Comprehensive income consists of net income for the current period and other comprehensive

income (loss), defined as income, expenses, gains and losses that bypass the consolidated statements of operations and are

reported directly in a separate component of shareholders’ equity. We classify and report items of other comprehensive

income (loss) according to their nature, report total comprehensive income in the consolidated statements of changes in

shareholders’ equity, and display the accumulated balance of other accumulated comprehensive income (loss) separately in

the shareholders’ equity section of the consolidated balance sheets. At December 31, 2018 and 2017, the only component of

accumulated other comprehensive income (loss) was unrealized gains and losses on available-for-sale investments.

Consolidated Statements of Cash Flows - The consolidated statements of cash flows report net cash provided or used by

operating, investing and financing activities and the net effect of those flows on cash and cash equivalents. Cash equivalents

include amounts due from banks, federal funds sold and securities purchased under agreements to resell.

Reclassifications - Certain reclassifications have been made to prior years’ financial statements in order to comply with

current year presentation. These reclassifications had no effect on previously reported results of operations or shareholders’

equity.

NOTE 2 – CASH AND DUE FROM BANKS

Banks are generally required by regulation to maintain an average cash reserve balance based on a percentage of deposits.

The cash reserve balances may be in the form of vault cash or unencumbered deposit balances with the Federal Reserve Bank.

The average amounts of the cash reserve balances at December 31, 2018 and 2017 were approximately $1,638 and $2,058,

respectively.

18


NOTE 3 – SECURITIES

The aggregate amortized cost and estimated fair values of securities, as well as gross unrealized gains and losses of securities

were as follows:

Available-for-sale

Debt securities

Mortgage-backed securities

issued by U.S. Government

December 31,

2018 2017

Gross Gross Gross Gross

Unrealized Unrealized Estimated Unrealized Unrealized Estimated

Amortized Holding Holding Fair Amortized Holding Holding Fair

Cost Gains Losses Value Cost Gains Losses Value

agencies $ 168 $ 9 $ - $ 177 $ 199 $ 10 $ - $ 209

Government sponsored

enterprises (GSEs) 7,937 - 242 7,695 8,719 - 213 8,506

Mortgage-backed securities

issued by GSEs 40,566 - 1,388 39,178 46,242 - 746 45,496

State, county and

municipal 489 - 17 472 1,403 1 48 1,356

Total debt securities 49,160 9 1,647 47,522 56,563 11 1,007 55,567

Equity securities 2 9 - 11 2 27 - 29

Total $ 49,162 $ 18 $ 1,647 $ 47,533 $ 56,565 $ 38 $ 1,007 $ 55,596

The amortized cost and estimated fair value of available-for-sale debt securities by contractual maturity are shown below:

December 31, 2018 December 31, 2017

Available-for-sale

Available-for-sale

Amortized Estimated Amortized Estimated

Non-mortgage backed securities issued by GSEs and Cost Fair Value Cost Fair Value

by state, county and municipal issuers

Due within one year $ - $ - $ 402 $ 402

Due after one through five years 3,994 3,881 1,998 1,967

Due after five through ten years 489 473 2,996 2,897

Due after ten years 3,943 3,813 4,726 4,596

8,426 8,167 10,122 9,862

Mortgage-backed securities issued by:

US Government agencies 168 177 199 209

GSEs 40,566 39,178 46,242 45,496

Total $ 49,160 $ 47,522 $ 56,563 $ 55,567

19


The estimated fair values and gross unrealized losses of investment securities whose estimated fair values were less than

amortized cost as of December 31, 2018 and 2017 which had not been determined to be other-than-temporarily impaired

are presented below. The securities have been aggregated by investment category and the length of time that individual

securities have been in a continuous unrealized loss position.

December 31, 2018

Continuously in Unrealized Loss Position for a Period of

Less than 12 Months 12 Months or more Total

Estimated

Fair Value

Unrealized

Loss

Estimated

Fair Value

Unrealized

Loss

Estimated

Fair Value

Unrealized

Loss

Government-sponsored

enterprises (GSEs) $ - $ - $ 7,695 $ 242 $ 7,695 $ 242

Mortgage-backed securities

issued by GSEs 1,293 8 37,885 1,380 39,178 1,388

State, county and

municipal securities - - 403 17 403 17

Total $ 1,293 $ 8 $ 45,983 $ 1,639 $ 47,276 $ 1,647

Available-forsale

Available-forsale

December 31, 2017

Continuously in Unrealized Loss Position for a Period of

Less than 12 Months 12 Months or more Total

Estimated

Fair Value

Unrealized

Loss

Estimated

Fair Value

Unrealized

Loss

Estimated

Fair Value

Unrealized

Loss

Government-sponsored

enterprises (GSEs) $ - $ - $ 8,506 $ 213 $ 8,506 $ 213

Mortgage-backed securities

issued by GSEs 6,458 47 39,038 699 45,496 746

State, county and

municipal securities - - 884 48 884 48

Total $ 6,458 $ 47 $ 48,428 $ 960 $ 54,886 $ 1,007

At December 31, 2018 and 2017, one and eight securities, respectively, had been continuously in an unrealized loss position

for less than 12 months, and 51 and 44 securities, respectively, had been continuously in an unrealized loss position for 12

months or more. We do not consider these investments to be other-than-temporarily impaired because the unrealized losses

involve primarily securities issued by government-sponsored enterprises and state, county and municipal governments, none

of the rated securities have been downgraded below investment grade, and there have been no failures by the issuers to remit

their periodic interest payments as required. Although we classify our investment securities as available-for-sale, management

has not determined that any specific securities will be disposed of prior to maturity and believes that we have both the ability

and the intent to hold those investments until a recovery of fair value, including until maturity. Substantially all of the

issuers of state, county and municipal securities held were rated at least “investment grade” as of December 31, 2018 and

2017. For non-rated state, county and municipal government obligations with significant unrealized losses, management

periodically reviews financial information and continuing disclosures to assess the issuers’ condition and ability to honor

their obligations.

During 2018, one security was sold, resulting in net realized losses of $50 and one security matured. No securities were called

during 2018. During 2017, 21 securities were sold, resulting in net realized gains of $11. No securities were called or matured

in 2017. During 2016, 36 securities were sold, resulting in net realized gains of $200 and 24 securities were called, resulting

in net realized gains of $109. One security matured in 2016. During 2016, the Bank sold 14 odd lot sized mortgage backed

securities that had been classified as held-to-maturity and reinvested the proceeds in order to increase the yield on the Bank’s

investment portfolio. In completing these sales, management has considered appropriate accounting guidance and determined

that these transactions have not tainted the held-to-maturity portfolio for future classification of securities.

At December 31, 2018 securities with a carrying value of $7,266, were pledged as collateral to secure public deposits.

20


NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following:

December 31,

2018 2017

Commercial, financial and industrial $ 10,064 $ 10,788

Real estate - construction 15,356 16,766

Real estate - mortgage 176,373 167,402

Consumer installment 77,088 58,337

Total 278,881 253,293

Allowance for loan losses (3,576) (3,354)

Loans - net $ 275,305 $ 249,939

Net deferred loan costs of $2,407 and $1,730 were allocated to the various loan categories as of December 31, 2018 and 2017,

respectively.

Certain officers and directors of the Company and the Bank, their immediate families and business interests were loan

customers of, and had other transactions with, the Bank in the normal course of business. Related party loans are made on

substantially the same terms, including interest rates and collateral, as loans made to unrelated third parties and do not

involve more than normal risk of collectability of loans to such third parties. The aggregate dollar amount of these loans was

$3,222 and $3,018 at December 31, 2018 and 2017, respectively. During 2018, $804 of new loans and advances on lines of

credit were made and repayments and other reductions totaled $600.

As of December 31, 2018 and 2017, there were no significant concentrations of credit risk in any single borrower or groups

of borrowers. Our loan portfolio consists primarily of extensions of credit to businesses and individuals in our market areas.

