Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s
discussion and analysis is included to assist the reader in understanding our financial condition, results of operations,
and cash flow. This discussion should be reviewed in conjunction with the audited consolidated financial statements and accompanying
notes presented in Item 8 of this report and the supplemental financial data appearing throughout this report. Since the primary
asset of the Company is its wholly-owned subsidiary, most of the discussion and analysis relates to the Bank.
OVERVIEW
The
Company is a bank holding company headquartered in Charleston, South Carolina, with $653.3 million in assets as of December 31, 2022
and net income of $6.7 million for the year ended December 31, 2022. The Company offers a broad range of financial services through
its wholly owned subsidiary, the Bank. The Bank is a state-chartered commercial bank, which operates principally in the Charleston,
Dorchester, and Berkeley counties of South Carolina. The Bank’s original and current concept is to be a full service financial
institution specializing in personal service, responsiveness, and attention to detail to foster long-standing
relationships.
We
derive most of our income from interest on loans and investment securities. The primary source of funding for making these loans
and purchasing investment securities is our interest-bearing and non-interest-bearing deposits. Consequently, one of the key measures
of our success is the amount of net interest income, or the difference between the income on our interest-earning assets, such
as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread
between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
A
consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk
characteristics of the loan portfolio as affected by economic conditions such as rising interest rates and the financial performance
of borrowers. The reserve for credit losses consists of the allowance for loan losses (the “allowance”) and a reserve
for unfunded commitments (the “unfunded reserve”). The allowance provides for probable and estimable losses inherent
in our loan portfolio while the unfunded reserve provides for potential losses related to unfunded lending commitments. For a
detailed discussion on the allowance for loan losses, see “Allowance for Loan Losses”.
In
addition to earning interest on loans and investment securities, we earn income through fees and other expenses we charge to the
customer. The various components of other income and other expenses are described in the following discussion. The discussion
and analysis also identifies significant factors that have affected our financial position and operating results as of and for
the year ended December 31, 2022 as compared to December 31, 2021 and our operating results for 2021 compared to 2020, and should
be read in conjunction with the consolidated financial statements and the related notes included in this report. In addition,
a number of tables have been included to assist in the discussion.
The
following table sets forth certain summary financial information concerning the Company and its wholly-owned subsidiary for the
last five years. The information was derived from the audited consolidated financial statements. The information should be read
in conjunction with this section of the report, and the audited consolidated financial statements and notes, which are presented
in Item 8 of this report.
| |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | |
For
December 31: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
income | |
$ | 6,655,140 | | |
$ | 6,744,865 | | |
$ | 6,460,631 | | |
$ | 7,318,433 | | |
$ | 6,922,934 | |
Selected
year end balances: | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
assets | |
| 653,345,609 | | |
| 679,220,646 | | |
| 532,494,599 | | |
| 445,012,520 | | |
| 429,135,198 | |
Total
loans1 | |
| 331,848,376 | | |
| 309,406,617 | | |
| 333,768,406 | | |
| 279,134,958 | | |
| 275,863,705 | |
Investment
securities available for sale | |
| 271,172,226 | | |
| 212,347,489 | | |
| 134,819,818 | | |
| 100,449,956 | | |
| 119,668,874 | |
Interest-bearing
deposits at the Federal Reserve | |
| 12,999,135 | | |
| 128,971,429 | | |
| 42,348,085 | | |
| 39,320,526 | | |
| 25,506,784 | |
Earning
assets | |
| 616,019,737 | | |
| 650,725,535 | | |
| 510,936,309 | | |
| 418,905,440 | | |
| 421,039,363 | |
Total
deposits | |
| 598,670,258 | | |
| 609,191,576 | | |
| 462,197,631 | | |
| 379,191,655 | | |
| 382,378,388 | |
Total
shareholders’ equity | |
| 38,811,387 | | |
| 53,917,633 | | |
| 54,980,356 | | |
| 51,168,032 | | |
| 45,462,561 | |
Weighted
Average Shares Outstanding - basic | |
| 5,550,078 | | |
| 5,531,518 | | |
| 5,526,948 | | |
| 5,522,025 | | |
| 5,500,027 | |
Weighted
Average Shares Outstanding - diluted | |
| 5,644,698 | | |
| 5,680,482 | | |
| 5,678,543 | | |
| 5,588,090 | | |
| 5,589,012 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
For
the Year: | |
| | | |
| | | |
| | | |
| | | |
| | |
Selected
average balances: | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 656,833,125 | | |
$ | 589,379,985 | | |
$ | 502,628,318 | | |
$ | 440,615,140 | | |
$ | 430,495,412 | |
Total
loans1 | |
| 320,826,946 | | |
| 324,078,445 | | |
| 313,303,363 | | |
| 281,508,711 | | |
| 277,223,600 | |
Investment
securities available for sale | |
| 266,432,504 | | |
| 167,250,568 | | |
| 112,970,054 | | |
| 106,421,507 | | |
| 123,347,669 | |
Interest-bearing
deposits at the Federal Reserve | |
| 41,131,016 | | |
| 75,734,060 | | |
| 54,231,372 | | |
| 34,713,982 | | |
| 20,151,823 | |
Earning
assets | |
| 628,390,466 | | |
| 567,063,073 | | |
| 480,504,789 | | |
| 422,644,200 | | |
| 420,723,092 | |
Total
deposits | |
| 596,881,098 | | |
| 519,900,412 | | |
| 434,071,108 | | |
| 381,687,960 | | |
| 386,025,147 | |
Total
shareholders’ equity | |
| 43,602,112 | | |
| 54,838,166 | | |
| 54,021,647 | | |
| 49,242,545 | | |
| 43,691,359 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Performance
Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
Return
on average equity | |
| 15.26 | % | |
| 12.30 | % | |
| 11.96 | % | |
| 14.86 | % | |
| 15.85 | % |
Return
on average assets | |
| 1.01 | % | |
| 1.14 | % | |
| 1.29 | % | |
| 1.66 | % | |
| 1.61 | % |
Average
equity to average assets | |
| 6.64 | % | |
| 9.30 | % | |
| 10.75 | % | |
| 11.18 | % | |
| 10.15 | % |
Net
interest margin | |
| 3.01 | % | |
| 3.06 | % | |
| 3.52 | % | |
| 4.28 | % | |
| 4.15 | % |
Net
(recoveries) charge-offs to average loans | |
| 0.00 | % | |
| -0.02 | % | |
| 0.02 | % | |
| 0.14 | % | |
| -0.01 | % |
Allowance
for loan losses as a percentage of total loans2 | |
| 1.30 | % | |
| 1.43 | % | |
| 1.30 | % | |
| 1.46 | % | |
| 1.53 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Per
Share: | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic
income per common share3 | |
$ | 1.20 | | |
$ | 1.22 | | |
$ | 1.17 | | |
$ | 1.33 | | |
$ | 1.26 | |
Diluted
income per common share3 | |
$ | 1.18 | | |
$ | 1.19 | | |
$ | 1.14 | | |
$ | 1.31 | | |
$ | 1.24 | |
Year
end book value3 | |
$ | 6.99 | | |
$ | 9.73 | | |
$ | 9.96 | | |
$ | 9.25 | | |
$ | 8.25 | |
Dividends
per common share | |
$ | 0.68 | | |
$ | 0.78 | | |
$ | 0.66 | | |
$ | 0.74 | | |
$ | 0.58 | |
Dividend
payout ratio | |
| 56.73 | % | |
| 63.98 | % | |
| 56.44 | % | |
| 55.88 | % | |
| 54.68 | % |
Full
time employee equivalents | |
| 80 | | |
| 79 | | |
| 76 | | |
| 79 | | |
| 79 | |
| (1) | Including
mortgage loans to be sold. |
| (2) | Excluding
mortgage loans to be sold. |
| (3) | Adjusted to retroactively reflect 10% stock dividend issued during the year ended December 31, 2018. |
We
have adopted various accounting policies that govern the application of accounting principles generally accepted in the United
States (“GAAP”) and with general practices within the banking industry in the preparation of our consolidated financial
statements. Our significant accounting policies are set forth in the notes to the consolidated financial statements in Item 8
of this report.
Certain
accounting policies involve significant judgments and assumptions made by the Company that have a material impact on the carrying
value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment
and assumptions we use are based on factors that we believe to be reasonable under the circumstances. Because of the number of
judgments and assumptions that we make, actual results could differ and have a material impact on the carrying values of our assets
and liabilities and our results of operations.
We
consider our policy regarding the allowance for loan losses to be our most subjective accounting policy due to the significant
degree of judgment. We have developed what we believe to be appropriate policies and procedures for assessing the adequacy of
the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to our
loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory
examinations and the discovery of information with respect to borrowers, which were not known at the time of the issuance of the
consolidated financial statements. For additional discussion concerning our allowance for loan losses and related matters, see
“Allowance for Loan Losses”.
COVID-19
On
March 11, 2020, the World Health Organization (“WHO”) declared COVID-19 a pandemic. Due to orders issued by the governor
of South Carolina and in an abundance of caution for the health of our customers and employees, in March 2020 the Bank closed
lobbies to all 5 offices but remained fully operational. The Bank subsequently reopened all of the lobbies in June 2021.
As discussed elsewhere in the report (See “Part I – Paycheck
Protection Program” and Note 4 to the Company’s Notes to Consolidated Financial Statements included in Part II – Item
8 of this report), on March 27, 2020, the PPP was established under the CARES Act in response to the COVID-19 pandemic.
While
the impacts of COVID-19 and its variants appeared to create less economic disruption during 2022 as compared to 2021 and 2020,
COVID-19 continues to evolve, along with governmental support and/or restrictions in response to it. As of December 31, 2021, the
Bank had received 391 PPP forgiveness applications, in the amount of $49.1 million in principal, and submitted 361 applications and
decisions to the SBA, in the amount of $47.7 million in principal. Of the 391 PPP submissions, 351 loans, in the amount of $46.9
million, were forgiven as of December 31, 2021. The remaining 129 loans, in the amount of $8.4 million, were forgiven during the
year ended December 31, 2022. There were no PPP loans outstanding as of December 31, 2022. Upon forgiveness the Bank recognized the
deferred fee income in accordance with ASC 310-20. The Bank received processing fees of $2.4 million and recognized $0.4 million and
$1.3 million during the years ended December 31, 2022 and 2021, respectively.
Regulatory
agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), encouraged financial
institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of
the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive
actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for
working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related
to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the
CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed
on a loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier
of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short- term loan modifications made
on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning
in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively
impacted by COVID-19. During 2020, the Bank processed approximately $0.7 million in principal deferments to 84 customers, with
an aggregate loan balance of $29.7 million. The principal deferments represented 0.24% of our total loan portfolio as of December
31, 2020. The Bank did not process any principal deferments during the years ended December 31, 2022 and 2021. The Bank has examined
the payment accommodations granted to borrowers in response to COVID-19 and classified 9 loans, with an aggregate loan balance
of $4.0 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated
industry risk, and multiple deferral requests. All other borrowers were current prior to relief, were not experiencing financial
difficulty prior to COVID-19, and the Bank determined they were not considered TDRs. As of December 31, 2021, 4 of the TDRs were
removed from TDR status due to improvement in financial condition and sustained performance under the restructured terms, 2 TDRs
were paid off through refinancing into new loans at market terms, and 1 TDR was paid off. Two loans with a balance of $0.5 million
remained in TDR status as of December 31, 2021. Additionally, of the 75 customers that received payment accommodations that were
not classified as TDRs, 41 customers, with an aggregate loan balance of $9.9 million, had paid their loan in full as of December
31, 2021. An additional loan was removed from TDR status during 2022. The remaining loan with a balance of $0.1 million is paying
as agreed as of December 31, 2022. There are no loans that received payment accommodation past due greater than 30 days. The Bank
will continue to examine payment accommodations as requested by borrowers.
While
the effects of COVID-19 have impacted all industries to varying degrees, during 2020 the Bank assessed the retail and/or service,
food and beverage, and short-term rental industries in our geographic area as having a higher risk due to the possibility of the
primary source of repayment not materializing. These industries are dependent upon the hospitality industry and were affected
by the mandates issued by the Governor of South Carolina to limit occupancy or close for a period of time. Our loans in these
industries represented 3.96% of our loan portfolio at December 31, 2020 and were temporarily downgraded to our “Watch”
category during 2020. In May 2021, due to improving economic conditions, increased vaccination rates and a continued reopening
of the South Carolina economy, these loans were upgraded to our “Satisfactory” category.
Effects
of COVID-19 or its variants may still negatively impact management assumptions and estimates, such as the allowance for loan losses.
However, it is difficult to assess or predict how, and to what extent, COVID-19 will affect the Bank in the future.
COMPARISON
OF THE YEAR ENDED DECEMBER 31, 2022 TO DECEMBER 31, 2021
Net
income decreased $0.1 million or 1.3% to $6.66 million, or basic and diluted income per share of $1.20 and $1.18, respectively,
for the year ended December 31, 2022 from $6.74 million or basic and diluted income per share of $1.22 and $1.19, respectively,
for the year ended December 31, 2021. This decrease was primarily due to lower mortgage banking income and gains on sales of securities
largely offset by higher average earning asset balances coupled with increased asset yields in our investment securities and a reduction in the provision for loan losses. Our
returns on average assets and average equity for the year ended December 31, 2022 were 1.01% and 15.26%, respectively, compared
to 1.14% and 12.30%, respectively, for the year ended December 31, 2021.
Net
interest income increased $1.5 million or 8.74% to $18.9 million for the year ended December 31, 2022 from $17.4 million for the
year ended December 31, 2021. This increase was primarily due to higher balances of average earning assets coupled with an increase
in asset yields on our investment securities and increased interest rates on variable rate loans and new originations and renewals
of fixed rate loans.
Average
earning assets increased $61.3 million or 10.81% to $628.4 million for the year ended December 31, 2022 from $567.1 million for
the year ended December 31, 2021. This is primarily related to an increase in the average balance of investment securities and
interest-bearing deposits at the Federal Reserve and, to a lesser extent, loans. The increase in investment securities and interest-bearing
balances at the Federal Reserve reflect the deployment of excess funds resulting from a $77.0 million increase in average deposits
during the year.
We
recorded a $75,000 reduction to the allowance for loan losses for the year ended December 31, 2022 compared to a provision for
loan losses of $120,000 for the year ended December 31, 2021. The decrease was primarily driven by the composition of our loan
portfolio in accordance with our allowance for loan loss methodology and our analysis of the adequacy of the allowance for loan
losses. The Board of Directors determined that this provision was appropriate based upon the adequacy of our reserve. Charge-offs
of $42,644 and recoveries of $31,878, together with the reduction in the allowance, resulted in an allowance for loan losses of
$4.3 million or 1.30% of total loans as of December 31, 2022.
Other
income decreased $1.8 million or 46.62% to $2.1 million for the year ended December 31, 2022, from $3.9 million for the year ended
December 31, 2021. Other income reflects lower mortgage banking income and decreases in gain on sales of securities of $0.2 million.
Our mortgage banking income decreased $1.6 million or 71.17% to $0.7 million for the year ended December 31, 2022 from $2.3 million
for the year ended December 31, 2021 due to decreased volume associated with the higher interest rate environment experienced
in 2022. Mortgage banking income is highly influenced by mortgage interest rates and the housing market.
Other
expense increased $0.1 million or 0.77% to $12.4 million for the year ended December 31, 2022, from $12.3 million for the year
ended December 31, 2021. Salaries and employee benefits increased approximately $0.1 million, or 1.47%, due to increased benefits,
payroll taxes and other employee-related costs. Net occupancy expense increased approximately $0.1 million due to rent escalation
provisions in certain of our leases. Other operating expenses decreased $0.1 million, or 0.77%.
For
the year ended December 31, 2022, the Company’s effective tax rate was 22.91% compared to 23.50% during the year ended December
31, 2021.
COMPARISON
OF THE YEAR ENDED DECEMBER 31, 2021 TO DECEMBER 31, 2020
Net
income increased $0.2 million or 4.40% to $6.7 million, or basic and diluted income per share of $1.22 and $1.19, respectively,
for the year ended December 31, 2021 from $6.5 million or basic and diluted income per share of $1.17 and $1.14, respectively,
for the year ended December 31, 2020. This increase was primarily due to higher average earning asset balances coupled with a
decline in our cost of funds. Our returns on average assets and average equity for the year ended December 31, 2021 were 1.14%
and 12.30%, respectively, compared to 1.29% and 11.96%, respectively, for the year ended December 31, 2020.
Net
interest income increased $0.5 million or 2.61% to $17.4 million for the year ended December 31, 2021 from $16.9 million for the
year ended December 31, 2020. This increase was primarily due to an increase in interest and fees on PPP loans and investment
securities. Interest and fees on loans and investment securities increased $0.4 million or 2.35% to $17.1 million for the year
ended December 31, 2021 from $16.7 million for the year ended December 31, 2020, as the result of higher balances of average earning
assets.
Average
earning assets increased $86.6 million or 18.01% to $567.1 million for the year ended December 31, 2021 from $480.5 million for
the year ended December 31, 2020. This is primarily related to an increase in the average balance of investment securities and
interest-bearing deposits at the Federal Reserve and, to a lesser extent, loans. The increase in investment securities and interest-bearing
balances at the Federal Reserve reflect the deployment of excess funds resulting from an $85.8 million increase in average deposits
during the year.
The
provision to the allowance for loan losses for the year ended December 31, 2021 was $120,000 compared to $240,000 for the year
ended December 31, 2020. The decrease was primarily driven by the composition of our loan portfolio in accordance with our allowance
for loan loss methodology. The Board of Directors determined that this provision was appropriate based upon the adequacy of our
reserve. Charge-offs of $20,990 and recoveries of $92,283, together with the provision to the allowance, resulted in an allowance
for loan losses of $4.4 million or 1.43% of total loans as of December 31, 2021. The allowance for loan losses is 1.47% of total
loans net of PPP loans.
Other
income increased $0.5 million or 13.61% to $3.9 million for the year ended December 31, 2021, from $3.4 million for the year ended December
31, 2020. Other income reflects increases in gain on sales of securities of $0.3 million and service charges and fees of $0.2 million.
Our mortgage banking income increased $46,700 or 2.06% to $2.3 million for the year ended December 31, 2021 from $2.3 million for the
year ended December 31, 2020 due to elevated volume associated with a continuation of the low interest rate environment. Mortgage banking
income is highly influenced by mortgage interest rates and the housing market.
Other
expense increased $0.6 million or 5.45% to $12.3 million for the year ended December 31, 2021, from $11.7 million for the year
ended December 31, 2020. Salaries and employee benefits increased approximately $0.2 million, or 3.03%, due to increased benefits,
payroll taxes and other employee-related costs. Net occupancy expense increased approximately $0.2 million due to rent escalation
provisions in certain of our leases. Other operating expense increased $0.2 million, or 14.45%, due to certain loan-related costs
and higher FDIC insurance assessments resulting from an increase in deposit balances.
For
the year ended December 31, 2021, the Company’s effective tax rate was 23.50% compared to 23.33% during the year ended December
31, 2020.
ASSET
AND LIABILITY MANAGEMENT
We
manage our assets and liabilities to ensure there is sufficient liquidity to enable management to fund deposit withdrawals, loan
demand, capital expenditures, reserve requirements, operating expenses, and dividends; and to manage daily operations on an ongoing
basis. Funds are primarily provided by the Bank through customer deposits, principal and interest payments on loans, mortgage
loan sales, the sale or maturity of securities, temporary investments and earnings. The Asset Liability/Investment Committee (“ALCO”)
manages asset and liability procedures though the ultimate responsibility rests with the President/Chief Executive Officer. At
December 31, 2022, total assets decreased 3.81% to $653.3 million from $679.2 million as of December 31, 2021 and total deposits
decreased 1.73% to $598.7 million from $609.2 million as of December 31, 2021.
As
of December 31, 2022, earning assets, which are composed of U.S. Treasury, Government Sponsored Enterprises and Municipal
Securities in the amount of $271.2 million, interest-bearing deposits at the Federal Reserve in the amount of $13.0 million
and total loans, including mortgage loans held for sale, in the amount of $331.8 million, constituted approximately 94.29% of
our total assets.
The
yield on a majority of our earning assets adjusts in tandem with changes in the general level of interest rates. Some of the Company’s
liabilities are issued with fixed terms and can be repriced only at maturity.
MARKET
RISK
Market
risk is the risk of loss from adverse changes in market prices and interest rates. Our risk consists primarily of interest rate
risk in our lending and investing activities as they relate to the funding by deposit and borrowing activities.
Our
policy is to minimize interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities
and to attempt to maintain an asset sensitive position over a one-year period. By adhering to this policy, we anticipate that
our net interest margins will not be materially affected, unless there is an extraordinary and or precipitous change in interest
rates. The average net interest rate margin for 2022 decreased to 3.01% from 3.06% for 2021. At December 31, 2022 and 2021, our
net cumulative gap was liability sensitive for periods less than one year and asset sensitive for periods of one year or more.
The reason for the shift in sensitivity is the direct result of management’s strategic decision to invest excess funds held
at the Federal Reserve into fixed rate investment securities that match our investment policy objectives. Management is aware
of this departure from policy and will continue to closely monitor our sensitivity position going forward.
Since
the rates on most of our interest-bearing liabilities can vary on a daily basis, we continue to maintain a loan portfolio priced
predominately on a variable rate basis. However, in an effort to protect future earnings in a declining rate environment, we offer
certain fixed rates, interest rate floors, and terms primarily associated with real estate transactions. We seek stable, long-term
deposit relationships to fund our loan portfolio. Furthermore, we do not have any brokered deposits or internet deposits.
At
December 31, 2022, the average maturity of the investment portfolio was 3.45 years with an average yield of 1.18% compared to
4.76 years with an average yield of 1.02% at December 31, 2021.
We
do not take foreign exchange or commodity risks. In addition, we do not own mortgage-backed securities, nor do we have any exposure
to the sub-prime market or any other distressed debt instruments.
