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United States

Securities and Exchange Commission 

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One) 

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2023

 

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____ to _____

 

Commission file number: 000-27702

 

Bank of South Carolina Corporation

(Exact name of registrant as specified in its charter)

 

South Carolina   57-1021355
(State or other jurisdiction of   (IRS Employer
incorporation or organization)    Identification No.)

  

256 Meeting Street, Charleston, SC   29401
(Address of principal executive offices)    (Zip Code)

 

(843) 724-1500

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock BKSC The NASDAQ Stock Market LLC

 

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

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
  Emerging growth company ☐

 

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

 

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

 

As of May 1, 2023, there were 5,552,351 Common Shares outstanding.

  

 

 

 

 

Part I. Financial Information Page
   
Item 1. Financial Statements 3
Consolidated Balance Sheets – March 31, 2023 and December 31, 2022 3
Consolidated Statements of Income – Three months ended March 31, 2023 and 2022 4
Consolidated Statements of Comprehensive Income (Loss) – Three months ended March 31, 2023 and 2022 5
Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2023 and 2022 6
Consolidated Statements of Cash Flows – Three months ended March 31, 2023 and 2022 7
   
Notes to Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
   
Item 4. Controls and Procedures 26
   
Part II. Other Information  
   
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Mine Safety Disclosure 26
Item 5. Other Information 26
Item 6. Exhibits 26
   
Signatures 27
Certifications 28

 

 

 

Part I. Financial Information  

 

Item 1. Financial Statements

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

   (Unaudited)     
   March 31,   December 31, 
   2023   2022 
ASSETS          
Cash and due from banks  $7,099,250   $14,772,564 
Interest-bearing deposits at the Federal Reserve   14,885,733    12,999,135 
Investment securities available for sale   267,439,924    271,172,226 
Mortgage loans to be sold   1,278,158    866,594 
Loans   333,789,455    330,981,782 
Less: Allowance for credit losses   (3,688,503)   (4,291,221)
Net loans   330,100,952    326,690,561 
Premises, equipment and leasehold improvements,  net   4,005,565    3,988,607 
Right of use asset   13,275,236    13,433,692 
Accrued interest receivable   1,842,995    2,145,522 
Other assets   7,433,816    7,276,708 
           
Total assets  $647,361,629   $653,345,609 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
Deposits:          
Non-interest bearing demand  $211,238,078   $223,117,903 
Interest bearing demand   149,605,230    195,143,514 
Money market accounts   102,387,646    100,014,125 
Time deposits $250,000 and over   52,635,553    5,303,509 
Other time deposits   11,919,031    11,266,099 
Other savings deposits   59,806,921    63,825,108 
Total deposits   587,592,459    598,670,258 
           
Accrued interest payable and other liabilities   2,986,116    2,430,272 
Lease liability   13,275,236    13,433,692 
Total liabilities   603,853,811    614,534,222 
           
Shareholders' equity          
Common stock - no par 12,000,000 shares authorized; Issued 5,852,325 shares at both March 31, 2023 and December 31, 2022. Shares outstanding 5,552,351 at both March 31, 2023 and December 31, 2022.   —    — 
Additional paid in capital   48,058,836    48,028,689 
Retained earnings   14,647,449    14,002,571 
Treasury stock: 299,974 shares at March 31, 2023 and December 31, 2022   (2,817,392)   (2,817,392)
Accumulated other comprehensive loss, net of income taxes   (16,381,075)   (20,402,481)
Total shareholders' equity   43,507,818    38,811,387 
           
Total liabilities and shareholders' equity  $647,361,629   $653,345,609 

 

See accompanying notes to consolidated financial statements.

