Stock Symbol: AQFH · Southpark Branch 4519 Sharon Rd. Charlotte, NC 28211 704.804.7930 Wilmington Branch ... We believe that each new Aquesta client is a potential future ambassador

Charleston Loan Production Office4000 Faber Place Dr.

Suite 300

North Charleston, SC 29405

843.242.1555

Rea Farms Branch Coming Soon!9915 Sandy Rock Pl.

Charlotte, NC 28277

Main Office 19510 Jetton Rd.

Cornelius, NC 28031

704.439.4343

Brawley Rd. Branch1078 Brawley School Rd.

Mooresville, NC 28117

704.439.1450

Williamson Rd. Branch 837 Williamson Rd.


704.439.1440

Davidson Branch 568 Jetton St.

Davidson, NC 28036

704.439.4350

Huntersville Branch 9906 Knockando Ln.

Huntersville, NC 28078

704.439.1430

Southpark Branch 4519 Sharon Rd.

Charlotte, NC 28211

704.804.7930

Wilmington Branch 901 Military Cutoff Rd. Wilmington, NC 28405

910.782.3830

Stock Symbol: AQFH

Going the distancewith our customers, community and shareholders.

2 0 1 8Annual Report

www.aquesta.com

Consolidated Financial Statements

December 31, 2018 and 2017(with Independent Auditor’s Report thereon)

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TABLE OF CONTENTS

Page No.

Letter to Shareholders...................................................................................................... 2

Independent Auditor’s Report........................................................................................... 3

Consolidated Financial Statements

Consolidated Balance Sheets....................................................................................... 4

Consolidated Statements of Earnings........................................................................... 5

Consolidated Statements of Comprehensive Income ................................................... 6

Consolidated Statements of Changes in Stockholders’ Equity ...................................... 7

Consolidated Statements of Cash Flows ...................................................................... 8

Notes to Consolidated Financial Statements.................................................................... 10

Board of Directors and Executive Management ............................................................... 32

General Corporate Information......................................................................................... 33

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May 3, 2019

Dear Shareholders:

I am pleased to provide you with the 2018 annual report of Aquesta Financial Holdings, Inc. and its subsidiaries.Aquesta recently celebrated its 12th anniversary and I continue to be proud of how well we have performed. Aquesta remains dedicated to our clients, shareholders, employees and our local communities. With that, I am pleased to report the continued excellent earnings in 2018 combined with excellent growth and asset quality.

Key Highlights:• Total assets increased $51.1 million or 12.5%• Total gross loans increased $63.4 million or 20.7%• Total core deposits increased $26.5 million or 10.9%• Total shareholders’ equity increased $3.7 million or 12.4%• Book value per share increased to $8.27 per share from $7.48 per share• Excellent asset quality with no foreclosed property and low nonperforming assets

Aquesta had another year of very good earnings with net income of $4.2 million (an increase of 124%) resulting in income to shareholders of $1.06 per share compared to $0.48 per share in 2017. Net Income and capital were positively impacted by the sale of Aquesta’s insurance subsidiary, Aquesta Insurances Services, Inc. with an aftertax gain of $1.3 million. In addition, net income continues to increase due to loan and deposit growth along with excellent credit quality. During the year, we paid our 7th consecutive cash dividend. We are pleased to provide a fair return to shareholders that allows for investments for future growth and future profits.

The growth continues to be organic. We have expanded our presence in Charleston, Raleigh and Wilmington. In addition, we have SBA lenders in the North Carolina, South Carolina, Georgia and Florida markets. We havegrown to 7 full service branches in the Lake Norman, Charlotte and Wilmington areas of North Carolina. We anticipate opening our eighth branch at Rea Farms in south Charlotte during the third quarter of 2019. We successfully transitioned to a new more robust core operation system and a new Operations Center located in Mooresville, North Carolina. Our loan growth has outpaced our core deposit growth and we are focused on meeting the full relationship needs of our clients and potential clients. So, we have expanded our resources in this area. In addition, we completed a private placement in the first quarter of 2019 for continued organic growth and strategic opportunities.

We believe that each new Aquesta client is a potential future ambassador for our bank. As shareholders, you too can help with the success of Aquesta and your investment by using our full line of banking services, providing us feedback and telling your friends and family about your positive experiences. And check out our shareholder’s money market special! Please do not hesitate to call us about your banking needs. We are here to help and thank you for your support. BANK NEAR. GO FAR.

Best regards,

Jim EngelPresident & Chief Executive Officer

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INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Stockholders Aquesta Financial Holdings, Inc. Cornelius, North Carolina Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of Aquesta Financial Holdings, Inc. and its subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”). Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these 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 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 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 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 financial statements referred to above present fairly, in all material respects, the financial position of Aquesta Financial Holdings, Inc. and its subsidiaries as of December 31, 2018 and 2017, 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. Atlanta, Georgia May 3, 2019

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AQUESTA FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2018 and 2017

2018 2017

Assets

Cash and due from banks $ 10,867,125 11,077,105 Federal funds sold - 675,000

Cash and cash equivalents 10,867,125 11,752,105 Interest bearing deposits in other banks 976,000 976,000 Investment securities available-for-sale 51,608,578 61,869,093 Other investments 4,674,500 3,158,200 Loans 369,227,785 305,792,847 Allowance for loan losses (3,493,365) (2,817,248) Unearned loan income (203,234) (479,721)

Loans, net of unearned loan income and allowance for loan losses 365,531,186 302,495,878 Premises and equipment, net 15,994,081 13,443,645 Goodwill - 895,456 Intangible assets, net 33,945 1,677,770 Bank owned life insurance 6,210,356 6,068,678 Accrued interest receivable 1,112,064 1,181,192 Other assets 2,638,128 5,062,187

Total assets $ 459,645,963 408,580,204

Liabilities and Stockholders’ Equity

Liabilities: Deposits:

Non-interest bearing demand $ 98,601,500 89,839,657 NOW 27,970,380 22,369,237 Money market and savings 143,855,488 131,696,631 Time deposits 49,776,310 61,183,055

Total deposits 320,203,678 305,088,580

Federal Home Loan Bank advances 101,400,000 66,900,000 Other borrowed funds 1,813,011 4,271,893 Accrued interest payable 86,334 76,610 Other liabilities 2,738,540 2,513,002

Total liabilities 426,241,563 378,850,085

Commitments and contingencies

Stockholders’ equity: Common stock, $.01 par value; 10,000,000 shares authorized;

4,039,485 and 3,972,760 shares issued and outstanding, respectively 40,394 39,727

Additional paid-in capital 25,909,960 25,822,159 Unearned compensation (285,444) (259,065) Retained earnings 10,367,810 6,523,537 Accumulated other comprehensive loss (2,628,320) (2,396,239)

Total stockholders’ equity 33,404,400 29,730,119

Total liabilities and stockholders’ equity $ 459,645,963 408,580,204 See accompanying notes to consolidated financial statements.

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AQUESTA FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings

For the Years Ended December 31, 2018 and 2017

2018 2017 Interest income:

Loans, including fees $ 17,647,967 13,438,177 Investment securities 1,395,624 1,683,062 Deposits in other banks and federal funds sold 210,334 84,028

Total interest income 19,253,925 15,205,267

Interest expense: Money market, NOW and savings deposits 1,617,128 649,228 Time deposits 837,636 641,698 Federal Home Loan Bank advances 1,941,850 1,201,944 Other borrowed funds 186,508 71,336

Total interest expense 4,583,122 2,564,206

Net interest income 14,670,803 12,641,061

Provision for loan losses 955,888 170,000

Net interest income after provision for loan losses 13,714,915 12,471,061

Noninterest income: Service charges on deposit accounts 887,385 826,523 Insurance commissions 1,194,808 2,500,311 (Loss) gain on sale of securities, net (109,518) 37,464 Other than temporary impairment - (332,797) SBA loan sale income 1,316,550 210,919 Mortgage broker fees 158,965 77,636 Other income 467,326 412,198 Gain on sale of subsidiary 1,909,613 -

Total noninterest income 5,825,129 3,732,254

Noninterest expense: Salaries and employee benefits 9,169,887 7,965,504 Occupancy 1,209,818 1,254,324 Loss on sales and write-downs of other real estate owned 48,667 33,360 Advertising and promotion 121,239 156,845 Professional fees 766,849 589,398 Other operating 2,845,541 2,689,637

Total noninterest expense 14,162,001 12,689,068

Earnings before income taxes 5,378,043 3,514,247

Income tax expense 1,129,716 1,615,058

Net earnings $ 4,248,327 1,899,189

Earnings per share – Basic $ 1.06 0.48

Earnings per share – Diluted $ 0.96 0.45

Weighted average shares outstanding - Basic 4,022,857 3,964,329

Weighted average shares outstanding - Diluted 4,429,197 4,234,698 See accompanying notes to consolidated financial statements.