The economy of these areas is diversified and does not depend on any one industry or group of related industries. Management

has established loan policies and practices that include set limitations on loan-to-collateral value for different types of

collateral, requirements for appraisals, obtaining and maintaining current credit and financial information on borrowers, and

credit approvals. The Bank makes loans to consumers that are collateralized by personal property such as boats, recreational

vehicles and automobiles through a direct relationship with fully vetted retailers that meet certain criteria. The Bank utilizes

defined underwriting procedures which are designed to mitigate risks associated with such loans, which are financed indirectly

to consumers. These loans are typically made with loan to actual collateral values averaging at or below 100% and can typically

have terms ranging from 60 to 180 months on average.

The following tables provide information about the payment status of loans:

30-89 Days

Past Due

Nonaccrual or 90

Days or More

Past Due Current Total Loans

As of December 31, 2018

Commercial, financial and

industrial $ 34 $ - $ 10,030 $ 10,064

Real estate - construction 7 13 15,336 15,356

Real estate - mortgage 997 455 174,921 176,373

Consumer installment 402 94 76,592 77,088

Total $ 1,440 $ 562 $ 276,879 $ 278,881

21


30-89 Days

Past Due

Nonaccrual or 90

Days or More

Past Due Current Total Loans

As of December 31, 2017

Commercial, financial and

industrial $ - $ - $ 10,788 $ 10,788

Real estate - construction 88 25 16,653 16,766

Real estate - mortgage 688 615 166,099 167,402

Consumer installment 333 105 57,899 58,337

Total $ 1,109 $ 745 $ 251,439 $ 253,293

The following table provides information about nonaccrual loans:

As of December 31,

2018 2017

Commercial, financial and industrial $ - $ -

Real estate - construction 13 25

Real estate - mortgage 455 615

Consumer installment 94 105

Total $ 562 $ 745

As of December 31, 2018, 2017 and 2016, no loans were past due 90 days or more and still accruing interest.

The following tables provide information about the credit quality of the Bank’s loans as indicated by its grading system:

Internally Assigned Risk Grade

As of December 31, 2018

Pass

Special

Mention Substandard Total

Commercial, financial and industrial $ 10,028 $ 36 $ - $ 10,064

Real estate - construction 15,260 39 57 15,356

Real estate - mortgage 167,709 7,347 1,317 176,373

Consumer installment 76,807 179 102 77,088

$ 269,804 $ 7,601 $ 1,476 $ 278,881

Internally Assigned Risk Grade

As of December 31, 2017

Pass

Special

Mention Substandard Total

Commercial, financial and industrial $ 10,769 $ 19 $ - $ 10,788

Real estate - construction 16,586 151 29 16,766

Real estate - mortgage 158,638 7,402 1,362 167,402

Consumer installment 58,222 10 105 58,337

$ 244,215 $ 7,582 $ 1,496 $ 253,293

22


Loans that are graded Special Mention are not believed to represent more than a minimal likelihood of loss. A rating of Special

Mention indicates that a change in the borrower’s circumstances, or some other event, has occurred such that an elevated

level of monitoring is warranted. Such loans generally are evaluated collectively for purposes of estimating the allowance

for loan losses. Loans graded Substandard are believed to present a moderate likelihood of loss due to the presence of

well-defined weakness in the borrower’s financial condition, a change in the customer’s demonstrated repayment history, the

effects of lower collateral values combined with other financial difficulties that the borrower may be experiencing, and

deterioration of other indicators of the borrower’s ability to service the loan as agreed. Loans graded Doubtful are believed

to present a high likelihood of loss due to serious deterioration of a borrower’s financial condition, severe past due status

and/or substantial deterioration of collateral value, or other factors. Loans graded Substandard and Doubtful are evaluated

individually for impairment. Management updates its internal risk grading no less often than monthly.

Impaired loans are generally nonaccrual loans, loans that are 90 days or more delinquent as to principal or interest payments,

and other loans where, based on current information and events, it is probable that we will be unable to collect principal and

interest payments according to the contractual terms of the loan agreements. A loan is not considered to be impaired, however,

if any periods of delay or shortfalls of amounts expected to be collected are insignificant or if we expect that we will collect all

amounts due including interest accrued at the contractual interest rate during the period of delay. Following is a summary

of our impaired loans, by class:

As of December 31, 2018

With no related allowance recorded:

Recorded

Investment

Unpaid

Principal

Balance

Related

Allowance

Average

Recorded

Investment

Interest

Income

Recognized

Commercial, financial and industrial $ - $ - $ - $ - $ -

Real estate - construction - - - - -

Real estate - mortgage 4,006 4,728 - 4,358 187

Consumer installment - - - 16 -

With an allowance recorded:

Commercial, financial and industrial $ 3 $ 3 $ 1 $ 3 $ 1

Real estate - construction 105 97 8 171 7

Real estate - mortgage 2,405 2,202 203 2,902 131

Consumer installment - - - - -

Total:

Commercial, financial and industrial $ 3 $ 3 $ 1 $ 3 $ 1

Real estate - construction 105 97 8 171 7

Real estate - mortgage 6,411 6,930 203 7,260 318

Consumer installment - - - 16 -

Total $ 6,519 $ 7,030 $ 212 $ 7,450 $ 326

23


As of December 31, 2017

With no related allowance recorded:

Recorded

Investment

Unpaid

Principal

Balance

Related

Allowance

Average

Recorded

Investment

Interest

Income

Recognized

Commercial, financial and industrial $ - $ - $ - $ - $ -

Real estate - construction 70 76 - 120 5

Real estate - mortgage 5,865 7,024 - 6,031 297

Consumer installment 63 202 - 31 3

With an allowance recorded:

Commercial, financial and industrial $ 6 $ 4 $ 1 $ 6 $ 1

Real estate - construction 269 250 19 272 15

Real estate - mortgage 2,719 2,448 271 2,753 140

Consumer installment - - - - -

Total:

Commercial, financial and industrial $ 6 $ 4 $ 1 $ 6 $ 1

Real estate - construction 339 326 19 392 20

Real estate - mortgage 8,584 9,472 271 8,784 437

Consumer installment 63 202 - 31 3

Total $ 8,992 $ 10,004 $ 291 $ 9,213 $ 461

The amount of interest income that would have been included in income if nonaccrual loans had been current in accordance

with their terms was approximately $23, $55, and $46 for 2018, 2017, and 2016, respectively. There were no irrevocable

commitments to lend additional funds to debtors owing amounts on impaired loans at December 31, 2018, 2017, or 2016.

24


The following tables provide information about how we evaluated loans for impairment, the amount of the allowance for loan

losses estimated for loans subjected to each type of evaluation, and the related total amounts, by loan portfolio segment:

Real Estate-

Construction

Real Estate-

Mortgage

December 31, 2018

Commercial,

Financial

and

Industrial

Consumer

Installment Unallocated Total

Allowance for loan losses

Ending balance $ 185 $ 2,333 $ 12 $ 785 $ 261 $ 3,576

Ending balance - individually

evaluated for impairment $ 8 $ 203 $ 1 $ - $ - $ 212

Ending balance - collectively

evaluated for impairment $ 177 $ 2,130 $ 11 $ 785 $ 261 $ 3,364

Loans

Ending balance $ 15,356 $ 176,373 $ 10,064 $ 77,088 N/A $ 278,881

Ending balance - individually

evaluated for impairment $ 105 $ 6,411 $ 3 $ - N/A $ 6,519

Ending balance - collectively

evaluated for impairment $ 15,251 $ 169,962 $ 10,061 $ 77,088 N/A $ 272,362

Real Estate-

Construction

Real Estate-

Mortgage

December 31, 2017

Commercial,

Financial

and

Industrial

Consumer

Installment Unallocated Total

Allowance for loan losses

Ending balance $ 410 $ 2,141 $ 242 $ 329 $ 232 $ 3,354

Ending balance - individually

evaluated for impairment $ 19 $ 271 $ 1 - $ - $ 291

Ending balance - collectively

evaluated for impairment $ 391 $ 1,870 $ 241 $ 329 $ 232 $ 3,063

Loans

Ending balance $ 16,766 $ 167,402 $ 10,788 $ 58,337 N/A $ 253,293

Ending balance - individually

evaluated for impairment $ 339 $ 8,584 $ 6 $ 63 N/A $ 8,992

Ending balance - collectively

evaluated for impairment $ 16,427 $ 158,818 $ 10,782 $ 58,274 N/A $ 244,301

Troubled debt restructurings (“TDRs”) occur when, for reasons related to a borrower’s financial difficulties, we agree to modify

the terms of a loan and, in the process, grant a concession. Modifications of loan terms and concessions granted may take

many forms. Sometimes, both we and the borrower may grant concessions. In such cases, we are considered to have granted

a concession if the value of the concession(s) we made in the borrower’s favor exceed the value of the concession(s) made by

the borrower in our favor.

