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SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 Warren UW Averett CPAs AND ADVISORS, SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY TABLE OF CONTENTS DECEMBER 31, 2019 AND 2018 INDEPENDENT AUDITORS’ REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements oan W. Warren Averett CPAs AND ADVISORS ‘warrenaverett.com INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Stockholders Southern Community Bancshares, Inc. and Subsidiary We have audited the accompanying consolidated financial statements of Southern Community Bancshares, Inc. and Subsidiary (the Company), which comprise the consolidated balances sheets as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Consolidated 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 contral relevant to the Preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibilty 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 auditors’ 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 auditors consider 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 Southern Community Bancshares, Inc. and Subsidiary as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of ‘America. Birmingham, Alabama February 25, 2020 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2019 AND 2018 ASSETS 209 nate CASH AND CASH EQUIVALENTS ‘Cash and due from banks $ 997,183 $ 1,010,557 Interest-bearing deposits in banks 9,770,453 TOTAL CASH AND CASH EQUIVALENTS 10,767,636 10,308,123 Investment securities available-for-sale 4,460,300 i Investment securities held-to-maturity - 6,391,081 Other investment securities 870,300 525,000 Loans, net of allowance for loan losses 102,977,936 89,709,436 Property and equipment, net 5,130,253, 5,020,657 Other real estate 181,825, 208,042 Bank-owned life insurance 2,209,950 (2,144,776 Prepaid expenses and other assets 376,937 270,908 TOTAL ASSETS $_ 126,975,137 $_114,578,023 AES Se LIABILITIES AND STOCKHOLDERS’ EQUITY DEPOSITS Interest-bearing deposits $ 86,418,978 $83,650,022 Noninterest-bearing deposits 11,280,594 TOTAL DEPOSITS 97,708,572 Borrowings 18,000,000 ‘Accounts payable and accrued liabilities 570,881 Deferred income tax lability 4,798 TOTAL LIABILITIES 116,281,251 104,566,086 ‘STOCKHOLDERS’ EQUITY Preferred stock, $.01 par value; 100,000 shares authorized; no shares issued - - ‘Common stock, $.01 par value; 2,845,568 shares authorized; 982,918 shares issued and 488,296 and 505,592 outstanding at December 31, 2019 and 2018, respectively 9,830 9,830 ‘Additional paid-in capital 9,203,905 9,221,395 Retained eamings 7,834,267 6,971,377 Uneared compensation (92,775) (129,075) ‘Treasury stock, at cost; 494,622 and 477,326 shares held at December 31, 2019 and 2018, respectively (6.273,074) (6,082,514) Accumulated other comprehensive income 11,733 20,944 TOTAL STOCKHOLDERS’ EQUITY 10,693,886 10,011,957 ‘TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 126,975,137 _$_ 114,578,023, ‘See notes to the consolidated financial statements. 3 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 2019 2018 INTEREST INCOME Interest and fees on loans $ 5,651,011 $ 3,811,509 Interest on deposits in banks 5,274 10,188 Interest and dividends on investment securities 296,992 324,767 Total interest income 5,953,277 4,146,464 INTEREST EXPENSE Interest on deposits 1,241,844 757,378 Total interest expense 1,241,844 757,378 PROVISION FOR LOAN LOSSES 582,506 167,400 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 128,927 21,686, NON-INTEREST INCOME Service charges and fees 127,178 108,629 Gain on sale of assets 54,761 Other Total non-interest income NON-INTEREST EXPENSES Salaries and employee benefits 1,580,855 1,651,859 Occupancy expenses 371,515 326,063 Other 1,464,711 1,082,503 Total non-interest expenses 3,417,081 160,425, INCOME BEFORE INCOME TAX EXPENSE 1,159,482 466,265 INCOME TAX EXPENSE 267,300 92,180 NET INCOME $892,182. $374,085 ‘See notes to the consolidated financial statements. 4 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 2019 2018 NET INCOME $ 892,182 $ = 374,085, Other comprehensive income (loss): Change in unrealized gain / loss on available-for-sale securities, net of tax (4,746) . Amortization of unrealized gain on available-for-sale securities, net of tax (4,465) (7,071 COMPREHENSIVE INCOME $882,971 $367,014 See notes to the consolidated financial statements. 5 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 BALANCE AT DECEMBER 31, 2017 Purchase of 500 shares of treasury stock Transfers shares from MRP plan Dividends declared (8.0145 per share) Net income Net change in other comprehensive income BALANCE AT DECEMBER 31, 2018 Purchase of 17,296 shares of treasury stock Transfers shares from MRP plan Dividends deciared (8.0145 per share) Net income Net change in other comprehensive income BALANCE AT DECEMBER 31, 2019 Accumulated Additional ‘Other ‘Common Paid-in Retained Unearned Treasury Comprehensive Stock Capital Earnings _ Compensation Stock Income Total S$ 9,830 $9,237,855 $6,626,655 $ (165,375) $ (6,078,514) $ 28,015 $9,658,466 : : : 7 (4,000) 7 (4,000) - (16,460) - 36,300 - - 19,840 - Ee (29,363) - - . (29,363) 5 - 374,085 - : - 374,085 = Ee Si i = (7.071) (7,071) 9,830 9,221,395 6,971,377 (129,075) (6,082,514) 20,944 10,011,957 : : - = (190,560) - (190,580) # (17,490) i 36,300 = - 18,810 : > (29,292) - - : (29,292) : > 892,182 - - 892,182 : : : : - (9.211) (9.244) $ 9,830 _$ 9,203,905 _$ 7,834,267 _$ (92,775) $ (6,273,074) _$ 11,733_ _$ 10,693,886 See notes to the consolidated financial statements. ‘SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for loan loss Investment securities, net amortization (accretion) of premiums (discounts) Writedown and losses on other real estate Eamnings on bank-owned life insurance, net Deferred income tax (benefit) expense ‘Share-based compensation expense Net gain on sale of assets Net change in prepaid expenses and other assel Net change in accounts payable and accrued liabilities. Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of premises and equipment ‘Net increase in loans Net change in other investment securities Proceeds from the sale of other real estate ‘Maturities, paydowns and calls of investment securities Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits Net change in FHLB borrowings Purchases of treasury stock Cash dividends paid Net cash provided by financing activities NET CHANGE IN CASH AND CASH EQUIVALENTS, CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ts CASH AND CASH EQUIVALENTS AT END OF YEAR 2019 $ 892,182 213,361 582,506 21,690 26217 (65,174) (108,708) 18,810 (64,761) (106,029) (142,253) 4,27,841 (822,957) (13,851,006) (345,300) 45,122 4,897,431 12,576,710} 4,878,234 7,500,000 (190,560) (29,292) 41,758,382 459,513 See notes to the consolidated financial statements. 7 2018 $ 374,085 190,732 167,400 60,220 18,284 (67,042) 1,837 19,840 (9,639) (42,725) 436,299 1,149,291 (101,931) (31,597,916) (242,800) 956,965, (30,985,682) 20,175,159. 7,500,000 (4,000) (29,363) 27,641,796 (2,194,595) 12,502,718 $10,908,128 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 1. ORGANIZATION Southern Community Bancshares, Inc. (the Company) and its wholly-owned subsidiary, First Community Bank of Cullman (the Bank), principal business activity is to provide banking services to the general public in Cullman, Alabama, and the surrounding area. The Company was formed as a federal savings and loan association in 1996 and converted to a state nonmember bank in 2011. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany balances and transactions have been eliminated. Unless otherwise indicated herein, the financial results of the Company refer to the Company and the Bank on a consolidated basis. Cash and Cash Equivalents For the purpose of cash flows, the Company considers cash and due from banks and interest-bearing deposits in banks to be cash and cash equivalents. The Company maintains cash and cash equivalents in various correspondent and other bank accounts. The amounts by which cash and cash equivalents exceeded Federal Deposit Insurance Corporation (FDIC) insurance coverage of $250,000 at December 31, 2019 and 2018, were approximately $1,404,000 and $1,180,000, respectively. The Company has not and does not expect to incur any losses with the cash balances that exceed FDIC insurance coverage. ‘Supplemental Cash Flow Information The following is a supplemental disclosure to the consolidated statements of cash flows for the years ended December 31, 2019 and 2018: 2019 2018 Cash paid for interest $ 1.204075 = $ —-700,544 Cash paid for income taxes, net 331,596 74,061 Non-cash disclosures: ‘Change in unrealized gains and losses on available-for-sale securities, net of deferred taxes of $1,243 for 2019 (4,748) - ‘Amortization of unrealized gains and losses on available-for-sale securities, net of deferred taxes of $1,206 for 2019 (81,879 for 2018) (4.465) (7.071) Other real estate sold — internally financed - 459,048 ‘Transfer of held-to-maturity securities to available-for-sale securites at fair value 5,816,334 - ‘SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Investment Securities Securities held-to-maturity represent debt securities, which the Company has the ability and intent to hold on a long-term basis or until maturity and includes all investment securities held at December 31, 2018. These securities are generally carried at amortized cost, adjusted for amortization of premiums and accretion of discount to the earlier of maturity or call date. Effective October 31, 2019, the Bank transferred all securities from held-to-maturity to available-for-sale. The purpose of the transfer was to improve liquidity. At the date of the transfer, the securities had an amortized cost value of $5,795,330 and a fair market value of $5,816,334. The unrealized gain at the time of the transfer of $21,004 was recognized in accumulated other comprehensive income, net of tax. The estimated fair market values are provided by security dealers who have obtained quoted prices. ‘Securities were transferred from the available-for-sale to held-to-maturity classification during 2014 at the fair market value at the date of transfer, which becomes the new recorded book value. The unrealized gain at the date of transfer was being amortized to income over the remaining life of each security transferred (Note 3) until reclassified to available-for-sale. Loans and Allowance for Loan Losses Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees. Loan origination and commitment fees, as well as certain origination costs, when material, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. The allowance for loan losses is established as losses are deemed to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the collectability of a loan balance is remote. Subsequent recoveries, if any, are credited to the allowance. As part of management's assessment of the allowance for loan losses, management segregates the loan portfolio into the following segments: commercial, financial and agricultural, real estate mortgage, consumer and other. The allowance for loan losses is evaluated on a regular basis by management and is based on management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underiying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as information becomes available and as economic conditions change. SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified. For such loans that are also classified as impaired, an allowance for losses is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which includes trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated ‘component of the allowance for loan losses reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Generally, impaired loans include loans on nonaccrual status, loans that have been assigned a specific allowance for credit losses, loans that have been partially charged off and loans designated as a troubled debt restructuring. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement. ‘While management believes that it has established the allowance for loan losses in accordance with generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment, there can be no assurance that in the future the Company's regulators or its economic environment will not require further increases in the allowance for loan losses. 