The
following table summarizes our interest sensitivity position as of December 31, 2022.
| |
One
Day | | |
Less
than three months | | |
Three
months to less than six months | | |
Six
months to less than one year | | |
One
year to less than five years | | |
Five
years or more | | |
Total | | |
Estimated
Fair Value | |
(in
thousands) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-earning
assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans1 | |
$ | 73,798 | | |
$ | 19,037 | | |
$ | 13,451 | | |
$ | 22,603 | | |
$ | 167,122 | | |
$ | 35,996 | | |
$ | 332,007 | | |
$ | 304,250 | |
Investment
securities available for sale2 | |
| — | | |
| 7,462 | | |
| 9,919 | | |
| 25,341 | | |
| 212,327 | | |
| 41,948 | | |
| 296,997 | | |
| 271,172 | |
Interest-bearing
deposits at the Federal Reserve | |
| 12,999 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 12,999 | | |
| 12,999 | |
Total | |
$ | 86,797 | | |
$ | 26,499 | | |
$ | 23,370 | | |
$ | 47,944 | | |
$ | 379,449 | | |
$ | 77,944 | | |
$ | 642,003 | | |
$ | 588,421 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing
liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
CD’s
and other time deposits less than $250,000 | |
$ | — | | |
$ | 3,852 | | |
$ | 2,269 | | |
$ | 3,643 | | |
$ | 1,502 | | |
$ | — | | |
$ | 11,266 | | |
$ | 14,156 | |
CD’s
and other time deposits $250,000
and over | |
| — | | |
| 2,088 | | |
| 549 | | |
| 2,667 | | |
| — | | |
| — | | |
| 5,304 | | |
| 7,272 | |
Money
Market and Interest Bearing Demand Accounts | |
| 296,235 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 296,235 | | |
| 518,276 | |
Savings | |
| 63,825 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 63,825 | | |
| 63,825 | |
Total | |
$ | 360,060 | | |
$ | 5,940 | | |
$ | 2,818 | | |
$ | 6,310 | | |
$ | 1,502 | | |
$ | — | | |
$ | 376,630 | | |
$ | 603,529 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net | |
$ | (276,263 | ) | |
$ | 20,559 | | |
$ | 20,552 | | |
$ | 41,634 | | |
$ | 377,947 | | |
$ | 77,944 | | |
$ | 265,373 | | |
| | |
Cumulative | |
| | | |
$ | (252,704 | ) | |
$ | (232,152 | ) | |
$ | (190,518 | ) | |
$ | 187,429 | | |
$ | 265,374 | | |
| | | |
| | |
| (1) | Including mortgage loans to be sold and deferred fees. |
| (2) | At amortized cost based on the earlier of the call date or scheduled maturity. |
LIQUIDITY
Historically,
we have maintained our liquidity at levels believed by management to be adequate to meet requirements of normal operations, potential
deposit outflows and strong loan demand and still allow for optimal investment of funds and return on assets.
The
following table summarizes future contractual obligations as of December 31, 2022.
| |
Total | | |
Less
than one year | | |
One
to five years | | |
After
five years | |
Contractual
Obligations | |
| | | |
| | | |
| | | |
| | |
(in
thousands) | |
| | | |
| | | |
| | | |
| | |
Time
deposits | |
$ | 16,569 | | |
$ | 14,829 | | |
$ | 1,740 | | |
$ | — | |
Operating
leases | |
| 18,223 | | |
| 1,183 | | |
| 5,914 | | |
| 11,126 | |
Total
contractual cash obligations | |
$ | 34,792 | | |
$ | 16,012 | | |
$ | 7,416 | | |
$ | 11,126 | |
Proper
liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet
the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our
primary liquid assets are cash and due from banks, investment securities available for sale, interest-bearing deposits at the
Federal Reserve, and mortgage loans held for sale. Our primary liquid assets accounted for 45.89% and 52.30% of total assets
at December 31, 2022 and 2021, respectively. Investment securities classified as available for sale, which are not pledged,
may be sold in response to changes in interest rates and liquidity needs. All of the investment securities presently owned
are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary
sources of liquidity. At December 31, 2022, we had unused short-term lines of credit totaling approximately $41 million
(which can be withdrawn at the lender’s option). Additional sources of funds available to us for liquidity include
increasing deposits by raising interest rates paid and selling mortgage loans held for sale. We also established a
Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits us to retain possession of assets pledged
as collateral to secure advances from the Federal Reserve Discount Window. At December 31, 2022, we could borrow up to $78.3
million.
Our
core deposits consist of non-interest bearing demand accounts, NOW accounts, money market accounts, time deposits and savings
accounts. We closely monitor our reliance on certificates of deposit greater than $250,000 and other large deposits. We maintain
a Contingency Funding Plan (“CFP”) that identifies liquidity needs and weighs alternate courses of action designed
to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate
the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate
to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect
on our liquidity position. At December 31, 2022 and 2021, our liquidity ratio was 48.09% and 56.43%, respectively.
The
following table shows the composition of average assets over the past five fiscal years.
| |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | |
Loans1 | |
$ | 320,826,946 | | |
$ | 324,078,445 | | |
$ | 313,303,363 | | |
$ | 277,395,432 | | |
$ | 277,223,600 | |
Investment
securities available for sale | |
| 266,432,504 | | |
| 167,250,568 | | |
| 112,970,054 | | |
| 106,421,507 | | |
| 123,347,669 | |
Interest-bearing
deposits at the Federal Reserve | |
| 41,131,016 | | |
| 75,734,060 | | |
| 54,231,372 | | |
| 34,713,982 | | |
| 20,151,823 | |
Non-earning
assets | |
| 28,442,659 | | |
| 22,316,912 | | |
| 22,123,529 | | |
| 22,084,219 | | |
| 9,772,320 | |
Total
average assets | |
$ | 656,833,125 | | |
$ | 589,379,985 | | |
$ | 502,628,318 | | |
$ | 440,615,140 | | |
$ | 430,495,412 | |
| 1 | Including
mortgage loans to be sold and deferred fees. |
ANALYSIS
OF CHANGES IN NET INTEREST INCOME
The
following table shows changes in interest income and expense based upon changes in volume and changes in rates.
| |
2022
vs. 2021 | | |
2021
vs. 2020 | | |
2020
vs. 2019 | |
| |
Volume | | |
Rate | | |
Net
Dollar Change1 | | |
Volume | | |
Rate | | |
Net Dollar Change1 | | |
Volume | | |
Rate | | |
Net
Dollar Change1 | |
Loans2 | |
$ | (153,327 | ) | |
$ | 545,916 | | |
$ | 392,589 | | |
$ | 519,830 | | |
$ | (290,799 | ) | |
$ | 229,031 | | |
$ | 1,798,561 | | |
$ | (2,736,870 | ) | |
$ | (938,309 | ) |
Investment
securities available for sale | |
| 1,274,919 | | |
| (320,851 | ) | |
| 954,068 | | |
| 963,531 | | |
| (800,492 | ) | |
| 163,039 | | |
| 136,175 | | |
| (324,518 | ) | |
| (188,343 | ) |
Interest-bearing
deposits at the Federal Reserve | |
| (47,994 | ) | |
| 348,709 | | |
| 300,715 | | |
| 72,342 | | |
| (153,057 | ) | |
| (80,715 | ) | |
| 409,494 | | |
| (955,338 | ) | |
| (545,844 | ) |
Interest
income | |
$ | 1,073,598 | | |
$ | 573,774 | | |
$ | 1,647,372 | | |
$ | 1,555,703 | | |
$ | (1,244,348 | ) | |
$ | 311,355 | | |
$ | 2,344,230 | | |
$ | (4,016,726 | ) | |
$ | (1,672,496 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing transaction accounts | |
$ | 12,170 | | |
$ | 121,959 | | |
$ | 134,129 | | |
$ | 25,230 | | |
$ | (103,212 | ) | |
$ | (77,982 | ) | |
$ | 56,917 | | |
$ | (443,183 | ) | |
$ | (386,266 | ) |
Savings | |
| 12,094 | | |
| — | | |
| 12,094 | | |
| 10,278 | | |
| (21,710 | ) | |
| (11,432 | ) | |
| 23,542 | | |
| (81,423 | ) | |
| (57,881 | ) |
Time
deposits | |
| (5,559 | ) | |
| (12,871 | ) | |
| (18,430 | ) | |
| (2,531 | ) | |
| (39,469 | ) | |
| (42,000 | ) | |
| (34,106 | ) | |
| (31,504 | ) | |
| (65,610 | ) |
Interest
expense | |
$ | 18,705 | | |
$ | 109,088 | | |
$ | 127,793 | | |
$ | 32,977 | | |
$ | (164,391 | ) | |
$ | (131,414 | ) | |
$ | 46,353 | | |
$ | (556,110 | ) | |
$ | (509,757 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Increase
(decrease) in net interest income | |
| | | |
| | | |
$ | 1,519,579 | | |
| | | |
| | | |
$ | 442,769 | | |
| | | |
| | | |
$ | (1,162,739 | ) |
| (1) | Volume/rate
changes have been allocated to each category based on the percentage of each change to
the total change. |
| (2) | Including
mortgage loans to be sold. |
YIELDS
ON AVERAGE EARNING ASSETS AND RATES ON AVERAGE INTEREST-BEARING LIABILITIES
The
following table shows the yields on average earning assets and average interest-bearing liabilities.
| |
2022 | | |
2021 | | |
2020 | |
| |
Average
Balance | | |
Interest
Paid/Earned | | |
Average
Yield/Rate1 | | |
Average
Balance | | |
Interest
Paid/Earned | | |
Average
Yield/Rate1 | | |
Average
Balance | | |
Interest
Paid/Earned | | |
Average
Yield/Rate1 | |
Interest-earning
assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans2 | |
$ | 320,826,946 | | |
$ | 15,677,601 | | |
| 4.89 | % | |
$ | 324,078,445 | | |
$ | 15,285,012 | | |
| 4.72 | % | |
$ | 313,303,363 | | |
$ | 15,055,981 | | |
| 4.81 | % |
Investment
Securities Available for Sale | |
| 266,432,504 | | |
| 3,116,858 | | |
| 1.17 | % | |
| 167,250,568 | | |
| 2,162,790 | | |
| 1.29 | % | |
| 112,970,054 | | |
| 1,999,751 | | |
| 1.77 | % |
Federal
Funds Sold & Interest bearing deposits | |
| 41,131,016 | | |
| 404,024 | | |
| 0.98 | % | |
| 75,734,060 | | |
| 103,309 | | |
| 0.14 | % | |
| 54,231,372 | | |
| 184,024 | | |
| 0.34 | % |
Total
earning assets | |
$ | 628,390,466 | | |
$ | 19,198,483 | | |
| 3.06 | % | |
$ | 567,063,073 | | |
$ | 17,551,111 | | |
| 3.10 | % | |
$ | 480,504,789 | | |
$ | 17,239,756 | | |
| 3.59 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing
liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing
transaction accounts | |
$ | 269,510,451 | | |
$ | 222,493 | | |
| 0.08 | % | |
$ | 242,617,530 | | |
$ | 88,364 | | |
| 0.04 | % | |
$ | 208,940,724 | | |
$ | 166,346 | | |
| 0.08 | % |
Savings | |
| 65,816,763 | | |
| 40,488 | | |
| 0.06 | % | |
| 51,608,804 | | |
| 28,394 | | |
| 0.06 | % | |
| 40,770,588 | | |
| 39,826 | | |
| 0.10 | % |
Time
Deposits | |
| 18,443,811 | | |
| 38,812 | | |
| 0.21 | % | |
| 20,435,199 | | |
| 57,242 | | |
| 0.28 | % | |
| 20,964,940 | | |
| 99,242 | | |
| 0.47 | % |
| |
$ | 353,771,025 | | |
$ | 301,793 | | |
| 0.09 | % | |
$ | 314,661,533 | | |
$ | 174,000 | | |
| 0.06 | % | |
$ | 270,676,252 | | |
$ | 305,414 | | |
| 0.11 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
interest spread | |
| | | |
| | | |
| 2.97 | % | |
| | | |
| | | |
| 3.04 | % | |
| | | |
| | | |
| 3.48 | % |
Net
interest margin | |
| | | |
| | | |
| 3.01 | % | |
| | | |
| | | |
| 3.06 | % | |
| | | |
| | | |
| 3.52 | % |
Net
interest income | |
| | | |
$ | 18,896,690 | | |
| | | |
| | | |
$ | 17,377,111 | | |
| | | |
| | | |
$ | 16,934,342 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| (1) | The
effect of forgone interest income as a result of non-accrual loans was not considered
in the above analysis. |
| (2) | Average
balance includes non-accrual loans and mortgage loans to be sold. |
INVESTMENT
PORTFOLIO
The
following tables summarize the carrying value of investment securities as of the indicated dates and the weighted-average yields
of those securities at December 31, 2022. Weighted-average yields are determined based on the amortized cost and book yield of
the individual investment securities comprising each investment security type and maturity classification.
| |
Amortized
Cost | | |
| |
| |
Within
One Year | | |
After
One Year through Five Years | | |
After
Five Years through Ten Years | | |
After
Ten Years | | |
Total | | |
Estimated
Fair Value | |
(in
thousands) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S.
Treasury Notes | |
$ | 25,341 | | |
$ | 154,957 | | |
$ | — | | |
$ | — | | |
$ | 180,298 | | |
$ | 168,187 | |
Government-Sponsored
Enterprises | |
| 4,998 | | |
| 20,000 | | |
| 42,387 | | |
| — | | |
| 67,385 | | |
| 57,075 | |
Municipal
Securities | |
| 12,383 | | |
| 15,613 | | |
| 11,609 | | |
| 9,710 | | |
| 49,315 | | |
| 45,910 | |
Total | |
$ | 42,722 | | |
$ | 190,570 | | |
$ | 53,996 | | |
$ | 9,710 | | |
$ | 296,998 | | |
$ | 271,172 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted
average yields | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S.
Treasury Notes | |
| 0.32 | % | |
| 1.11 | % | |
| 0.00 | % | |
| 0.00 | % | |
| | | |
| | |
Government-Sponsored
Enterprises | |
| 0.52 | % | |
| 0.90 | % | |
| 1.23 | % | |
| 0.00 | % | |
| | | |
| | |
Municipal
Securities | |
| 1.85 | % | |
| 1.62 | % | |
| 1.76 | % | |
| 2.05 | % | |
| | | |
| | |
Total | |
| 0.79 | % | |
| 1.13 | % | |
| 1.34 | % | |
| 2.05 | % | |
| 1.17 | % | |
| | |
The following tables present
the amortized cost and estimated fair value of investment securities for the past three years.
December 31, 2022 | |
Amortized
Cost | | |
Estimated Fair
Value | |
(in thousands) | |
| | | |
| | |
U.S. Treasury Notes | |
$ | 180,298 | | |
$ | 168,187 | |
Government-Sponsored Enterprises | |
| 67,385 | | |
| 57,075 | |
Municipal Securities | |
| 49,315 | | |
| 45,910 | |
| |
| | | |
| | |
Total | |
$ | 296,998 | | |
$ | 271,172 | |
December 31, 2021 | |
Amortized
Cost | | |
Estimated Fair
Value | |
(in thousands) | |
| | | |
| | |
U.S. Treasury Notes | |
$ | 101,270 | | |
$ | 100,062 | |
Government-Sponsored Enterprises | |
| 76,356 | | |
| 74,721 | |
Municipal Securities | |
| 37,422 | | |
| 37,564 | |
| |
| | | |
| | |
Total | |
$ | 215,048 | | |
$ | 212,347 | |
December 31, 2020 | |
Amortized
Cost | | |
Estimated Fair
Value | |
(in thousands) | |
| | | |
| | |
U.S. Treasury Notes | |
$ | 20,037 | | |
$ | 20,411 | |
Government-Sponsored Enterprises | |
| 96,614 | | |
| 97,853 | |
Municipal Securities | |
| 16,055 | | |
| 16,556 | |
| |
| | | |
| | |
Total | |
$ | 132,706 | | |
$ | 134,820 | |
As of December 31, 2022, we had
25 U.S. Treasury Notes and 77 Municipal Securities with an unrealized loss of $12.1 million and $3.4 million, respectively. As of
December 31, 2021, we had fifteen U.S. Treasury Notes and nineteen Municipal Securities with an unrealized loss of $1.3 million and
$0.2 million, respectively. As of December 31, 2020, we had no U.S. Treasury Notes or Municipal Securities with an unrealized loss.
As of December 31, 2022, we had 11 securities issued by Government-Sponsored Enterprises with an unrealized loss of $10.3 million
compared to nine Government-Sponsored Enterprises with an unrealized loss of $1.9 million as of December 31, 2021. The unrealized
losses on these securities are related to changes in the interest rate environment from the date of purchase. The contractual terms
of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.
Therefore, these investments are not considered other-than-temporarily impaired. We have the ability to hold these investments until
market price recovery or maturity.
The primary purpose of the
investment portfolio is to fund loan demand, manage fluctuations in deposits and liquidity, satisfy pledging requirements and generate
a favorable return on investment. In doing these things, our main objective is to adhere to sound investment practices. To that
end, all purchases and sales of investment securities are made through reputable securities dealers that have been approved by
the Board of Directors. The Board of Directors of the Bank reviews the entire investment portfolio at each regular monthly meeting,
including any purchases, sales, calls, and maturities during the previous month. Furthermore, the Credit Department conducts a
financial underwriting assessment of all municipal securities and their corresponding municipalities annually and management reviews
the assessments.
LOAN PORTFOLIO COMPOSITION
We focus our lending activities
on small and middle market businesses, professionals and individuals in our geographic market. At December 31, 2022, outstanding
loans (including deferred loan fees of $159,434) totaled $331.0 million, which equaled 55.29% of total deposits and 50.66% of total
assets.
The following table presents
our loan portfolio, excluding both mortgage loans to be sold and deferred loan fees, as of December 31, 2022, compared to the prior
four years.
(in thousands) | |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | |
Commercial | |
$ | 45,072 | | |
$ | 45,804 | | |
$ | 51,041 | | |
$ | 52,848 | | |
$ | 54,829 | |
Commercial real estate construction | |
| 17,524 | | |
| 12,054 | | |
| 14,814 | | |
| 12,491 | | |
| 7,304 | |
Commercial real estate other | |
| 172,897 | | |
| 165,719 | | |
| 146,188 | | |
| 143,824 | | |
| 143,703 | |
Consumer real estate | |
| 91,637 | | |
| 71,307 | | |
| 71,836 | | |
| 59,532 | | |
| 63,787 | |
Consumer other | |
| 3,852 | | |
| 3,769 | | |
| 4,481 | | |
| 5,378 | | |
| 5,040 | |
Paycheck protection program | |
| — | | |
| 7,979 | | |
| 32,443 | | |
| — | | |
| — | |
Total | |
$ | 330,982 | | |
$ | 306,632 | | |
$ | 320,803 | | |
$ | 274,073 | | |
$ | 274,663 | |
During the year ended December 31, 2022, total loans
increased $24.3 million. This is primarily due to growth in our consumer real estate and commercial real estate portfolios.
We had no foreign loans or loans to fund leveraged
buyouts at any time during the years ended December 31, 2018 through December 31, 2022.
The following table presents
the contractual terms to maturity for loans outstanding at December 31, 2022. Overdrafts are reported as due in one year or less.
The table does not include an estimate of prepayments, which can significantly affect the average life of loans and may cause our
actual principal experience to differ from that shown.
| |
Selected Loan Maturity as of December 31, 2022 | |
(in thousands) | |
One Year or Less | | |
Over One Year
but Less Than 5
Years | | |
After 5 Years
Through 15
Years | | |
Over 15
Years | | |
Total | |
Commercial | |
$ | 17,634 | | |
$ | 25,142 | | |
$ | 2,296 | | |
$ | — | | |
$ | 45,072 | |
Commercial real estate construction | |
| 3,734 | | |
| 13,790 | | |
| — | | |
| — | | |
| 17,524 | |
Commercial real estate other | |
| 28,684 | | |
| 138,107 | | |
| 4,007 | | |
| 2,099 | | |
| 172,897 | |
Consumer real estate | |
| 10,747 | | |
| 9,967 | | |
| 31,704 | | |
| 39,219 | | |
| 91,637 | |
Consumer other | |
| 1,498 | | |
| 2,354 | | |
| — | | |
| — | | |
| 3,852 | |
Paycheck protection program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 62,297 | | |
$ | 189,360 | | |
$ | 38,007 | | |
$ | 41,318 | | |
$ | 330,982 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Loans maturing after one year with: | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed interest rates | |
| | | |
| | | |
| | | |
| | | |
$ | 203,054 | |
Floating interest rates | |
| | | |
| | | |
| | | |
| | | |
| — | |
Total | |
| | | |
| | | |
| | | |
| | | |
$ | 203,054 | |
IMPAIRED LOANS
A loan is impaired when
it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based
on current information and events. All loans with a principal balance over $50,000 placed on non-accrual status are classified
as impaired. However, not all impaired loans are on non-accrual status nor do they all represent a loss.
Impairment loss is measured by:
| a. | The present value of the future cash flow discounted at the loan’s effective interest rate, or |
| b. | The fair value of the collateral if the loan is collateral dependent. |
The following is a schedule of our impaired loans
and non-accrual loans as of December 31, 2018 through 2022.
| |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | |
Nonaccrual loans | |
$ | 631,453 | | |
$ | 814,614 | | |
$ | 1,155,930 | | |
$ | 1,666,301 | | |
$ | 823,534 | |
Impaired loans | |
$ | 2,766,060 | | |
$ | 3,406,508 | | |
$ | 7,805,600 | | |
$ | 4,776,928 | | |
$ | 4,278,347 | |
Beginning in March 2020,
the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted
by COVID-19. During 2020, the Bank processed approximately $0.7 million in principal deferments to 84 customers, with an aggregate
loan balance of $29.7 million. The Bank did not process any principal deferments during the years ended December 31, 2022 and 2021.