25


The following table presents information about loans that were modified in troubled debt restructurings during 2018 and

2017:

Troubled Debt Restructurings

Number of

Contracts

Pre-

Modification

Outstanding

Recorded

Investment

2018 2017

Post-

Modification

Outstanding

Recorded

Investment

Number of

Contracts

Pre-

Modification

Outstanding

Recorded

Investment

Post-

Modification

Outstanding

Recorded

Investment

Commercial, financial and

industrial - $ - $ - - $ - $ -

Real estate - construction - - - 1 38 41

Real estate - mortgage 4 361 330 2 141 100

Consumer installment - - - - - -

Troubled Debt Restructurings

that Subsequently Defaulted

Number of

Contracts

Recorded

Investment

Number of

Contracts

Recorded

Investment

Commercial, financial and

industrial - $ - - $ -

Real estate - construction - - 1 70

Real estate - mortgage - - 1 218

Consumer installment - - 1 1

Due to the concessions granted in loan modifications that result in TDRs, we generally recognize loan losses when such

modifications are made. For loans in the real estate segment, TDR recognition generally indicates that the loans are collateral

dependent. Consequently, we write down such restructured loans to the extent that the pre-modification outstanding recorded

investment exceeds the fair value of the collateral, less estimated selling costs. For loans in the other segments, collateral

may or may not be held. If we hold collateral and the loan is collateral dependent, we write down to the fair value of the

collateral. If we hold no collateral, the expected cash flows under the modified terms are discounted at the effective interest

rate of the original loan and, if there is a shortfall, we write down to that amount. In both cases, if we had previously allowed

for the losses sufficiently in the allowance for loan losses, no further provision expense would result in the current period. If

we had not previously allowed sufficiently, additional current expenses may be necessary to cover the shortfall.

At December 31, 2018 and 2017, the recorded investment in TDRs totaled $6,360 and $8,662, respectively. All TDRs were

considered classified and impaired at December 31, 2018 and 2017. Of the balance outstanding at December 31, 2018, four

loans totaling $172 were on nonaccrual status. The remaining loans were accruing and performing in accordance with the

new terms. The allowance for loan losses associated with troubled debt restructurings, on the basis of a current evaluation

of loss, was $212 and $290 at December 31, 2018 and 2017, respectively.

As of December 31, 2018 and 2017, we had no loan commitments to borrowers who have loans included in TDRs.

The following table provides information about charge-offs and recoveries of loans, and the provision and allowance for loan

losses:

Year Ended December 31,

2018 2017

Balance of allowance at January 1 $ 3,354 $ 3,031

Charge-offs (245) (82)

Recoveries 319 405

Provision charged to expense 148 -

Balance of allowance at December 31 $ 3,576 $ 3,354

26


The following tables provide additional information about charge-offs and recoveries of loans, and the provision and allowance

for loan losses for the years ended December 31, 2018 and 2017:

Real Estate-

Construction

Real Estate-

Mortgage

For the Year Ended December 31, 2018

Commercial,

Financial and

Industrial

Consumer-

Installment Unallocated Total

Allowance for loan losses:

Beginning balance $ 410 $ 2,141 $ 242 $ 329 $ 232 $ 3,354

Charge-offs - (134) - (111) - (245)

Recoveries 68 69 173 9 - 319

Provision for loan losses (293) 257 (403) 558 29 148

Ending balance $ 185 $ 2,333 $ 12 $ 785 $ 261 $ 3,576

For the Year Ended December 31, 2017

Real Estate-

Construction

Real Estate-

Mortgage

Commercial,

Financial and

Industrial

Consumer-

Installment Unallocated Total

Allowance for loan losses:

Beginning balance $ 605 $ 1,737 $ 227 $ 133 $ 329 $ 3,031

Charge-offs (50) - - (32) - (82)

Recoveries 157 100 94 54 - 405

Provision for loan losses (302) 304 (79) 174 (97) -

Ending balance $ 410 $ 2,141 $ 242 $ 329 $ 232 $ 3,354

NOTE 5 – PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

December 31,

2018 2017

Land $ 3,117 $ 3,117

Buildings and land improvements 6,674 6,574

Furniture and equipment 5,217 4,997

Construction in progress 2,654 -

Total 17,662 14,688

Accumulated depreciation 7,429 7,025

Premises and equipment - net $ 10,233 $ 7,663

Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $404, $437, and $521, respectively.

NOTE 6 – FORECLOSED ASSETS

The following table summarizes activity with respect to foreclosed assets:

December 31,

2018 2017

Balance, beginning of year $ 1,232 $ 1,743

Additions, net 184 94

Sales (752) (485)

Write-downs (18) (120)

Balance, end of year $ 646 $ 1,232

27


NOTE 7 - DEPOSITS

A summary of deposits follows:

December 31,

2018 2017

Noninterest bearing demand $ 58,557 $ 63,126

Interest bearing transaction accounts 95,713 92,628

Savings 38,651 34,499

Time deposits $100 and over 66,374 56,624

Other time deposits 70,074 70,811

Total deposits $ 329,369 $ 317,688

At December 31, 2018 and 2017, time deposits $250,000 and greater totaled $16,314 and $8,611, respectively.

As of December 31, 2018 and 2017, $78 and $58, respectively, of overdrawn deposit balances were reclassified as loans. As

of December 31, 2018 and 2017, deposits of directors, officers and their related business interests totaled approximately

$4,104 and $3,645, respectively.

At December 31, 2018, the scheduled maturities of time deposits were as follows:

Year

Amount

2019 $ 55,866

2020 44,209

2021 22,573

2022 11,144

2023 2,656

$ 136,448

NOTE 8 – LONG-TERM DEBT

At December 31, 2018 and 2017, the Bank had the ability to borrow up to 25 percent of its total assets from the FHLB subject

to available qualifying collateral and collateralization requirements. We may use different forms of collateral (certain eligible

loans, certain investment securities, etc.) for each advance and the amounts of collateral required to secure borrowings vary

depending upon the type of collateral utilized.

At December 31, 2018 and 2017, the outstanding balances of FHLB advances are summarized as follows:

The scheduled maturity dates and related interest rates on FHLB advances at December 31, 2018:

Maturity Date

2018 2017

Weighted Average

Weighted Average

Balance Coupon Rate

Balance Coupon Rate

FHLB Advances $ 10,000 2.155% $ -

-%

Interest Rate

Outstanding Amount

March 13, 2028 2.045% $ 5,000

March 13, 2028 2.265% 5,000

Total FHLB Advances $ 10,000

On March 13, 2020 and 2021, respectively, the above advances can be converted to variable interest rates at the option of the

FHLB. If the FHLB converts the advances to variable rates of interest, the Bank has the option to prepay the advances without

penalty.

28


We have pledged certain of our first mortgage loans secured by one-to-four family residential properties and our holdings

of FHLB stock (collectively, “qualifying collateral instruments”) to secure our debt due to the FHLB under a blanket lien

agreement. The amount of qualifying collateral instruments pledged to secure any potential borrowings as of December 31,

2018 and 2017 was approximately $15,128 and $14,335, respectively.