 

3

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

             
   Three Months Ended 
   March 31, 
   2023   2022 
Interest and fee income          
Loans, including fees  $4,668,099   $3,551,875 
Taxable securities   690,324    559,670 
Tax-exempt securities   161,444    109,129 
Other   111,967    34,286 
Total interest and fee income   5,631,834    4,254,960 
           
Interest expense          
Deposits   931,101    36,797 
Total interest expense   931,101    36,797 
           
Net interest income   4,700,733    4,218,163 
Provision for credit losses   45,000    (75,000)
Net interest income after provision for credit losses   4,655,733    4,293,163 
           
Other income          
Service charges and fees   327,073    307,593 
Mortgage banking income   112,160    258,896 
Gain on sales of securities   —    61,780 
Other non-interest income   9,968    6,285 
Total other income   449,201    634,554 
           
Other expense          
Salaries and employee benefits   1,966,523    1,812,155 
Net occupancy expense   654,062    620,942 
Other operating expenses   305,181    294,733 
Professional fees   167,777    139,642 
Data processing fees   156,818    149,090 
Total other expense   3,250,361    3,016,562 
           
Income before income tax expense   1,854,573    1,911,155 
Income tax expense   265,794    447,049 
           
Net income  $1,588,779   $1,464,106 
           
Weighted average shares outstanding          
Basic   5,552,351    5,544,546 
Diluted   5,640,313    5,688,619 
           
Basic income per common share  $0.29   $0.26 
Diluted income per common share  $0.28   $0.26 

 

See accompanying notes to consolidated financial statements.

 

4

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

             
   Three Months Ended 
   March 31, 
   2023   2022 
Net income  $1,588,779   $1,464,106 
Other comprehensive income          
Unrealized gain (loss) on securities arising during the period   3,928,218    (12,152,716)
Reclassification adjustment for securities gains realized in net income   —    (61,780)
Other comprehensive income (loss) before tax   3,928,218    (12,214,496)
Income tax effect related to items of other comprehensive income before tax   93,188    2,565,043 
Other comprehensive income (loss) after tax   4,021,406    (9,649,453)
Total comprehensive income (loss)  $5,610,185   $(8,185,347)

 

See accompanying notes to consolidated financial statements.

 

5

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 (UNAUDITED)

 

                           
   Shares Outstanding   Additional Paid in Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive Loss   Total 
December 31, 2022  -5,552,351   $48,028,689   $14,002,571   $(2,817,392)  $(20,402,481)  $38,811,387 
Adoption of ASU 2016-13   —    —    —    —    —    — 
Net income  -—    —    1,588,779    —    —    1,588,779 
Other comprehensive income   —    —    —    —    4,021,406    4,021,406 
Stock-based compensation expense   —    30,147    —    —    —    30,147 
Cash dividends ($0.17 per common share)   —    —    (943,901)   —    —    (943,901)
March 31, 2023  -5,552,351   $48,058,836   $14,647,449   $(2,817,392)  $(16,381,075)  $43,507,818 

 

                           
   Shares Outstanding   Additional Paid in Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive Loss   Total 
December 31, 2021  -5,541,266   $47,745,285   $11,122,710   $(2,817,392)  $(2,132,970)  $53,917,633 
Net income  -—    —    1,464,106    —    —    1,464,106 
Other comprehensive loss   —    —    —    —    (9,649,453)   (9,649,453)
Stock option exercises, net of surrenders   9,210    141,618    —    —    —    141,618 
Stock-based compensation expense   —    27,989    —    —    —    27,989 
Cash dividends ($0.17 per common share)   —    —    (943,580)   —    —    (943,580)
March 31, 2022  -5,550,476   $47,914,892   $11,643,236   $(2,817,392)  $(11,782,423)  $44,958,313 

 

See accompanying notes to consolidated financial statements.

 

6

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

             
   Three Months Ended 
   March 31, 
   2023   2022 
Cash flows from operating activities:          
Net income  $1,588,779   $1,464,106 
Adjustments to reconcile net income net cash provided by operating activities:          
Depreciation expense   85,157    97,694 
Gain on sale of investment securities   —    (61,780)
Provision for credit losses   45,000    (75,000)
Stock-based compensation expense   30,147    27,989 
Deferred income taxes and other assets   (63,922)   (344,938)
Net amortization of unearned discounts on investment securities available for sale   198,522    214,931 
Origination of mortgage loans held for sale   (8,412,515)   (17,582,370)
Proceeds from sale of mortgage loans held for sale   8,000,951    17,729,759 
Decrease (increase) in accrued interest receivable   302,527    (68,881)
(Decrease) increase in accrued interest payable and other liabilities   (44,156)   302,580 
Net cash provided by operating activities   1,730,490    1,704,090 
           