The principal deferments represented 0.24% of our total loan portfolio as of December 31, 2020.
TROUBLED DEBT RESTRUCTURINGS
According to GAAP, we are
required to account for certain loan modifications or restructurings as a troubled debt restructuring (“TDR”), when
appropriate. In general, the modification or restructuring of a debt is considered a TDR if we, for economic or legal reasons related
to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. Three factors
must always be present:
| 1. | An existing credit must formally be renewed, extended, or modified, |
| 2. | The borrower is experiencing financial difficulties, and |
| 3. | We grant a concession that we would not otherwise consider. |
The following is a schedule of our TDR’s
including the number of loans represented.
| | |
| | |
| | |
| | |
| | |
| |
| | |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | |
Number of TDRs | | |
| 5 | | |
| 5 | | |
| 14 | | |
| 3 | | |
| — | |
Amount of TDRs | | |
$ | 971,150 | | |
$ | 1,039,909 | | |
$ | 5,803,163 | | |
$ | 573,473 | | |
$ | — | |
The Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20-35-9 allows a loan to be removed
from TDR status if the terms of the loan reflect current market rates and the loan has been performing under modified terms for
an extended period of time or under certain other circumstances.
Nine TDRs with a balance
of $4.7 million at December 31, 2020 were removed from TDR status during the year ended December 31, 2021. Five TDRs with a balance
of $3.8 million were removed from TDR status due to improvement in financial condition and sustained performance under the restructured
terms, two TDRs with a balance of $0.5 million were paid off, and two TDRs with a balance of $0.4 million were paid off through
refinancing into new loans at market terms. One TDR with a balance of $33,300 at December 31, 2017 was removed from TDR status
during the year ended December 31, 2018 since, at the most recent renewal, the loan was amortized at market rate and no concessions
were granted. We do not know of any potential problem loans which will not meet their contractual obligations that are not otherwise
discussed herein.
Regulatory agencies, as
set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected
by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial institutions to
work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of
COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that
may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with
borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19
may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act,
banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that
was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of December 31,
2020 or 60 days after the date of termination of the National Emergency. All short- term loan modifications made on a good faith
basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning in March 2020,
the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted
by COVID-19. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 9 loans,
with an aggregate loan balance of $4.0 million, that were granted payment accommodations as TDRs given the continued financial
difficulty of the customer, associated industry risk, and multiple deferral requests. As of December 31, 2021, 4 of the TDRs were
removed from TDR status due to improvement in financial condition and sustained performance under the restructured terms, 2 TDRs
were paid off through refinancing into new loans at market terms, and 1 TDR was paid off. Two loans with a balance of $0.5 million
remained in TDR status as of December 31, 2021. An additional loan was removed from TDR status during 2022. The remaining loan with a balance of $0.1 million is paying as agreed as of
December 31, 2022. The Bank will continue to examine payment accommodations as requested by the borrowers.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan
losses represents our estimate of probable losses inherent in our loan portfolio. The adequacy of the allowance for loan losses
(the “allowance”) is reviewed by the Loan Committee and by the Board of Directors on a quarterly basis. For purposes
of this analysis, adequacy is defined as a level sufficient to absorb estimated losses in the loan portfolio as of the balance
sheet date presented. To remain consistent with GAAP, the methodology employed for this analysis has been modified over the years
to reflect the economic environment and new accounting pronouncements. The Credit Department reviews this calculation on a quarterly
basis. In addition, an independent third party validates the allowance calculation on a periodic basis. The methodology is based
on a reserve model that is comprised of the three components listed below:
| 1) | Specific reserve analysis for impaired loans based on FASB ASC 310-10-35, Receivables - Overall |
| 2) | General reserve analysis applying historical loss rates based on FASB ASC 450-20, Contingencies: Loss Contingencies |
| 3) | Qualitative or environmental factors. |
Loans greater than $50,000 are
reviewed for impairment on a quarterly basis if any of the following criteria are met:
| 1) | The loan is on non-accrual |
| 2) | The loan is a troubled debt restructuring |
| 3) | The loan is over 60 days past due |
| 4) | The loan is rated substandard, doubtful, or loss |
| 5) | Excessive principal extensions are executed |
| 6) | If we are provided information that indicates we will not collect all principal and interest as scheduled |
Impairment is measured by
the present value of the future cash flow discounted at the loan’s effective interest rate or the fair value of the collateral
if the loan is collateral dependent. An impaired loan may not represent an expected loss.
A general reserve analysis
is performed on all loans, excluding impaired loans. This analysis includes a pool of loans that are reviewed for impairment but
are not found to be impaired. Loans are segregated into similar risk groups and a historical loss ratio is determined for each
group over a five-year period. The five-year average loss ratio by loan type is then used to calculate the estimated loss based
on the current balance of each group.
Qualitative and environmental
loss factors are also applied against the portfolio, excluding impaired loans. These factors include external risk factors that
we believe are representative of our overall lending environment. We believe that the following factors create a more comprehensive
loss projection, which we can use to monitor the quality of the loan portfolio.
| a) | Levels and trends in delinquencies and impaired loans and changes in loan rating matrix |
| b) | Trends in volume and terms of loans |
| c) | Over-margined real estate lending risk |
| 2) | National and local economic trends and conditions |
| 3) | Effects of changes in risk selection and underwriting practices |
| 4) | Experience, ability and depth of lending management staff |
| 6) | Effects of changes in credit concentrations |
| b) | Geographic concentration |
| c) | Regulatory concentration |
| 7) | Loan and credit administration risk |
| a) | Collateral documentation |
| c) | Maintenance of financial information risk |
Portfolio Risk
Portfolio risk includes
the levels and trends in delinquencies, impaired loans and changes in the loan rating matrix, trends in volume and terms of loans,
and over- margined real estate lending. We are satisfied with the stability of the past due and non-performing loans and believe
there has been no decline in the quality of our loan portfolio due to any trend in delinquent or adversely classified loans. Sizable
unsecured principal balances on a non-amortizing basis are monitored. Although the vast majority of our real estate loans are underwritten
on a cash flow basis, the secondary source of repayment is typically tied to our ability to realize the conversion of the collateral
to cash. Accordingly, we closely monitor loan to value ratios. The maximum collateral advance rate is 80% on all real estate transactions,
with the exception of raw land at 65% and land development at 70%.
Occasionally, we extend
credit beyond our normal collateral advance margins in real estate lending. We refer to these loans as over-margined real estate
loans. These loans are
monitored and the balances reported to the Board of Directors every quarter. An excessive level of this practice (as a percentage
of capital) could result in additional regulatory scrutiny, competitive disadvantages and potential losses if forced to convert
the collateral. The consideration of over-margined real estate loans directly relates to the capacity of the borrower to repay.
We often request additional collateral to bring the loan to value ratio within the policy objectives and require a strong secondary
source of repayment.
Although significantly under
our policy threshold of 100% of capital (currently approximately $38.8 million), the amount of over-margined real estate loans
currently totals approximately $2.9 million or approximately 0.88% of our loan portfolio at December 31, 2022 compared to $1.5
million or approximately 0.48% of the loan portfolio at December 31, 2021.
A credit rating matrix is used
to rate all extensions of credit and to provide a more specific picture of the risk each loan poses to the quality of the loan
portfolio. There are eight possible ratings used to determine the quality of each loan based on the following characteristics: cash
flow, collateral quality, guarantor strength, financial condition, management quality, operating performance, the relevancy of the
financial statements, historical loan performance, debt coverage ratio, and the borrower’s leverage position. The matrix is
designed to meet our standards and expectations of loan quality. It is based on experience with similarly graded loans, industry
best practices, and regulatory guidance. Our loan portfolio is graded in its entirety, with the exception of PPP loans. Because PPP
loans were 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they were not
graded. There were no PPP loans outstanding at December 31, 2022.
National and local
economic trends and conditions
National and local economic
trends and conditions are constantly changing and both positively and negatively impact borrowers. Most macroeconomic conditions
are not controllable by us and are incorporated into the qualitative risk factors. Natural and environmental disasters, including
the rise of sea levels, political uncertainty, increasing levels of consumer price inflation, supply-chain disruptions and international
instability are a few of the trends and conditions that are currently affecting the national and local economies. Additionally,
the national and local economy has been affected by COVID-19 during the years ended December 31, 2022 and 2021. These changes have
impacted borrowers’ ability, in many cases, to repay loans in a timely manner. On occasion, a loan’s primary source
of repayment (i.e. personal income, cash flow, or lease income) may be eroded as a result of unemployment, lack of revenues, or
the inability of a tenant to make rent payments.
Effects of changes
in risk selection and underwriting practices
The quality of our loan
portfolio is contingent upon our risk selection and underwriting practices. All new loans (except for mortgage loans in the
process of being sold to investors and loans secured by properly margined negotiable securities traded on an established
market or other cash collateral) with exposure over $300,000 are reviewed by the Loan Committee on a monthly basis. The Board
of Directors review credits over $750,000 monthly. Annual credit analyses are conducted on credits over $500,000 upon the
receipt of updated financial information. Prior to extensions of credit, significant loan opportunities go through sound
credit underwriting. Our Credit Department conducts a detailed cash flow analysis on each proposal using the most current
financial information.
Experience, ability
and depth of lending management staff
We have over 300 combined
years of lending experience among our lending staff. We are aware of the many challenges currently facing the banking industry.
As other banks look to increase earnings in the short term, we will continue to emphasize the need to maintain safe and sound lending
practices and core deposit growth managed with a long-term perspective.
Industry conditions
There continues to be an
influx of new banks and consolidation of existing banks in our geographic area, which creates pricing competition. We believe that
our borrowing base is well established and therefore unsound price competition is not necessary.
Effects of changes
in credit concentrations
The risks associated with
the effects of changes in credit concentration include loan, geographic and regulatory concentrations. As of December 31, 2022,
two Standard Industrial Code groups, activities related to real estate and redi-mix concrete, comprised more than 2% of our total
loans outstanding.
Effects of changes
in geographic concentrations
We are located along the
east coast of the United States and on an earthquake fault line, increasing the chances that a natural disaster may impact our
borrowers and us. We have a Disaster Recovery Plan in place; however, the amount of time it would take for our customers to return
to normal operations is unknown. Our plan is reviewed and tested annually.
Loan and credit
administration risk
Loan and credit administration
risk includes collateral documentation, insurance risk and maintaining financial information risk.
The majority of our loan portfolio
is collateralized with a variety of our borrowers’ assets. The execution and monitoring of the documentation to properly
secure the loan is the responsibility of our lenders and loan department. We require insurance coverage naming us as the mortgagee
or loss payee. Although insurance risk is also considered collateral documentation risk, the actual coverage, amounts of coverage
and increased deductibles are important to management.
Financial Information Risk
includes a function of time during which the borrower’s financial condition may change; therefore, keeping financial information
up to date is important to us. Our policy requires all new loans (with a credit exposure of $10,000 or more), regardless of the
customer’s history with us, to have updated financial information. In addition, we monitor appraisals closely as real estate
values are appreciating.
Based on our analysis of
the adequacy of the allowance for loan loss model, we recorded a reduction in the allowance for loan loss of $0.1 million for the
year ended December 31, 2022 compared to a provision for loan loss of $0.1 million for the year ended December 31, 2021. At December
31, 2022, the five-year average loss ratios were: 0.19% Commercial, 0.00% Commercial Real Estate Construction, -0.02% Commercial
Real Estate Other, -0.03% Consumer Real Estate, and 0.46% Consumer Other.
With regard to jumbo loans, we obtain peer data for use to calculate historical loss ratios. At December 31, 2022, the 5-year average
loss for the jumbo loan portfolio was 0.01%.
During the year ended December
31, 2022, charge-offs of $42,644 and recoveries of $31,878 were recorded to the allowance for loan losses, resulting in an allowance
for loan losses of $4.3 million or 1.30% of total loans at December 31, 2022. During the year ended December 31, 2021, charge-offs
of $20,990 and recoveries of $0.1 million were recorded to the allowance for loan losses, resulting in an allowance for loan losses
of $4.4 million or 1.43% of total loans at December 31, 2021. During the year ended December 31, 2020, charge-offs of $0.3 million
and recoveries of $0.2 million were recorded to the allowance for loan losses, resulting in an allowance for loan losses of $4.2
million or 1.30% of total loans at December 31, 2020. We believe loss exposure in the portfolio is identified, reserved against,
and closely monitored to ensure that economic changes are promptly addressed in the analysis of reserve adequacy.
The accrual of interest
is generally discontinued on loans which become 90 days past due as to principal or interest. The accrual of interest on some loans
may continue even though they are 90 days past due if the loans are well secured or in the process of collection and we deem it
appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of six to nine months, they
are reviewed individually to determine if they should be returned to accrual status. At December 31, 2022 and 2021, there were
no loans over 90 days past due still accruing interest.
The following table represents
a summary of loan loss experience for the past five years.
| |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | |
(in thousands) | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance of the allowance of loan losses at the
beginning of the period | |
$ | 4,377 | | |
$ | 4,186 | | |
$ | 4,004 | | |
$ | 4,214 | | |
$ | 3,875 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Charge-offs | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| (41 | ) | |
| — | | |
| (172 | ) | |
| (399 | ) | |
| (31 | ) |
Commercial Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial Real Estate Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Consumer Real Estate | |
| (2 | ) | |
| — | | |
| — | | |
| — | | |
| — | |
Consumer Other | |
| — | | |
| (11 | ) | |
| (116 | ) | |
| (8 | ) | |
| (85 | ) |
Paycheck Protection Program | |
| (0 | ) | |
| (10 | ) | |
| (2 | ) | |
| — | | |
| — | |
Total charge-offs | |
| (43 | ) | |
| (21 | ) | |
| (290 | ) | |
| (407 | ) | |
| (116 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Recoveries | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| 1 | | |
| 21 | | |
| 89 | | |
| 12 | | |
| 14 | |
Commercial Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial Real Estate Other | |
| 18 | | |
| — | | |
| 100 | | |
| — | | |
| 57 | |
Consumer Real Estate | |
| — | | |
| 48 | | |
| — | | |
| — | | |
| 45 | |
Consumer Other | |
| 12 | | |
| 22 | | |
| 43 | | |
| 5 | | |
| 14 | |
Paycheck Protection Program | |
| 1 | | |
| 1 | | |
| — | | |
| — | | |
| — | |
Total recoveries | |
| 32 | | |
| 92 | | |
| 232 | | |
| 17 | | |
| 130 | |
Net (charge-offs) recoveries | |
| (11 | ) | |
| 71 | | |
| (58 | ) | |
| (390 | ) | |
| 14 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Provision charged to operations | |
| (75 | ) | |
| 120 | | |
| 240 | | |
| 180 | | |
| 325 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance of the allowance for loan losses at the
end of the period |
|
$ | 4,291 | | |
$ | 4,377 | | |
$ | 4,186 | | |
$ | 4,004 | | |
$ | 4,214 | |
We believe the allowance for loan losses at December 31, 2022 is adequate to cover estimated losses in the loan portfolio;
however, assessing the adequacy of the allowance is a process that requires considerable judgment. Our judgments are based
on numerous assumptions about current events that we believe to be reasonable, but may or may not be valid. Thus, there can
be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in
the allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio in light of
changing economic conditions and other relevant circumstances will not require significant future additions to the allowance,
thus adversely affecting our operating results.
The following table presents
a breakdown of the allowance for loan losses for the past five years.
| |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | |
| |
$ | | |
%(1) | | |
$ | | |
%(1) | | |
$ | | |
%(1) | | |
$ | | |
%(1) | | |
$ | | |
%(1) | |
(in thousands) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 736 | | |
| 14 | % | |
$ | 796 | | |
| 15 | % | |
$ | 1,030 | | |
| 16 | % | |
$ | 1,430 | | |
| 19 | % | |
$ | 1,665 | | |
| 20 | % |
Commercial Real Estate Construction | |
| 231 | | |
| 5 | % | |
| 175 | | |
| 4 | % | |
| 199 | | |
| 5 | % | |
| 109 | | |
| 5 | % | |
| 64 | | |
| 3 | % |
Commercial Real Estate Other | |
| 2,216 | | |
| 52 | % | |
| 2,376 | | |
| 54 | % | |
| 1,909 | | |
| 46 | % | |
| 1,271 | | |
| 52 | % | |
| 1,292 | | |
| 52 | % |
Consumer Real Estate | |
| 1,015 | | |
| 28 | % | |
| 925 | | |
| 23 | % | |
| 925 | | |
| 22 | % | |
| 496 | | |
| 22 | % | |
| 387 | | |
| 23 | % |
Consumer Other | |
| 94 | | |
| 1 | % | |
| 105 | | |
| 1 | % | |
| 123 | | |
| 1 | % | |
| 698 | | |
| 2 | % | |
| 806 | | |
| 2 | % |
Paycheck Protection Program | |
| — | | |
| — | % | |
| — | | |
| 3 | % | |
| — | | |
| 10 | % | |
| — | | |
| — | % | |
| — | | |
| — | % |
Total | |
$ | 4,291 | | |
| 100 | % | |
$ | 4,377 | | |
| 100 | % | |
$ | 4,186 | | |
| 100 | % | |
$ | 4,004 | | |
| 100 | % | |
$ | 4,214 | | |
| 100 | % |
| (1) | Loan category as a percentage of total loans. |
The allowance is also subject
to examination testing by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and
the size of the allowance relative to that of peer institutions and other adequacy tests. In addition, such regulatory agencies
could require us to adjust our allowance based on information available to them at the time of their examination.
The methodology used to
determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to the methodology
used to determine the allowance for loan losses described above, adjusted for factors specific to binding commitments, including
the probability of funding and historical loss ratio. During the years ended December 31, 2022 and 2021, no provisions were recorded.
The balance for the reserve for unfunded lending commitments was $44,912 as of December 31, 2022 and 2021.
NONPERFORMING ASSETS
Nonperforming assets include
other real estate owned (“OREO”), nonaccrual loans and loans past due 90 days or more and still accruing interest. The following table
summarizes nonperforming assets for the five years ended December 31:
Nonperforming Assets | |
| | |
| | |
| | |
| | |
| |
(in thousands) | |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | |
Nonaccrual loans | |
$ | 631 | | |
$ | 815 | | |
$ | 1,156 | | |
$ | 1,666 | | |
$ | 824 | |
Loans past due 90 days or more and still accruing interest | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total nonperforming loans | |
| 631 | | |
| 815 | | |
| 1,156 | | |
| 1,666 | | |
| 824 | |
Other real estate owned | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total nonperforming assets | |
$ | 631 | | |
$ | 815 | | |
$ | 1,156 | | |
$ | 1,666 | | |
$ | 824 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses to nonaccrual loans | |
| 679.60 | % | |
| 537.36 | % | |
| 362.11 | % | |
| 240.34 | % | |
| 511.41 | % |
Nonaccrual loans to total loans | |
| 0.19 | % | |
| 0.27 | % | |
| 0.36 | % | |
| 0.61 | % | |
| 0.30 | % |
Nonperforming loans to total loans | |
| 0.19 | % | |
| 0.27 | % | |
| 0.36 | % | |
| 0.61 | % | |
| 0.30 | % |
Nonperforming assets to total assets | |
| 0.10 | % | |
| 0.12 | % | |
| 0.22 | % | |
| 0.37 | % | |
| 0.19 | % |
DEPOSITS
The following table shows the contractual maturities
of time deposits in denominations of $100,000 or more at December 31, 2022 and the amount of time deposits in excess of FDIC insurance
limits.
| |
One Day | | |
Less than three months | | |
Three months to less than
six months | | |
Six months to less than one year | | |
One year to less than
five years | | |
Five years or more | | |
Total | |
(in thousands) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
CD’s and other time deposits less than $100,000 | |
$ | — | | |
$ | 1,875 | | |
$ | 1,158 | | |
$ | 1,486 | | |
$ | 1,130 | | |
$ | — | | |
$ | 5,649 | |
CD’s and other time deposits $100,000 and over | |
| — | | |
| 4,065 | | |
| 1,660 | | |
| 4,574 | | |
| 622 | | |
| — | | |
| 10,921 | |
Total | |
$ | — | | |
$ | 5,940 | | |
$ | 2,818 | | |
$ | 6,060 | | |
$ | 1,752 | | |
$ | — | | |
$ | 16,570 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
CD’s and other time deposits in excess of FDIC insurance limit | |
$ | — | | |
$ | 838 | | |
$ | 299 | | |
$ | 917 | | |
$ | — | | |
$ | — | | |
| 2,054 | |
Certificates of Deposit
$100,000 and over decreased $4.3 million or 28.3% to $10.9 million as of December 31, 2022 from $15.2 million as of December 31,
2021. The higher balance in 2021 for these demand deposits was temporary in nature.
The following table presents average deposits by
category.
| |
2022 | | |
2021 | | |
2020 | |
(in thousands) | |
Average Balance | | |
Average Rate Paid | | |
Average Balance | | |
Average Rate Paid | | |
Average Balance | | |
Average Rate Paid | |
Non-interest-bearing demand | |
$ | 243,110 | | |
| N/A | | |
$ | 205,238 | | |
| N/A | | |
$ | 163,394 | | |
| N/A | |
Interest-bearing transaction accounts | |
| 269,510 | | |
| 0.08 | % | |
| 242,618 | | |
| 0.04 | % | |
| 208,941 | | |
| 0.08 | % |
Savings | |
| 65,817 | | |
| 0.06 | % | |
| 51,609 | | |
| 0.06 | % | |
| 40,771 | | |
| 0.10 | % |
Time deposits | |
| 18,444 | | |
| 0.21 | % | |
| 20,435 | | |
| 0.28 | % | |
| 20,965 | | |
| 0.47 | % |
| |
$ | 596,881 | | |
| | | |
$ | 519,900 | | |
| | | |
$ | 434,071 | | |
| | |
Deposits decreased $10.5
million or 1.73% to $598.7 million as of December 31, 2022, from $609.2 million as of December 31, 2021. Non-interest bearing deposits
decreased $32.7 million to $223.1 million as of December 31, 2022. The higher balance in 2021 for these demand deposits was temporary
in nature.