We have been granted access to the Federal Reserve Bank of Richmond’s (the “FRB”) Discount Window which would allow us

to borrow approximately $40,256 and $46,897 from it at the end of 2018 and 2017, respectively, subject to our providing

collateral of sufficient market value.

The Company has arranged for unsecured lines of credit totaling $24,961 from correspondent banks. The Company has not

pledged securities toward these lines and did not draw on these lines during 2018 or 2017. The lines are usable on a shortterm

basis and may be withdrawn by the correspondent banks at any time.

NOTE 9 – SHAREHOLDERS’ EQUITY

Preferred Stock - The Company issued 3,150 shares of Series A Cumulative Convertible Preferred Stock (“Series A”) on

December 31, 2009. The shares were issued following the approval on January 27, 2009, by the Company’s shareholders, of

an amendment to the Company’s articles of incorporation authorizing the issuance of up to 10,000,000 shares of preferred

stock in one or more series with the preferences, limitations, and relative rights of each series to be determined by the

Company’s Board of Directors before any such series is issued. The issued shares have a liquidation preference of $1,000 each.

On the tenth anniversary of the Effective Date (as defined), or June 17, 2019, the shares are convertible to shares of common

stock at the option of the holder. The original conversion ratio was 100 shares of common stock per surrendered share of

preferred stock. The number of shares of common stock to be issued upon conversion was affected by 5% stock dividends

issued in each of the years 2010 and 2011. As a result, on June 17, 2019, the total number of common shares that could be

issued if all shares of preferred stock were surrendered to be converted into shares of common stock is 347,287 shares.

Dividends on the Series A non-voting preferred shares accumulate at 5% per annum and, under the terms of the preferred

stock, no cash dividends may be declared or become payable on common shares unless all of the accumulated preferred shares

have been paid. In 2017 the Company began paying current dividends on the outstanding preferred shares. In 2018 the

Company paid a portion of previously accrued, but unpaid dividends. Dividends accumulated prior to May 1, 2017 that remain

accrued but unpaid as of December 31, 2018 total $354. Accrued and unpaid dividends are included in Other Liabilities in

the Company’s consolidated balance sheets.

Stock Options - The Company currently awards incentive stock options under a plan approved by the Company’s Shareholders

in 2016, as amended. The 2016 Long-Term Stock Incentive Plan (“The 2016 Plan”) replaced the 1998 Stock Option Plan (“the

1998 Plan”). All options granted under the 1998 Plan expired, with none exercised, in 2016

Pursuant to the 2016 Plan, as amended, 500,000 shares of the Company’s authorized but unissued common stock were

reserved for possible issuance pursuant to the exercise of stock awards. Under the 2016 Plan, eligible employees will be eligible

for awards of non-qualified stock options (“NSOs”), incentive stock options (“ISOs”), rights to receive shares of common stock

at a future date or dates (“Restricted Stock Units”), restricted shares of the Company’s common stock (“Restricted Stock”),

and/or performance units having a designated value (“Performance Units”) (collectively “Awards”) over the 10-year term of

the 2016 Plan. Non-employees (including non-employee directors) will be eligible for awards of NSOs, Restricted Stock Units

and/or Restricted Stock. Except with respect to Awards then outstanding, unless sooner terminated, all Awards must be

granted or awarded on or before the 10th anniversary of the date on which the 2016 Plan was approved by the Company’s

shareholders, May 25, 2016.

In December 2016, 55,000 NSOs were granted to the members of the Board of Directors and certain executive officers of the

Company. Each option has an exercise price of $6.48 as determined on the grant date and expires 10 years from the grant

date. The fair value of each option award was estimated on the date of the grant using the Black-Scholes option valuation

model, which resulted in a per share fair value of $2.85. These options are scheduled to vest over a five-year period. During

2018, 4,000 of these options were forfeited prior to meeting vesting requirements as the associated executive officer ceased

employment with the Company.

In May 2017, 72,700 NSOs were granted to the members of the Board of Directors and certain executive officers of the

Company. Each option has an exercise price of $7.10 as determined on the grant date and expires 10 years from the grant

date. The fair value of each option award was estimated on the date of the grant using the Black-Scholes option valuation

model, which resulted in a per share fair value of $3.04. These options are scheduled to vest over a five-year period.

29


In August 2017, 49,500 NSOs were granted to the employees of the Company. Each option has an exercise price of $7.10 as

determined on the grant date and expires 10 years from the grant date. The fair value of each option award was estimated on

the date of the grant using the Black-Scholes option valuation model, which resulted in a per share fair value of $3.03. These

options are scheduled to vest over a five-year period. During 2018, 2,500 of these options were forfeited prior to meeting

vesting requirements as several of the employees who received grants ceased employment with the Company.

In August 2018, 20,000 NSOs were granted to a member of the Board of Directors and an executive officer of the Company.

Each option has an exercise price of $8.15 as determined on the grant date and expires 10 years from the grant date. The fair

value of each option award was estimated on the date of the grant using the Black-Scholes option valuation model, which

resulted in a per share fair value of $3.21. These options are scheduled to vest over a five-year period.

A summary of the activity in the 2016 Plan is presented below:

Options

to

Acquire

Shares

Weighted

Average

Exercise

Price Per

Share

Weighted

Average

Remaining

Contractual

Life (Years)

Aggregate

Intrinsic

Value (1)

Outstanding at December 31, 2016 55,000 $ 6.48 9.0

Options Granted 122,200 $ 7.10 9.6

Exercised -

Forfeited (13,500) $6.87

Outstanding at December 31, 2017 163,700 $ 6.92 9.4 $ 253,735

Options Granted 20,000 $ 8.15 9.7

Exercised (2,000) $ 6.48

Forfeited (6,500) $ 6.72

Outstanding at December 31, 2018 175,200 $ 7.06 8.5 $ 89,352

Restricted stock awards approved,

not issued, net of forfeitures -

Remaining unissued options or units

under the 2016 Plan 315,300

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the

current market value of the underlying stock exceeds the exercise priceintheoption).Ateachyearenddatetheamountrepresentsthe

value that would have been received by the option holders had all option holders exercised their options on that date. This amount

changes based on changes in the market value of the Company’s common stock.

In May 2017, the Company granted 2,500 restricted stock units to an executive officer of the Company. The restricted stock

units vested over the eight month period ended December 31, 2017. In November 2017, the Company granted 5,000 restricted

stock units to an executive officer of the Company. The restricted stock units vested over the six month period ended May

31, 2018. In January 2018, a former executive officer of the Company forfeited 916 restricted stock units in connection with

the exercise of stock options.

Total compensation expense recognized in the statement of operations for share-based payment arrangements during the

years ended December 31, 2018 and 2017 was $125 and $100, respectively. No compensation expense was recognized for

share-based payment arrangements in the year ended December 31, 2016.

As of December 31, 2018 and 2017, there was $310 and $438, respectively, of total unrecognized compensation expense

related to non-vested share based compensation arrangements granted under the Plan. That cost is expected to be recognized

over a weighted average period of 4.3 years.

30


Net Income per Common Share - Net Income per common share and net income per common share, assuming dilution, were

computed as follows:

Year Ended December 31,

2018 2017 2016

Net income per common share, basic

Numerator - net income available to common

shareholders $ 4,242 $ 730 $ 767

Denominator - weighted average common

shares issued and outstanding 4,156,954 4,152,294 4,152,294

Net income per common share, basic $ 1.02 $ 0.18 $ 0.18

Year Ended December 31,

2018 2017 2016

Net income per common share, diluted

Numerator - net income available to common

shareholders $ 4,242 $ 730 $ 767

Denominator - weighted average common

shares issued and outstanding 4,156,954 4,152,294 4,152,294

Effect of dilutive stock options

Stock options 27,286 13,687 -

Restricted stock units - 2,884 -

Total shares 4,184,240 4,168,865 4,152,294

Net income per common share, assuming

dilution $ 1.01 $ 0.18 $ 0.18

Dividends - The FRB granted its approval for the Company to pay all dividends accumulated on the Company’s cumulative

preferred stock as called for in the preferred stock instruments through November 15, 2012. When preferred stock dividends

accumulate and are unpaid, the Company is unable to make any distributions to holders of its common stock until such time

as all of the arrearages on the preferred stock are satisfied. In December 2018 the Company paid $354 of $708 in accrued

dividends on preferred stock.