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AQUESTA FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2018 and 2017 2018 2017

Net earnings $ 4,248,327 1,899,189

Other comprehensive (loss) income: Unrealized holding (loss)/gain on investment securities available-for-

sale (969,001) 462,948 Tax effect 218,994 (185,179)

Reclassification of loss/(gain) recognized in net earnings 109,518 (37,464) Tax effect (24,751) 14,986

Reclassification for other than temporary impairment losses on securities available-for-sale - 332,797 Tax effect - (133,119)

Unrealized holding gain on derivatives 576,381 305,646 Tax effect (130,262) (122,258)

Gains on calls recognized in other comprehensive income related to available-for-sale securities previously transferred to held-to-maturity - 85,136

Amount amortized from other comprehensive income related to available-for-sale securities previously transferred to held-to-maturity (12,960) (1,656)

Amount transferred from held-to-maturity to available-for-sale - 132,844

Other comprehensive (loss) income (232,081) 854,681

Comprehensive income $ 4,016,246 2,753,870 See accompanying notes to consolidated financial statements.

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AQUESTA FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders’ Equity


Common Stock

Additional

Paid-in Capital

Unearned Compensation

Retained Earnings

Accumulated Other

Comprehensive Loss

Total

Shares Amount Balance December 31, 2016 3,936,377 $ 39,365 25,496,799 (103,262) 4,616,386 (2,846,297) 27,202,991 Dividends on common stock -

$.11 per share - - -

- (396,661) - (396,661) Exercise of stock options 4,469 44 (44) - - - - Restricted stock grant 31,914 318 217,057 (217,375) - - - Equity compensation expense - - 108,347 61,572 - - 169,919 Reclassification of stranded tax

from AOCI to retained earnings - - -

- 404,623 (404,623) - Net earnings - - - - 1,899,189 - 1,899,189 Other comprehensive income - - - - - 854,681 854,681 Balance December 31, 2017 3,972,760 39,727 25,822,159 (259,065) 6,523,537 (2,396,239) 29,730,119 Dividends on common stock -

$.10 per share - - -

- (404,054) - (404,054) Exercise of stock options 57,594 576 45,844 - - - 46,420 Restricted stock grant 22,000 220 227,862 (228,082) - - - Restricted stock forfeiture (12,869) (129) (103,918) 104,047 - - - Equity compensation expense - - (81,987) 97,656 - - 15,669 Net earnings - - - - 4,248,327 - 4,248,327 Other comprehensive income - - - - - (232,081) (232,081) Balance December 31, 2018 4,039, 485 $ 40,394 25,909,960 (285,444) 10,367,810 (2,628,320) 33,404,400

See accompanying notes to consolidated financial statements.

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AQUESTA FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows


2018 2017 Cash flows from operating activities:

Net earnings $ 4,248,327 1,899,189 Adjustments to reconcile net earnings to net cash provided by operating

activities:

Depreciation and amortization 726,784 1,109,225 Amortization of intangible assets 213,239 406,244 Provision for loan losses 955,888 170,000 Deferred income tax expense (benefit) (196,393) 621,393 Equity compensation expense 15,669 169,919 Loss (gain) on sale of securities 109,518 (37,464) Other than temporary impairment losses - 332,797 (Gain) loss on sales and write-downs of other real estate owned (42,800) 33,360 Gain on sale of subsidiary (1,909,613) - Change in (net of effect of business combinations):

Accrued interest receivable 69,128 (125,609) Other assets 2,832,418 (2,369,371) Accrued interest payable 9,724 22,387 Other liabilities 408,452 (720,174)

Net cash provided by operating activities 7,440,341 1,511,896

Cash flows from investing activities (net of effect of business combinations): Proceeds from maturities/calls/paydowns of investment securities

available-for-sale

6,908,994 6,211,566 Proceeds from maturities/calls/paydowns of investment securities held-to-

maturity

- 1,449,184 Proceeds from sales of investment securities available-for-sale 2,132,100 5,614,920 Proceeds from sales of investment securities held-to-maturity - 529,235 Purchases of investment securities available-for-sale - (10,157,076) Change in loans, net (64,057,082) (54,508,313) Proceeds from the sale of other real estate owned 108,686 30,870 Proceeds from sale of premises and equipment 158,234 - Purchases of premises and equipment (3,265,510) (135,387) Purchases of other investments (1,516,300) (718,600) Cash paid for acquisition - (350,000) Proceeds from sale of subsidiary, net 4,256,493 -

Net cash used in investing activities (55,274,385) (52,033,601)

Cash flows from financing activities (net of effect of business combinations): Change in deposits, net 15,115,098 35,782,153 Dividends on common stock (404,054) (396,661) Exercise of stock options 46,420 - Change in other borrowings (2,545,400) 2,077,888 Net change in federal funds purchased 237,000 (1,854,400) Proceeds from Federal Home Loan Bank advances 83,400,000 - Payments of Federal Home Loan Bank advances (48,900,000) 17,700,000

Net cash provided by financing activities 46,949,064 53,308,980 Net change in cash and cash equivalents (884,980) 2,787,275

Cash and cash equivalents at beginning of the year 11,752,105 8,964,830 Cash and cash equivalents at end of the year $ 10,867,125 11,752,105 See accompanying notes to consolidated financial statements.

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AQUESTA FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued For the Years Ended December 31, 2018 and 2017

2018 2017 Supplemental information on cash payments:

Interest paid $ 4,573,398 2,541,819 Taxes paid $ 1,059,235 1,610,200

Supplemental information of non-cash transactions: Change in unrealized gain/(loss) on derivatives, net of tax $ 446,119 (183,388) Change in unrealized loss on available-for-sale investments, net of tax $ 630,111 477,477 Loans transferred to other real estate owned $ 585,886 - Other real estate transferred to premises and equipment $ - 1,475,000 Bank financed other real estate owned sales $ 520,000 - Transfer of securities held-to-maturity to available-for-sale $ - 12,244,218 Cashless exercise of stock options $ 47,865 36,428

The following is a summary of the fair value of assets acquired and liabilities assumed in the business combinations: 2018 2017

Fair value of assets acquired $ - 382,987 Fair value of liabilities assumed $ - - See accompanying notes to consolidated financial statements.

AQUESTA FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements

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(1) Organization and Operations Aquesta Bank (the “Bank”) was incorporated on June 12, 2006 and began banking operations on August 1, 2006. The Bank is engaged in commercial banking in the Charlotte region of North Carolina, principally Mecklenburg County and has seven banking branches. The Bank operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities. Aquesta Financial Holdings, Inc. (the “Company”) was incorporated on August 8, 2013 for the purpose of becoming a financial holding company. On June 29, 2018, the Company sold its subsidiary, Aquesta Insurance Services, Inc. (“Aquesta Insurance Services”). Aquesta Insurance Services offered property, casualty and health insurance products through its three insurance agency branches in North Carolina and one insurance branch in South Carolina. As a result of the sale, Aquesta Financial Holdings, Inc. is no longer a financial holding company.