We fund growth through core
deposits. We do not have, nor do we rely on, Brokered Deposits or Internet Deposits.
SHORT-TERM BORROWINGS
At December 31, 2022 and
2021, we had no outstanding federal funds purchased. We have a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement
permits the Company to retain possession of loans pledged as collateral to secure advances from the Federal Reserve Discount Window.
Under this agreement, we may borrow up to $78.3 million. We established this arrangement as an additional source of liquidity.
At December 31, 2022 and 2021, the Bank had unused
short-term lines of credit totaling approximately $41 million (which are withdrawable at the lender’s option).
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of
operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements,
or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit,
interest rate, and liquidity risk. We use such transactions for general corporate purposes or customer needs. General corporate
purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions
are used to manage customer requests for funding.
Our off-balance sheet arrangements
consist principally of commitments to extend credit described below. We estimate probable losses related to binding unfunded lending
commitments and record a reserve for unfunded lending commitments in other liabilities on the consolidated balance sheet. At December
31, 2022 and 2021, the balance of this reserve was $44,912. At December 31, 2022 and 2021, we had no interests in non-consolidated
special purpose entities.
Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is
based on our credit evaluation of the borrower. Collateral held varies but may include accounts receivable, negotiable
instruments, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines
of credit, amounted to $145.4 million and $117.5 million as of December 31, 2022 and 2021, respectively.
Standby letters of credit
represent our obligation to a third-party contingent upon the failure of our customer to perform under the terms of an underlying
contract with the third party or obligates us to guarantee or stand as surety for the benefit of the third party. The underlying
contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of goods, performance
of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be drawn only when the
underlying event fails to occur as intended. We can seek recovery of the amounts paid from the borrower. Commitments under standby
letters of credit are usually for one year or less. The maximum potential amount of undiscounted future payments related to standby
letters of credit at December 31, 2022 and 2021 was $2.5 million and $0.6 million, respectively.
We originate certain fixed rate residential
loans and commit these loans for sale. The commitments to originate fixed rate residential loans and the sales commitments
are freestanding derivative instruments. We had forward sales commitments, totaling $0.9 million at December 31, 2022, to
sell loans held for sale of $0.9 million, compared to forward sales commitments of $2.8 million at December 31, 2021, to sell
loans held for sale of $2.8 million. The fair value of these commitments was not significant at December 31, 2022 or 2021. We
had no embedded derivative instruments requiring separate accounting treatment.
Once we sell certain fixed
rate residential loans, the loans are no longer reportable on our balance sheet. With most of these sales, we have an obligation
to repurchase the loan in the event of a default of principal or interest on the loan. This recourse period ranges from three to
nine months. Misrepresentation or fraud carries unlimited time for recourse. The unpaid principal balance of loans sold with recourse
was $8.9 million at December 31, 2022 and $30.8 million at December 31, 2021. For the years ended December 31, 2022 and December
31, 2021, there were two loans and one loan repurchased, respectively.
EFFECT OF INFLATION
AND CHANGING PRICES
The consolidated financial statements have been
prepared in accordance with GAAP, which require the measurement of financial position and results of operations in terms of historical
dollars without consideration of changes in the relative purchasing power over time due to inflation.
Unlike most other industries,
the assets and liabilities of financial institutions like the Company are primarily monetary in nature. As a result, interest rates
generally have a more significant impact on our performance than the effects of general levels of inflation and changes in prices.
In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services.
We strive to manage the relationship between interest rate sensitive assets and liabilities in order to protect against wide interest
rate fluctuations, including those resulting from inflation.
CAPITAL RESOURCES
Our capital needs have been
met to date through the $10.6 million in capital raised in our initial offering, the retention of earnings less dividends paid
and the exercise of options to purchase stock. Total shareholders’ equity at December 31, 2022 was $38.8 million. The rate
of asset growth since our inception has not negatively impacted our capital base.
On July 2, 2013, the Federal Reserve Board
approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital
guidelines for U.S. banks (“Basel III”). Following the actions by the Federal Reserve, the FDIC also approved
regulatory capital requirements on July 9, 2013. The FDIC’s rule is identical in substance to the final rules issued by
the Federal Reserve Bank.
The purpose of Basel III is to
improve the quality and increase the quantity of capital for all banking organizations. The minimum requirements for the quantity
and quality of capital were increased. The rule includes a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5%
and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raised the minimum ratio
of Tier 1 capital to risk-weighted assets from 4% to 6% and requires a minimum leverage ratio of 4%. In addition, the rule implemented
a strict eligibility criteria for regulatory capital instruments and improved the methodology for calculating risk-weighted assets
to enhance risk sensitivity.
On November 4, 2019, the federal
banking agencies jointly issued a final rule on an optional, simplified measure of capital adequacy for qualifying community banking
organizations called the community bank leverage ratio (“CBLR”) framework effective on January 1, 2020. A qualifying community
banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance
sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets.
Additionally, the qualifying community banking institution must be a non-advanced approaches FDIC supervised institution. The final rule
adopts Tier 1 capital and existing leverage ratio into the CBLR framework. The Bank adopted this rule as of September 30, 2020 and is
no longer subject to other capital and leverage requirements. A CBLR bank meeting qualifying criterion is deemed to have met the “well
capitalized” ratio requirements and be in compliance with the generally applicable capital rule. The Bank’s CBLR as of December
31, 2022 was 9.03%. As of December 31, 2022, the Company and the Bank were categorized as “well capitalized.” We believe,
as of December 31, 2022, that the Company and the Bank meet all capital adequacy requirements to which we are subject.
There are no current
conditions or events that we are aware of that would change the Company’s or the Bank’s capital adequacy category.
Please see “Notes to Consolidated Financial
Statements” for additional information regarding the Company’s and the Bank’s capital ratios at December 31,
2022.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, the Company is not required to provide the information required by this item.
See the Market Risk section in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this report for a discussion of certain market risks we face, including interest rate risk.
| Item 8. | Financial Statements and Supplementary Data |
Report of Independent
Registered Public Accounting Firm
To the Shareholders and the Board of Directors
of Bank of South Carolina Corporation:
Opinion on the Financial Statements
We have audited the accompanying
consolidated balance sheets of Bank of South Carolina Corporation (the “Company”) as of December 31, 2022 and 2021 and the
related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the years then ended, and the
related notes to the consolidated financial statements and schedules (collectively, the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results
of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated
below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved
our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses
As described in Note 4 to the
Company’s financial statements, the Company has a gross loan portfolio of approximately $331.0 million and related allowance for
loan losses of approximately $4.3 million as of December 31, 2022. As described by the Company in Note 1, the evaluation of the allowance
for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes
available. The allowance for loan losses is evaluated on a regular basis and is based upon the Company’s review of the collectability
of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s
ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.
We identified the Company’s
estimate of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance
for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining
the qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment
due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill
or knowledge needed.
The primary procedures we performed
to address this critical audit matter included the following:
| · | We
evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions,
and other risk factors used in development of the qualitative factors for collectively evaluated loans. |
| · | We validated the completeness
and accuracy of the underlying data used to develop the factors. |
| · | We validated the mathematical
accuracy of the calculation. |
| · | We
evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data
points to internally developed and third-party sources, as well as other audit evidence gathered. |
| · | Analytical
procedures were performed to evaluate the directional consistency of changes that occurred in the allowance for loan losses for loans
collectively evaluated for impairment. |
We have served as the Company’s auditor since 2006.
Charleston, South Carolina
March 2, 2023
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
ASSETS | |
| | | |
| | |
Cash and due from banks | |
$ | 14,772,564 | | |
$ | 11,140,559 | |
Interest-bearing deposits at the Federal Reserve | |
| 12,999,135 | | |
| 128,971,429 | |
Investment securities available for sale (amortized cost of $296,998,150 and $215,047,451 in
2021 and 2020, respectively) | |
| 271,172,226 | | |
| 212,347,489 | |
Mortgage loans to be sold | |
| 866,594 | | |
| 2,774,388 | |
Loans | |
| 330,981,782 | | |
| 306,632,229 | |
Less: Allowance for loan losses | |
| (4,291,221 | ) | |
| (4,376,987 | ) |
Net loans | |
| 326,690,561 | | |
| 302,255,242 | |
Premises, equipment and leasehold improvements, net | |
| 3,988,607 | | |
| 3,782,936 | |
Right of use asset | |
| 13,433,692 | | |
| 14,041,843 | |
Accrued interest receivable | |
| 2,145,522 | | |
| 1,404,227 | |
Other assets | |
| 7,276,708 | | |
| 2,502,533 | |
| |
| | | |
| | |
Total assets | |
$ | 653,345,609 | | |
$ | 679,220,646 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
Liabilities | |
| | | |
| | |
Deposits: | |
| | | |
| | |
Non-interest bearing demand | |
$ | 223,117,903 | | |
$ | 255,783,644 | |
Interest bearing demand | |
| 195,143,514 | | |
| 165,335,038 | |
Money market accounts | |
| 100,014,125 | | |
| 98,113,942 | |
Time deposits $250,000 and over | |
| 5,303,509 | | |
| 7,417,864 | |
Other time deposits | |
| 11,266,099 | | |
| 13,870,356 | |
Other savings deposits | |
| 63,825,108 | | |
| 68,670,732 | |
Total deposits | |
| 598,670,258 | | |
| 609,191,576 | |
| |
| | | |
| | |
Accrued interest payable and other liabilities | |
| 2,430,272 | | |
| 2,069,594 | |
Lease liability | |
| 13,433,692 | | |
| 14,041,843 | |
Total liabilities | |
| 614,534,222 | | |
| 625,303,013 | |
Commitments and contingencies in Note 11 | |
| | | |
| | |
Shareholders’ equity | |
| | | |
| | |
Common stock - no
par 12,000,000
shares authorized; Issued 5,852,325 and 5,841,240
shares at December 31, 2022 and December 31, 2021, respectively. Shares outstanding 5,552,351
and 5,541,266 at December 31,
2022 and December 31, 2021, respectively. | |
| | | |
| | |
Additional paid in capital | |
| 48,028,689 | | |
| 47,745,285 | |
Retained earnings | |
| 14,002,571 | | |
| 11,122,710 | |
Treasury stock: 299,974 shares as of December 31, 2022 and 2021 | |
| (2,817,392 | ) | |
| (2,817,392 | ) |
Accumulated other comprehensive loss, net of income taxes | |
| (20,402,481 | ) | |
| (2,132,970 | ) |
Total shareholders’ equity | |
| 38,811,387 | | |
| 53,917,633 | |
| |
| | | |
| | |
Total liabilities and shareholders’ equity | |
$ | 653,345,609 | | |
$ | 679,220,646 | |
See accompanying notes to consolidated financial statements.
BANK OF SOUTH CAROLINA
CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF INCOME
| |
| | |
| | |
| |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Interest and fee income | |
| | | |
| | | |
| | |
Loans, including fees | |
$ | 15,677,601 | | |
$ | 15,285,012 | | |
$ | 15,055,981 | |
Taxable securities | |
| 2,531,951 | | |
| 1,849,347 | | |
| 1,628,753 | |
Tax-exempt securities | |
| 584,907 | | |
| 313,443 | | |
| 370,998 | |
Other | |
| 404,024 | | |
| 103,309 | | |
| 184,024 | |
Total interest and fee income | |
| 19,198,483 | | |
| 17,551,111 | | |
| 17,239,756 | |
| |
| | | |
| | | |
| | |
Interest expense | |
| | | |
| | | |
| | |
Deposits | |
| 301,793 | | |
| 174,000 | | |
| 305,414 | |
Total interest expense | |
| 301,793 | | |
| 174,000 | | |
| 305,414 | |
| |
| | | |
| | | |
| | |
Net interest income | |
| 18,896,690 | | |
| 17,377,111 | | |
| 16,934,342 | |
Provision for loan losses | |
| (75,000 | ) | |
| 120,000 | | |
| 240,000 | |
Net interest income after provision for loan losses | |
| 18,971,690 | | |
| 17,257,111 | | |
| 16,694,342 | |
| |
| | | |
| | | |
| | |
Other income | |
| | | |
| | | |
| | |
Service charges and fees | |
| 1,290,665 | | |
| 1,254,699 | | |
| 1,094,985 | |
Mortgage banking income | |
| 667,257 | | |
| 2,314,106 | | |
| 2,267,406 | |
Gain on sales of securities, net | |
| 64,782 | | |
| 266,944 | | |
| 10,002 | |
Other non-interest income | |
| 42,158 | | |
| 32,482 | | |
| 32,508 | |
Total other income | |
| 2,064,862 | | |
| 3,868,231 | | |
| 3,404,901 | |
| |
| | | |
| | | |
| | |
Other expense | |
| | | |
| | | |
| | |
Salaries and employee benefits | |
| 7,547,306 | | |
| 7,437,787 | | |
| 7,219,005 | |
Net occupancy expense | |
| 2,514,904 | | |
| 2,428,082 | | |
| 2,216,727 | |
Data processing fees | |
| 562,228 | | |
| 622,536 | | |
| 646,590 | |
Professional expenses | |
| 448,248 | | |
| 395,115 | | |
| 345,126 | |
Other operating expenses | |
| 1,331,354 | | |
| 1,425,454 | | |
| 1,245,485 | |
Total other expense | |
| 12,404,040 | | |
| 12,308,974 | | |
| 11,672,933 | |
| |
| | | |
| | | |
| | |
Income tax expense | |
| 1,977,372 | | |
| 2,071,503 | | |
| 1,965,679 | |
| |
| | | |
| | | |
| | |
Net income | |
$ | 6,655,140 | | |
$ | 6,744,865 | | |
$ | 6,460,631 | |
| |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| | | |
| | | |
| | |
Basic | |
| 5,550,078 | | |
| 5,531,518 | | |
| 5,526,948 | |
Diluted | |
| 5,644,698 | | |
| 5,680,482 | | |
| 5,678,543 | |
| |
| | | |
| | | |
| | |
Basic income per common share | |
$ | 1.20 | | |
$ | 1.22 | | |
$ | 1.17 | |
Diluted income per common share | |
$ | 1.18 | | |
$ | 1.19 | | |
$ | 1.14 | |
See accompanying notes to consolidated financial statements.
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
| |
| | |
| | |
| |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Net income | |
$ | 6,655,140 | | |
$ | 6,744,865 | | |
$ | 6,460,631 | |
Other comprehensive (loss) income | |
| | | |
| | | |
| | |
Unrealized (loss) gain on securities arising during the period | |
| (23,061,180 | ) | |
| (4,546,773 | ) | |
| 1,512,600 | |
Reclassification adjustment for securities gains realized in net income | |
| (64,782 | ) | |
| (266,944 | ) | |
| (10,002 | ) |
Other comprehensive (loss) income before tax | |
| (23,125,962 | ) | |
| (4,813,717 | ) | |
| 1,502,598 | |
Income tax effect related to items of other comprehensive (loss) income before tax | |
| 4,856,451 | | |
| 1,010,881 | | |
| (315,546 | ) |
Other comprehensive (loss) income after tax | |
| (18,269,511 | ) | |
| (3,802,836 | ) | |
| 1,187,052 | |
Total comprehensive (loss) income | |
$ | (11,614,371 | ) | |
$ | 2,942,029 | | |
$ | 7,647,683 | |
See accompanying notes to consolidated financial statements.
BANK
OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
| |
Shares Outstanding | | |
Additional Paid
in Capital | | |
Retained Earnings | | |
Treasury Stock | | |
Accumulated
Other
Comprehensive
Income (Loss) | | |
Total | |
December 31, 2019 | |
| 5,530,001 | | |
$ | 47,131,034 | | |
$ | 5,879,409 | | |
$ | (2,325,225 | ) | |
$ | 482,814 | | |
$ | 51,168,032 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| — | | |
| — | | |
| 6,460,631 | | |
| — | | |
| — | | |
| 6,460,631 | |
Other comprehensive gain | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,187,052 | | |
| 1,187,052 | |
Stock option exercises, net of surrenders | |
| 15,535 | | |
| 180,849 | | |
| — | | |
| (63,805 | ) | |
| — | | |
| 117,044 | |
Stock-based compensation expense | |
| — | | |
| 92,986 | | |
| — | | |
| — | | |
| — | | |
| 92,986 | |
Repurchase of common shares | |
| (25,067 | ) | |
| — | | |
| — | | |
| (398,868 | ) | |
| | | |
| (398,868 | ) |
Cash dividends ($0.66 per common share) | |
| — | | |
| — | | |
| (3,646,521 | ) | |
| — | | |
| — | | |
| (3,646,521 | ) |
December 31, 2020 | |
| 5,520,469 | | |
$ | 47,404,869 | | |
$ | 8,693,519 | | |
$ | (2,787,898 | ) | |
$ | 1,669,866 | | |
$ | 54,980,356 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| — | | |
| — | | |
| 6,744,865 | | |
| — | | |
| — | | |
| 6,744,865 | |
Other comprehensive loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (3,802,836 | ) | |
| (3,802,836 | ) |
Stock option exercises, net of surrenders | |
| 20,797 | | |
| 237,383 | | |
| — | | |
| (29,494 | ) | |
| — | | |
| 207,889 | |
Stock-based compensation expense | |
| — | | |
| 103,033 | | |
| — | | |
| — | | |
| — | | |
| 103,033 | |
Cash dividends ($0.78 per common share) | |
| — | | |
| — | | |
| (4,315,674 | ) | |
| — | | |
| — | | |
| (4,315,674 | ) |
December 31, 2021 | |
| 5,541,266 | | |
$ | 47,745,285 | | |
$ | 11,122,710 | | |
$ | (2,817,392 | ) | |
$ | (2,132,970 | ) | |
$ | 53,917,633 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| — | | |
| — | | |
| 6,655,140 | | |
| — | | |
| — | | |
| 6,655,140 | |
Other comprehensive loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (18,269,511 | ) | |
| (18,269,511 | ) |
Stock option exercises, net of surrenders | |
| 11,085 | | |
| 161,731 | | |
| — | | |
| — | | |
| — | | |
| 161,731 | |
Stock-based compensation expense | |
| — | | |
| 121,673 | | |
| — | | |
| — | | |
| — | | |
| 121,673 | |
Cash dividends ($0.68 per common share) | |
| — | | |
| — | | |
| (3,775,279 | ) | |
| — | | |
| — | | |
| (3,775,279 | ) |
December 31, 2022 | |
| 5,552,351 | | |
$ | 48,028,689 | | |
$ | 14,002,571 | | |
$ | (2,817,392 | ) | |
$ | (20,402,481 | ) | |
$ | 38,811,387 | |
See accompanying notes to consolidated financial statements.
BANK
OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
| | |
| | |
| |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Cash flows from operating activities: | |
| | | |
| | | |
| | |
Net income | |
$ | 6,655,140 | | |
$ | 6,744,865 | | |
$ | 6,460,631 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | | |
| | |
Depreciation expense | |
| 359,251 | | |
| 412,866 | | |
| 421,040 | |
Gain on sale of investment securities | |
| (64,782 | ) | |
| (266,944 | ) | |
| (10,002 | ) |
Provision for loan losses | |
| (75,000 | ) | |
| 120,000 | | |
| 240,000 | |
Stock-based compensation expense | |
| 121,673 | | |
| 103,033 | | |
| 92,986 | |
Deferred income taxes | |
| (171,800 | ) | |
| (46,751 | ) | |
| (422,345 | ) |
Net amortization of unearned discounts on investment securities available for sale | |
| 869,690 | | |
| 592,357 | | |
| 362,159 | |
Origination of mortgage loans held for sale | |
| (60,017,637 | ) | |
| (163,176,146 | ) | |
| (181,781,058 | ) |
Proceeds from sale of mortgage loans held for sale | |
| 61,925,431 | | |
| 173,367,491 | | |
| 173,877,723 | |
(Increase) decrease in accrued interest receivable and other assets | |
| (487,217 | ) | |
| 133,276 | | |
| (38,312 | ) |
Increase (decrease) in accrued interest payable and other liabilities | |
| 358,795 | | |
| (520,403 | ) | |
| 1,089,165 | |
Net cash provided by operating activities | |
| 9,473,544 | | |
| 17,463,644 | | |
| 291,987 | |
| |
| | | |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | | |
| | |
Proceeds from calls and maturities of investment securities available for sale | |
| 3,539,000 | | |
| 36,967,000 | | |
| 23,491,000 | |
Proceeds from sale of investment securities available for sale | |
| 18,525,780 | | |
| 15,572,500 | | |
| 11,550,000 | |
Purchase of investment securities available for sale | |
| (104,820,389 | ) | |
| (135,206,301 | ) | |
| (68,260,421 | ) |
Net (increase) decrease in loans | |
| (24,360,319 | ) | |
| 14,241,737 | | |
| (46,788,177 | ) |
Purchase of premises, equipment, and leasehold improvements, net | |
| (564,922 | ) | |
| (142,269 | ) | |
| (184,138 | ) |
Net cash used in investing activities | |
| (107,680,850 | ) | |
| (68,567,333 | ) | |
| (80,191,736 | ) |
| |
| | | |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | | |
| | |
Net (decrease) increase in deposit accounts | |
| (10,521,318 | ) | |
| 146,993,945 | | |
| 83,005,976 | |
Dividends paid | |
| (3,773,396 | ) | |
| (4,312,138 | ) | |
| (3,592,841 | ) |
Repurchase of common shares | |
| — | | |
| — | | |
| (398,868 | ) |
Stock options exercised | |
| 161,731 | | |
| 207,889 | | |
| 117,044 | |
Net cash (used in) provided by financing activities | |
| (14,132,983 | ) | |
| 142,889,696 | | |
| 79,131,311 | |
Net (decrease) increase in cash and cash equivalents | |
| (112,340,289 | ) | |
| 91,786,007 | | |
| (768,438 | ) |
Cash and cash equivalents at the beginning of the period | |
| 140,111,988 | | |
| 48,325,981 | | |
| 49,094,419 | |
Cash and cash equivalents at the end of the period | |
$ | 27,771,699 | | |
$ | 140,111,988 | | |
$ | 48,325,981 | |
| |
| | | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | | |
| | |
Interest | |
$ | 275,700 | | |
$ | 179,793 | | |
$ | 323,455 | |
Income taxes | |
$ | 1,582,810 | | |
$ | 2,845,420 | | |
$ | 814,052 | |
| |
| | | |
| | | |
| | |
Supplemental disclosures for non-cash investing and financing activity: | |
| | | |
| | | |
| | |
Change in unrealized (loss) gain on securities available for
sale, net of income taxes | |
$ | (18,269,511 | ) | |
$ | (3,082,836 | ) | |
$ | 1,187,052 | |
Change in dividends payable | |
$ | 1,883 | | |
$ | 3,536 | | |
$ | 53,680 | |
Right of use assets obtained in exchange for lease obligation | |
$ | — | | |
$ | 1,825,793 | | |
$ | — | |
Change in right of use assets and lease liabilities | |
$ | 608,151 | | |
$ | 514,101 | | |
$ | 479,066 | |
See accompanying notes to consolidated financial
statements.