NOTE 10 – REGULATORY MATTERS

All bank holding companies and banks are 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 Company’s consolidated

financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,

bank holding companies and banks must meet specific capital guidelines that involve quantitative measures of their assets,

liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and

classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other

factors.

Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require the Company and the Bank to

maintain certain capital as a percentage of assets and certain off-balance sheet items adjusted for predefined credit risk factors

(risk-weighted assets). Quantitative measures of capital adequacy include the leverage ratio (Tier 1 capital as a percentage of

average assets), Tier 1 risk-based capital ratio (Tier 1 capital as a percent of risk-weighted assets), Total Risk-Based Capital

rate (Total Risk-Based Capital as a percentage of Total Risk-Weighted assets), and Common Equity Tier 1 (“CET1”) capital

ratio. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions

by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital

adequacy guidelines and the regulatory framework for prompt corrective action applicable to banks, the Company and

the Bank must meet specific capital guidelines. Prompt corrective action provisions are not applicable to bank holding

companies.

31


In September 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking

Supervision, adopted Basel III, which constitutes a set of capital reform measures designed to strengthen the regulation,

supervision and risk management of banking organizations worldwide. In order to implement Basel III and certain additional

capital changes required by the Dodd-Frank Act, the FDIC approved, as an interim final rule in July 2014, the regulatory

capital requirements substantially similar to final rules issued by the Board of Governors of the Federal Reserve System for

U.S. state nonmember banks and the Office of the Comptroller of the Currency for national banks.

The interim final rule includes new risk-based capital and leverage ratios that will be phased-in from 2015 to 2019 for most

state nonmember banks. The rule includes the new CET1 ratio of 4.5% of risk-weighted assets and a common equity Tier 1

capital conservation buffer of 2.5% of risk-weighted assets, which will be fully phased in by 2019, in addition to the Tier 1

and Total risk-based capital requirements. The interim final rule also raises the minimum ratio of Tier 1 capital to risk-weighted

assets from 4.0% to 6.0% and requires a minimum leverage ratio of 4.0%. The required minimum ratio of Total Capital to

risk-weighted assets will remain 8.0%. The new risk-based capital requirements (except for the capital conservation buffer)

became effective for the Company and the Bank on January 1, 2015.

The Company’s and the Banks’ actual capital amounts and ratios and minimum regulatory amounts and ratios are presented

in the table that follows.

Minimum for

Minimum to be

Actual Capital Adequacy Well Capitalized

Amount Ratio Amount Ratio Amount Ratio

December 31, 2018

(Dollars in thousands)

The Company

Total Capital to risk-weighted assets $ 39,347 13.4% $ 23,483 8.0% NA NA

Tier 1 Capital to risk-weighted assets $ 35,771 12.2% $ 17,612 6.0% NA NA

CET1 Capital to risk-weighted assets $ 35,771 12.2% $ 13,209 4.5% NA NA

Tier 1 Capital to average assets (leverage) $ 35,771 9.5% $ 15,102 4.0% NA NA

Community First Bank

Total Capital to risk-weighted assets $ 37,567 12.8% $ 23,460 8.0% $ 29,326 10.0%

Tier 1 Capital to risk-weighted assets $ 33,991 11.6% $ 17,595 6.0% $ 23,460 8.0%

CET1 Capital to risk-weighted assets $ 33,991 11.6% $ 13,196 4.5% $ 19,062 6.5%

Tier 1 Capital to average assets (leverage) $ 33,991 9.0% $ 15,097 4.0% $ 18,871 5.0%

Minimum for

Minimum to be

Actual Capital Adequacy Well Capitalized

Amount Ratio Amount Ratio Amount Ratio

December 31, 2017

(Dollars in thousands)

The Company

Total Capital to risk-weighted assets $ 36,723 13.7% $ 21,444 8.0% NA NA

Tier 1 Capital to risk-weighted assets $ 33,357 12.4% $ 16,140 6.0% NA NA

CET1 Capital to risk-weighted assets $ 33,357 12.4% $ 12,105 4.5% NA NA

Tier 1 Capital to average assets (leverage) $ 33,357 9.3% $ 14,347 4.0% NA NA

Community First Bank

Total Capital to risk-weighted assets $ 35,695 13.3% $ 21,471 8.0% $ 26,838 10.0%

Tier 1 Capital to risk-weighted assets $ 32,329 12.0% $ 10,776 4.0% $ 21,553 8.0%

CET1 Capital to risk-weighted assets $ 32,329 12.0% $ 12,123 4.5% $ 17,512 6.5%

Tier 1 Capital to average assets (leverage) $ 32,329 9.0% $ 14,368 4.0% $ 17,961 5.0%

32


NOTE 11 – NONINTEREST EXPENSES

Other expenses are summarized below:

Year Ended December 31,

2018 2017 2016

Salaries and employee benefits $ 8,566 $ 6,881 $ 6,220

Net occupancy 829 794 867

Furniture and equipment 415 476 456

Legal and professional fees 1146 1,014 1,019

FDIC insurance 206 179 409

Foreclosed assets costs and expenses, net 263 134 47

Data processing 1,058 2,084 1,207

Other

Miscellaneous loan expenses 276 312 229

Stationery, printing and postage 103 227 215

Telephone 197 225 233

Advertising and promotion 370 245 175

Insurance 50 109 164

Directors' compensation 166 125 129

Losses other than loans 133 91 45

Other 1,013 941 630

Total $ 14,791 $ 13,837 $ 12,045

NOTE 12 – INCOME TAXES

The Company’s provision for income taxes differs from applying the federal statutory income tax rate to income before income

taxes. The primary difference results from the changes effected from the enactment of the Tax Cuts and Jobs Act (“Tax Act”)

on December 22, 2017, including the impact of a remeasurement of the deferred taxes at the rate in which the deferred taxes

are expected to reverse which is 21% for federal purposes.

Income tax expense (benefit) consisted of:

Year Ended December 31,

2018 2017 2016

Current

Federal $ (9) $ - $ -

State 142 2 8

Total current 133 2 8

Deferred

Federal 12 2,848 189

Reduction in valuation allowance against net deferred tax assets (3,958) (2,848) (189)

Total deferred (3,946) - -

Total income tax expense (benefit) $ (3,813) $ 2 $ 8

33


A reconciliation between the income tax expense (benefit) and the amount computed by applying the federal statutory rate

of 21% for 2018 and 34% for 2017 and 2016 to income before income taxes follows:

Year Ended December 31

2018 2017 2016

Tax expense at statutory rate $ 132 $ 302 $ 317

State income taxes, net of federal benefit 112 1 5

Tax-exempt interest income (5) (13) (18)

Non-taxable increase in value of life insurancecontracts (64) (108) (111)

Change in federal tax rate - 2,548 -

Reduction in valuation allowance against net deferred tax

assets (3,958) (2,848) (189)

Write-off/expiration of deferred tax assets 7 119 -

Other, net (37) 1 4

Total $ (3,813) $ 2 $ 8

Deferred tax assets and liabilities included in the consolidated balance sheets consisted of the following:

December 31,

2018 2017 2016

Deferred tax assets

Allowance for loan losses $ 781 $ 704 $ 1,030

Writedowns of foreclosed assets 65 90 254

Non-qualified stock options 45 21 99

Deferred compensation 644 538 871

Excess charitable contributions carryforward 21 24 56

Net operating loss carryforward 2,999 3,257 4,956

Unrealized net holding losses on available-for-sale securities 400 238 464

Other 311 92 177

Gross deferred tax assets 5,266 4,964 7,907

Valuation allowance (90) (4,286) (7,240)

Net deferred taxes 5,176 678 667

Deferred tax liabilities

Accelerated depreciation and amortization 271 277 499

Deferred net loan fees 525 363 97

Acquired in business combination, net 34 38 71

Gross deferred tax liabilities 830 678 667

Net deferred income tax assets $ 4,346 $ - $ -

As of December 31, 2018, we have federal net operating loss carryforwards totaling $13,854. The remaining amount will

expire as follows: $271 in 2031, $2,110 in 2032, $3,522 in 2033, $2,937 in 2034, $3,409 in 2035, $896 in 2036, and $709 in

2037. As of December 31, 2018, we have South Carolina net operating loss carry forwards totaling $2,280, which will expire

2026 through 2038.