(2) Summary of Significant Accounting Policies

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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of investment securities and deferred taxes. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents include amounts from cash, due from banks, interest-bearing deposits in banks and federal funds sold. Federal funds are generally sold for one-day periods and interest bearing deposits in banks are available on demand. A portion of cash on hand and on deposit with the Federal Reserve Bank was required to meet regulatory reserve requirements. At December 31, 2018 and 2017, the Bank’s regulatory reserve requirement was $2,937,000 and $2,535,000, respectively, with the Federal Reserve Bank. Investment Securities Available-for-sale securities are reported at fair value and consist of debt instruments that are not classified as trading securities nor as held-to-maturity securities. Trading securities are both debt and equity securities which an entity intends to sell in the short term for a profit. Trading securities are reported at fair value. Held-to-maturity securities are reported at amortized cost and consist of debt securities and are not available-for-sale or trading. Unrealized holding gains and losses, net of applicable deferred income tax, on available-for-sale securities are reported as a net amount in other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Other Investments Other investments include Federal Home Loan Bank (“FHLB”) stock which has no readily determined fair value. These investments are carried at cost.

AQUESTA FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued

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(2) Summary of Significant Accounting Policies, continued Transfers of Financial Assets The Company originates Small Business Administration (“SBA”) loans for sale to governmental agencies and institutional investors. Loans held-for-sale are carried at the lower of aggregate cost or market value. The amount by which cost exceeds market value is accounted for as a valuation allowance. Changes in the valuation allowance are included in the determination of net earnings of the period in which the change occurs. At December 31, 2018 and 2017, there was no valuation allowance associated with loans held-for-sale. 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 the Bank – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (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) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed unless the collateral for the loan is sufficient to cover the accrued interest. Interest income is subsequently recognized only to the extent cash payments are received. Troubled Debt Restructurings The Company identifies loans for potential restructuring on a loan-by-loan basis using a variety of sources which may include, but are not limited to any one or a combination of the following: being approached or contacted by the borrower to modify loan terms; review of the borrower’s financial statements indicates the borrower may be experiencing financial difficulties; past due payment reports; loans extending past their stated maturity dates; and nonaccrual loan reports. Not all loan modifications constitute troubled debt restructurings (“TDRs”). Identifying whether a loan restructuring is a TDR is based upon individual facts and circumstances and requires the use of judgment on a loan-by-loan basis. The Company must first determine if the borrower is experiencing financial difficulty. A restructuring constitutes a TDR if for economic or legal reasons related to an individual borrower’s financial condition the Company grants a concession to the borrower that would not otherwise be considered. A restructuring that results in only a delay in payment that is insignificant is not a concession. Allowance for Loan Losses The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level. In making the evaluation of the adequacy of the allowance for loan losses, management gives consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, delinquency information and management’s internal review of the loan portfolio. Loans are considered impaired when it is probable that all amounts due under the contractual terms of the loan will not be collected. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require the Company to recognize changes to the allowance for loan losses based on their judgments about information available to them at the time of their examination.


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(2) Summary of Significant Accounting Policies, continued Premises and Equipment Land is stated at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 40 years for buildings, 5 to 10 years for furniture, fixtures and equipment, and 5 years for computers and related equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are charged to operations as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current operations.

Other Real Estate Owned Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value of the property less estimated costs to sell at the date of foreclosure. After foreclosure, management periodically performs valuations of the property and the real estate is carried at the lower of cost or fair value minus estimated cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Income Taxes The Company does not anticipate any increase or decrease in unrecognized tax benefits during the next twelve months that would result in a material change to its financial position. The Company’s income tax returns for years ended after December 31, 2014 remain open for examination. The Company includes interest and penalties in the consolidated financial statements as a component of income tax expense. No interest or penalties are included in the Company’s income tax expense for the years ended December 31, 2018 and 2017. The Company has determined that it has no uncertain income tax positions as of December 31, 2018. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. Derivative Instruments and Hedging Activities The Company’s interest rate risk management strategy incorporates the use of derivative instruments to minimize fluctuations in net earnings that are caused by interest rate volatility. The Company’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that net interest income is not, on a material basis, adversely affected by movements in interest rates. The Company views this strategy as a prudent management of interest rate risk, such that net earnings is not exposed to undue risk presented by changes in interest rates. In carrying out this part of its interest rate risk management strategy, the Company uses interest rate derivative contracts. The primary type of derivative contract used by the Company to manage interest rate risk is interest rate swaps. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date. The Company also utilizes interest rate caps which limit the Company’s interest expense exposure to a maximum rate on a notional principal amount. The Company classifies its derivative financial instruments as either (1) a hedge of an exposure to changes in the fair value of a recorded asset or liability (“fair value hedge”), (2) a hedge of an exposure to changes in the cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”), or (3) derivatives not designated as accounting hedges. Changes in the fair value of derivatives not designated as hedges are recognized in current period earnings. Derivatives are reflected as gross assets and liabilities on the consolidated balance sheet.


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(2) Summary of Significant Accounting Policies, continued Derivative Instruments and Hedging Activities, continued The Company uses the long-haul method to assess hedge effectiveness. The Company documents, both at inception and over the life of the hedge, at least quarterly, its analysis of actual and expected hedge effectiveness. This analysis includes techniques such as regression analysis and hypothetical derivatives to demonstrate that the hedge has been, and is expected to be, highly effective in offsetting corresponding changes in the fair value or the cash flows of the hedged item. For a qualifying fair value hedge, changes in the value of derivatives that have been highly effective as hedges are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged. For a qualifying cash flow hedge, the portion of changes in the fair value of the derivatives that have been highly effective are recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings.

For fair value hedges and cash flow hedges, ineffectiveness is recognized in the same income statement line as interest accruals on the hedged item to the extent that changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. If the hedge ceases to be highly effective, the Company discontinues hedge accounting and recognizes the changes in fair value in current period earnings. If a derivative that qualifies as a fair value or cash flow hedge is terminated or the designation removed, the realized or then unrealized gain or loss is recognized into income over the life of the hedged item (fair value hedge) or over the time when the hedged item was forecasted to impact earnings (cash flow hedge). Immediate recognition in earnings is required upon sale or extinguishment of the hedged item (fair value hedge) or if it is probable that the hedged cash flows will not occur (cash flow hedge). By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is represented by the fair value gain in a derivative. When the fair value of a derivative contract is positive, this situation generally indicates that the counterparty is obligated to pay the Company, and, therefore, creates a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company is obligated to pay the counterparty and, therefore, has no repayment risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company. Acquisition Activities The Company accounts for business combinations under the acquisition method of accounting. Assets acquired and liabilities assumed are measured and recorded at fair value at the date of acquisition, including identifiable intangible assets. If the fair value of net assets purchased exceeds the fair value of consideration paid, a bargain purchase gain is recognized at the date of acquisition. Conversely, if the consideration paid exceeds the fair value of the net assets acquired, goodwill is recognized at the acquisition date. Fair values are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available. The determination of the fair value of loans acquired takes into account credit quality deterioration and probability of loss; therefore, the related allowance for loan losses is not carried forward. All identifiable intangible assets that are acquired in a business combination are recognized at fair value on the acquisition date. Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). Deposit liabilities and the related depositor relationship intangible assets may be exchanged in observable exchange transactions. As a result, the depositor relationship intangible asset is considered identifiable, because the separability criterion has been met.


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(2) Summary of Significant Accounting Policies, continued Goodwill and Intangible Assets Goodwill is deemed to have an indefinite useful life. Identifiable intangible assets include a core deposit premium, noncompete agreements and customer lists, which are being amortized on a straight-line basis over the estimated useful lives of the asset. The core deposit premium is being amortized over 10 years. The noncompete agreements and customer lists are being amortized over 2 to 15 years. Goodwill and intangible assets are reviewed annually for possible impairment, and if the assets are deemed impaired, an expense would be charged in the then current period. Per Share Results Basic earnings per share represents earnings available to common stockholders divided by the weighted-average number of common shares outstanding during the year. For the years ended December 31, 2018 and 2017, 406,340 and 270,369 options and warrants, respectively, were dilutive and were included in the calculation of the diluted earnings per share. There were no antidilutive options or warrants as of December 31, 2018 and 2017.

Stock Compensation Plans Accounting standards require recognition of the cost of employee services received in exchange for an award of equity instruments in the consolidated financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). These standards also require measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. Comprehensive Income The Company reports as comprehensive income all changes in stockholders' equity during the year from sources other than stockholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net earnings.