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank of South Carolina
(the “Bank”) was organized on October 22, 1986 and opened for business as a state-chartered financial institution on
February 26, 1987, in Charleston, South Carolina. The Bank was reorganized into a wholly-owned subsidiary of Bank of South Carolina
Corporation (the “Company”), effective April 17, 1995. At the time of the reorganization, each outstanding share of
the Bank was exchanged for two shares of Bank of South Carolina Corporation Stock.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Our accounting and reporting
policies conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”), and to general
practices within the banking industry. The following summarizes the more significant of these policies and practices.
Principles
of Consolidation:
The accompanying consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. In consolidation, all significant
intercompany balances and transactions have been eliminated.
References to “we,”
“us,” “our,” “the Bank,” or “the Company” refer to the parent and its subsidiary
that are consolidated for financial reporting purposes.
Accounting
Estimates and Assumptions:
The financial statements
are prepared in conformity with GAAP, which require management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results
could differ significantly from these estimates and assumptions. Material estimates generally susceptible to significant change
are related to the determination of the allowance for loan losses, impaired loans, other real estate owned, deferred tax assets,
the fair value of financial instruments and other-than-temporary impairment of investment securities.
Subsequent
Events:
Subsequent events are events
or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events
are events or transactions that provide additional evidence about conditions that existed as of the date of the balance sheet,
including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events
that provide evidence about conditions that did not exist as of the date of the balance sheet but arose after that date. We have
reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred
requiring accrual or disclosure.
Cash and Cash Equivalents:
Cash and cash equivalents include working cash funds,
due from banks, interest-bearing deposits at the Federal Reserve, items in process of collection and federal funds sold. All cash
equivalents are readily convertible to cash and have maturities of less than 90 days.
Depository institutions are required to maintain
reserve and clearing balances at the Federal Reserve Bank. Vault cash satisfied our daily reserve requirement for the years ended
December 31, 2022 and 2021.
Interest-bearing Deposits at
the Federal Reserve:
Interest-bearing deposits at the Federal Reserve
mature daily and are carried at cost.
Investment
Securities:
We classify investments
into three categories: (1) Held to Maturity - debt securities that we have the positive intent and ability to hold to maturity,
which are reported at amortized cost, adjusted for the amortization of any related premiums or the accretion of any related discounts
into interest income using a methodology which approximates a level yield of interest over the estimated remaining period until
maturity; (2) Trading - debt securities that are bought and held principally for the purpose of selling them in the near term,
which are reported at fair value, with unrealized gains and losses included in earnings; and (3) Available for Sale - debt securities
that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders’ equity, net of income taxes. Unrealized losses on securities due to
fluctuations in fair value are recognized when it is determined that an other than temporary decline in value has occurred.
Realized gains or losses
on the sale of investments are recognized on a specific identification, trade date basis. All securities were classified as available
for sale for 2022 and 2021.
Mortgage
Loans to be Sold:
We originate fixed and
variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed but not yet settled with
an investor are carried in our loans to be sold portfolio. Virtually all of these loans have commitments to be purchased by investors
and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan
was locked in with our customers. Therefore, these loans present very little market risk. We usually deliver to, and receive funding
from, the investor within 30 to 60 days. Commitments to sell these loans to the investor are considered derivative contracts and
are sold to investors on a “best efforts” basis. We are not obligated to deliver a loan or pay a penalty if a loan
is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage
loans to be sold in most cases is materially the same as the value of the loan amount at its origination.
Mortgage loans originated
and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income.
Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking
income in the consolidated statements of income.
BANK OF SOUTH
CAROLINA CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Loans and
Allowance for Loan Losses:
Loans are carried at principal
amounts outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the weighted
average life of the loan as an adjustment to yield. Interest income on all loans is recorded on an accrual basis. The accrual of
interest and the amortization of net loan fees are generally discontinued on loans that 1) are maintained on a cash basis because
of deterioration in the financial condition of the borrower; 2) the payment of full principal is not expected; or 3) the principal
or interest has been in default for a period of 90 days or more. We define past due loans based on contractual payment and maturity
dates.
The accrual of interest
is generally discontinued on loans that become 90 days past due as to principal or interest. The accrual of interest on some loans
may continue even though they are 90 days past due if the loans are well secured or in the process of collection and management
deems it appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of six to nine months,
they are reviewed individually by management to determine if they should be returned to accrual status.
When the ultimate collectability
of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest
has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. When this doubt does
not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest income and then to principal.
We account for impaired
loans by requiring that all loans (greater than $50,000) where it is estimated that we will be unable to collect all amounts due
according to the terms of the loan agreement be recorded at the loan’s fair value. Fair value may be determined based upon
the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the
collateral less cost to sell, if the loan is collateral dependent.
Additional accounting
guidance allows us to use existing methods for recognizing interest income on an impaired loan. The guidance also requires additional
disclosures about how we estimate interest income related to our impaired loans.
A loan is also considered
impaired if its terms are modified in a troubled debt restructuring (“TDR”). For this type of impaired loan, cash receipts
are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest
income is recognized on these loans using the accrual method of accounting, provided they are performing in accordance with their
restructured terms.
The allowance for loan
losses (the “allowance”) is our estimate of credit losses inherent in the loan portfolio. The allowance is established
as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when we believe the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited
to the allowance. The allowance is evaluated on a regular basis and is based upon our periodic review of the collectability of
the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the
borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
We believe that the allowance
is adequate to absorb inherent losses in the loan portfolio; however, there can be no assurance that loan losses in future periods
will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be
given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances,
will not require significant future additions to the allowance, thus adversely affecting our operating results.
The allowance is also subject
to examination by regulatory agencies, which may consider factors such as the methodology used to determine adequacy and the size
of the allowance relative to that of peer institutions and other adequacy tests. In addition, such regulatory agencies could require
us to adjust our allowance based on information available at the time of the examination.
The methodology used to
determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to the methodology
used to determine the allowance adjusted for factors specific to binding commitments, including the probability of funding and
historical loss ratio.
Concentration
of Credit Risk:
Our primary market consists
of the counties of Berkeley, Charleston and Dorchester, South Carolina. As of December 31, 2022, the majority of the total loan
portfolio, as well as a substantial portion of the commercial and real estate loan portfolios, were to borrowers within this region.
No other areas of significant concentration of credit risk have been identified.
Premises,
Equipment and Leasehold Improvements and Depreciation:
Land is carried at cost.
Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method
for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the assets
ranging from 40 years for buildings and 3 to 15 years for equipment. Leasehold improvements are amortized over the shorter of the
asset’s useful life or the remaining lease term, including renewal periods when reasonably assured. The cost of maintenance
and repairs is charged to operating expense as incurred.
Leases:
In accordance with ASU
2016-02, the Company determines if a contractual arrangement is a lease at inception. Operating leases are included in the operating
right of use (“ROU”) assets and current operating lease liabilities on the Company’s consolidated balance sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the
Company’s obligation to make lease payments arising from the lease. Currently, the Company does not have any finance leases.
BANK OF SOUTH CAROLINA
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Operating lease ROU assets
and lease liabilities are recognized at the commencement of the lease based on the present value of lease payments over the lease
term. The lease payments included in the present value are fixed payments and index-based variable lease payments. The Company
estimates the incremental borrowing rate, based on information available at the commencement of the lease, as most of the Company’s
leases do not include an implicit rate.
Revenue
Recognition:
In accordance with Topic 606, revenues are recognized
when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects
to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines
are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
The Company only applies the five-step model
to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services
it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company
assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses
whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Service Fees on Deposit Accounts
The Bank earns fees from its deposit customers
for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and
analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized
on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for
specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation
is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
ATM and Check Card Fee Income
Check card fee income represents fees earned
when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Mastercard
payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are
recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied
and the fees are earned when the cost of the transaction is charged to the card. Certain expenses directly associated with the debit
card are recorded on a net basis with the fee income.
Income Taxes:
We account for income
taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. Net deferred tax assets are included
in other assets in the consolidated balance sheet.
Accounting standards require
the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. These standards also prescribe
a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. We
believe that we had no uncertain tax positions for the years ended December 31, 2022 and 2021.
The income tax effects
of unrealized gains and losses on investment securities available for sale are released from accumulated other comprehensive income
at the time such securities are sold or impaired.
Stock-Based Compensation:
Compensation cost is recognized
for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized
to estimate the fair value of stock options. Compensation cost is recognized over the expected term of the stock options and is
adjusted for forfeitures as they occur.
Income Per Common
Share:
Basic income per share
is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed
by dividing net income by the weighted-average number of common shares and potential common shares outstanding. Potential common
shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock.
Earnings per share are restated for all stock splits and stock dividends, if any, through the date of issuance of the consolidated
financial statements.
Segment Information:
The Company operates and manages
itself within one retail banking segment and therefore has not provided segment disclosures.
Interest Rate Lock
Commitments and Forward Sale Contracts:
Commitments to fund mortgage
loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage
loans are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment
to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitments before the loan is funded. In
order to hedge the change in interest rates resulting from commitments to fund the loans, we enter into forward commitments for
the future delivery of mortgage loans when the interest rate is locked. Fair values of these mortgage derivatives are estimated
based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these
derivatives are included in income when they occur. As a result of the short-term nature of mortgage loans held for sale (derivative
contract), our derivative instruments were considered to be immaterial as of December 31, 2022 and 2021.
We had no embedded derivative
instruments requiring hedge accounting treatment at December 31, 2022 and 2021. We do not currently engage in hedging activities.
Recent Accounting
Pronouncements:
The following is a summary
of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure of financial information by
the Company.
In June 2016, the FASB
issued ASU 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU 2016-13
changes the impairment model for most financial assets to a current expected credit loss (“CECL”) model, replacing the
incurred loss model that is currently in use. The new guidance requires an entity to measure all expected credit losses for
financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable
forecasts. The CECL model will apply to financial assets measured at amortized cost, such as loans and investments, as well as
certain off-balance sheet credit exposures. In May 2019, the FASB issued guidance to provide entities with an option to irrevocably
elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13,
Measurement of Credit Losses on Financial Instruments. In October 2019, the FASB voted to extend the implementation date for smaller
reporting companies, non-SEC public companies, and private companies. This amendment became effective for the Company on January 1,
2023.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance,
including the current expected credit losses (CECL) guidance issued in 2016. The amendments related to conforming amendments.
For public business entities, the amendments are effective upon issuance of this final ASU. For the amendments related to ASU
2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (SRCs)
as defined by the SEC, should adopt the amendments in ASU 2016-13 during 2020. Early adoption will continue to be permitted. For
entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these
amendments are the same as the effective date and transition requirements in ASU 2016-13.
The
Company is finalizing its evaluation of the adoption of ASU 2016-13 and plans to adopt as of January 1, 2023. The Company to-date
has sourced and tested required data from the Company’s loan systems, tested data feeds to the model, contracted an
independent third party for model validation of the CECL model and process, determined appropriate segmentations of its portfolio,
selected a preliminary forecast period for reasonable and supportable forecasts, and has performed parallel runs of the model. The
Company is currently finalizing its assessment of current and forecasted macroeconomic factors, assumptions, testing, and
finalization of internal controls. The Company currently estimates a decrease in the allowance for loan losses between $25,000 and
$125,000 upon adoption. The Company is currently evaluating the impact of the reserve for unfunded commitments. The Company will
finalize the adoption during the first quarter of 2023.
In
March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings
and Vintage Disclosures, which eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in
ASC 310-402 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs
by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced
disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty.
The amendments in ASU 2022-02 are effective upon the Company’s adoption of ASU 2016-13.
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference
rate reform. In December 2022, the FASB extended the sunset date of ASC 848 from December 31, 2022 to December 31, 2024. The Company
does not expect these amendments to have a material effect on its consolidated financial statements.
In
November 2021, the FASB added a topic to the Accounting Standards Codification, Government Assistance, to require certain annual
disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by
analogy to other accounting guidance. The guidance is effective for financial statements issued for annual periods beginning after
December 15, 2021. The amendment became effective January 1, 2022 and did not have a material effect on the consolidated financial
statements.
Other
accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have
a material impact on our financial position, results of operations or cash flows.
3. | INVESTMENT
SECURITIES AVAILABLE FOR SALE |
The
amortized cost and fair value of investment securities available for sale are summarized as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December
31, 2022 | |
| |
Amortized
Cost | | |
Gross
Unrealized Gains | | |
Gross
Unrealized Losses | | |
Estimated
Fair Value | |
U.S. Treasury
Notes | |
$ | 180,298,301 | | |
$ | — | | |
$ | (12,110,986 | ) | |
$ | 168,187,315 | |
Municipal
Securities | |
| 49,315,041 | | |
| 2,510 | | |
| (3,407,364 | ) | |
| 45,910,187 | |
Total | |
$ | 296,998,150 | | |
$ | 2,510 | | |
$ | (25,828,434 | ) | |
$ | 271,172,226 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December
31, 2021 | |
| |
Amortized
Cost | | |
Gross
Unrealized Gains | | |
Gross
Unrealized Losses | | |
Estimated
Fair Value | |
U.S. Treasury
Notes | |
$ | 101,269,851 | | |
$ | 68,848 | | |
$ | (1,276,399 | ) | |
$ | 100,062,300 | |
Municipal
Securities | |
| 37,421,880 | | |
| 335,912 | | |
| (193,612 | ) | |
| 37,564,180 | |
Total | |
$ | 215,047,451 | | |
$ | 679,883 | | |
$ | (3,379,845 | ) | |
$ | 212,347,489 | |
BANK OF SOUTH
CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
amortized cost and estimated fair value of investment securities available for sale at December 31, 2022 and 2021, by contractual
maturity are in the following table.
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
Amortized
Cost | | |
Estimated
Fair Value | | |
Amortized
Cost | | |
Estimated
Fair Value | |
Due in
one year or less | |
$ | 42,722,655 | | |
$ | 41,698,011 | | |
$ | 12,756,176 | | |
$ | 12,859,086 | |
Due in one year to
five years | |
| 190,569,869 | | |
| 176,217,530 | | |
| 116,602,790 | | |
| 115,896,465 | |
Due in five years to
ten years | |
| 53,995,700 | | |
| 45,386,818 | | |
| 76,531,464 | | |
| 74,575,862 | |
Due
in ten years and over | |
| 9,709,926 | | |
| 7,869,867 | | |
| 9,157,021 | | |
| 9,016,076 | |
Total | |
$ | 296,998,150 | | |
$ | 271,172,226 | | |
$ | 215,047,451 | | |
$ | 212,347,489 | |
Securities
pledged to secure deposits at December 31, 2022 and 2021, had a carrying amount of $30,103,249 and $33,292,124, respectively.
The
tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated
by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December
31, 2022 and 2021. We believe that all unrealized losses have resulted from temporary changes in the interest rate market and
not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of
the securities referenced in the table below before recovery of their amortized cost.
| |
December
31, 2022 | |
| |
Less
Than 12 Months | | |
12
Months or Longer | | |
Total | |
| |
# | | |
Fair
Value | | |
Gross
Unrealized Loss | | |
# | | |
Fair
Value | | |
Gross
Unrealized Loss | | |
# | | |
Fair
Value | | |
Gross
Unrealized Loss | |
U.S. Treasury
Notes | |
| 7 | | |
$ | 38,181,255 | | |
$ | (1,790,134 | ) | |
| 18 | | |
$ | 130,006,060 | | |
$ | (10,320,852 | ) | |
| 25 | | |
$ | 168,187,315 | | |
$ | (12,110,986 | ) |
Government-Sponsored
Enterprises | |
| | |
| | |
| ) | |
| | |
| | |
| ) | |
| | |
| | |
| ) |
Municipal
Securities | |
| 46 | | |
| 26,068,218 | | |
| (932,565 | ) | |
| 31 | | |
| 14,859,459 | | |
| (2,474,799 | ) | |
| 77 | | |
| 40,927,677 | | |
| (3,407,364 | ) |
Total | |
| 55 | | |
$ | 70,461,758 | | |
$ | (2,806,869 | ) | |
| 58 | | |
$ | 195,727,958 | | |
$ | (23,021,565 | ) | |
| 113 | | |
$ | 266,189,716 | | |
$ | (25,828,434 | ) |
| |
December
31, 2021 | |
| |
Less
Than 12 Months | | |
12
Months or Longer | | |
Total | |
| |
# | | |
Fair
Value | | |
Gross
Unrealized Loss | | |
# | | |
Fair
Value | | |
Gross
Unrealized Loss | | |
# | | |
Fair
Value | | |
Gross
Unrealized Loss | |
U.S. Treasury
Notes | |
| 15 | | |
$ | 94,994,915 | | |
$ | (1,276,399 | ) | |
| — | | |
$ | — | | |
$ | — | | |
| 15 | | |
$ | 94,994,915 | | |
$ | (1,276,399 | ) |
Government-Sponsored
Enterprises | |
| | |
| | |
| ) | |
| | |
| | |
| ) | |
| | |
| | |
| ) |
Municipal
Securities | |
| 19 | | |
| 11,384,462 | | |
| (193,612 | ) | |
| — | | |
| — | | |
| — | | |
| 19 | | |
| 11,384,462 | | |
| (193,612 | ) |
Total | |
| 37 | | |
$ | 125,859,972 | | |
$ | (1,989,416 | ) | |
| 6 | | |
$ | 39,909,134 | | |
$ | (1,390,429 | ) | |
| 43 | | |
$ | 165,769,106 | | |
$ | (3,379,845 | ) |
The table below shows the proceeds received from sales of securities available for sale and gross realized gains and losses.
| |
|
|
|
|
|
|
|
|
|
| |
| |
For
the Year Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
| | |
| | |
| |
Gross proceeds | |
$ | 18,525,780 | | |
$ | 15,572,500 | | |
$ | 11,550,000 | |
Gross realized gains | |
| 64,782 | | |
| 266,944 | | |
| 10,002 | |
The
tax provision related to these gains was $13,604, $56,058 and $2,100 for the years ended December 31, 2022, 2021 and 2020, respectively.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | LOANS
AND ALLOWANCE FOR LOAN LOSSES |
Major
classifications of loans (net of deferred loan fees of $159,434 at December 31, 2022, and $488,481 at December 31, 2021) are shown
in the table below.
| |
December 31, 2022 | | |
December 31, 2021 | |
Commercial | |
$ | 45,072,059 | | |
$ | 45,804,434 | |
Commercial real estate: | |
| | | |
| | |
Construction | |
| 17,524,260 | | |
| 12,054,095 | |
Other | |
| 172,897,387 | | |
| 165,719,078 | |
Consumer: | |
| | | |
| | |
Real estate | |
| 91,636,538 | | |
| 71,307,488 | |
Other | |
| 3,851,538 | | |
| 3,768,531 | |
Paycheck protection program | |
| — | | |
| 7,978,603 | |
Loans | |
| 330,981,782 | | |
| 306,632,229 | |
Allowance for loan losses | |
| (4,291,221 | ) | |
| (4,376,987 | ) |
Loans, net | |
$ | 326,690,561 | | |
$ | 302,255,242 | |
We
had $93.1 million and $94.7 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”)
Discount Window at December 31, 2022 and 2021, respectively.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which established
the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions.
Under the program, the Small Business Administration (“SBA”) forgave loans, in whole or in part, made by approved
lenders to eligible borrowers for payroll and other permitted purposes in accordance with the requirements of the program. These
loans carried a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. The loans were 100% guaranteed
by the SBA and as long as the borrower submitted its loan forgiveness application within ten months of completion of the covered
period. The borrower was not required to make any payments until the forgiveness amount was remitted to the lender by the SBA.
The Bank received a processing fee from the SBA ranging from 1% to 5% based on the size of the loan. The fees are deferred and
amortized over the life of the loans in accordance with ASC 310-20. The Paycheck Protection Program and Health Care Enhancement
Act (“PPP/ HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized additional funding under
the CARES Act of $310.0 billion for PPP loans to be issued by financial institutions through the SBA. On December 27, 2020, the
Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) was enacted, which reauthorized
lending under the PPP program through March 31, 2021, with an additional $325 billion. Over the course of the PPP program, the
Bank extended 480 loans with a total loan amount of $55.3 million. Because these loans were 100% guaranteed by the SBA and did
not undergo the Bank’s typical underwriting process, they were not graded and did not have an associated allowance.
Our
portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements
as scheduled. Our internal credit risk grading system is based on experience with similarly graded loans, industry best practices,
and regulatory guidance. Our portfolio is graded in its entirety, with the exception of the PPP loans.