10 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Income Recognition on Impaired and Nonaccrual Loans The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication the borrower may be unable to meet payments as they become due. Therefore, no interest ‘on such loans is taken into income until received. Loans that are on a current payment status or past due less than 90 days may also be classified as nonacerual if repayment in full of principal and/or interestis in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms of principal and interest. While a loan is classified as nonaccrual, and the future collectability of the recorded loan balance is doubtful, collections of principal and interest are generally applied as a reduction to principal outstanding, except in the case of loans with scheduled amortizations, where the paymentis generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Additions and improvements, which extend the life of an asset, are capitalized. Expenditures for repairs and maintenance are charged against operations when incurred. Depreciation is computed using the straight-line method over the estimated useful lives ranging from 5 to 15 years for furniture, fixtures and equipment and 5 to 40 years for building and improvements. Other Real Estate Other real estate includes both formally foreclosed property and in-substance foreclosed property. In- substance foreclosed properties are those properties for which the Bank has taken physical Possession or has a legal right to, whether or not formal foreclosure proceedings have taken place. At the time of foreclosure, foreclosed real estate is recorded at the fair value less estimated costs to sell, which becomes the property's new basis. Any writedowns based on the asset's fair value at date of acquisition are charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying value amount or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and ‘subsequent adjustments to the carrying amount of the property are included in foreclosed real estate expenses. Costs incurred to complete, repair, renovate or make the property whole are capitalized, if they do not exceed the appraised value for the property. 1 ‘SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Bank-Owned Life Insurance ‘The Company has purchased life insurance on a key executive officer, a member of management and a board member. These policies are recorded at their cash surrender value or the amount that can be realized. Income from these polices and changes in the cash surrender value are recorded in other noninterest income. Income Taxes ‘The Company files a federal income tax return and State of Alabama excise tax return. These returns are filed using the accrual basis of accounting. Provisions for income taxes are calculated and allocated to each entity based on consolidated pre-tax income (after exclusion of nontaxable income, such as the change in the cash surrender value of bank-owned life insurance) and include deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Such amounts are net of any valuation allowance for deferred tax assets. ‘The Company measures and recognizes tax positions taken or expected to be taken in a tax return that directly or indirectly affects amounts reported in the Company's consolidated financial statements and reviews its income tax positions and determines if each position meets a "more likely than not” threshold of expectation of prevailing. As of December 31, 2019 and 2018, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements under the current guidance. Advertising ‘Advertising costs are expensed as incurred. Comprehensive Income (Loss) Comprehensive income (loss) includes those items not recorded as components of net income, such as unrealized gain (loss) on available-for-sale investment securities. The accumulated balance of other comprehensive income (loss) is reported separately from retained earnings in the equity section of the consolidated balance sheets. Reclassification adjustments included in net income were not considered material for each period presented. Financial Instruments ‘The Company's financial instruments consist of cash and cash equivalents, investment securities, loans, deposits, borrowings and related receivables and payables (see Note 15). Three categories exist within the fair value hierarchy, which are presented below: Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. 12 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — CONTINUED Level 2 — Valuations based on observable inputs, including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, prepayment speeds, yield curves, volatiities and default rates, and inputs that are derived principally from or corroborated by observable market data. Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value Measurement. ‘Subsequent Events Management has evaluated subsequent events and their potential effects on these consolidated financial statements through February 25, 2020, the date the independent auditors’ report was available for issue. Use of Estimates ‘The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management evaluates the overall portfolio characteristics and monitors economic conditions. Substantial portions of the Bank's loans are secured by real estate in its primary market area. Accordingly, the ultimate collectability of a substantial portion of the Bank's loan portfolio is susceptible to changes in economic conditions in the Bank’s primary market. While management uses available information to recognize losses on loans, further reduction in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgments about information available at the time of the examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change in the near term. However, the amount of change that is reasonably possible cannot be estimated. 13 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Recently Issued Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13 and in November 2019 issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU cover two areas: assets measured at amortized cost and available-for-sale debt securities. For assets measured at amortized cost, the amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. For available-for-sale debt securities, credit losses relating to available-for- sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost, because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The amendments in this ASU are effective January 1, 2023, for the Company. The Company is reviewing the impact that the adoption of this ASU may have on its consolidated financial statements. 