Deferred tax assets represent the future tax benefit of deductible differences and, if it is more-likely-than-not that a tax asset

will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. During

2018 the Company reversed a majority of the valuation allowance as management believes the net deferred tax asset will

ultimately be realized. The remaining valuation allowance relates to the parent company’s state operating loss carryforwards

for which realizability is uncertain. Realization of deferred tax assets is dependent upon sufficient taxable income during the

period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income. Based

on management’s projections, the deferred tax assets are more-likely-than-not to be fully recovered with projected taxable

income.

34


As of December 31, 2018 and 2017, there were no uncertain tax positions. The amount of uncertain tax positions may increase

or decrease in the future for various reasons including adding amounts for current tax positions, expiration of open tax returns

due to statutes of limitations, changes in management’s judgment about the level of uncertainty, status of examinations,

litigation and legislative activity and the addition or elimination of uncertain tax positions. The Company’s policy is to report

interest and penalties, if any, related to uncertain tax positions in income tax expense. With few exceptions, the Company is

no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2015.

NOTE 13 – RETIREMENT PLANS

The Company sponsors the Community First Bank 401(k) Plan (the “401(k) Plan”) for the exclusive benefit of all eligible

employees and their beneficiaries. Employees are eligible to participate in the 401(k) Plan with a minimum age requirement

of 18, and there is no minimum service requirement for deferral. Employees are allowed to defer and contribute any amount

of their salary, up to a maximum determined under the Internal Revenue Code each year. The Company will match 50% of

each dollar deferred up to 10% of total salary for employees with a minimum of 1,000 hours of service during the 12-month

period immediately following date of hire. The Board of Directors can also elect to make discretionary contributions.

Employees are fully vested in both the matching and any discretionary contributions after five years of service. The employer

contributions to the plan for 2018, 2017 and 2016 totaled $150, $133 and $114, respectively.

In 2007, the Bank’s Board of Directors approved certain supplemental retirement benefits for a former Chief Executive Officer

under a salary continuation plan (the “Plan”). These benefits are not qualified under the Internal Revenue Code. Although

these benefits are not funded, the Bank has accrued the related expenses under Generally Accepted Accounting Principles.

Moreover, life insurance contracts owned by the Bank provide informal, indirect funding for those benefits. During 2015,

the Bank ceased making payments to the former officer due to certain issues of suspected misconduct. As a result, the former

officer filed legal action against the Bank in state court. The Bank removed the case to federal court on October 23, 2015.

On November 25, 2015, the Bank filed a motion to dismiss on the grounds that the claims were preempted by the Employee

Retirement Income Security Act (“ERISA”). The former officer moved to remand the case to state court on November 23,

2015. On March 7, 2016, the federal court denied the motion to remand and granted a motion to dismiss with leave to amend.

The former officer filed an amended complaint on April 1, 2016. The Bank has also filed counterclaims seeking to recover

payments made to the former officer under the Plan which the Bank claims should not have been made due to the disqualifying

actions. On November 1, 2017, the court dismissed the Bank’s state law counterclaims stating that they were preempted by

ERISA. The Bank disagrees with that decision and may appeal at the appropriate time. The court also denied the former

officer’s motion to dismiss the ERISA-based claims seeking recovery of previously paid benefits. On January 26, 2018, the

parties filed cross-motions for summary judgment seeking a determination of whether the Bank’s decision to stop payments

should be upheld. A hearing on these cross-motions was held on November 9, 2018. Subsequent to year end, on March 28,

2019, the Bank was notified that the court awarded to former officer benefits that would have been paid to date in accordance

with the Plan, plus attorney fees. The Bank believes the court’s ruling was erroneous and that the Bank has meritorious

defenses to the former officer’s claims. It is currently considering an appeal. As of December 31, 2018, the Company adjusted

its deferred compensation accrual with regard to the Plan to bring the liability current and adjusted accrued legal expenses.

No deferred compensation expense related to these benefits was recorded in 2017. At December 31, 2018 and 2017, the

deferred compensation accrued and unpaid totaled $2,949 and $2,561, respectively, and is included in Other Liabilities in

the Company’s consolidated financial statements.

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Commitments to Extend Credit - In the normal course of business, the Bank is party to financial instruments with offbalance-sheet

risk. These financial instruments include commitments to extend credit and standby letters of credit, and have

elements of credit risk in excess of the amount recognized in the balance sheet. The exposure to credit loss in the event of

nonperformance by the other parties to the financial instruments for commitments to extend credit and standby letters of

credit is represented by the contractual, or notional, amount of those instruments. Generally, the same credit policies used

for on-balance-sheet instruments, such as loans, are used in extending loan commitments and standby letters of credit.

Following are the off-balance-sheet financial instruments whose contract amounts represent credit risk:

December 31,

2018 2017

Loan commitments $ 46,691 $ 37,736

Standby letters of credit 1,011 1,065

35


Loan commitments involve 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 some involve payment of

a fee. Many of the commitments are expected to expire without being fully drawn; therefore, the total amount of loan

commitments does not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a

case-by-case basis. The amount of collateral obtained, if any, upon extension of credit is based on management’s credit

evaluation of the borrower. Collateral held varies but may include commercial and residential real properties, accounts

receivable, inventory and equipment.

Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. The

credit risk involved in issuing standby letters of credit is the same as that involved in making loan commitments to customers.

Litigation - As of December 31, 2018, the Bank was involved as a defendant in litigation brought by a former bank customer.

The former customer is asserting tort claims, as well as a claim for an accounting, against the Bank and a former Bank employee

based on allegations that the former employee, who held the former customer’s power of attorney, misappropriated funds

from the former customer’s account. The former customer is seeking damages in excess of $1,750. The Bank is vigorously

defending its interests, has denied all of the former customer’s substantive allegations, has asserted various defenses, and

has asserted counterclaims against the former customer of approximately $789. In September 2017, the Court entered an

order granting the Bank summary judgment on all claims. Counsel for the former customer filed a motion to reconsider that

order. Counsel for the Bank argued that motion in December, 2017, and the court still has it under consideration.

Prior to 2015, the Board of Directors became aware of a loan to a customer which was charged off in excess of $800 without

their informed agreement. The Bank obtained a payoff agreement and schedule from this customer. Discussion with the

customer and further investigation by the Bank revealed the loan proceeds may have been used to also benefit the Bank’s

former Chief Executive Officer, the Bank’s former Chairman of the Board, and their related interests. When the customer

defaulted on the payoff agreement, the Bank filed legal actions against all three parties and their related companies for the

full amount of the loan. Counterclaims were filed by the customer. During the course of the litigation the trial Court issued

an order awarding the former Chief Executive Officer $64 in discovery-related sanctions. The Bank vigorously disagrees with

the Court’s order and has appealed it. The appeal is pending with a decision expected in 2019. The Bank believes the appeal

has significant merit and that the Court of Appeals will reverse the trial court. The Bank and the parties resolved the remaining

issues in the litigation and all claims by all parties were dismissed, including the counterclaims asserted by the customer.