Our
internally assigned grades pursuant to the Board-approved lending policy are as follows:
| ● | Excellent
(1) The borrowing entity has more than adequate cash flow, unquestionable strength,
strong earnings and capital, and where applicable, no overdrafts. |
| ● | Good
(2) The borrowing entity has dependable cash flow, better than average financial
condition, good capital and usually no overdrafts. |
| ● | Satisfactory
(3) The borrowing entity has adequate cash flow, satisfactory financial condition,
and explainable overdrafts (if any). |
| ● | Watch
(4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical
earnings, weak capital, loan to/from stockholders, and infrequent overdrafts. The borrower
has consistent yet sometimes unpredictable sales and growth. |
| ● | OAEM
(5) The borrowing entity has marginal cash flow, occasional past dues, and frequent
and unexpected working capital needs. |
| ● | Substandard
(6) The borrowing entity has cash flow barely sufficient to service debt, deteriorated
financial condition, and bankruptcy is a possibility. The borrowing entity has declining
sales, rising costs, and may need to look for secondary source of repayment. |
| ● | Doubtful
(7) The borrowing entity has negative cash flow. Survival of the business is at risk,
full repayment is unlikely, and there are frequent and unexplained overdrafts. The borrowing
entity shows declining trends and no operating profits. |
| ● | Loss
(8) The borrowing entity has negative cash flow with no alternatives. Survival of
the business is unlikely. |
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables illustrate credit risks by category and internally assigned grades at December 31, 2022 and 2021. “Pass”
includes loans internally graded as excellent, good and satisfactory.
December
31, 2022 | |
| | |
Commercial | | |
Commerical
Real Estate Construction | | |
Commercial
Real Estate Other | | |
Consumer
Real Estate | | |
Consumer
Other | | |
Paycheck
Protection Program | | |
Total | |
Pass | | |
$ | 42,724,289 | | |
$ | 17,524,260 | | |
$ | 167,518,577 | | |
$ | 86,183,899 | | |
$ | 3,597,886 | | |
$ | — | | |
$ | 317,548,911 | |
Watch | | |
| 976,966 | | |
| — | | |
| 3,223,532 | | |
| 4,928,437 | | |
| 208,417 | | |
| — | | |
| 9,337,352 | |
OAEM | | |
| 94,803 | | |
| — | | |
| 968,611 | | |
| 274,445 | | |
| 7,345 | | |
| — | | |
| 1,345,204 | |
Substandard | | |
| 1,276,001 | | |
| — | | |
| 1,186,667 | | |
| 249,757 | | |
| 37,890 | | |
| — | | |
| 2,750,315 | |
Doubtful | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | | |
$ | 45,072,059 | | |
$ | 17,524,260 | | |
$ | 172,897,387 | | |
$ | 91,636,538 | | |
$ | 3,851,538 | | |
$ | — | | |
$ | 330,981,782 | |
December
31, 2021 | |
| | |
Commercial | | |
Commerical
Real Estate Construction | | |
Commercial
Real Estate Other | | |
Consumer
Real Estate | | |
Consumer
Other | | |
Paycheck
Protection Program | | |
Total | |
Pass | | |
$ | 43,853,889 | | |
$ | 11,616,118 | | |
$ | 159,825,281 | | |
$ | 69,920,347 | | |
$ | 3,565,716 | | |
$ | 7,978,603 | | |
$ | 296,759,954 | |
Watch | | |
| 450,319 | | |
| 437,977 | | |
| 3,082,408 | | |
| 862,938 | | |
| 133,418 | | |
| — | | |
| 4,967,060 | |
OAEM | | |
| 36,749 | | |
| — | | |
| 1,158,268 | | |
| 274,445 | | |
| 29,244 | | |
| — | | |
| 1,498,706 | |
Substandard | | |
| 1,463,477 | | |
| — | | |
| 1,653,121 | | |
| 249,758 | | |
| 40,153 | | |
| — | | |
| 3,406,509 | |
Doubtful | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | | |
$ | 45,804,434 | | |
$ | 12,054,095 | | |
$ | 165,719,078 | | |
$ | 71,307,488 | | |
$ | 3,768,531 | | |
$ | 7,978,603 | | |
$ | 306,632,229 | |
The
following tables include an aging analysis of the recorded investment in loans segregated by class.
December
31, 2022 |
|
| |
30-59
Days
Past Due | | |
60-89
Days
Past Due | | |
Greater
than
90 Days | | |
Total
Past Due | | |
Current | | |
Total
Loans Receivable | | |
Recorded
Investment ≥ 90 Days and Accruing | |
Commercial |
| |
$ | 16,451 | | |
$ | 178,975 | | |
$ | — | | |
$ | 195,426 | | |
$ | 44,876,633 | | |
$ | 45,072,059 | | |
$ | — | |
Commercial Real Estate
Construction |
| |
| — | | |
| — | | |
| — | | |
| — | | |
| 17,524,260 | | |
| 17,524,260 | | |
| — | |
Commercial Real Estate
Other |
| |
| 45,425 | | |
| — | | |
| 631,453 | | |
| 676,878 | | |
| 172,220,509 | | |
| 172,897,387 | | |
| — | |
Consumer Real Estate |
| |
| 274,445 | | |
| — | | |
| — | | |
| 274,445 | | |
| 91,362,093 | | |
| 91,636,538 | | |
| — | |
Consumer Other |
| |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,851,538 | | |
| 3,851,538 | | |
| — | |
Paycheck
Protection Program |
| |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| | |
Total |
| |
$ | 336,321 | | |
$ | 178,975 | | |
$ | 631,453 | | |
$ | 1,146,749 | | |
$ | 329,835,033 | | |
$ | 330,981,782 | | |
$ | — | |
December
31, 2021 |
|
| |
30-59
Days Past Due | | |
60-89
Days Past Due | | |
Greater
than 90 Days | | |
Total
Past Due | | |
Current | | |
Total
Loans Receivable | | |
Recorded
Investment ≥ 90 Days and Accruing | |
Commercial |
| |
$ | 88,659 | | |
$ | — | | |
$ | — | | |
$ | 88,659 | | |
$ | 45,715,775 | | |
$ | 45,804,434 | | |
$ | — | |
Commercial Real Estate
Construction |
| |
| — | | |
| — | | |
| — | | |
| — | | |
| 12,054,095 | | |
| 12,054,095 | | |
| — | |
Commercial Real Estate
Other |
| |
| 59,269 | | |
| 288,464 | | |
| 337,490 | | |
| 685,223 | | |
| 165,033,855 | | |
| 165,719,078 | | |
| — | |
Consumer Real Estate |
| |
| — | | |
| — | | |
| — | | |
| — | | |
| 71,307,488 | | |
| 71,307,488 | | |
| — | |
Consumer Other |
| |
| 23,971 | | |
| — | | |
| — | | |
| 23,971 | | |
| 3,744,560 | | |
| 3,768,531 | | |
| — | |
Paycheck
Protection Program |
| |
| — | | |
| — | | |
| — | | |
| — | | |
| 7,978,603 | | |
| 7,978,603 | | |
| | |
Total |
| |
$ | 171,899 | | |
$ | 288,464 | | |
$ | 337,490 | | |
$ | 797,853 | | |
$ | 305,834,376 | | |
$ | 306,632,229 | | |
$ | — | |
There
were no loans past due 90 days or more and still accruing interest at December 31, 2022 and 2021.
The
following table summarizes the balances of non-accrual loans.
| |
| Loans Receivable on Non-Accrual | |
| |
| December 31, 2022 | | |
| December 31, 2021 | |
| |
| | | |
| | |
Commercial | |
$ | — | | |
$ | 178,975 | |
Commercial Real Estate Construction | |
| — | | |
| — | |
Commercial Real Estate Other | |
| 631,453 | | |
| 625,953 | |
Consumer Real Estate | |
| — | | |
| — | |
Consumer Other | |
| — | | |
| 9,686 | |
Paycheck Protection Program | |
| — | | |
| — | |
Total | |
$ | 631,453 | | |
$ | 814,614 | |
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables set forth the changes in the allowance and an allocation of the allowance by class at December 31, 2022, 2021,
and 2020. The allowance consists of specific and general components. The specific component relates to loans that are individually
classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for
current economic factors.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
December
31, 2022 |
| |
Commercial | | |
Commercial
Real Estate Construction | | |
Commercial
Real Estate Other | | |
Consumer
Real Estate | | |
Consumer
Other | | |
Paycheck
Protection Program | | |
Total | |
Allowance
for Loan Losses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning
Balance | |
$ | 795,689 | | |
$ | 175,493 | | |
$ | 2,376,306 | | |
$ | 924,784 | | |
$ | 104,715 | | |
$ | — | | |
$ | 4,376,987 | |
Charge-offs | |
| (40,600 | ) | |
| — | | |
| — | | |
| (2,034 | ) | |
| — | | |
| (10 | ) | |
| (42,644 | ) |
Recoveries | |
| 800 | | |
| — | | |
| 18,000 | | |
| — | | |
| 12,224 | | |
| 854 | | |
| 31,878 | |
Provisions | |
| (20,130 | ) | |
| 55,132 | | |
| (177,822 | ) | |
| 92,027 | | |
| (23,363 | ) | |
| (844 | ) | |
| (75,000 | ) |
Ending Balance | |
$ | 735,759 | | |
$ | 230,625 | | |
$ | 2,216,484 | | |
$ | 1,014,777 | | |
$ | 93,576 | | |
$ | — | | |
$ | 4,291,221 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
December
31, 2021 |
| |
Commercial | | |
Commercial
Real Estate Construction | | |
Commercial
Real Estate Other | | |
Consumer
Real Estate | | |
Consumer
Other | | |
Paycheck
Protection Program | | |
Total | |
Allowance
for Loan Losses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning
Balance | |
$ | 1,029,310 | | |
$ | 199,266 | | |
$ | 1,909,121 | | |
$ | 925,077 | | |
$ | 122,920 | | |
$ | — | | |
$ | 4,185,694 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| (11,440 | ) | |
| (9,550 | ) | |
| (20,990 | ) |
Recoveries | |
| 21,329 | | |
| — | | |
| — | | |
| 47,711 | | |
| 22,367 | | |
| 876 | | |
| 92,283 | |
Provisions | |
| (254,950 | ) | |
| (23,773 | ) | |
| 467,185 | | |
| (48,004 | ) | |
| (29,132 | ) | |
| 8,674 | | |
| 120,000 | |
Ending Balance | |
$ | 795,689 | | |
$ | 175,493 | | |
$ | 2,376,306 | | |
$ | 924,784 | | |
$ | 104,715 | | |
$ | — | | |
$ | 4,376,987 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
December
31, 2020 |
| |
Commercial | | |
Commercial
Real Estate Construction | | |
Commercial
Real Estate Other | | |
Consumer
Real Estate | | |
Consumer
Other | | |
Paycheck
Protection Program | | |
Total | |
Allowance
for Loan Losses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning
Balance | |
$ | 1,429,917 | | |
$ | 109,235 | | |
$ | 1,270,445 | | |
$ | 496,221 | | |
$ | 697,940 | | |
$ | — | | |
$ | 4,003,758 | |
Charge-offs | |
| (171,646 | ) | |
| — | | |
| — | | |
| — | | |
| (116,001 | ) | |
| (2,650 | ) | |
| (290,297 | ) |
Recoveries | |
| 88,811 | | |
| — | | |
| 99,801 | | |
| — | | |
| 43,599 | | |
| 22 | | |
| 232,233 | |
Provisions | |
| (317,772 | ) | |
| 90,031 | | |
| 538,875 | | |
| 428,856 | | |
| (502,618 | ) | |
| 2,628 | | |
| 240,000 | |
Ending Balance | |
$ | 1,029,310 | | |
$ | 199,266 | | |
$ | 1,909,121 | | |
$ | 925,077 | | |
$ | 122,920 | | |
$ | — | | |
$ | 4,185,694 | |
The
following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment
in loans.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December
31, 2022 | |
| |
Commercial | | |
Commercial
Real Estate Construction | | |
Commercial
Real Estate Other | | |
Consumer
Real Estate | | |
Consumer
Other | | |
Paycheck
Protection Program | | |
Total | |
Allowance
for Loan Losses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for impairment | |
$ | 179,230 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 37,889 | | |
$ | — | | |
$ | 217,119 | |
Collectively
evaluated for impairment | |
| 556,529 | | |
| 230,625 | | |
| 2,216,484 | | |
| 1,014,777 | | |
| 55,687 | | |
| — | | |
| 4,074,102 | |
Total
Allowance for Loan Losses | |
| 735,759 | | |
| 230,625 | | |
| 2,216,484 | | |
| 1,014,777 | | |
| 93,576 | | |
| — | | |
| 4,291,221 | |
Loans
Receivable | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated
for impairment | |
| 1,276,001 | | |
| — | | |
| 1,202,412 | | |
| 249,758 | | |
| 37,889 | | |
| — | | |
| 2,766,060 | |
Collectively
evaluated for impairment | |
| 43,796,058 | | |
| 17,524,260 | | |
| 171,694,975 | | |
| 91,386,780 | | |
| 3,813,649 | | |
| — | | |
| 328,215,722 | |
Total
Loans Receivable | |
$ | 45,072,059 | | |
$ | 17,524,260 | | |
$ | 172,897,387 | | |
$ | 91,636,538 | | |
$ | 3,851,538 | | |
$ | — | | |
$ | 330,981,782 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December
31, 2021 | |
| |
Commercial | | |
Commercial
Real Estate Construction | | |
Commercial
Real Estate Other | | |
Consumer
Real Estate | | |
Consumer
Other | | |
Paycheck
Protection Program | | |
Total | |
Allowance
for Loan Losses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for impairment | |
$ | 179,988 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 40,153 | | |
$ | — | | |
$ | 220,141 | |
Collectively
evaluated for impairment | |
| 615,701 | | |
| 175,493 | | |
| 2,376,306 | | |
| 924,784 | | |
| 64,562 | | |
| — | | |
| 4,156,846 | |
Total
Allowance for Loan Losses | |
| 795,689 | | |
| 175,493 | | |
| 2,376,306 | | |
| 924,784 | | |
| 104,715 | | |
| — | | |
| 4,376,987 | |
Loans
Receivable | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated
for impairment | |
| 1,463,477 | | |
| — | | |
| 1,653,121 | | |
| 249,758 | | |
| 40,153 | | |
| — | | |
| 3,406,509 | |
Collectively
evaluated for impairment | |
| 44,340,957 | | |
| 12,054,095 | | |
| 164,065,957 | | |
| 71,057,730 | | |
| 3,728,378 | | |
| 7,978,603 | | |
| 303,225,720 | |
Total
Loans Receivable | |
$ | 45,804,434 | | |
$ | 12,054,095 | | |
$ | 165,719,078 | | |
$ | 71,307,488 | | |
$ | 3,768,531 | | |
$ | 7,978,603 | | |
$ | 306,632,229 | |
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2022 and 2021, loans individually evaluated for impairment and the corresponding allowance for loan losses are
presented in the following table.
| |
Impaired
and Restructured Loans As of | |
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
| Unpaid
Principal Balance | | |
| Recorded
Investment | | |
| Related
Allowance | | |
| Unpaid
Principal Balance | | |
| Recorded
Investment | | |
| Related
Allowance | |
With
no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 317,553 | | |
$ | 317,553 | | |
$ | — | | |
$ | 1,096,407 | | |
$ | 1,096,407 | | |
$ | — | |
Commercial
Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial
Real Estate Other | |
| 1,202,412 | | |
| 1,202,412 | | |
| — | | |
| 1,653,121 | | |
| 1,653,121 | | |
| — | |
Consumer
Real Estate | |
| 249,758 | | |
| 249,758 | | |
| — | | |
| 249,758 | | |
| 249,758 | | |
| — | |
Consumer
Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Paycheck
Protection Program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
| 1,769,723 | | |
| 1,769,723 | | |
| — | | |
| 2,999,286 | | |
| 2,999,286 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
With
an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| 958,448 | | |
| 958,448 | | |
| 179,230 | | |
| 367,070 | | |
| 367,070 | | |
| 179,988 | |
Commercial
Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial
Real Estate Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Consumer
Real Estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Consumer
Other | |
| 37,889 | | |
| 37,889 | | |
| 37,889 | | |
| 40,153 | | |
| 40,153 | | |
| 40,153 | |
Paycheck
Protection Program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
| 996,337 | | |
| 996,337 | | |
| 217,119 | | |
| 407,223 | | |
| 407,223 | | |
| 220,141 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| 1,276,001 | | |
| 1,276,001 | | |
| 179,230 | | |
| 1,463,477 | | |
| 1,463,477 | | |
| 179,988 | |
Commercial
Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial
Real Estate Other | |
| 1,202,412 | | |
| 1,202,412 | | |
| — | | |
| 1,653,121 | | |
| 1,653,121 | | |
| — | |
Consumer
Real Estate | |
| 249,758 | | |
| 249,758 | | |
| — | | |
| 249,758 | | |
| 249,758 | | |
| — | |
Consumer
Other | |
| 37,889 | | |
| 37,889 | | |
| 37,889 | | |
| 40,153 | | |
| 40,153 | | |
| 40,153 | |
Paycheck
Protection Program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 2,766,060 | | |
$ | 2,766,060 | | |
$ | 217,119 | | |
$ | 3,406,509 | | |
$ | 3,406,509 | | |
$ | 220,141 | |
The
following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for
the periods indicated.
| |
For
the year ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
Average
Recorded Investment | | |
Interest
Income Recognized | | |
Average
Recorded Investment | | |
Interest
Income Recognized | | |
Average
Recorded Investment | | |
Interest
Income Recognized | |
With
no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 344,592 | | |
$ | 21,445 | | |
$ | 1,142,667 | | |
$ | 68,602 | | |
$ | 1,866,590 | | |
$ | 102,636 | |
Commercial
Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial
Real Estate Other | |
| 1,231,015 | | |
| 30,689 | | |
| 1,645,375 | | |
| 68,031 | | |
| 4,849,474 | | |
| 218,372 | |
Consumer
Real Estate | |
| 249,758 | | |
| 14,019 | | |
| 249,777 | | |
| 10,615 | | |
| 249,813 | | |
| 11,580 | |
Consumer
Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Paycheck
Protection Program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
| 1,825,365 | | |
| 66,153 | | |
| 3,037,819 | | |
| 147,248 | | |
| 6,965,877 | | |
| 332,588 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
With
an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| 981,575 | | |
| 63,267 | | |
| 378,499 | | |
| 22,130 | | |
| 578,399 | | |
| 37,663 | |
Commercial
Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial
Real Estate Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| 337,304 | | |
| — | |
Consumer
Real Estate | |
| — | | |
| — | | |
| — | | |
| — | | |
| 36,483 | | |
| (116 | ) |
Consumer
Other | |
| 38,962 | | |
| 2,532 | | |
| 41,133 | | |
| 2,674 | | |
| 42,089 | | |
| 2,743 | |
Paycheck
Protection Program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
| 1,020,537 | | |
| 65,799 | | |
| 419,632 | | |
| 24,804 | | |
| 994,275 | | |
| 40,290 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| 1,326,167 | | |
| 84,712 | | |
| 1,521,166 | | |
| 90,732 | | |
| 2,444,989 | | |
| 140,299 | |
Commercial
Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial
Real Estate Other | |
| 1,231,015 | | |
| 30,689 | | |
| 1,645,375 | | |
| 68,031 | | |
| 5,186,778 | | |
| 218,372 | |
Consumer
Real Estate | |
| 249,758 | | |
| 14,019 | | |
| 249,777 | | |
| 10,615 | | |
| 286,296 | | |
| 11,464 | |
Consumer
Other | |
| 38,962 | | |
| 2,532 | | |
| 41,133 | | |
| 2,674 | | |
| 42,089 | | |
| 2,743 | |
Paycheck
Protection Program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| |
$ | 2,845,902 | | |
$ | 131,952 | | |
$ | 3,457,451 | | |
$ | 172,052 | | |
$ | 7,960,152 | | |
$ | 372,878 | |
In
general, the modification or restructuring of a debt is considered a troubled debt restructuring (“TDR”) if we, for
economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not
otherwise consider. As of December 31, 2022 and December 31, 2021, there were five
TDRs with a balance of $1.0 million.
These TDRs were granted extended payment terms with no principal reduction. The structure of two of
the loans changed to interest only. One TDR was performing as agreed as of December 31, 2022, while the other TDR is not performing as agreed and we are considering further collection actions, including potential foreclosure proceedings. No other TDRs that were modified
within the previous twelve months defaulted during the following year for the years ended December 31, 2022, 2021, and
2020.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Regulatory
agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial
institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of
the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive
actions that may mitigate adverse effects on borrowers due to COVID- 19 and that the agencies will not criticize institutions
for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications
related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013
of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed
on a loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier
of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short-term loan modifications made
on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning
in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively
impacted by COVID-19. During 2020, the Bank processed approximately $0.7 million in principal deferments to 84 customers, with
an aggregate loan balance of $25.9 million. The Bank did not process any principal deferments during the years ended December
31, 2022 and 2021. The principal deferments represented 0.24% of our total loan portfolio as of December 31, 2020. The Bank has
examined the payment accommodations granted to borrowers in response to COVID-19 and classified 9 loans, with an aggregate loan
balance of $4.0 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer,
associated industry risk, and multiple deferral requests. All other borrowers were current prior to relief, were not experiencing
financial difficulty prior to COVID- 19, and the Bank determined they were not considered TDRs. As of December 31, 2021, 4 of
the TDRs were removed from TDR status due to improvement in financial condition and sustained performance under the restructured
terms, 2 TDRs were paid off through refinancing into new loans at market terms, and 1 TDR was paid off. Two loans with a balance
of $0.5 million remain in TDR status as of December 31, 2021. Additionally, of the 75 customers that received payment accommodations
that were not classified as TDRs, 41 customers, with an aggregate loan balance of $9.9 million, have paid their loan in full as
of December 31, 2021. An additional loan was removed from TDR status during 2022. The remaining loan with a balance of $0.1 million
is paying as agreed as of December 31, 2022. There are no loans that received payment accommodation past due greater than 30 days.
The Bank will continue to examine payment accommodations as requested by borrowers.