3. INVESTMENT SECURITIES The carrying amounts of securities available-for-sale and their approximate fair values at December 31, 2019, (securities held-to-maturity at December 31, 2018), were as follows: Gross Gross Amortized Unrealized Unrealized ~—Estimated Cost Gains Losses Value ‘As of December 31, 2019 U.S. Government agency securities $ 1,886,567 $ 26,560 $ (9,589) $ 1,903,538 Corporate bonds 1,010,026 3,724 - 4,013,750 Mortgage-backed securities 1,548,855 3,488 (9,331) ___ 1,543,012 $4,445,448 _$ 33,772 _$ (18,920) _$ 4,460,300 Gross Gross Amortized Unrealized ‘Unrealized ~—Estimated Cost Gai Losses Fair Value As of December 31, 2018 U.S. Government agency securities $ 2,063,456 $ = $ (44,307) $ 2,019,149 State, county and municipal securities 1,014,444 676 - 1,015,120 Corporate bonds 1,016,595 - (15,237) 1,001,358 Mortgage-backed securities 2,046,586 132 (67,683) 1,989,035 Certificates of deposit 250,000 (1,373) 248,627 081 S$. 808_ _$_ (118,600) 4 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 3. INVESTMENT SECURITIES - CONTINUED ‘There were no trading securities at December 31, 2019 or 2018. The amortized cost and estimated fair value of securities available-for-sale at December 31, 2019, by contractual maturity, are as follows: Amortized Cost Fair Value ‘Amounts maturing: Within 4 year $ 499,760 $ 500,999 After 1 through 6 years 2,357,019 2,385,857 After § through 10 years 357,533 357,088 After 10 years 4,231,136 16,356 $4,445,448 = $4,460,300 Expected maturities of mortgage-backed securities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. All investment securities held were transferred from available-for-sale to held-to-maturity during 2014 at the fair market value at the date of transfer, which becomes the new recorded book value. The net unrealized gain of $46,018 (net of related deferred taxes $34,049) at the date of transfer were being amortized to income over the remaining life of each security transferred until the securities were transferred to available for sale. The net unrealized gain on investment securities was $20,944 (reported net of related deferred taxes of $5,568) as of December 31, 2018, respectively, and is reported as accumulated other comprehensive income in the accompanying consolidated financial statements. Effective October 31, 2019, the Bank transferred alll securities from held-to-maturity to available-for- sale. The purpose of the transfer was to improve liquidity. At the date of the transfer, the securities had an amortized cost value of $5,795,330 and a fair market value of $5,816,334. The unrealized gain of $21,004 was recognized in accumulated other comprehensive income, net of tax. As of December 31, 2019 and 2018, the Company had $3,422,250 and $5,886,949, respectively, of investment securities pledged to the State of Alabama's Security for Alabama Funds Enhancement (SAFE) Program. As a member of the state-sponsored SAFE Program, the Company is a qualified public depository and, as such, is eligible to receive public funds. Additionally, the Bank has executed and pledged Irrevocable Letters of Credit with the Federal Home Loan Bank (FHLB) in favor of the Alabama State Treasurer for the SAFE Program in the amount of $5,000,000 and $4,000,000 at December 31, 2019 and 2018, respectively. 15 ‘SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 3. INVESTMENT SECURITIES - CONTINUED ‘The Company is a member of the FHLB and is required to own stock in the FHLB. The aggregate carrying value of the Company's cost-method investments (Federal Home Loan Bank stock) totaled $870,300 and $525,000 at December 31, 2019 and 2018, respectively. The Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments and estimated that the fair value exceeded the cost of investments (that is, the investments were not impaired). Therefore, these investments were not evaluated for impairment. 4. LOANS The composition of loans by primary loan classification and by performing and impaired loan status at December 31, 2019 and 2018, is as follows: ‘Commercial, Financial and Real Estate Consumer and ‘Allowance for 2019 ‘Agricultural __ Mortgage Other Subtotal __Loan Losses__Net Loans Performing loans $453,208 $ 93,579,790 $ 3,872,536 § 102,905,624 $ 1,183,923 $ 101,721,701 Impaired toans, 45,127 4,120,786, 90,322 1,256,235, 4,256,235 $ 5498425 _$ 94,700,576 $ 3,962,058 _$ 104,161,959 _$ 1,183,923 _$ 102,977,936 Real Estate- Consumer and Allowance for 2018 Mortgage thor Subtotal ___Loan Losses__Net Loans Performing loans $6,563,066 § 79,048,726 $ 4,990,328 $ 99,942,120 § 614,114 $ 69,328,006 Impaired toans = 381,430 381,430 381,430 $ 6,563,006 $79,490,156 _$ 4,330,928 $ 90,323,550 $ 614,114 $89,709,436 The changes in the allowance for loan losses for the years ended December 31, 2019 and 2018, are as follows: Balance at beginning of year Charge-offs Recoveries Net charge-offs Provision Balance at end of year 2019 $ 614114 § (18,003) 5,306 (12,697) 582,506 $1,183,923, _$ 16 2018 444,049 (16,317) 18,982 2,665 167,400 614,114 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 4, LOANS - CONTINUED The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underiying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. In assessing the adequacy of the allowance for loan losses, management analyzes the allowance for loan losses based on the categories of: commercial, financial and agricultural; real estate — mortgage; consumer and other. The allocation and changes in the allowance for loan losses, by loan classification, as of and for the years ended December 31, 2019 and 2018, are as follows: Commercial, Financial and Real Estate~ Consumer and Balance at December 31,2018 = $39,200 $ © 848,007 $ 26.907 § + 8 61414 Charge-offs - : (18,003) : (18,003) Recoveries 5,306 : 5,306 Net recoveries : (12,687) : (12,697) Provision 42,244 460,930 19,421 59,911 582,506 Balance at December 31,2019 _$ 81.444 $1,008,937 _$ 33631 $59,911 $1,183,923, Real