The Company's only components of other comprehensive income are unrealized gains and losses on investment securities available-for-sale, unrealized gains and losses on investments held-to-maturity prior to reclassification from available-for-sale and unrealized gains and losses on derivatives, net of related income tax effects. Reclassifications Certain 2017 amounts have been reclassified to conform to the presentation used in 2018. These reclassifications had no effect on the operations, financial condition or cash flows of the Company.

(3) Business Combinations and Sales of Subsidiaries The Company sold its subsidiary, Aquesta Insurance Services, on June 29, 2018. The base purchase price of the transaction was $4,550,000 with the final closing purchase price adjusted for the closing working capital of the subsidiary. Adjustments were made to the base purchase price based on the sales agreement and closing statement which includes indebtedness to be paid by the acquirer on behalf of the Company and certain working capital adjustments identified after the close of the transaction. The net proceeds received by the Company at the closing of the sale were approximately $1,950,000.


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(3) Business Combinations and Sales of Subsidiaries, continued The following table summarizes the consideration paid for the subsidiary and the amounts of assets sold and liabilities assumed by the acquirer at the acquisition date:

Base purchase price $ 4,550,000 Adjustments:

Working capital adjustments (105,598) Indebtedness paid by acquirer (2,494,034)

Net proceeds 1,950,368

Total assets sold 2,868,185 Total liabilities satisfied (including indebtedness) (2,827,430)

Net worth of subsidiary 40,755

Gain recorded on sale of subsidiary $ 1,909,613 On September 1, 2017, Aquesta Insurance Services acquired assets and a book of business from an insurance agency in Murrells Inlet, South Carolina. The total assets acquired were approximately $383,000, consisting of a book of business identified as an intangible asset to be amortized on a straight line basis over 15 years. No liabilities were assumed. Total purchase price at the date of acquisition was approximately $550,000. Approximately, $350,000 was paid upon closing the transaction and approximately $200,000 was agreed to be paid in equal installments annually over the next 3 years. As additional consideration for the acquired assets, approximately $42,000 is estimated to be paid out related to the performance of the book of business, resulting in goodwill of approximately $208,000. As a result of the sale of Aquesta Insurance Services in June 2018, there is no remaining goodwill recorded as of December 31, 2018 due to no future payout consideration.

(4) Investment Securities

The amortized cost and estimated fair value of securities available-for-sale, with gross unrealized gains and losses, at December 31, 2018 and 2017 are as follows:

Amortized

Cost

Gross Unrealized

Gains

Gross Unrealized

Losses

Estimated Fair

Value December 31, 2018:

U.S. government agency securities $ 11,676,951 - 461,370 11,215,581 Mortgage-backed securities 40,069,597 543 1,664,626 38,405,514 Corporate shares 1,040,089 - 208,019 832,070 Foreign debt securities 1,004,337 - 155,431 848,906 Municipal bonds 328,537 - 22,030 306,507

Total $ 54,119,511 543 2,511,476 51,608,578

December 31, 2017: Amortized

Cost

Gross Unrealized

Gains

Gross Unrealized

Losses

Estimated Fair

Value

U.S. government agency securities $ 12,371,872 - 295,047 12,076,825 Mortgage-backed securities 45,971,685 27,286 914,559 45,084,412 Corporate shares 3,843,447 12,500 452,866 3,403,081 Foreign debt securities 1,005,146 - 21,751 983,395 Municipal bonds 328,393 - 7,013 321,380

Total $ 63,520,543 39,786 1,691,236 61,869,093


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(4) Investment Securities, continued The amortized cost and estimated fair value of investment securities at December 31, 2018, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.

Amortized

Cost

Estimated Fair

Value Due in one year or less $ - - Due after one year through five years 1,518,949 1,426,654 Due after five years through ten years 6,467,068 5,965,745 After ten years 6,063,897 5,810,665 Mortgage-backed securities 40,069,597 38,405,514

$ 54,119,511 51,608,578 The composition of the investment securities with an unrealized loss position at December 31, 2018 and 2017 is shown below. 2018 2017

Available-for-Sale

Count Estimated

Fair Value Unrealized

Losses

Count Estimated

Fair Value Unrealized

Losses

Unrealized loss for less than 12 months:

U.S. government agency securities - $ - - - $ - - Mortgage-backed securities 1 1,044,786 4,403 6 14,568,581 180,744 Corporate bonds - - - 1 492,500 3,133 Foreign debt securities - - - 1 983,395 21,751 Municipal bonds - - - 1 321,380 7,013

Less than 12 months 1 1,044,786 4,403 9 16,365,856 212,641

Unrealized loss for less than 12 months:

U.S. government agency securities 12 11,215,581 461,370 12 12,076,826 295,047 Mortgage-backed securities 31 37,217,439 1,660,223 24 28,168,168 733,815 Corporate bonds 2 832,070 208,019 - 2,341,829 449,733 Foreign debt securities 1 848,906 155,431 6 - - Municipal bonds 1 306,507 22,030 - - -

More than 12 months 47 50,420,503 2,507,073 42 42,586,823 1,478,595

Total 48 $ 51,465,289 2,511,476 51 $ 58,952,679 1,691,236

Management continuously evaluates unrealized losses in its investment securities portfolio. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The declines in fair value noted above were largely attributable to the increases in interest rates and not attributable to credit quality. Since the Bank has the ability and intent to hold these investments until a market price recovery or maturity, these investments were not considered other-than-temporarily impaired. Proceeds from the sales of investment securities totaled $2,132,100 and $6,144,155 in 2018 and 2017, respectively. The Company realized gross gains of $7,500 and $85,327 in 2018 and 2017, respectively. The Company realized gross losses of $117,018 and $47,863 in 2018 and 2017, respectively. As of December 31, 2018, 48 securities of the total 49 securities in the investment security portfolio were in an unrealized loss position. During 2017, the Bank determined the value of a corporate bond to be other-than-temporarily impaired. The determination was a result of the financial condition and performance of the corporation. As a result, the Company recorded a $332,797 non-cash other-than-temporary impairment on this security. The bond was subsequently sold in 2018 for approximately book value. Securities with a fair value of approximately $21,707,000 and $20,602,000 were pledged to secure public deposits at December 31, 2018 and 2017, respectively.


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(5) Loans Major classifications of loans at December 31, 2018 and 2017, are summarized as follows:

2018 2017

Amount % of Total

Loans Amount % of Total

Loans Real estate loans:

1 - 4 Family residential $ 24,103,241 6.5% $ 16,549,057 5.4% Multi-family and commercial 232,995,714 63.1% 202,043,749 66.1% Construction 20,260,130 5.5% 14,427,866 4.7% Home equity lines of credit 35,644,831 9.7% 31,688,340 10.4%

Total real estate loans 313,003,916 84.8% 264,709,012 86.6%

Other loans: Commercial and industrial 55,809,392 15.0% 40,742,970 13.2% Loans to individuals 265,220 0.1% 324,966 0.1% Overdrafts 149,257 0.1% 15,899 0.1%

Total other loans 56,223,869 15.2% 41,083,835 13.4%

Total loans 369,227,785 100.0% 305,792,847 100.0%

Less: Allowance for loan losses 3,493,365 2,817,248 Less: Unamortized deferred fees 203,234 479,721

Total loans, net $ 365,531,186 $ 302,495,878 Following is a summary of the changes in the allowance for loan losses by portfolio class for the years ended December 31, 2018 and 2017:

December 31, 2018:

Allowance for loan losses:

1 – 4 Family

Residential

Multi-family and

Commercial Construction

Home Equity

Lines of Credit

Commercial and

Industrial Loans to

Individuals Overdrafts

Unallocated Total

Balance at beginning of the period

$ 72,816 2,076,140 50,355 282,026 227,205 15,952 - 92,754 2,817,248 Provision for loan

losses 55,104 442,886 51,853 (25,357) 198,658 348 11,617 220,779 955,888 Charge-offs - (240,272) - - (44,161) (1,091) (11,617) - (297,141) Recoveries - 2,487 - - 13,986 897 - - 17,370

Ending balance $ 127,920 2,281,241 102,208 256,669 395,688 16,106 - 313,533 3,493,365