5. | CONCENTRATIONS
OF CREDIT RISK |
We
grant short to intermediate term commercial and consumer loans to customers throughout our primary market area of Charleston,
Berkeley and Dorchester counties of South Carolina. Our primary market area is heavily dependent on tourism, medical, and legal
services. Although we have a diversified loan portfolio, a substantial portion of our debtors’ ability to honor their contracts
is dependent upon the stability of the economic environment in their primary market. The majority of the loan portfolio is located
in our immediate market area with a concentration in real estate related activities.
Our
loans were concentrated in the following categories.
| |
December
31, 2022 | | |
December
31, 2021 | |
Commercial | |
| 13.62 | % | |
| 14.94 | % |
Commercial Real Estate
Construction | |
| 5.29 | % | |
| 3.93 | % |
Commercial Real Estate
Other | |
| 52.24 | % | |
| 54.04 | % |
Consumer Real Estate | |
| 27.69 | % | |
| 23.26 | % |
Consumer Other | |
| 1.16 | % | |
| 1.23 | % |
Paycheck
Protection Program | |
| — | % | |
| 2.60 | % |
Total | |
| 100.00 | % | |
| 100.00 | % |
6. | PREMISES,
EQUIPMENT AND LEASEHOLD IMPROVEMENTS |
Premises,
equipment and leasehold improvements are summarized in the table below.
| |
|
|
|
|
|
| |
| |
December
31, | |
| |
2022 | | |
2021 | |
Bank buildings | |
$ | 1,861,237 | | |
$ | 1,861,237 | |
Land | |
| 838,075 | | |
| 838,075 | |
Leasehold purchases | |
| 30,000 | | |
| 30,000 | |
Leasehold improvements | |
| 2,629,441 | | |
| 2,595,825 | |
Construction in progress | |
| 535,434 | | |
| 31,654 | |
Equipment | |
| 4,273,339 | | |
| 4,241,305 | |
Premises, equipment and leasehold improvements, gross | |
| 10,167,526 | | |
| 9,598,096 | |
Accumulated
depreciation | |
| (6,178,919 | ) | |
| (5,815,160 | ) |
Total | |
$ | 3,988,607 | | |
$ | 3,782,936 | |
Depreciation
on our bank premises and equipment charged to operating expense totaled $359,251, $412,866, and $421,040, during the year ended
December 31, 2022, 2021, and 2020, respectively.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2022 and 2021, the Company had operating right of use (“ROU”) assets of $13.4 million and $14.0 million,
respectively, and operating lease liabilities of $13.4 million and $14.0 million, respectively. The Company maintains operating
leases on land, branch facilities, and parking. Operating leases generally contain initial fixed payment terms that adjust in
future years based on the consumer price index or similar measure. Most of the leases include one or more options to renew, with
renewal terms extending up to 20 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet
and are recognized in lease expense.
As
of December 31, 2022, the weighted average remaining lease term is 15.69 years and the weighted average incremental borrowing
rate is 4.08%.
The
exercise of renewal options is based on the sole judgement of management and what they consider to be reasonably certain. Based
on the market areas, past practices, and contract terms of all leases, the Bank assumed all renewal options will be exercised.
Minimum rental commitments for these leases as of December 31, 2022 are presented in the table below.
| | |
| | |
2023 | | |
$ | 1,182,746 | |
2024 | | |
| 1,182,746 | |
2025 | | |
| 1,182,746 | |
2026 | | |
| 1,182,746 | |
2027 | | |
| 1,182,746 | |
2028
and thereafter | | |
| 12,309,253 | |
Total
undiscounted lease payments | | |
$ | 18,222,983 | |
Less:
effect of discounting | | |
| (4,789,291 | ) |
Present
value of estimated lease payments | | |
$ | 13,433,692 | |
The
table below shows lease expense components for the years ended December 31, 2022 and 2021.
| |
|
|
|
|
|
| |
| |
December 31, | |
Lease Expense Components: | |
2022 | | |
2021 | |
Operating lease expense | |
$ | 1,192,292 | | |
$ | 1,139,393 | |
Short-term lease expense | |
| — | | |
| — | |
Total lease expense | |
$ | 1,192,292 | | |
$ | 1,139,393 | |
Total
rental expense was $1,192,292,
$1,139,393 and
$972,815, during
the years ended December 31, 2022, 2021 and 2020, respectively.
As
of December 31, 2022, we did not maintain any finance leases and we determined that the number and dollar amount of equipment
leases was immaterial. As of December 31, 2022, we have no additional operating leases that have not yet commenced.
As
of December 31, 2022 and 2021, time deposits of $250,000 or more totaled approximately $5,303,509 and $7,417,864, respectively.
The scheduled maturities of certificates of deposit as of December 31, 2022 are presented in the table below:
| | |
| | |
2023 | | |
$ | 14,820,344 | |
2024 | | |
| 581,665 | |
2025 | | |
| 34,427 | |
2026 | | |
| 780,208 | |
2027 and thereafter | | |
| 352,964 | |
| | |
$ | 16,569,608 | |
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2022 and 2021, deposits with a deficit balance of $80,524 and $28,549, respectively, were re-classified as other
loans.
At
December 31, 2022 and 2021, we had no outstanding federal funds purchased. We have a Borrower-In-Custody arrangement with the
Federal Reserve. This arrangement permits the Company to retain possession of loans pledged as collateral to secure advances from
the Federal Reserve Discount Window. Under this agreement, we may borrow up to $78.3 million as of December 31, 2022. We established
this arrangement as an additional source of liquidity.
At
December 31, 2022 and 2021, the Bank had unused short-term lines of credit totaling approximately $41.0 million and $41.0 million,
respectively (which are withdrawable at the lender’s option).
Total income taxes for the years ended December 31, 2022, 2021 and 2020 are presented in the table below.
| |
|
|
|
|
|
|
|
|
|
| |
| |
For the year ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Income tax expense | |
$ | 1,977,372 | | |
$ | 2,071,503 | | |
$ | 1,965,679 | |
Unrealized gains (losses) on securities available for sale presented in accumulated other comprehensive income (loss) | |
| (4,856,451 | ) | |
| (1,010,881 | ) | |
| 315,546 | |
Total | |
$ | (2,879,079 | ) | |
$ | 1,060,622 | | |
$ | 2,281,225 | |
Income
tax expense was as follows:
| |
|
|
|
|
|
|
|
|
|
| |
| |
For the year ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Current income taxes | |
| | | |
| | | |
| | |
Federal | |
$ | 1,837,678 | | |
$ | 1,796,283 | | |
$ | 1,543,334 | |
State | |
| 311,494 | | |
| 321,971 | | |
| — | |
Total current tax expense | |
| 2,149,172 | | |
| 2,118,254 | | |
| 1,543,334 | |
Deferred income tax (benefit) expense | |
| (171,800 | ) | |
| (46,751 | ) | |
| 422,345 | |
Total income tax expense | |
$ | 1,977,372 | | |
$ | 2,071,503 | | |
$ | 1,965,679 | |
The
differences between actual income tax expense and the amounts computed by applying the U.S. federal income tax rate of 21% to
pretax income from continuing operations for the periods indicated are reconciled in the table below.
| |
|
|
|
|
|
|
|
|
|
| |
| |
For the year ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Computed “expected” tax expense | |
$ | 1,812,828 | | |
$ | 1,851,433 | | |
$ | 1,769,525 | |
Increase (reduction) in income taxes resulting from: | |
| | | |
| | | |
| | |
Stock based compensation | |
| 24,901 | | |
| 21,637 | | |
| 19,527 | |
Valuation allowance | |
| (9,111 | ) | |
| 7,658 | | |
| 8,083 | |
Other | |
| 22,389 | | |
| 7,477 | | |
| 7,259 | |
State income tax, net of federal benefit | |
| 246,080 | | |
| 248,887 | | |
| 238,729 | |
Tax exempt interest income | |
| (119,715 | ) | |
| (65,589 | ) | |
| (77,444 | ) |
Total income tax expense | |
$ | 1,977,372 | | |
$ | 2,071,503 | | |
$ | 1,965,679 | |
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2022 and 2021 are presented below.
| |
| | |
| |
| |
As
of December 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | | |
| | |
Allowance
for loan losses | |
$ | 901,156 | | |
$ | 905,365 | |
Unrealized loss
on securities available for sale | |
| 5,423,444 | | |
| — | |
Deferred loan fees | |
| 33,481 | | |
| 102,581 | |
Pass through income | |
| 188,401 | | |
| 26,525 | |
State net operating
loss carryforward | |
| 88,229 | | |
| 97,655 | |
Nonaccrual interest | |
| 36,879 | | |
| 29,246 | |
Other | |
| 11,421 | | |
| 9,432 | |
Total gross deferred
tax assets | |
| 6,683,011 | | |
| 1,170,804 | |
Valuation
allowance | |
| (88,544 | ) | |
| (97,655 | ) |
Total gross deferred
tax assets, net of valuation allowance | |
| 6,594,467 | | |
| 1,073,149 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Fixed assets, principally
due to differences in depreciation | |
| (289,935 | ) | |
| (338,716 | ) |
Unrealized
gain on securities available for sale | |
| — | | |
| (1,360,199 | ) |
State credit carryforward | |
| — | | |
| (5,672 | ) |
Prepaid expenses | |
| (567 | ) | |
| (29,869 | ) |
Other | |
| (59,337 | ) | |
| (58,619 | ) |
Total gross deferred tax liabilities | |
| (349,839 | ) | |
| (1,793,075 | ) |
| |
| | | |
| | |
Net
deferred tax asset (liability) | |
$ | 6,244,628 | | |
$ | (719,926 | ) |
There
was a $88,544 and $97,655 valuation allowance for deferred tax assets at December 31, 2022 and 2021, respectively, associated
with the Company’s state tax credits. In assessing the realization of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible and prior to their expiration governed by the income tax code. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future taxable income over the periods during which the
deferred income tax assets are expected to be deductible, management believes it is more likely than not the Company will realize
the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2022 and 2021. The amount
of the deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable
income during the carry forward period are reduced.
The
Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary
differences are expected to be recovered or paid.
The
Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related
to uncertain tax positions in accordance with applicable regulations.
Tax
returns for 2019 and subsequent years are subject to examination by taxing authorities.
11. | COMMITMENTS
AND CONTINGENCIES |
We
are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is
essentially the same as that involved in extending loan facilities to customers. We use the same credit policies in making commitments
and conditional obligations as we do for on-balance sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. If deemed necessary, the amount of collateral obtained upon extension of credit is based on our credit evaluation
of the borrower. Collateral held varies, but may include accounts receivable, negotiable instruments, inventory, property, plant
and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to $145,392,792 and $117,450,893
at December 31, 2022 and 2021, respectively.
Standby
letters of credit represent our obligation to a third-party contingent upon the failure by our customer to perform under the terms
of an underlying contract with the third party or obligates us to guarantee or stand as surety for the benefit of the third party.
The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of
goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be
drawn only when the underlying event fails to occur as intended. We can seek recovery of the amounts paid from the borrower. Commitments
under standby letters of credit are usually for one year or less. At December 31, 2022 and 2021, we have recorded no liability
for the current carrying amount of the obligation to perform as a guarantor; as such amounts are not considered material. The
maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2022 and 2021 was
$2,518,771 and $648,717, respectively.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. | RELATED
PARTY TRANSACTIONS |
In
the opinion of management, loans to our Executive Officers and Directors are made on substantially the same terms, including interest
rates and collateral, as those terms prevailing at the time for comparable loans with persons not related to the lender that do
not involve more than the normal risk of collectability. There were no past due loans to our Executive Officers and Directors
as of December 31, 2022 and 2021.
The
table below summarizes related party loans.
| |
December
31, 2022 | | |
December
31, 2021 | |
Balance
at beginning of the year | |
$ | 5,513,146 | | |
$ | 5,970,014 | |
New loans or advances | |
| 806,053 | | |
| 3,693,836 | |
Repayments | |
| (2,134,441 | ) | |
| (4,150,704 | ) |
Balance
at the end of the year | |
$ | 4,184,758 | | |
$ | 5,513,146 | |
At
December 31, 2022 and 2021, total deposits held by related parties were $7,426,656 and $11,405,076, respectively.
The
table below summarizes the components of other operating expense.
| |
|
|
|
|
|
|
|
|
|
| |
| |
For the year ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Telephone and postage | |
$ | 205,296 | | |
$ | 233,667 | | |
$ | 219,065 | |
State and FDIC insurance and fees | |
| 258,541 | | |
| 212,284 | | |
| 95,353 | |
Supplies | |
| 61,551 | | |
| 63,850 | | |
| 74,472 | |
Courier service | |
| 48,475 | | |
| 44,825 | | |
| 48,048 | |
Insurance | |
| 55,178 | | |
| 56,748 | | |
| 53,000 | |
Advertising and business development | |
| 11,480 | | |
| 8,114 | | |
| 9,045 | |
Other | |
| 690,833 | | |
| 805,966 | | |
| 746,502 | |
Total other operating expenses | |
$ | 1,331,354 | | |
$ | 1,425,454 | | |
$ | 1,245,485 | |
We
have two
employee Stock Incentive Plans: the first plan, which was approved in 2010, has 300,000
(363,000
adjusted for two 10%
stock dividends) shares reserved and the second plan, which was approved in 2020, has 300,000
shares reserved. No new options may be granted under the 2010 plan, as it expired on April 14, 2020. Under the 2020 plan, options
are periodically granted to employees at a price not less than the fair market value of the shares at the date of grant. Employees
become 20%
vested after five years and then vest 20%
each year until fully vested. The right to exercise each such 20%
of the options is cumulative and will not expire until the tenth anniversary of the date of the grant. All employees are eligible to
participate in the 2020 plan if the Executive/Long-Range Planning Committee, in its sole discretion, determines that such person has
contributed or can be expected to contribute to our profits or growth. With respect to Executive Officers, the Executive/ Long-Range
Planning Committee will obtain approval from the Compensation Committee for any options granted to them.
We
also have a stock incentive plan to provide equity incentive compensation to the Company’s eligible independent directors. The
plan was approved by the shareholders in 2021 and has 150,000 shares reserved. Under the 2021 plan, options may be granted to
eligible independent directors at a price not less than the fair market value of the shares at the date of grant. Options granted
to independent directors become vested as to 20% of the options per year and will be fully vested after five years. The right
to exercise each such 20% of the options is cumulative and will not expire until the tenth anniversary of the date of the grant.
Each independent director is eligible to participate in the 2021 plan if the Compensation Committee, in its sole discretion, determines
that such person has contributed or can be expected to contribute to our profits or growth.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option
awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date
of grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes)
model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of our common
stock. The expected term of the options granted shall not exceed ten years from the date of grant (the amount of time options
granted are expected to be outstanding). The risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant.
The
fair value of options granted was determined using the following weighted-average assumptions as of grant date:
| |
2022 | | |
2021 | | |
2020 | |
Risk free interest rate | |
| 2.75 | % | |
| 1.46 | % | |
| 0.63 | % |
Expected life (in years) | |
| 5.00 | | |
| 5.99 | | |
| 7.50 | |
Expected stock price volatility | |
| 35.30 | % | |
| 34.18 | % | |
| 32.90 | % |
Dividend yield | |
| 4.15 | % | |
| 4.00 | % | |
| 4.26 | % |
The
following table presents a summary of the activity under the 2010, 2020 and 2021 Stock Incentive Plans for the years ended December
31:
| |
2022 | | |
2021 | | |
2020 | |
| |
Shares | | |
Weighted
Average Exercise Price | | |
Shares | | |
Weighted
Average Exercise Price | | |
Shares | | |
Weighted
Average Exercise Price | |
Outstanding, January 1 | |
| 273,747 | | |
$ | 17.50 | | |
| 202,344 | | |
$ | 14.89 | | |
| 86,097 | | |
$ | 12.92 | |
Granted | |
| 5,000 | | |
| 17.10 | | |
| 115,750 | | |
| 20.15 | | |
| 145,750 | | |
| 15.31 | |
Exercised | |
| (11,085 | ) | |
| 14.58 | | |
| (22,305 | ) | |
| 10.64 | | |
| (19,298 | ) | |
| 9.39 | |
Forfeited | |
| (13,250 | ) | |
| 18.68 | | |
| (22,042 | ) | |
| 15.07 | | |
| (10,205 | ) | |
| 15.19 | |
Outstanding, December
31 | |
| 254,412 | | |
$ | 17.56 | | |
| 273,747 | | |
$ | 17.50 | | |
| 202,344 | | |
$ | 14.89 | |
Exercisable
at year end | |
| 20,626 | | |
$ | 17.76 | | |
| 7,804 | | |
$ | 12.17 | | |
| 21,113 | | |
$ | 9.77 | |
The
following table presents information pertaining to options outstanding at December 31, 2022.
Exercise Price | | |
Number of Options Outstanding | | |
Weighted Average Remaining Contractual Life | | |
Weighted Average Exercise Price of Options Outstanding | | |
Intrinsic Value of Options Outstanding | | |
Number of Options Exercisable | | |
Weighted Average Exercise Price of Options Exercisable | | |
Intrinsic Value of Options Exercisable | |
$ | 12.26 | | |
| 3,508 | | |
| 1.58 | | |
$ | 12.26 | | |
$ | 43,008 | | |
| 2,806 | | |
$ | 12.26 | | |
$ | 13,038 | |
$ | 12.40 | | |
| 969 | | |
| 1.00 | | |
$ | 12.40 | | |
$ | 12,016 | | |
| 969 | | |
$ | 12.40 | | |
$ | 4,366 | |
$ | 13.05 | | |
| 7,260 | | |
| 2.33 | | |
$ | 13.05 | | |
$ | 94,743 | | |
| 4,356 | | |
$ | 13.05 | | |
$ | 16,796 | |
$ | 15.21 | | |
| 106,250 | | |
| 7.33 | | |
$ | 15.21 | | |
$ | 1,616,063 | | |
| — | | |
$ | 15.21 | | |
$ | — | |
$ | 16.73 | | |
| 10,000 | | |
| 7.33 | | |
$ | 16.73 | | |
$ | 167,300 | | |
| — | | |
$ | 16.73 | | |
$ | — | |
$ | 17.10 | | |
| 5,000 | | |
| 9.42 | | |
$ | 17.10 | | |
$ | 85,500 | | |
| — | | |
$ | 16.73 | | |
$ | — | |
$ | 18.23 | | |
| 28,950 | | |
| 7.33 | | |
$ | 18.23 | | |
$ | 527,759 | | |
| — | | |
$ | 18.23 | | |
$ | — | |
$ | 19.82 | | |
| 7,225 | | |
| 7.33 | | |
$ | 19.82 | | |
$ | 143,200 | | |
| 495 | | |
$ | 19.82 | | |
$ | — | |
$ | 20.04 | | |
| 20,250 | | |
| 8.59 | | |
$ | 20.04 | | |
$ | 405,810 | | |
| — | | |
$ | 20.04 | | |
$ | — | |
$ | 21.10 | | |
| 65,000 | | |
| 8.33 | | |
$ | 21.10 | | |
$ | 1,371,500 | | |
| 12,000 | | |
$ | 21.10 | | |
$ | — | |
| | | |
| 254,412 | | |
| 7.48 | | |
$ | 17.56 | | |
$ | 4,466,899 | | |
| 20,626 | | |
$ | 17.76 | | |
$ | 34,200 | |
The
total intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $161,740, $208,259 and
$139,837, respectively. Shares issued upon exercise of stock options are obtained from the authorized and unissued pool of common
stock. Shares surrendered as payment of the stock option exercise price are included in treasury stock.
We
recognized compensation cost for the years ended December 31, 2022, 2021 and 2020 in the amount of $121,673, $103,033 and $92,986,
respectively, related to the granted options.
As
of December 31, 2022, there was a total of $593,680 in unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Plan. The cost is expected to be recognized over a weighted average period of 4.41 years.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. | EMPLOYEE
STOCK OWNERSHIP PLAN AND TRUST |
We
established an Employee Stock Ownership Plan (“ESOP”) effective January 1, 1989. Any employee of the Bank is eligible
to become a participant in the ESOP upon reaching 21 years of age and credited with one-year of service (1,000 hours of service).
The employee may enter the Plan on the January 1st that occurs nearest the date on which the employee first satisfies the age
and service requirements described above. No contributions by employees are permitted. The amount and time of contributions are
at the sole discretion of the Board of Directors of the Bank. The contribution for all participants is based solely on each participant’s
respective regular or base salary and wages paid by the Bank including commissions, bonuses and overtime, if any.
The
Company recognizes expense when the contribution is approved by the Board of Directors. The total expenses amounted to
$540,000, $540,000 and $540,000, during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31,
2022, the plan owned 336,088 shares of common stock of the Company.
A
participant vests in the ESOP based upon the participant’s credited years of service. The vesting schedule is as follows:
| ● | 1
Year of Service 0% Vested |
| ● | 2
Years of Service 25% Vested |
| ● | 3
Years of Service 50% Vested |
| ● | 4
Years of Service 75% Vested |
| ● | 5
Years of Service 100% Vested |
Periodically,
the Internal Revenue Service “IRS” requires a restatement of a qualified retirement plan to ensure that the plan document
includes provisions required by legislative and regulatory changes made since the last restatement. There have been no substantive
changes to the plan. The Board of Directors approved a restated plan, on January 26, 2012 (incorporated as Exhibit 10.5 in the
2011 10-K). The Plan was submitted to the IRS for approval and a determination letter was issued September 26, 2013, stating that
the plan satisfies the requirements of Code Section 4975(e)(7). On January 26, 2017, the Board of Directors approved a restated
plan (incorporated as Exhibit 10.6 in the 2016 10-K). The Plan was submitted to the IRS for approval and a determination letter
was issued November 17, 2017, stating that the plan satisfies the requirements of Code Section 4975(e)(7).
The
Bank’s ability to pay dividends to the Company is restricted by the laws and regulations of the State of South Carolina.