Estate- Consumer and Mortgage, Other, located Total Balance at December 31, 2017 S 380559 $ 30,788 = $444,049 Charge-offs : : (16,317) : (16317) Recoveries : = 18,982 = 18,982 Not recoveries s - 2.665 - 2,685 Provision 6498 167.448 (6.546) 167,400 Balance at December 31,2018 _$_-99,200_$ 548.007 _§ 26,907 _$ = S__ 614.t14 Risk ratings are categorized as pass, special mention, substandard or doubtful. Management believes that the categories follow those outlined by the primary regulator. Pass rated loans include all risk rated credits not included in another category. The risk rating categories are defined as follows: ‘* Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank's credit position at some future date. 7 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: DECEMBER 31, 2019 AND 2018 4, LOANS — CONTINUED * Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard generally have well-defined weaknesses that jeopardize orderly payment or liquidation of the loan. Substandard loans generally include a higher probability that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans may be placed on nonaccrual status. ‘* Doubtful loans have all the characteristics of substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or improbable. The Bank considers all doubtful loans. to be impaired and places all such loans on nonaccrual status. The following tables outline the amount of each loan classification based on internally assigned risk ratings as of December 31, 2019 and 2018: Commercial, Financial and Estate- Consumer and 2019 Agricultural __ Mortgage Oth Total Grade: Pass $ 5,488,908 $ 93,582,812 $ 3,872,536 $102,944,256 Special mention - 12,042 - 12,042 Substandard 9,517 1,105,722 90,322 1,205,561 Doubtful : $5,498,425 Commercial, Financial and Real Estate- Consumer and 2018 Agricul Mortgage Other Total Grade: Pass $ 6,563,066 $ 78,522,006 $ 4,326,242 $ 89,412,304 Special mention - 525,730 4,086 529,816 ‘Substandard - 381,430 - 381,430 Doubtful - : $_6,563,066__$ 79,430,156 _$ 4,330,328 _$ 90,323,550 At December 31, 2019 and 2018, there were $497,610 and $428,715, respectively, of loans classified as nonaccrual. The Bank did not have any loans identified as troubled debt restructurings as of December 31, 2019 and 2018. ‘The Bank had $38,795 and $382,683 of loans past due 90 days or more and still accruing interest as. of December 31, 2019 and 2018, respectively. 18 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 4, LOANS - CONTINUED Past due balances and loans on nonaccrual status by loan classification are as follows: Past Due 30.89 Past Duo 90 Loans on Days and Stil Days and Stil Total Past Due Nonacerual December 3, 2019 ‘Accruing __Accruing and Performing Status Curront____Total Loans Commercial, rancial and agreulral $ 689,300 § - $689,300 + $ 4900,125 $ 5496425 Real estate - mortgage 4314523, = 484528 9811590 94,700,576 Consumer and ther 181,975, 38,795, 20770 ~ _3742,088 3.962.858 $5,605,706 $ 38,705 | _5,724503 $ 74.463. _$ 98,960,003 _$ 104,161,850 Past Due 30-89 Past Duo 90 Loans on Days and Stil Days and Still Total Past Due Nonacerual December 3, 2018 ‘Accruing __Accrulng and Performing Status Curront____Total Loans. Commercial nancial and agicutural $282,330 $ - 8 20230 § ~ $ 6280.79 $ 6563085 Real estate - merigage Consumer and other 7.813 362683 2220498 «428,715 76,780,045 79,430,156, 4,330,928 sos The following tables detail the recorded investments, unpaid principal balance, and the related allowance of impaired loans as of December 31, 2019 and 2018, and the average recorded investment of impaired loans, as well as the interest income recognized for the years ended December 31, 2019 and 2018: For the Year Ended December 31, 2019 December 31, 2019 Unpaid ‘Average _ Interest Recorded Principal Related = Recorded —_Income Investment Recognized Impaired foans with no recorded allowance: Commercial, financial ‘and agricultural $ 45837 $ 45,127 $ - Real estate ~ mortgage 1,135,403 1,120,786 : Consumer and other 90,636 90,322 Total impaired loans $1,271,876__$ 1,256,235 _$ 19 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 4. LOANS - CONTINUED For the Year Ended December 31, 2018 December 31, 2018 Unpaid ‘Average Interest Recorded Principal Related Recorded —_Income Investment _ Balance Allowance Investment Recognized Impaired loans with no recorded allowance: Real estate ~ mortgage $ 385,585 $§ 381,430 $ = $472,583 $ 39,298 Consumer and other : : - 25451 : Total impaired loans $385,585 $381,430 _$ = $497,734 $39,298 The Bank had participation loans sold of $6,219,497 and $5,503,892 at December 31, 2019 and 2018, respectively, that are netted to loans. Approximately $2,900,000 and $3,500,000 at December 31, 2019 and 2018, respectively, of these loan participations were sold to the Federal Home Loan Mortgage Corporation with servicing retained by the Bank. 5. PROPERTY AND EQUIPMENT Major classifications of property and equipment as of December 31, 2019 and 2018, are summarized below: 2019 2018 Land $ 1,166,051 $ 1,166,051 Buildings and improvements 5,175,869 4,921,925 Furniture, equipment and auto 41,282,701 1,213,688 7,624,621 7,301,664 Less accumulated depreciation and amortization 2,281,007 Property and equipment, net Depreciation charged to occupancy expense for the years ended December 31, 2019 and 2018, totaled $213,361 and $190,732, respectively. During December 2012, the Bank sold and contributed the former Bank headquarters building to an unrelated entity. As part of the transaction, the bank loaned the entity $250,000 and recorded a deferred gain of approximately $143,000 to be recognized over the life of the loan (15 years) ($9,639 of gain was recognized during 2019 and 2018). 20 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 5. PROPERTY AND EQUIPMENT — CONTINUED The Company leases various space of their facilities. The Company recorded rental income of approximately $49,000 and $48,000 for the years ended December 31, 2019 and 2018, respectively. 