Ending balance individually evaluated for impairment

$ - 139,995 - - 5,094 - - - 145,089

Ending balance collectively evaluated for impairment 127,920 2,141,246 102,208 256,669 390,594 16,106 - 313,533 3,348,276

$ 127,920 2,281,241 102,208 256,669 395,688 16,106 - 313,533 3,493,365

Loans:

Individually evaluated for impairment

$ - 1,216,092 - - 209,361 - - - 1,425,453

Collectively evaluated for impairment 24,103,241 231,779,622 20,260,130 35,644,831 55,600,031 265,220 149,257 - 367,802,332

$ 24,103,241 232,995,714 20,260,130 35,644,831 55,809,392 265,220 149,257 - 369,227,785


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(5) Loans, continued

December 31, 2017:

Allowance for loan losses:

1 – 4 Family

Residential

Multi-family and

Commercial Construction

Home Equity

Lines of Credit

Commercial and

Industrial Loans to

Individuals Overdrafts

Unallocated Total

Balance at beginning of the period

$ 99,120 1,808,850 63,363 291,589 255,939 629 - 130,452 2,649,942 Provision for loan

losses (26,304) 211,019 (13,008) (9,563) 18,700 14,518 12,336 (37,698) 170,000 Charge-offs - - - - (47,434) - (12,336) - (59,770) Recoveries - 56,271 - - - 805 - - 57,076

Ending balance $ 72,816 2,076,140 50,355 282,026 227,205 15,952 - 92,754 2,817,248

Ending balance individually evaluated for impairment

$ - - - - 5,094 - - - 5,094 Ending balance

collectively evaluated for impairment 72,816 2,076,140 50,355 282,026 222,111 15,952 - 92,754 2,812,154

$ 72,816 2,076,140 50,355 282,026 227,205 15,952 - 92,754 2,817,248

Loans:

Individually evaluated for impairment

$ - 2,119 - - 338,728 - - - 340,847 Collectively evaluated

for impairment 16,549,057 202,041,630 14,427,866 31,688,340 40,404,242 324,966 15,899 - 305,452,000

$ 16,549,057 202,043,749 14,427,866 31,688,340 40,742,970 324,966 15,899 - 305,792,847

The Bank individually assesses all nonaccrual loans and TDRs for potential impairment. A loan is considered impaired when, based on current events and circumstances it is probable that all amounts due, according to the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired loans are applied as a reduction of the outstanding principal balance. Impaired loans as of December 31, 2018 and 2017, segregated by class of loans, were as follows:

December 31, 2018:

Unpaid Principal

Balance (1)

Recorded

Investment(2)

Related

Allowance

Average Recorded Investment

Interest Income

Recognized Impaired loans without related

allowance:

Real estate loans:

Multi-family and commercial $ 1,019,847 1,019,847 - 1,029,572 - Other loans:

Commercial and industrial 122,552 122,552 - 142,899 23,041

1,142,399 1,142,399 - 1,172,471 23,041 Impaired loans with related allowance:

Real estate loans: Multi-family and commercial 196,245 196,245 139,995 787,400 -

Other loans: Commercial and industrial 86,809 86,809 5,094 122,068 6,364

283,054 283,054 145,089 909,468 6,364 Total:

Real estate loans: Multi-family and commercial 1,216,092 1,216,092 139,995 1,816,972 -


$ 1,425,453 1,425,453 145,089 2,081,939 29,405


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(5) Loans, continued

December 31, 2017:

Unpaid Principal

Balance (1)

Recorded

Investment(2)

Related

Allowance

Average Recorded Investment

Interest Income

Recognized Impaired loans without related

allowance:

Real estate loans:

Multi-family and commercial $ 2,119 2,119 - 394,303 18,686 Other loans:

Commercial and industrial 230,406 181,402 - 382,768 22,244

232,525 183,521 - 777,071 40,930 Impaired loans with related allowance:


157,326 157,326 5,094 187,366 8,782 Total:

Real estate loans: Multi-family and commercial 2,119 2,119 - 394,303 18,686


$ 389,851 340,847 5,094 964,437 49,712

(1) Unpaid principal balance represents the contractual obligation due from the customer. (2) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before any

related allowance for loan losses.

At December 31, 2018 and 2017, the Bank had impaired loans classified as TDRs of approximately $147,000 and $341,000, respectively. During 2018, there was one new TDR added with a pre- and post-modification balance of $59,952. During 2017, there was one new TDR added with a pre- and post-modification balance of $376,766 and $27,886, respectively. The Bank received approximately $301,000 for the government guaranteed portion of the loan (the 2017 TDR) and charged off approximately $49,000 in conjunction with the modification. The Bank allocated $5,094 and $99,594 of the allowance for loan losses to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2018 and 2017, respectively. The Bank has no commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs. There were no loans modified in a TDR during 2018 or 2017 for which there was subsequent payment default. Default is defined as 90 days or more past due or nonaccrual. The Bank categorizes loans into different risk categories based on relevant information about a borrower’s ability to service their debt. This is determined by various factors such as current financial information, historical payment experience, credit documentation and economic trends along with other factors. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions and are defined as follows:

• Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

• Special Mention – loans that are still adequately protected by the borrower’s capital adequacy and payment capability but have potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Bank’s position at some future date. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment and require management’s close attention. These loans are not adversely classified.

• Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though the loan is currently performing. These loans are characterized by the distinct possibility that the Bank may sustain a loss in the future if these weaknesses are not corrected.


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(5) Loans, continued Nonaccrual – includes loans where management has determined that full payment of principal and interest per the contract terms is in doubt. The loans categorized by different risk categories based on relevant information about a borrower’s ability to service their debt at December 31, 2018 and 2017 are as follows:

December 31, 2018:

Pass Special Mention

Substandard Accruing Nonaccrual Total

Real estate loans: 1 - 4 Family residential $ 24,103,241 - - - 24,103,241 Multi-family and commercial 187,775,288 38,914,675 5,089,659 1,216,092 232,995,714 Construction 20,260,130 - - - 20,260,130 Home equity lines of credit 35,644,831 - - - 35,644,831

Total real estate loans 267,783,490 38,914,675 5,089,659 1,216,092 313,003,916

Other loans: Commercial and industrial 46,990,233 8,405,761 413,398 - 55,809,392 Loans to individuals 253,157 12,063 - - 265,220 Overdrafts 149,257 - - - 149,257

Total other loans 47,392,647 8,417,824 413,398 - 56,223,869

Total $ 315,176,137 47,332,499 5,503,057 1,216,092 369,227,785

December 31, 2017:

Real estate loans: 1 - 4 Family residential $ 16,549,057 - - - 16,549,057 Multi-family and commercial 198,629,716 3,411,914 2,119 - 202,043,749 Construction 14,155,760 272,106 - - 14,427,866 Home equity lines of credit 31,688,340 - - - 31,688,340

Total real estate loans 261,022,873 3,684,020 2,119 - 264,709,012

Other loans: Commercial and industrial 31,976,994 135,703 8,602,387 27,886 40,742,970 Loans to individuals 314,966 10,000 - - 324,966 Overdrafts 15,899 - - - 15,899

Total other loans 32,307,859 145,703 8,602,387 27,886 41,083,835

Total $ 293,330,732 3,829,723 8,604,506 27,886 305,792,847 At December 31, 2018, there were two real estate loans within the mutli-family and commercial loan category with a recorded investment of $1,019,847 that were past due greater than 90 days and one loan with a recorded investment of $196,245 that was past due greater than 60 days. At December 31, 2017, there was one loan with a recorded investment of $27,886 that was past due greater than 90 days. All other loans were current as of December 31, 2017 and there were no accruing loans past due greater than 30 days.