Generally, these restrictions allow the Bank to pay dividends from current earnings without the prior written consent of the South
Carolina Commissioner of Banking, if it received a satisfactory rating at its most recent examination. Cash dividends when declared,
are paid by the Bank to the Company for distribution to shareholders of the Company. The Bank paid dividends of $3.8 million,
$4.3 million and $3.6 million, to the Company during the years ended December 31, 2022, 2021 and 2020, respectively.
17. | INCOME
PER COMMON SHARE |
The
following table is a summary of the reconciliation of weighted average shares outstanding for the years ended December 31:
| |
2022 | | |
2021 | | |
2020 | |
Net
income | |
$ | 6,655,140 | | |
$ | 6,744,865 | | |
$ | 6,460,631 | |
| |
| | | |
| | | |
| | |
Weighted average shares outstanding | |
| 5,550,078 | | |
| 5,531,518 | | |
| 5,526,948 | |
Effect of dilutive
shares | |
| 94,620 | | |
| 148,964 | | |
| 151,595 | |
Weighted average
shares outstanding - diluted | |
| 5,644,698 | | |
| 5,680,482 | | |
| 5,678,543 | |
| |
| | | |
| | | |
| | |
Earnings per share - basic | |
$ | 1.20 | | |
$ | 1.22 | | |
$ | 1.17 | |
Earnings per share - diluted | |
$ | 1.18 | | |
$ | 1.19 | | |
$ | 1.14 | |
18. | REGULATORY
CAPITAL REQUIREMENTS |
The
Company and the Bank are subject to various capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Company and 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 assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification are also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
On
July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s
(“BCBS”) capital guidelines for U.S. banks (“Basel III”). Following the actions by the Federal Reserve,
the FDIC also approved regulatory capital requirements on July 9, 2013. The FDIC’s rule is identical in substance to the
final rules issued by the Federal Reserve Bank.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basel
III became effective on January 1, 2015 and its purpose is to improve the quality and increase the quantity of capital for all
banking organizations. The rule was phased in over a four-year period, with full implementation occurring on January 1, 2019. The
minimum requirements for the quantity and quality of capital were increased. The rule includes a new common equity Tier 1 capital
(as defined in the regulation) to risk-weighted assets ratio of 4.50%
and a common equity Tier 1 capital conservation buffer of 2.50%
of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00%
to 6.00%
and requires a minimum leverage ratio of 4.00%.
In addition, the rule also implements strict eligibility criteria for regulatory capital instruments and improves the methodology
for calculating risk-weighted assets to enhance risk sensitivity.
On
November 4, 2019, the federal banking agencies jointly issued a final rule on an optional, simplified measure of capital adequacy
for qualifying community banking organizations called the community bank leverage ratio (“CBLR”) framework effective on
January 1, 2020. A qualifying community banking organization is defined as having less than $
billion in total consolidated assets, a leverage ratio greater than %,
off-balance sheet exposures of %
or less of total consolidated assets, and trading assets and liabilities of 5%
or less of total consolidated assets. Additionally, the qualifying community banking institution must be a non-advanced approaches
FDIC supervised institution. The final rule adopts Tier 1 capital and existing leverage ratio into the CBLR framework. The Bank
adopted this rule as of September 30, 2020 and is no longer subject to other capital and leverage requirements. Under the CBLR
framework, a qualifying community banking organization is deemed to have met the “well capitalized” ratio requirements
and be in compliance with the generally applicable capital rule. As noted in the table below, the leverage ratio was below .0% at
December 31, 2021 and therefore we did not meet the "well capitalized" ratio requirements and was not in complinance.
The following table presents the actual CBLR for the Bank and Company at:
|
December
31, 2022 |
|
December
31, 2021 |
Bank |
|
Company |
|
We
believe that the Company and the Bank meet all capital adequacy requirements to which they were subject at December 31, 2022 and
2021.
19. | DISCLOSURES
REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS |
Fair
value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring
or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the
principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly
transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing
activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction.
GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent
sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed
based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would
use in pricing an asset or liability.
The
fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken
down into three levels based on the reliability of inputs as follows:
| ● | Level
1: valuation is based upon unadjusted quoted market prices for identical instruments
traded in active markets. |
| ● | Level
2: valuation is based upon quoted market prices for similar instruments traded in active
markets, quoted market prices for identical or similar instruments traded in markets
that are not active and model-based valuation techniques for which all significant assumptions
are observable in the market or can be corroborated by market data. |
| ● | Level
3: valuation is derived from other valuation methodologies, including discounted cash
flow models and similar techniques that use significant assumptions not observable in
the market. These unobservable assumptions reflect estimates of assumptions that market
participants would use in determining fair value. |
Fair
value estimates are made at a specific point of time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could result from offering for sale our entire holdings
of a particular financial instrument. Because no active market exists for a significant portion of our financial instruments,
fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, current interest
rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes
in any of these assumptions used in calculating fair value would also significantly affect the estimates. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates
and have not been considered in any of these estimates.
The
following paragraphs describe the valuation methodologies used for assets recorded at fair value on a recurring basis:
Investment
Securities Available for Sale
Investment
securities are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices
are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as
the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other
factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York
Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage-backed
securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as
Level 3 include asset-backed and municipal securities in less liquid markets.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative
Instruments
Derivative
instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on the change
in the value of the underlying loan between the commitment date and the end of the period. We classify these instruments as Level
3.
We
had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments consisting
of fixed rate conforming loan commitments with interest rate locks and commitments to sell fixed rate conforming loans on a best-efforts
basis. We do not currently engage in hedging activities. Based on the short-term nature of mortgage loans to be sold (derivative
contract), our derivative instruments were immaterial to our consolidated financial statements as of December 31, 2022 and 2021.
The
following table presents information about assets measured at fair value on a recurring basis as of December 31, 2022 and 2021.
| |
Balance
as of December 31, 2022 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
U.S. Treasury
Notes | |
$ | 168,187,315 | | |
$ | — | | |
$ | — | | |
$ | 168,187,315 | |
Government-Sponsored
Enterprises | |
| — | | |
| | |
| — | | |
| |
Municipal
Securities | |
| — | | |
| 16,448,375 | | |
| 29,461,812 | | |
| 45,910,187 | |
Total | |
$ | 168,187,315 | | |
$ | 73,523,099 | | |
$ | 29,461,812 | | |
$ | 271,172,226 | |
| |
Balance
as of December 31, 2021 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
U.S. Treasury
Notes | |
$ | 100,062,300 | | |
$ | — | | |
$ | — | | |
$ | 100,062,300 | |
Government-Sponsored
Enterprises | |
| — | | |
| | |
| — | | |
| |
Municipal
Securities | |
| — | | |
| 13,080,133 | | |
| 24,484,047 | | |
| 37,564,180 | |
Total | |
$ | 100,062,300 | | |
$ | 87,801,142 | | |
$ | 24,484,047 | | |
$ | 212,347,489 | |
There
were no liabilities recorded at fair value on a recurring basis as of December 31, 2022 or 2021.
The
following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the years ended December 31, 2022 and 2021.
| |
December 31, 2022 | | |
December 31, 2021 | |
Beginning balance | |
$ | 24,484,047 | | |
$ | 5,683,930 | |
Total realized/unrealized gains (losses) | |
| | | |
| | |
Included in earnings | |
| — | | |
| — | |
Included in other comprehensive income | |
| (3,714,235 | ) | |
| (79,883 | ) |
Purchases, issuances, and settlements net of maturities | |
| 8,692,000 | | |
| 18,880,000 | |
Transfers in and/or out of Level 3 | |
| — | | |
| — | |
Ending balance | |
$ | 29,461,812 | | |
$ | 24,484,047 | |
The
following paragraphs describe the valuation methodologies used for assets recorded at fair value on a nonrecurring basis:
Impaired
Loans
Impaired
loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to
sell is the most frequently used method. Typically, we review the most recent appraisal and, if it is over 12 to 18 months old,
we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location
of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in
the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis.
Specifically, as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary
market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming
or immediately following the determination that the loan is impaired.
However,
as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and surrounding areas
and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby
the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar
properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These
valuations are reviewed and updated on a quarterly basis.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
accordance with ASC 820, Fair Value Measurement, impaired loans, where an allowance is established based on the fair value
of collateral, require classification in the fair value hierarchy. These impaired loans are classified as Level 3. Impaired loans
measured using discounted future cash flows are not deemed to be measured at fair value.
Mortgage
Loans to be Sold
Mortgage
loans to be sold are carried at the lower of cost or market value. The fair values of mortgage loans to be sold are based on current
market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates fair
value. These loans are classified as Level 2.
Certain
assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). The following tables present information about certain assets
measured at fair value on a nonrecurring basis as of December 31, 2022 and 2021.
| |
December 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Impaired loans | |
$ | — | | |
$ | — | | |
$ | 1,452,170 | | |
$ | 1,452,170 | |
Mortgage loans to be sold | |
| — | | |
| 866,594 | | |
| — | | |
| 866,594 | |
Total | |
$ | — | | |
$ | 866,594 | | |
$ | 1,452,170 | | |
$ | 2,318,764 | |
| |
December 31, 2021 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Impaired loans | |
$ | — | | |
$ | — | | |
$ | 1,902,879 | | |
$ | 1,902,879 | |
Mortgage loans to be sold | |
| — | | |
| 2,774,388 | | |
| — | | |
| 2,774,388 | |
Total | |
$ | — | | |
$ | 2,774,388 | | |
$ | 1,902,879 | | |
$ | 4,677,267 | |
There
were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2022 or 2021.
The
following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31,
2022:
|
|
|
|
Inputs |
|
|
|
|
Valuation
Technique |
|
Unobservable
Input |
|
General
Range of Inputs |
Impaired Loans |
|
Appraisal Value/Comparison
Sales/Other Estimates |
|
Appraisals and/or
Sales of Comparable Properties |
|
Appraisals Discounted
10% to 20% for Sales Commissions and Other Holding Costs |
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting
standards require disclosure of fair value information for all of our assets and liabilities that are considered financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to estimate fair value.
Under
the accounting standard, fair value estimates are based on existing financial instruments without attempting to estimate the value
of anticipated future business and the value of the assets and liabilities that are not financial instruments. Accordingly, the
aggregate fair value amounts of existing financial instruments do not represent the underlying value of those instruments on our
books.
The
following paragraphs describe the methods and assumptions we use in estimating the fair values of financial instruments:
| a. | Cash
and due from banks, interest-bearing deposits at the Federal Reserve Bank |
The
carrying value approximates fair value. All instruments mature within 90 days and do not present unanticipated credit concerns.
| b. | Investment
securities available for sale |
Investment
securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices,
if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions.
The
fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its
loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical
orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides
its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then
adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit
risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain
assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit
risk over the lifetime of a loan. Additionally, in accordance with ASU 2016-01, Recognition and Measurement of Financial Assets
and Liabilities, this consideration of enhanced credit risk provides an estimated exit price for the Company’s loan
portfolio.
For
variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.
Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.
The
estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is estimated
by discounting contractual cash flows, using interest rates currently being offered on the deposit products. The fair value estimates
for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities as compared
to the cost of alternative forms of funding (deposit base intangibles).
| e. | Accrued
interest receivable and payable |
Since
these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are
deemed a reasonable estimate of fair value.
Estimates
of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the
credit standing on the counterparties.
The
following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments
as of December 31, 2022 and 2021, respectively.
|
|
Fair
Value Measurements at December 31, 2022 |
|
|
|
Carrying
Amount |
|
|
Estimated
Fair Value |
|
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks |
|
$ |
14,772,564 |
|
|
$ |
14,772,564 |
|
|
$ |
14,772,564 |
|
|
$ |
— |
|
|
$ |
— |
|
Interest-bearing
deposits at the Federal Reserve |
|
|
12,999,135 |
|
|
|
12,999,135 |
|
|
|
12,999,135 |
|
|
|
— |
|
|
|
— |
|
Investment securities
available for sale |
|
|
271,172,226 |
|
|
|
271,172,226 |
|
|
|
168,187,315 |
|
|
|
73,523,099 |
|
|
|
29,461,812 |
|
Mortgage loans to
be sold |
|
|
866,594 |
|
|
|
866,594 |
|
|
|
— |
|
|
|
866,594 |
|
|
|
— |
|
Loans, net |
|
|
326,690,561 |
|
|
|
304,249,626 |
|
|
|
— |
|
|
|
— |
|
|
|
304,249,626 |
|
Accrued interest
receivable |
|
|
2,145,522 |
|
|
|
2,145,522 |
|
|
|
— |
|
|
|
2,145,522 |
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
582,100,650 |
|
|
|
582,100,650 |
|
|
|
— |
|
|
|
582,100,650 |
|
|
|
— |
|
Time deposits |
|
|
16,569,608 |
|
|
|
16,933,818 |
|
|
|
— |
|
|
|
16,933,818 |
|
|
|
— |
|
Accrued interest
payable |
|
|
41,007 |
|
|
|
41,007 |
|
|
|
— |
|
|
|
41,007 |
|
|
|
— |
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Fair
Value Measurements at December 31, 2021 |
|
|
|
Carrying
Amount |
|
|
Estimated
Fair Value |
|
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks |
|
$ |
11,140,559 |
|
|
$ |
11,140,559 |
|
|
$ |
11,140,559 |
|
|
$ |
— |
|
|
$ |
— |
|
Interest-bearing
deposits at the Federal Reserve |
|
|
128,971,429 |
|
|
|
128,971,429 |
|
|
|
128,971,429 |
|
|
|
— |
|
|
|
— |
|
Investment securities
available for sale |
|
|
212,347,489 |
|
|
|
212,347,489 |
|
|
|
100,062,300 |
|
|
|
87,801,142 |
|
|
|
24,484,047 |
|
Mortgage loans to
be sold |
|
|
2,774,388 |
|
|
|
2,774,388 |
|
|
|
— |
|
|
|
2,774,388 |
|
|
|
— |
|
Loans, net |
|
|
302,255,242 |
|
|
|
293,731,997 |
|
|
|
— |
|
|
|
— |
|
|
|
293,731,997 |
|
Accrued interest
receivable |
|
|
1,404,227 |
|
|
|
1,404,227 |
|
|
|
— |
|
|
|
1,404,227 |
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
587,903,356 |
|
|
|
587,903,356 |
|
|
|
— |
|
|
|
587,903,356 |
|
|
|
— |
|
Time deposits |
|
|
21,288,220 |
|
|
|
21,248,310 |
|
|
|
— |
|
|
|
21,428,310 |
|
|
|
— |
|
Accrued interest
payable |
|
|
14,914 |
|
|
|
14,914 |
|
|
|
— |
|
|
|
14,914 |
|
|
|
— |
|
20. | BANK
OF SOUTH CAROLINA CORPORATION - PARENT COMPANY |
The
Company’s principal source of income is dividends from the Bank. Certain regulatory requirements restrict the amount of
dividends which the Bank can pay to the Company. The Company’s principal asset is its investment in its Bank subsidiary.
The Company’s condensed statements of financial condition as of December 31, 2022 and 2021, and the related condensed statements
of income and cash flows for the years ended December 31, 2022, 2021 and 2020, are as follows:
Condensed
Statements of Financial Condition
| |
| | | |
| | |
| |
December
31, | |
| |
2022 | | |
2021 | |
Assets | |
| | |
| |
Cash | |
$ | 1,077,082 | | |
$ | 1,233,354 | |
Investment
in wholly-owned bank subsidiary | |
| 38,339,882 | | |
| 53,327,296 | |
Other
assets | |
| 338,322 | | |
| 298,998 | |
Total
assets | |
$ | 39,755,286 | | |
$ | 54,859,648 | |
| |
| | | |
| | |
Liabilities and shareholders’
equity | |
| | | |
| | |
Other
liabilities | |
$ | 943,899 | | |
$ | 942,015 | |
Shareholders’
equity | |
| 38,811,387 | | |
| 53,917,633 | |
Total
liabilities and shareholders’ equity | |
$ | 39,755,286 | | |
$ | 54,859,648 | |
Condensed
Statements of Income
| |
|
|
|
|
|
|
|
|
|
| |
| |
For
the year ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Interest
income | |
$ | 287 | | |
$ | 288 | | |
$ | 759 | |
Net operating expenses | |
| (267,243 | ) | |
| (256,471 | ) | |
| (255,409 | ) |
Dividends received
fom bank | |
| 3,640,000 | | |
| 3,805,000 | | |
| 4,700,000 | |
Equity
in undistributed earnings of subsidiary | |
| 3,282,096 | | |
| 3,196,048 | | |
| 2,015,281 | |
Net
income | |
$ | 6,655,140 | | |
$ | 6,744,865 | | |
$ | 6,460,631 | |
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed
Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
| |
| |
For
the year ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Cash flows from operating
activities: | |
| | | |
| | | |
| | |
Net income | |
$ | 6,655,140 | | |
$ | 6,744,865 | | |
$ | 6,460,631 | |
Stock-based compensation
expense | |
| 121,673 | | |
| 103,033 | | |
| 92,986 | |
Equity in undistributed
earnings of subsidiary | |
| (3,282,096 | ) | |
| (3,196,048 | ) | |
| (2,015,280 | ) |
Decrease in other assets | |
| (39,324 | ) | |
| (37,802 | ) | |
| (36,590 | ) |
Increase
in other liabilities | |
| — | | |
| (1 | ) | |
| — | |
Net cash provided by
operating activities | |
| 3,455,393 | | |
| 3,614,047 | | |
| 4,501,747 | |
| |
| | | |
| | | |
| | |
Cash flows from financing
activities: | |
| | | |
| | | |
| | |
Dividends paid | |
| (3,773,396 | ) | |
| (4,312,138 | ) | |
| (3,592,841 | ) |
Repurchase of common shares | |
| — | | |
| — | | |
| (398,868 | ) |
Stock
options exercised | |
| 161,731 | | |
| 207,889 | | |
| 117,044 | |
Net
cash used in financing activities | |
| (3,611,665 | ) | |
| (4,104,249 | ) | |
| (3,874,665 | ) |
| |
| | | |
| | | |
| | |
Net (decrease) increase
in cash | |
| (156,272 | ) | |
| (490,202 | ) | |
| 627,082 | |
Cash
at the beginning of the year | |
| 1,233,354 | | |
| 1,723,556 | | |
| 1,096,474 | |
Cash
at the end of the year | |
$ | 1,077,082 | | |
$ | 1,233,354 | | |
$ | 1,723,556 | |
| |
| | | |
| | | |
| | |
Supplemental disclosure
for non-cash investing and financing activity | |
| | | |
| | | |
| | |
Change
in dividends payable | |
$ | 1,883 | | |
$ | 3,536 | | |
$ | 53,680 | |
21. | QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED) |
The
tables below represent the quarterly results of operations for the years ended December 31, 2022 and 2021, respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
2022 | |
| |
Fourth | | |
Third | | |
Second | | |
First | |
Total interest
and fee income | |
$ | 5,312,520 | | |
$ | 5,047,752 | | |
$ | 4,583,251 | | |
$ | 4,254,960 | |
Total
interest expense | |
| 189,653 | | |
| 37,519 | | |
| 37,824 | | |
| 36,797 | |
Net interest income | |
| 5,122,867 | | |
| 5,010,233 | | |
| 4,545,427 | | |
| 4,218,163 | |
Provision
for loan losses | |
| — | | |
| — | | |
| — | | |
| (75,000 | ) |
Net interest income
after provision for loan losses | |
| 5,122,867 | | |
| 5,010,233 | | |
| 4,545,427 | | |
| 4,293,163 | |
Total other income | |
| 393,270 | | |
| 443,340 | | |
| 593,698 | | |
| 634,554 | |
Total
other expense | |
| 3,181,330 | | |
| 3,067,733 | | |
| 3,138,415 | | |
| 3,016,562 | |
Income
tax expense | |
| 527,022 | | |
| 545,573 | | |
| 457,728 | | |
| 447,049 | |
Net
income | |
$ | 1,807,785 | | |
$ | 1,840,267 | | |
$ | 1,542,982 | | |
$ | 1,464,106 | |
| |
| | | |
| | | |
| | | |
| | |
Basic income per common share | |
$ | 0.33 | | |
$ | 0.33 | | |
$ | 0.28 | | |
$ | 0.26 | |
Diluted income per common share | |
$ | 0.32 | | |
$ | 0.33 | | |
$ | 0.27 | | |
$ | 0.26 | |
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
2021 | |
| |
Fourth | | |
Third | | |
Second | | |
First | |
Total interest
and fee income | |
$ | 4,345,017 | | |
$ | 4,201,069 | | |
$ | 4,363,910 | | |
$ | 4,641,115 | |
Total
interest expense | |
| 37,840 | | |
| 39,319 | | |
| 42,317 | | |
| 54,524 | |
Net interest income | |
| 4,307,177 | | |
| 4,161,750 | | |
| 4,321,593 | | |
| 4,586,591 | |
Provision
for loan losses | |
| — | | |
| — | | |
| — | | |
| 120,000 | |
Net interest income
after provision for loan losses | |
| 4,307,177 | | |
| 4,161,750 | | |
| 4,321,593 | | |
| 4,466,591 | |
Total other income | |
| 842,935 | | |
| 1,138,431 | | |
| 946,951 | | |
| 939,914 | |
Total
other expense | |
| 3,146,129 | | |
| 3,047,534 | | |
| 3,084,596 | | |
| 3,030,715 | |
Income
tax expense | |
| 464,814 | | |
| 525,710 | | |
| 515,264 | | |
| 565,715 | |
Net
income | |
$ | 1,539,169 | | |
$ | 1,726,937 | | |
$ | 1,668,684 | | |
$ | 1,810,075 | |
| |
| | | |
| | | |
| | | |
| | |
Basic income per common share | |
$ | 0.28 | | |
$ | 0.31 | | |
$ | 0.30 | | |
$ | 0.33 | |
Diluted income per common share | |
$ | 0.27 | | |
$ | 0.30 | | |
$ | 0.29 | | |
$ | 0.32 | |