6. TIME DEPOSITS The Bank had $16,065,374 and $15,570,642 of time deposits outstanding greater than the FDIC insurance limit of $250,000 at December 31, 2019 and 2018, respectively. Interest expense on these time deposits totaled $214,358 and $167,931 for the years ended December 31, 2019 and 2018, respectively. The maturity schedule for all outstanding time deposits as of December 31, 2019, is as follows: 2020 $ 29,752,605 2021 7,828,654 2022 2,617,935 2023 3,773,130 2024 2,127,569 $ 46,099,893 7. BORROWINGS ‘At December 31, 2019 and 2018, the Bank had $18,000,000 and $10,500,000, respectively, FHLB advances outstanding, secured by real estate mortgage loans with fixed interest rates ranging from 1.8% to 2.6%. The advances mature as follows: 2020 $ 5,000,000 2021 3,000,000 2022 2,000,000 2023 2024 $ 18,000,000 8, RELATED PARTY AND PARTY-IN-INTEREST TRANSACTIONS ‘The Company holds deposits from executive officers, directors and related companies under common ownership and control of executive officers or directors of approximately $5,000,000 and $4,600,000 as of December 31, 2019 and 2018, respectively. Loans to executive officers, directors or companies in which officers or directors own a significant interest totaled approximately $3,000,000 and $3,500,000 at December 31, 2019 and 2018, respectively. 2 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The outstanding notional amount of off-balance-sheet risks at December 31, 2019 and 2018, is as follows: 2019 2018 Unused lines of credit $ 2,632,000 —$ 2,420,000 ‘Commitments to fund loans 3,346,000 3,691,000 $_5,978,000, _$ 6,111,000 In addition, the Company entered into Irrevocable Letters of Credit with the Federal Home Loan Bank totaling $5,000,000 at both December 31, 2019 and 2018, in favor of the State of Alabama, to secure certain SAFE deposits (Note 3). The letters of credit mature in October 2023. 10. CONCENTRATION OF CREDIT RISK Most of the Company's deposit and lending activities occur with customers located within a 60-mile radius of Cullman County, Alabama. The Company grants commercial, residential and consumer loans primarily to customers in central Alabama. The concentrations of loans by type are set forth in Note 4. 11. INCOME TAXES Provisions for income taxes are based on consolidated pre-tax income (after exclusion of nontaxable income items) and include deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. The primary deferred tax differences result from different depreciation methods for book and tax and the allowance for loan losses, Federal and state income taxes receivable (payable) were $14,389 and $(66,534) at December 31, 2019, and $864 and $(8,596) at December 31, 2018, respectively. SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 11. INCOME TAXES - CONTINUED The components of income tax expense (benefit) for the years ended December 31, 2019 and 2018, were as follows: Current: Federal State Deferred: Federal State Income tax expense 2019 $ 309,474 66,534 376,008 (95,002) (13,706) (108,708) $267,300 2018 $ 81,748 8,595 90,343 1,582 255 1,837, S210, The components of the net deferred tax asset (liability) as of December 31, 2019 and 2018, are as follows: Deferred tax asset: Federal State Deferred tax liability: Federal State Less: valuation allowance Net deferred tax liability 23 2019 $ 234,032 65,218 299,250 (239,938) 45,747) (285,685) 15,363) S_(1.798) 2018 $ — 192,026 52,457 ——52,457_ 244,483 (287,595) (54,480) (342,075) (15,363) $__ (112,955) SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 11, INCOME TAXES — CONTINUED The tax effects of each type of income and expense item that gave rise to deferred taxes as of December 31, 2019 and 2018, were as follows: 2019 2018 Allowance for loan losses $ 263,015 ~$ 153,876 Net unrealized gains on securities available-for-sale 3,119) (5,568) Bond accretion (12,523) (13,205) Depreciation (247,038) (249,826) Prepaids (23,005) (29,795) Other real estate owned 12,839 30,034 Net operating loss carryforward 15,363 15,363 Valuation allowance (15,363) (15,363) Other 2,033, 4,529 $ (1,798) _$ (112,955) Pursuant to ASC 740-10-30-2, deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes for financial reporting purposes differ from the amount computed by applying the statutory federal income tax rate of 21% for the years ended December 31, 2019 and 2018, respectively, for the reasons below: 2019 2018 Tax expense on income computed at statutory federal income tax rate $ 243,491 § =~ 97,915 Increase (decrease) in taxes resulting from: Permanent items (15,045) (15,735) State income tax, net of federal tax benefit 38,854 7,045 Other 2,955 Income tax expense 267,300 92,180, 24 SOUTHERN COMMUNITY BANCSHARES, INC, , INC. AND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 12. REGULATORY CAPITAL i Company and Bank are subject to various regulatory capital requirements administered by its primary federal regulator, the FDIC. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Company's assets, liabilities and certain off- balance-sheet items per the regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the regulations) and Tier 1 capital to adjusted total assets (as defined) to meet the regulatory capital requirements. Failure to meet the minimum regulatory capital requirements can result in certain mandatory or discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and these consolidated financial statements. In July 2013, the banking regulators published Final Rules establishing a new comprehensive capital framework for U.S. banking organizations (the Final Rules). The Final Rules implement the Basel Committee of Banking Supervision's framework known as Basel Ill, as well as certain provisions of the Dodd-Frank Act. The Final Rules, which define the components of capital and also address risk weights, became effective on January 1, 2015. The Final Rules include a capital ratio designated as ‘Common Equity Tier 1 ratio, which is a tighter definition of Tier 1 capital (banks must hold 4.5% by January 2015 and then a further 2.5% capital conservation buffer, totaling 7% that is implemented ‘annually through January 2019); an increase in Tier 1 capital ratio from 4% to 6%; a framework for countercyclical buffers; adjustments to prompt corrective action thresholds; short- and medium-term quantitative liquidity ratios and establishes criteria that instruments must meet in order to be considered regulatory capital. 