Periodically, the Bank may engage in loan transactions with the Company and the Bank’s directors and executive officers. Such loans are made in the ordinary course of business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and do not involve more than the normal risk of collectability or present other unfavorable features. The following is a summary of activity for related party loans for 2018:

Prior year balance $ 7,219,738 Advances 2,730,593 Repayments (1,949,787) Change in related parties (1,957,179)

$ 6,043,365


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(6) Premises and Equipment Following is a summary of premises and equipment at December 31, 2018 and 2017:

2018 2017

Land $ 4,805,232 3,200,540 Buildings 11,967,350 11,120,318 Furniture and fixtures 3,250,160 3,715,748 Leasehold improvements - 92,480 Construction-in-progress 567,982 138,093

20,590,724 18,267,179 Accumulated depreciation 4,596,643 4,823,534

Total $ 15,994,081 13,443,645 Depreciation totaling approximately $489,000 and $585,000 for the years ended December 31, 2018 and 2017, respectively, is included in occupancy expense. Amortization of software was approximately $30,000 and $23,000 for the years ended December 31, 2018 and 2017, respectively, and is included in other operating expense.

(7) Goodwill and Intangible Assets

The Company recorded goodwill and intangible assets arising from the acquisition of Aquesta Insurance Services. The Company recorded a core deposit intangible from the purchase of a bank branch in 2015. As described in note 3, the Company sold Aquesta Insurance Services in June 2018. As a result, the Company does not have customer list or non-compete intangibles as of December 31, 2018. In 2017, the book of business acquisition described in note 3 added an additional customer list intangible asset. The Company evaluates intangible assets and goodwill for possible impairment on an annual basis. There was no impairment on intangible assets and goodwill identified in the years ending December 31, 2018 and 2017. The changes in the carrying amount of other identifiable intangibles for the years ended December 31, 2018 and 2017 were as follows:

Customer List

Intangibles

Non-Compete

Intangibles

Core Deposit

Intangible

Totals Net carrying amount at December

31, 2016 $ 1,040,673 665,357 44,997 1,751,027 Current year additions 332,987 - - 332,987 Current year amortization expense (113,544) (287,165) (5,535) (406,244)

Net carrying amount at December 31, 2017 1,260,116 378,192 39,462 1,677,770

Current year additions - - - - Current year sales (1,195,987) (234,610) - (1,430,597) Current year amortization expense (64,129) (143,582) (5,517) (213,228)

Net carrying amount at December 31, 2018 $ - - 33,945 33,945


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(7) Goodwill and Intangible Assets, continued Estimated annual amortization expense for the years ending December 31 is as follows:

2019 $ 5,526 2020 5,526 2021 5,526 2022 5,526 2023 5,526 Thereafter 6,315

$ 33,945 (8) Deposits

The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2018 and 2017, was approximately $5,677,000 and $5,203,000, respectively. At December 31, 2018, contractual maturities of time deposits are summarized as follows:

2019 $ 37,992,617 2020 8,592,268 2021 3,185,098 2022 2,515 2023 3,812

$ 49,776,310

Time deposits listed above includes approximately $3,151,000 and $1,150,000 in brokered certificates of deposit at December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, deposits from directors, executive officers and their related interests aggregated approximately $4,609,000 and $4,412,000, respectively. These deposits were taken in the normal course of business at market interest rates. At December 31, 2018 and 2017, there was one depositor considered major who accounted for approximately $20,001,000 and $19,924,000 of total deposits, respectively.

(9) Borrowings

The Bank has established a credit line with the FHLB. The credit line is secured by a portion of the Bank’s loan portfolio that qualifies under FHLB guidelines as eligible collateral. At December 31, 2018, total availability was approximately $137,054,000, of which $101,400,000 was advanced. Approximately $174,112,000 of collateral was pledged to secure FLHB borrowings. At December 31, 2017, total availability was $113,019,000, of which $66,900,000 was advanced. Approximately $147,972,000 of collateral was pledged to secure FLHB borrowings. The FHLB borrowings have variable and fixed rate terms with a weighted average interest rate of .61% at December 31, 2018 and 2017.


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(9) Borrowings, continued The Company had available lines of credit totaling $44,000,000 from correspondent banks excluding the FHLB and the Federal Reserve Discount Window at December 31, 2018 and 2017. As of December 31, 2018 and 2017, the Company had outstanding borrowings of approximately $1,893,000 and $3,968,000, respectively, with the Company’s correspondent banks.

Other borrowed funds consisted of overnight borrowings and estimated future debt obligations assumed from the purchase of Aquesta Insurance Services. Other borrowed funds at December 31, 2018 and 2017 consisted of the following:

Maturity Dates

Interest Basis

Weighted Average

Interest Rate 2018 2017 Holding company

borrowings 2018 Variable

4.75% $ 1,625,000 3,900,000 Estimate of future

insurance debt 2018 - 2020 Fixed

1.00% - 303,460 Other borrowed funds Overnight Fixed 0.04% 188,011 68,433

$ 1,813,011 4,271,893 Required annual principal payments on borrowed funds for years subsequent to December 31, 2018 are as follows:

FHLB

Advances Other

Borrowings Total

2019 $ 88,400,000 1,813,011 90,213,011 2020 4,000,000 - 4,000,000 2021 8,000,000 - 8,000,000 2022 1,000,000 - 1,000,000

Total $ 101,400,000 1,813,011 103,213,011

(10) Income Taxes On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform") was signed into law and impacts individuals, pass through entities and corporations. The Company was impacted by the corporation changes. The corporate tax rate remained unchanged for the year ended December 31, 2017, with the new corporate tax rate falling from a maximum 35% rate to 21% beginning in 2018. Current income tax expense was based on a tax rate of 34% in 2017; however, GAAP requires the deferred tax components to be recorded at the rate in which the differences are expected to reverse which impacts tax expense for the year ended December 31, 2017. Based on the new corporate tax rate of 21% for 2018 and forward, the deferred tax assets and liabilities were revalued at the new rate and the adjustment was recorded directly to earnings in 2017, including any impact associated with the deferred tax component of accumulated other comprehensive income. In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendment grants the option of reporting tax effects of the recently enacted Tax Cuts and Jobs Act that were temporarily stranded in accumulated other comprehensive income as a reclassification from AOCI to retained earnings. The Company elected to reflect the reclassification for reporting as of December 31, 2017 and for the year then ended in accordance with the update.


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(10) Income Taxes, continued The Company recorded a reclassification entry of approximately $405,000 between accumulated other comprehensive income and retained earnings in order to correct the stranded amount associated with the true up of the net deferred asset on available-for-sale securities and derivatives. The reclassification entry is disclosed within the consolidated Statements of Changes in Stockholders' Equity. The components of income tax expense (benefit) for the years ended December 31, 2018 and 2017 are as follows:

2018 2017 Current $ 1,326,109 589,042 Deferred (196,393) 621,393 Rate reduction adjustment - 404,623

Total income tax expense $ 1,129,716 1,615,058 The difference between income tax expense and the amount computed by applying the statutory federal income tax rate to earnings before taxes for the years ended December 31, 2018 and 2017 is as follows:

2018 2017 Pretax income at statutory rate $ 1,129,366 1,194,844 State income tax expense, net 52,166 21,256 Other (51,816) (5,665) Rate reduction adjustment - 404,623

$ 1,129,716 1,615,058

The following summarizes the components of the net deferred tax asset, which is included as a component of other assets at December 31, 2018 and 2017:

2018 2017 Deferred income tax assets:

Unrealized loss on securities $ 567,339 383,353 Unrealized loss on derivatives 198,349 328,611 Allowance for loan losses 618,148 405,385 Net operating loss carryforward - 14,733 Pre-opening costs and expenses 51,279 52,490 Stock-based compensation 190,990 169,399 Deferred compensation 133,773 98,842 Intangibles 35,704 176,685 Other 57,685 49,831

Total deferred income tax assets 1,853,267 1,679,329

Deferred income tax liabilities: Premises and equipment 571,102 618,323 Goodwill - 105,641 SBA servicing asset 158,745 98,371 Other 30,278 13,969

Total deferred income tax liabilities 760,125 836,304

Net deferred income tax assets $ 1,093,142 843,025


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(11) Regulatory Matters The Bank, as a North Carolina banking corporation, may pay cash dividends only out of undivided profits as determined pursuant to North Carolina General Statutes. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such limitation is in the public interest and is necessary to ensure financial soundness of the Bank. The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In July 2013, the Federal bank regulatory agencies issued a final rule that revises their risk-based capital requirements and the method for calculating components of capital and of computing risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. The rule establishes a new common equity Tier 1 minimum capital requirement, increases the minimum capital ratios and assigns a higher risk weight to certain assets based on the risk associated with these assets. The final rule includes transition periods that generally implement the new regulations over a five year period. These changes were phased in beginning in January 2015. Management continues to evaluate this final rule and its potential impact on the Bank. Preliminary assessments indicate that the Bank will continue to exceed all regulatory capital requirements under the phased in requirements of the new rule.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total common equity Tier 1, of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 2018 and 2017, the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2018 and 2017, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1 risk-based, total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below. There are no conditions or events since that notification that management believes have changed the institution’s category. The Bank’s actual capital amounts and ratios as of December 31, 2018 and 2017 are also presented below.