Please see Note 13 for information concerning additional litigation with the Bank’s former Chief Executive Officer.

NOTE 15 – DISCLOSURES ABOUT FAIR VALUES

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market

participants at the measurement date. A three-level hierarchy is used for fair value measurements based upon the transparency

of inputs to the valuation. For disclosure purposes, fair values for assets and liabilities are shown in the level of the hierarchy

that correlates with the least observable level input that is significant to the fair value measurement in its entirety. The three

levels of the fair value hierarchy are described as follows:

Level 1 inputs reflect quoted prices in active markets for identical assets or liabilities.

Level 2 inputs reflect observable inputs that may consist of quoted market prices for similar assets or liabilities, quoted prices

that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable

market data for substantially the full term of the assets or liabilities being valued.

Level 3 inputs reflect the use of pricing models and/or discounted cash flow methodologies using other than contractual

interest rates or methodologies that incorporate a significant amount of management judgment, use of the entity’s own data,

or other forms of unobservable data.

Pricing for securities available-for-sale is obtained from an independent third-party that uses a process that may incorporate

current prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers,

other reference items and industry and economic events that a market participant would be expected to use as inputs in

valuing the securities. Not all of the inputs listed apply to each individual security at each measurement date. The independent

third party assigns specific securities into an “asset class” for the purpose of assigning the applicable level of the fair value

hierarchy used to value the securities. Securities available-for-sale are measured at fair value with unrealized gains and losses,

net of income taxes, recorded in other comprehensive income.

36


The following is a summary of the measurement attributes applicable to financial assets and liabilities that would be measured

at fair value on a recurring basis:

Fair Value Measurement at Reporting Date Using

Measured at

Fair Value at

Description December 31, 2018 Level 1 Level 2 Level 3

Securities available-for-sale:

Mortgage-backed securities issued

by U.S. Government agencies $ 177 $ - $ 177 $ -

Government sponsored enterprises (GSEs) 7,695 - 7,695 -

Mortgage-backed securities issued

by GSEs 39,178 - 39,178 -

State, county and municipal 472 - 472 -

Equity securities 11 11 - -

Total securities available-for-sale $ 47,533 $ 11 $ 47,522 $ -

Measured at

Fair Value at

Fair Value Measurement at Reporting Date Using

Description December 31, 2017 Level 1 Level 2 Level 3

Securities available-for-sale:

Mortgage-backed securities issued

by U.S. Government agencies $ 209 $ - $ 209 $ -

Government sponsored enterprises (GSEs) 8,506 - 8,506 -

Mortgage-backed securities issued

by GSEs 45,496 - 45,496 -

State, county and municipal 1,356 - 1,356 -

Equity securities 29 29 - -

Total securities available-for-sale $ 55,596 $ 29 $ 55,567 $ -

Fair values of collateral dependent impaired loans are estimated based on recent appraisals of the underlying properties or

other information derived from market sources. The fair value of foreclosed assets is estimated based on recent appraisals or

other information obtained from market sources. Management reviews all fair value estimates periodically or whenever new

information indicates that there may have been a significant change in the fair value of a property.

The following is a summary of assets measured at fair value on a nonrecurring basis in the consolidated balance sheets,

including the general classification of such instruments pursuant to the valuation hierarchy.

Measured at

Fair Value at

Fair Value Measurement at Reporting Date Using

Description December 31, 2018 Level 1 Level 2 Level 3

Collateral dependent impaired loans $ 1,936 $ - $ - $ 1,936

Foreclosed assets 646 - - 646

Measured at

Fair Value at

Fair Value Measurement at Reporting Date Using

Description December 31, 2017 Level 1 Level 2 Level 3

Collateral dependent impaired loans $ 2,707 $ - $ - $ 2,707

Foreclosed assets 1,232 - - 1,232

37


NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle

of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in

an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company

for annual periods beginning after December 15, 2018 and interim periods within annual reporting periods beginning after

December 15, 2019.

The Company will apply the guidance using a modified retrospective approach. The Company’s revenue is primarily comprised

of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as

many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the

majority of our revenues will not be affected. The Company is currently assessing our revenue contracts related to revenue

streams that are within the scope of the standard. Our accounting policies will not change materially since the principles of

revenue recognition from the ASU are largely consistent with existing guidance and current practices applied by our businesses.

We have not identified material changes to the timing or amount of revenue recognition. Based on the updated guidance,

we do anticipate changes in our disclosures associated with our revenues. We will provide qualitative disclosures of our

performance obligations related to our revenue recognition and we continue to evaluate disaggregation for significant

categories of revenue in the scope of the guidance.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address

certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be

effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December

15, 2019. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the

beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values

will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company

does not expect these amendments to have a material effect on its financial statements.

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of

recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal

years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early

adoption is permitted. We expect to adopt the guidance using the modified retrospective method and practical expedients

for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance

except for the incremental balance sheet recognition for lessees. We have started an initial evaluation of our leasing contracts

and activities. We have also started developing our methodology to estimate the right-of use assets and lease liabilities, which

is based on the present value of lease payments. We do not expect a material change to the timing of expense recognition,

but we are early in the implementation process and will continue to evaluate the impact. We are evaluating our existing disclosures

and may need to provide additional information as a result of adoption of the Accounting Standards Update (“ASU”).

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions

including the income tax consequences, the classification of awards as either equity or liabilities, and the classification

on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business

entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service

conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all

liability-classified awards at fair value to measuring them at intrinsic value. The amendments were effective for the Company

for annual periods beginning after December 15, 2017, and interim periods within annual reporting periods beginning after

December 15, 2018. The amendment did not have a material effect on the financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for

certain debt securities. The amendments will be effective for the Company for annual periods beginning after December 15,

2020, and interim periods within annual reporting periods beginning after December 15, 2021. Early adoption is permitted

for all organizations for periods beginning after December 15, 2018. While early adoption is permitted beginning in

first quarter 2019, we do not expect to elect that option. The Company will apply the amendments to the ASU through a

cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We expect the ASU will result

in an increase in the recorded allowance for loan losses given the change to estimated losses over the contractual life of the

loans adjusted for expected prepayments. In addition to our allowance for loan losses, we will also record an allowance for

credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments

will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and

forecasts at that time. The Company is currently evaluating the effect that implementation of the new standard will have on

its financial position, results of operations, and cash flows.

38


In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting

Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments

provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply

modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within

those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these

amendments to have a material effect on its financial statements.

In February 2018, the FASB amended the Income Statement—Reporting Comprehensive Income Topic of the Accounting

Standards Codification. The amendments allow a reclassification from accumulated other comprehensive income to retained

earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments are effective for fiscal years

beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company

does not expect these amendments to have a material effect on its financial statements.

In February 2018, the FASB amended the Financial Instruments Topic of the Accounting Standards Codification. The

amendments clarify certain aspects of the guidance issued in ASU 2016-01. The amendments are effective for fiscal years

beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Entities may

early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those

fiscal years, as long as they have adopted ASU 2016-01. The Company does not expect these amendments to have a material

effect on its financial statements.

In May 2018, the FASB amended the Financial Services—Depository and Lending Topic of the Accounting Standards

Codification to remove outdated guidance related to Circular 202. The amendments were effective upon issuance and did not

have a material effect on the financial statements.

In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The

amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts

Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are

effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this

ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these

amendments to have a material effect on its financial statements.

In November 2018, the FASB issued guidance to amend the Financial Instruments - Credit Losses topic of the Accounting

Standards Codification. The guidance aligns the implementation date of the topic for annual financial statements of nonpublic

companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables

arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the

leases topic. The amendments will be effective for the Company for fiscal years beginning after December 15, 2021, including

interim periods within those fiscal years. Early adoption is permitted for all organizations for periods beginning after

December 15, 2018. The Company is currently in the process of evaluating the impact of adoption of this guidance on the

financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected

to have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE 17 – CONDENSED FINANCIAL INFORMATION

The following is condensed financial information of Community First Bancorporation (parent company only).