25 IDIARY N COMMUNITY BANCSHARES, INC. AND SUBS! SONOTES: ‘TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 42, REGULATORY CAPITAL - CONTINUED ‘The Company and Bank's 2019 and 2018 capital amounts and ratios under the new capital guidance are as follows (dollars in thousands): For Capital Adequacy To Be Well — Purposes (includes Capitalized Under the the conservation buffer Prompt Corrective Actual for the Bank only) Action Provisions “Amount __ Ratio “Amount __ Ratio Amount___Ratio ‘As of December 31, 2019 ‘Common equity Tier 1 capital (to risk-weighted assets) Consolidated $14,185 15.03% $ 4,247 4.50% NIA NA Bank 10,510 11.14% 6,607 7.00% $ 6,135 6.50% Tier 1 Capital Ratio (to risk-weighted assets) ‘Consolidated 14,185 15.03% 5,663 6.00% NA NIA Bank 10.510 11.14% = 8,022 8.50% 7,550 8.00% Total Capital Ratio (to risk-weighted assets) Consolidated 15,365 16.28% 7,550 8.00% NA N/A Bank 11,690 12.39% 9,910 10.50% 9,438 10.00% Tier 1 Leverage Ratio (to average assets) Consolidated 14,185 11.19% 5,070 4.00% NIA NA Bank 10,510 8.29% 5,070 4.00% 6,338 5.00% 26 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 42. REGULATORY CAPITAL - CONTINUED For Capital Adequacy To Be Well - Purposes (includes Capitalized Under the the conservation buffer Prompt Corrective Actual for the Bank only) Action Provisions ‘Amount _ Ratio _ Amount As of December 31, 2018 Common equity Tier 1 capital (to risk-weighted assets) Consolidated $ 13,194 © 15.815% $ 3,754 4.500% NA NA Bank 9,608 11.519% 5,317 6.375% $ 5421 6.500% Tier 1 Capital Ratio (to risk-weighted assets) Consolidated 13,194 15.815% 5,006 6.000% NA NA Bank 9608 11.519% 6,568 7.875% 6,872 8.000% Total Capital Ratio (to risk-weighted assets) Consolidated 13,808 16.551% 6,674 8.000% NA NA Bank 10,222 12.255% 8,236 9.875% 8,340 10.00% Tier 1 Leverage Ratio (to average assets) Consolidated 13,194 11.756% 4,489 4.000% NA NA Bank 9,608 8.562% 4,488 4.000% 5,610 6.000% Management believes as of December 31, 2019 and 2018, that the Company meets all the capital adequacy requirements to which it is subject. Based on the Company's current capital ratios, the Company is categorized as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, the Company will have to maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios, as disclosed in the table above. There are no conditions or events since year end that management believes have changed the Company's prompt corrective action category. The Company may consider paying dividends in the future depending on a number of factors, including current capital levels, the profitability of the Company, growth expectations and regulatory approval. 7 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 13. EMPLOYEE BENEFIT PLANS Management Recognition Plan (MRP) The MRP provides for awards of common stock to directors and officers of the Bank. The aggregate fair value of the shares of stock purchased by the MRP is considered unearned compensation at the time of purchase, and compensation is earned ratably over the stipulated vesting period. The Bank awarded 2,200 shares and recognized $18,810 of share-based compensation expense for the year ended December 31, 2019. The Bank awarded 2,200 shares and recognized $19,840 of share-based compensation expense for the year ended December 31, 2018. There were no shares purchased for the plan during 2019 or 2018. The unearned compensation balances for the MRP totaled $92,775 and $129,075 for 2019 and 2018, respectively, and are recorded as a reduction in stockholders’ equity. The MRP Trust held 8,712 and 10,912 shares of common stock at December 31, 2019 and 2018, respectively. Employee Stock Ownership Plan (ESOP) The Bank established an ESOP for eligible employees. As of December 31, 2019 and 2018, the ESOP owned 126,541 shares of the Company's common stock. Unearned compensation is amortized and recorded as compensation expense based on employee services rendered in relation to shares, which are committed to be released based on the fair value of shares. No expense was recorded for the years ended December 31, 2019 and 2018, since no shares were released to employees during those time periods. At December 31, 2019 and 2018, the ESOP Trust held 2,345 unallocated shares. Profit Sharing Plan (401(k)) ‘The Company provides a profit sharing plan with a 401(k) provision, which allows employees to defer up to 5% of their compensation. The plan allows the Company to make a matching contribution of up to the first 5% of each eligible employee's deferral. The Company contributed approximately $40,000 and $25,000 to the plan for the years ended December 31, 2019 and 2018, respectively. 14, OTHER EXPENSES Other expenses that exceed 1% of the aggregate of total interest income and other income for the years ended December 31, 2019 and 2018, are as follows: 2019 2018 Data processing $ 371,206 280,035 FHLB advance fees 343,515 119,289 Professional fees and dues 204,653 157,930 Insurance and taxes — FDIC and other 172,220 154,379 Telephone, communications and supplies 135,338 139,642 ATM expense 47,986 65,944 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 15. FAIR VALUE MEASUREMENT AND DISCLOSURES The fair value hierarchy has designated three categories to determine fair value disclosures (Note 2). The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash Equivalents and Short-Term Investments — For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities — Securities held-to-maturity and available-for-sale consist of U.S. Government agency securities; State, County and municipal securities; corporate bonds; and mortgage-backed securities. Fair values for these securities are based on quoted market prices or dealer quotes of identical assets on active exchanges. If such quoted market prices are not available, the Company utilizes quoted market prices of similar instruments and/or discounted cash flows to estimate the value of these securities, or Level 2 measurements. Level 2 discounted cash flow analyses are typically based on market interest rates, prepayment speeds and/or adjusted spread. Loans — For certain homogeneous categories of loans, such as some residential mortgage and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amount is not materially different from fair value. Deposits - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The recorded value of fixed-maturity certificates of deposit approximates the fair value as interest rates approximate market rates. Borrowings — Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees Written - The fair value of commitments, letters of credit and financial guarantees is estimated to be approximately the same as the fees charged for these arrangements. Impaired Loans — Nonrecurring fair value adjustments to loans reflect full or partial writedowns that are based on the loan's observable market price or current appraised value of the collateral. Loans subjected to nonrecurring fair value adjustments based on the current appraised value of the collateral may be classified as Level 2 or Level 3, depending on the type of asset and the inputs to the valuation. When appraisals are used to determine impairment, and these appraisals require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows to measure fair value, the related loans subjected to nonrecurring fair value adjustments are typically classified as Level 3 due to the fact that Level 3 inputs are significant to the fair value measurements. 29 ‘SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 15. FAIR VALUE MEASUREMENT AND DISCLOSURES — CONTINUED Other Real Estate — Nonrecurring fair value adjustments to other real estate reflect full or partial writedowns that are based on the real estate's observable market price or current appraised value of the collateral, net of estimated selling costs. items Measured at Fair Value on a Nonrecurring Basis The following fair value hierarchy table presents information about the Bank's assets and liabilities ‘measured at fair value on a nonrecurring basis as of December 31, 2019 and 2018: Date Using ‘Quoted ‘Significant Prices in Other Significant Active Observable —_Unobsorvable Markets Inputs Inputs ‘As of December 31, 2019 Fair Value Level 4 Level 2 Level 3 Securities held-to-maturity USS. Government agency securities § 1,003,538 $ - $ 1903598 $ - Corporate bonds 41,013,750 : 1,013,750 - Mortgage-backed securities 4,543,012 3,012 A edlecae! S800, S$, S_400300, $s Measurement at Report Date Usin ‘Quoted Significant Prices in Other Significant Active Observable —_Unobservable Markets Inputs inputs ‘As of December 31, 2018 Fair Value Levelt __Level2___ikevel3_ Securities held-o-maturity U.S. Government agency secures § 2,019,149 § = $ 2019149 § - State, county and municipal securities 4,016,120 : 1,048,120 Corporate bonds 4,001,368 - 1,001,358 - Mortgage-backed securities, 1,989,035 : 1,989,035 - Certificates of deposit 248,627 248,627 ~ Total assets $_ 6273289 $ 248627, $ 6024662, § ‘SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 15. FAIR VALUE MEASUREMENT AND DISCLOSURES - CONTINUED Impaired Loans and Other Real Estate Fair Value Me at Report Date Using ‘Quoted icant Prices in Oth Significant Active Observable Unobservable Markets Inputs Inputs December 31, 2019 Fair Value Level 1 Level 2 Level 3 Impaired loans, net $1,256,235 - § = $1,256,235 Other real estate 181,825 181,825 Total assets December 31, 2018 Fair Value Level 3 Impairedioans,net $+ 381.430 $ seats: - $381,430 Other real estate 208,042 - = 208,042 Total assets $509,472 $ SHS: = $589,472 ‘There were no assets or liabilities measured at fair value on a recurring basis. No gains or losses have been recorded for impaired loans subsequent to the initial measurement. The estimated fair values of the Company's financial instruments as of December 31, 2019 and 2018, are as follows (in thousands): 2019 2018 Carrying Carrying Amount Fair Value Amount Fair Value (in Thousands) Financial assets: Cash and short-term investments $ 10,768 $ 10,768 $ 10,308 $ 10,308 Securities available-for-sale 4,460 4,460 - - Securities held-to-maturity - - 6,391 6,273 Investments in FHLB stock 870 870 525 525 Loans, net 102,978 93,565 89,709 89,709 Financial liabilities: Deposits 97,709 93,619 93,230 93,230 Borrowings 18,000 18,000 10,500 10,500 Unrecognized financial instruments: Commitments to extend credit 5.978 6 6111 6 31 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 16. CONDENSED PARENT COMPANY INFORMATION Balance Sheets December 31, 2019 and 2018 2019 2018 ASSETS Cash and cash equivalents $ 191,201 $ 388,275 Investment in subsidiary (equity method) - eliminated upon consolidation 10,510,251 9,607,479 Deferred tax asset : 23,769 Total Assets $ 10,701,452 _$ 10,019,523 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Due to subsidiary $ 7,566 7,586 Stockholders’ equity 10,693,886 10,011,957 Total Liabilities and Stockholders’ Equity $ 10,701,452 _$ 10,019,523 Statements of Income For the Years Ended December 31, 2019 and 2018 2019 2018 Income Interest income $ 626 $ 651 Gain on sale of ORE 45,122 - Total income 45,748 651 Expenses Operating expenses 22,970 27,565 Income (loss) before income taxes and equity in undistributed earnings of subsidiary 22,778 (26,914) Income tax expense (23,769) - Loss before equity in undistributed earnings of subsidiary (991) (26,914) Equity in undistributed eamings of subsidiary 893,173 400,999 Net Income $892,182 $374,085 32 SOUTHERN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018 16. CONDENSED PARENT COMPANY INFORMATION ~ CONTINUED Statements of Cash Flows For the Years Ended December 31, 2019 and 2018 2019 __20ta Cash Flows from Operating Activities Net income $ 992,182 $ 374,085 Adjustments to reconcile net income to net cash used in operating activities: Gain on the sale of other real estate (45,122) - Equity in undistributed income of subsidiary (893,173) (400,999) Change in deferred tax assets 23,769 Net Cash Used in Operating Activities (22,344) (26,914) Cash Flows from Investing Activities Proceeds from the sale of other real estate 45,122 : Net Cash Provided by Investing Activities 45,122 - Cash Flows from Financing Activities Purchase of treasury stock (190,560) (4,000) Cash dividends paid (29,292) (29,363) Net Cash Used in Financing Activities (219,852) (33,363) Net Decrease in Cash and Cash Equivalents (197,074) (60,277) Cash and Cash Equivalents - Beginning of Year 388,275 448,552 Cash and Cash Equivalents - End of Year $ 191,201 $___ 388,275 33 (This page intentionally left blank)