Actual

For Capital Adequacy Purposes

To Be Well Capitalized Under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio December 31, 2018: (Dollars in Thousands)

Common Equity Tier 1 (to Risk-Weighted Assets) $ 37,974 10.32% $ 16,511 4.50% $ 23,906 6.50% Total Capital (to Risk-Weighted Assets) $ 41,467 11.27% $ 29,423 8.00% $ 36,779 10.00% Tier I Capital (to Risk-Weighted Assets) $ 37,974 10.32% $ 22,067 6.00% $ 29,423 8.00% Tier I Capital (to Average Assets) $ 37,974 8.30% $ 18,291 4.00% $ 22,864 5.00%

December 31, 2017:

Common Equity Tier 1 (to Risk-Weighted Assets) $ 33,296 10.29% $ 14,561 4.50% $ 21,032 6.50% Total Capital (to Risk-Weighted Assets) $ 36,113 11.16% $ 25,886 8.00% $ 32,358 10.00% Tier I Capital (to Risk-Weighted Assets) $ 33,296 10.29% $ 19,415 6.00% $ 25,886 8.00% Tier I Capital (to Average Assets) $ 33,296 8.48% $ 15,704 4.00% $ 19,630 5.00%


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(12) Leases The Company leases buildings for several of its branches. The termination dates of these leases vary between May 2020 and April 2034. Minimum future rental payments under the Company’s office facility leases are as follows:

2019 $ 354,602 2020 348,594 2021 335,640 2022 300,144 2023 306,057 Thereafter 1,687,764 $ 3,332,801

Rental expense amounting to approximately $220,000 and $200,000 during the years ended December 31, 2018 and 2017, respectively, is included in occupancy expense in the accompanying consolidated statements of earnings.

(13) Commitments and Contingencies The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, inventory, stocks, bonds, and certificates of deposit. In management’s opinion, these commitments represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity. A summary of the contract amount of the Company’s exposure to off-balance sheet risk as of December 31, 2018 and 2017 is as follows: 2018 2017 Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit $ 60,506,022 49,174,635 Undisbursed lines of credit 32,823,759 23,877,731 Standby letters of credit 192,045 238,065

In the normal course of business, the Company may be named as a defendant in litigation. Some of these matters may claim substantial damages. After consultation with outside legal counsel about existing claims, management believes that resolution of these issues will not result in a material adverse effect on the Company’s financial position or results of operations.


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(13) Commitments and Contingencies, continued Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. As of December 31, 2018, the Company has $31.4 million in notional amount designated as a cash flow hedge on variable rate borrowings. The Company’s management has determined the hedges to be effective cash flow hedges. These interest rate swaps were purchased to add protection to the Company against a potential rise in interest rates by converting variable rate liabilities into fixed rate instruments. These interest rate swaps are based on the three-month LIBOR rate and were in a loss position at December 31, 2018 and December 31, 2017 totaling approximately $1.0 and $1.5 million, respectively. At December, 31, 2018, the Company also has an interest rate cap with a notational amount of $4.0 million designated as a cash flow hedge on variable rate money market deposit accounts. The Company’s management has determined the hedges to be effective cash flow hedges. This interest rate cap was purchased to add protection to the Company against the potential rise in interest rates. The interest rate cap is based on the one-month LIBOR rate and was in a neutral position at December 31, 2018. As of December 31, 2017 the interest rate cap was in a gain position of $19. The interest rate cap matured in February 2018. The derivative fair values are included in other assets and other liabilities on the Company’s consolidated balance sheets.

(14) Fair Value Measurements and Disclosures The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities. Securities available-for-sale, as well as derivative financial instruments, are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve the application of the lower of cost or market accounting or write-downs of individual assets. Fair Value Hierarchy The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

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

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

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

Following is a description of valuation methodologies used for assets and liabilities which are recorded at fair value. Investments Securities Available-for-Sale Fair values for investment securities available-for-sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. For these items, a fair value hierarchy of Level 2 or Level 3 has been assigned.


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(14) Fair Value Measurements and Disclosures, continued Loans The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for loan losses. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of three methods, including collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans in which an allowance is established based on one of the three impairment methods require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is utilized or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Other Real Estate Owned Other real estate properties are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned. Subsequently, other real estate properties are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral of management’s estimation of the value of the collateral. When the fair value is based on an observable market price, the Company records the other real estate as nonrecurring Level 2. When the fair value is based on an appraised value, or when an appraised value is not available, the Company records the other real estate asset as nonrecurring Level 3. Derivative Financial Instruments For derivative financial instruments, fair value is estimated at the amount the Company would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gain or loss on the open contracts. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2018, the Company had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2018 and 2017 were as follows:

Assets and Liabilities Recorded at Fair Value on a Recurring Basis The table below presents the recorded amount of assets (liabilities) measured at fair value on a recurring basis as of December 31, 2018 and 2017.

December 31, 2018: Level 1 Level 2 Level 3 Total U.S. government agency

securities $ - 11,215,581 - 11,215,581 Mortgage-backed securities - 38,405,514 - 38,405,514 Corporate bonds - 832,070 - 832,070 Foreign debt securities - 848,906 - 848,906 Municipal bonds - 306,507 - 306,507 $ - 51,608,578 - 51,608,578 Fair value of derivatives:

Derivative assets $ - 130,701 - 130,701 Derivative liabilities - (1,008,547) - (1,008,547)

$ - (877,846) - (877,846)


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(14) Fair Value Measurements and Disclosures, continued

December 31, 2017: Level 1 Level 2 Level 3 Total U.S. government agency

securities $ - 12,076,825 - 12,076,825 Mortgage-backed securities - 45,084,412 - 45,084,412 Corporate bonds - 3,403,081 - 3,403,081 Foreign debt securities - 983,395 - 983,395 Municipal bonds - 321,380 - 321,380 $ 61,869,093 61,869,093 Fair value of derivatives:

Derivative assets $ - 56,357 - 56,357 Derivative liabilities - (1,516,299) - (1,516,299)

$ - (1,459,942) - (1,459,942)

Assets Recorded at Fair Value on a Nonrecurring Basis The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of December 31, 2018 and 2017.

December 31, 2018: Level 1 Level 2 Level 3 Total

Impaired loans, net - - 134,901 134,901 Total assets at fair value $ - - 134,901 134,901

December 31, 2017:

Impaired loans, net - - 152,232 152,232 Total assets at fair value $ - - 152,232 152,232

(15) Employee and Director Benefit Plans

401(k) Plan The Company has a 401(k) Plan in which full-time employees are eligible to participate. The Company makes matching contributions of up to four percent of an employee’s compensation contributed to the Plan. Matching contributions vest to the employee immediately. For the years ended December 31, 2018 and 2017, expense attributable to the Plan amounted to approximately $236,000 and $188,000, respectively. Employment Contracts The Company enters into employment agreements with members of its leadership team to ensure a stable and competent management base. The agreements provide for terms of six months to three years, with automatic extensions. The agreements provide for benefits as spelled out in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers’ rights to receive certain vested rights, including compensation. In the event of a change in control of the Company and in certain other events, as defined in the agreements, the Company or any successor to the Company will be bound to the terms of the contracts. Postretirement Benefit Plan The Company has one supplemental executive retirement plan whereby benefits are payable at retirement over a fifteen year period. The estimated liability is being accrued over the expected remaining years of employment. Expenses incurred for benefits relating to the postretirement benefit plan were $159,312 and $146,671 for the years 2018 and 2017, respectively. The accrued liability recorded on the balance sheet related to the plan was $582,256 and $422,944 at December 31, 2018 and 2017, respectively.