December 31,

2018 2017

Condensed Balance Sheets

Assets

Cash $ 1,540 $ 1,618

Investment in banking subsidiary 35,151 31,446

Deferred income tax assets, net 139 -

Land held for sale 138 138

Total assets $ 36,968 $ 33,202

Liabilities

Accrued preferred stock dividends $ 354 $ 708

Shareholders' equity 36,614 32,494

Total liabilities and shareholders' equity $ 36,968 $ 33,202

39


Condensed Statements of Income

Income

Expenses

Distribution income from banking subsidiary $ 552 $ 118 $ -

Other income - - -

Total income 552 118 -

Other expenses 91 66 59

Total expenses 91 66 59

Income (loss) before income taxes and equity

in undistributed earnings of subsidiaries 461 52 (59)

Equity in undistributed earnings of banking subsidiary 3,840 835 983

Income before taxes

Income tax benefit

Year Ended December 31,

2018 2017 2016

4,301 887 924

139 - -

Net income $ 4,440 $887 $ 924

Income before taxes

Condensed Statements of Cash Flows

Operating activities

Net income $ 4,440 $ 887 $ 924

Adjustments to reconcile net income to net cash provided by

operating activities

Financing activities

Year Ended December 31,

2018 2017 2016

Net deferred income tax assests (139) - -

Equity in undistributed net income of banking subsidiary (3,840) (835) (983)

Net cash provided (used) by operating activities 461 52 (59)

Cash dividends (552) (118) -

Proceeds from exercise of stock options 13 - -

Net cash used by financing activities (539) (118) -

Decrease in cash and cash equivalents (78) (66) (59)

Cash and cash equivalents, beginning 1,618 1,684 1,743

Cash and cash equivalents, ending $ 1,540 $ 1,618 $ 1,684

NOTE 18 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through April 16, 2019, the date these consolidated financial statements were

available to be issued, and has determined that there are no other subsequent events that would require recognition or

disclosure in the Company’s consolidated financial statements. See Note 13 for information regarding a subsequent event

for which an accrual has been included in the Company’s consolidated financial statements.

This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT furnished pursuant to Part 350

of the Federal Deposit Insurance Corporation’s Rules and Regulations. THIS STATEMENT HAS NOT BEEN

REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE, BY THE FEDERAL DEPOSIT INSURANCE

CORPORATION. Community First Bancorporation will furnish free of charge a copy of this Annual Report upon

written request to Community First Bancorporation, P.O. Box 1097, Walhalla, South Carolina 29691.

40


Board of Directors, Community First Bancorporation

Dr. Larry S. Bowman

Vice Chairman

Orthopedic Surgeon

GHS Blue Ridge Orthopedic

Association, P.A.

William M. Brown

Secretary

Retired President

and Executive Officer

Lindsay Oil, Inc.

Richard D. Burleson, Jr.

President and

Chief Executive Officer

Community First Bancorporation

and Community First Bank

T. Brandon Cox, CFP

Managing Director

United Capital

Joel R. Davis

President and Owner

J. Davis Construction, Inc.

Amber B. Glidewell, Esq.

Partner, Roe Cassidy Coates

& Price, P.A.

John R. Hamrick

President

John Hamrick Real Estate

Charles L. Winchester

President, Winchester Lumber

Company, Inc.

Vice President,

Boones Lumber Company

R. Joseph Jackson

Founder and Managing Partner

Metrolina Capital Advisors, LLC

Gary V. Thrift, Chairman

President, Thrift Development Corp

President, Thrift Group, Inc

Officers, Community First

Bancorporation

Richard D. Burleson, Jr.

President and Chief Executive Officer

William M. Brown

Secretary

Jennifer M. Champagne

Executive Vice President,

Chief Financial Officer, and Treasurer

William P. Lackey, Jr.

Executive Vice President

41


Officers, Community First Bank

William P. Lackey, Jr.

Executive Vice President and

Chief Operating Officer

Jennifer M. Champagne

Executive Vice President and

Chief Financial Officer

Richard D. Burleson, Jr.

President and

Chief Executive Officer

Kimberly A. Blackwell

Senior Vice President,

Commercial Lending Officer

Amanda J. Brackens

Director of Compliance

Chase M. Christopher

Senior Vice President,

Senior Credit Officer

Keith B. Crain

Senior Vice President,

Sales Finance Manager

Sheila L. Galloway

Senior Vice President,

City Executive and Commercial

Lending Officer

Sandra D. Gravley

Senior Vice President,

Loan Operations Manager

Jeffery A. Griffith

Senior Vice President,

Enterprise Risk Officer

Stuart L. Hester

Senior Vice President,

Regional Market Executive

Andrew L. Howard

Senior Vice President,

Commercial Lending Officer

Michelle L. Riley

Senior Vice President,

City Executive

Robert R. Shaw

Senior Vice President,

City Executive and Commercial

Lending Officer

M. Scott Shires

Senior Vice President,

Commercial Lending Officer

Alisa M. Suddeth

Senior Vice President,

Chief of Talent

and Marketing Officer

Randall C. Townes

Senior Vice President,

Information Technology Manager

Trisha W. Warwick

Senior Vice President,

Chief Credit Officer

Carol G. Wilson

Senior Vice President,

Deposit Operations Officer

Douglas B. Alexander

Vice President,

Credit Administration

James W. Blakely, III

Vice President,

Special Assests and Facilities

Management

Scot S. Frith

Vice President,

Branch Manager

Kevin P. Harmon

Vice President, Controller

Timothy W. Hawks

Vice President, City Executive

Tammy T. Holt

Vice President,

Central Documentation

Mananger

Murphy R. Mahaffey, III

Vice President, Credit Manager

Katie A. Melton

Vice President, Director of

Human Resources

Scott J. Merriam

Vice President,

Commercial Lending Officer

Grantham A. Nicholson

Vice President, SBA Officer,

CRA Officer, and

Commercial Lending Officer

Tammy S. Pitt

Vice President,

Branch Operations

Rhonda P. Tippett

Vice President,

Credit Card Operations Manager

Angela L. Blackwell

Assistant Vice President,

BSA Officer

Chris L. Blue

Assistant Vice President,

Branch Manager

Preston A. Bruce

Assistant Vice President,

Relationship Manager

V. Marie Clark

Assistant Vice President,

Call Center Specialist

Elizabeth M. Coppola

Assistant Vice President,

Compliance Officer

Emily G. Crawford

Assistant Vice President,

Branch Manager

Megan L. Grisham

Assistant Vice President,

Manager of Deposit Operations

Jennifer N. Lee

Assistant Vice President,

Branch Manager

V. Jo Nelson

Assistant Vice President,

Branch Manager

Amanda B. Olson

Assistant Vice President,

Branch Manager

Kim L. Rhodes

Assistant Vice President,

Credit Card Specialist

Julie P. Whitfield

Assistant Vice President,

Branch Manager

42


43


44



COMMUNITY FIRST

BANCORPORATION

Stock Transfer Agent

Transfer Online, Inc.

512 SE Salmon St., Portland, OR 97214 • (503) 227-2950

info@transferonline.com • www.transferonline.com

Stock Symbol

CFOK

Community First Bank Full-Service Offices

1600 Sandifer Blvd., Seneca, SC 29678

3685 Blue Ridge Blvd., Walhalla, SC 29691

306 East Windsor St., Westminster, SC 29693

449 Highway 123 Bypass, Seneca, SC 29678

2007 East Greenville St., Anderson, SC 29621

4002 Clemson Blvd., Anderson, SC 29621

208 East Main St., Williamston, SC 29697

210 Brendan Way, Greenville, SC 29615

Community First Bank Loan Production Offices

800 East Arrowood Rd., Charlotte, NC 28217

300 McGill Avenue NW, Ste 200, Concord, NC 28207

www.c1stbank.com

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