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(15) Employee and Director Benefit Plans, continued Stock Option Plans In October 2006, the Company’s stockholders approved a Non-statutory Stock Option Plan ("the Director Plan") and an Incentive Stock Option Plan ("Employee Plan"). The maximum numbers of shares available for grant under the Director Plan and the Employee Plan are 364,606 each. Exercise prices for both plans are established at market value on the grant date. Under the plans, unissued options expired in August 2016. Options granted become exercisable in accordance with the vesting schedule specified by the Board of Directors in the Plan agreements. A portion of the options granted under the Director Plan vest immediately and the remaining balance vests over a three-year period with none vesting at the time of grant. The options granted under the Employee Plan vest over a five-year period with none vesting at the time of grant. All unexercised options expire 10 years after the date of grant. Option related compensation costs recorded during the years ended December 31, 2018 and 2017 totaled approximately $56,000 and $62,000, respectively. At December 31, 2018 and 2017, there was approximately $69,000 and $133,000 of total unrecognized expense related to outstanding stock options. This cost is expected to be recognized over a weighted average period of approximately one year. A summary of the changes in the Company’s option plans for the years ended December 31, 2018 and 2017 is as follows:

Outstanding Options

Number

Outstanding

Weighted Average Exercise

Price

Weighted Average

Remaining Contractual

Term Balance at December 31, 2016 702,962 $ 6.19 7.61 years

Options exercised (12,082) $ 5.90 - Options forfeited (18,112) $ 6.09 -

Balance at December 31, 2017 672,768 $ 5.34 5.52

Options exercised (57,594) $ 4.95 - Options forfeited (43,987) $ 5.27 -

Balance at December 31, 2018 571,187 $ 5.37 5.10

Exercisable at December 31, 2018 157,214

Warrants Organizers who personally guaranteed a portion of the Company’s organizational line of credit were granted warrants to purchase shares of the Company’s common stock. As part of the stock option and warrant exchange program, the Company's issued warrants are now exercisable for a period of ten years at an exercise price of $4.92 per share and were granted on a pro rata basis, based upon the dollar amount of a personal guarantee assumed by each organizer during the Company’s organization. These warrants vested immediately. There were no new warrants granted or exercised in 2018 or 2017. As of December 31, 2018 and 2017 there were 172,800 warrants outstanding. The warrants have a 10 year term from the date of grant and expire in 2023.


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(15) Employee and Director Benefit Plans, continued Restricted Stock Plan In 2015, the Company’s stockholders approved a Restricted Stock Plan. The Company has reserved 144,000 shares of its authorized but unissued common stock to be issued under the Plan. During 2017, the Company approved the grant of 31,800 shares of restricted stock under this plan. These shares of restricted stock have a five-year term, with all shares vesting ratably over five years of continued employment. At grant dates, the weighted average stock valued was $7.78 per share. The compensation cost for stock is amortized to expense over the vesting period. Total restricted stock compensation expense for 2017 was approximately $62,000. During 2018, the Company approved the grant of 22,000 shares of restricted stock under this plan. These shares of restricted stock had a five-year term, with all shares vesting ratably over five years of continued employment. At grant dates, the weighted average stock valued was $10.37 per share. The compensation cost for stock is amortized to expense over the vesting period. Total restricted stock compensation expense for 2018 was approximately $98,000.

(17) Subsequent Events

During the first quarter of 2019, Management closed a private placement offering in the amount of $15.2 million through the sale of common stock and newly issued series of convertible perpetual preferred stock. The capital was raised primarily through a single investor who also received a warrant for 150,000 shares of voting stock exercisable anytime over a 7 year period at $11.50 per share.

Aquesta Financial Holdings, Inc. and Subsidiaries Board of Directors and Executive Management

Aquesta Financial Holdings, Inc. and Aquesta Bank Board of Directors

James Borders, Jr. (Chairman) Spencer Cohn AC Control Company, Inc., President Castle Creek Capital, Vice President

Paul Dougovito Jon Dressler Banking Consultant Proprietor, Rare Roots Hospitality Group

Jim Engel J. David GoodrumPresident and Chief Executive Officer JD Goodrum Company Inc.

President and General Manager

Ginger Griffin Carol HouleGinger Griffin Marketing and Design, Principal Cognizant Technology Solutions

VP – Global Head of Digital Engineering Consulting

Paul Jaszewksi Charles Knox, Jr.Physicians Anesthesiologist The Knox Group,

American Anesthesiology of the South, PLLC Commercial Real Estate Broker and Developer

Craig Larsen Alison SmithREVITA Anti-Aging Center, Owner/CEO Smith Capital Inc., President

Executive Aquesta Bank OfficersJim Engel Tim Beck

President and Chief Executive Officer Chief Credit Officer

Kristin Couch Carrie HewittChief Financial Officer Chief Operations and Compliance Officer

Trey WeirChief Banking Officer

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Aquesta Financial Holdings, Inc. and SubsidiariesGeneral Corporate Information

Office Location19510 Jetton Road

Cornelius, North Carolina 28031Phone: (704) 439-4343

Fax: (704) 439-4344Website: www.aquestabank.com

Regulatory and Securities CounselWyrick Robbins Yates & Ponton L.L.P.

4101 Lake Boone Trail, Suite 300Raleigh, North Carolina 27607

Stock Transfer Agent Independent AuditorsContinental Stock Transfer & Trust Company Porter Keadle Moore, LLC

17 Battery Place 235 Peachtree Street, NENew York, New York 10004 Suite 1800

Atlanta, Georgia 30303

Annual Shareholders Meeting

The Annual Meeting of the shareholders of Aquesta Financial Holdings, Inc. will be held at Aquesta Bank Headquarters Building on June 18, 2019 at 5:00 pm in Cornelius, North Carolina.

Common Stock and Related Matters

The Bank’s outstanding common stock shares were held by approximately 320 holders of record (excluding shares held in street name) as of December 31, 2018. As of December 31, 2018, the Bank had 4,039,485shares of common stock outstanding. On January 16, 2018, the Company declared a 20 percent stock dividend in the form of a stock split for all shareholders on record as of February 3, 2018. A cash dividend was paid out on November 14, 2018 and December 22, 2017.

Market for Common Stock

On April 1, 2014, Aquesta Bank successfully completed its reorganization into a bank holding company, Aquesta Financial Holdings, Inc. (AQFH) (the "Company"). There is public trading market for the Company’s common stock under symbol AQFH. Shareholders received a letter along with a letter of transmittal that needs to be returned to the transfer agent in order to exchange shares. For more information, please contact investor relations by telephone or mail at the Bank’s corporate headquarters.

This Annual Report serves as the annual financial disclosure statement furnished pursuant to 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.

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Charleston Loan Production Office4000 Faber Place Dr.

Suite 300

North Charleston, SC 29405

843.242.1555

Rea Farms Branch Coming Soon!9915 Sandy Rock Pl.

Charlotte, NC 28277

Main Office 19510 Jetton Rd.

Cornelius, NC 28031

704.439.4343

Brawley Rd. Branch1078 Brawley School Rd.


704.439.1450

Williamson Rd. Branch 837 Williamson Rd.


704.439.1440

Davidson Branch 568 Jetton St.

Davidson, NC 28036

704.439.4350

Huntersville Branch 9906 Knockando Ln.

Huntersville, NC 28078

704.439.1430

Southpark Branch 4519 Sharon Rd.

Charlotte, NC 28211

704.804.7930

Wilmington Branch 901 Military Cutoff Rd. Wilmington, NC 28405

910.782.3830

Stock Symbol: AQFH

Going the distancewith our customers, community and shareholders.

2 0 1 8Annual Report

www.aquesta.com

Documents

Stock Symbol: AQFH · Southpark Branch 4519 Sharon Rd. Charlotte, NC 28211 704.804.7930 Wilmington Branch ... We believe that each new Aquesta client is a potential future ambassador