Cash flows from investing activities:          
Proceeds from calls and maturities of investment securities available for sale   7,462,000    2,718,000 
Proceeds from sale of investment securities available for sale   —    15,120,000 
Purchase of investment securities available for sale   —    (75,764,462)
Net increase in loans   (2,855,391)   (8,271,231)
Purchase of premises, equipment, and leasehold improvements, net   (102,115)   (31,563)
Net cash provided by (used in) investing activities   4,504,494    (66,229,256)
           
Cash flows from financing activities:          
Net decrease in deposit accounts   (11,077,799)   (5,420,096)
Dividends paid   (943,901)   (942,015)
Stock options exercised, net of surrenders   —    141,618 
Net cash used in financing activities   (12,021,700)   (6,220,493)
Net decrease in cash and cash equivalents   (5,786,716)   (70,745,659)
Cash and cash equivalents at the beginning of the period   27,771,699    140,111,988 
Cash and cash equivalents at the end of the period  $21,984,983   $69,366,329 
           
Supplemental disclosure of cash flow data:          
Cash paid during the period for:          
Interest  $578,256   $37,340 
Income taxes, net  $616,245   $— 
           
Supplemental disclosures for non-cash investing and financing activity:          
Change in unrealized gain (loss) on securities available for sale, net of income taxes  $4,021,406  $(9,649,453)
Change in dividends payable  $—   $1,565 

 

See accompanying notes to consolidated financial statements.

 

7

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Organization:

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.

 

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 purposes.

 

Basis of Presentation:

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or (“GAAP”), for the interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 2, 2023. In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

 

Accounting Estimates and Assumptions:

The consolidated 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 credit losses, impaired loans, other real estate owned, deferred tax assets, and the fair value of financial instruments.

 

Income Per Common Share:

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Dilutive income 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.

 

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 at 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 at 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.

 

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.

  

8

 

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The Accounting Standards Update, or ASU, introduced a new credit loss methodology, the Current Expected Credit Loss (“CECL”) methodology, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.

 

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities, and other receivables at the time the financial asset is originated or acquired. It also applies to off-balance sheet credit exposures such as unfunded commitments to extend credit. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk.

 

On January 1, 2023, the Company adopted the guidance prospectively. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the previously applicable incurred loss accounting methodology. The adoption of CECL resulted in an increase in the allowance for unfunded commitments of $600,000, a decrease in the allowance for credit losses of $600,000 and no change to the Company’s investment securities portfolio. There was no adjustment to retained earnings as of January 1, 2023. Federal banking regulatory agencies provided optional relief to delay the adverse regulatory capital impact of CECL at adoption. The Company did not elect to use this optional relief.

 

Significant Accounting Policy Changes

 

Upon adoption of ASC 326, the Company revised the accounting policy for the Allowance for Credit Losses as detailed below.

 

Allowance for Credit Losses - Securities Available for Sale

 

For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with the establishment of an allowance under CECL compared to a direct write down of the security under Incurred Loss. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

 

Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, there was no allowance for credit losses related to the available-for-sale portfolio.

 

Accrued interest receivable on available for sale debt securities totaled $436,000 at March 31, 2023 and was excluded from the estimate of credit losses. 

 

Allowance for Credit Losses - Loans

 

Under the current expected credit loss model, the allowance for credit losses on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

 

Management assesses the adequacy of the allowance on a quarterly basis. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off, or negative provisions, when appropriate.

 

The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. The Company uses the Loss Rate Approach to estimate the current expected credit losses. The Bank calculates the annual loss rate by dividing the annual net charge-offs by the average balance of loans. The Bank used the simple average of the prior year and current year balance to get the average balance by segment and is adjusted by the estimated prepayment rate to get the lifetime historical loss rate, which is further adjusted by qualitative and forecast adjustments to get the estimated lifetime loss rate.

 

The forecast adjustments (House Price Index, Vacancy Rate, and Unemployment Rate) are discussed by the Management Asset Liability Committee (ALCO) on a periodic basis. Upon ALCO’s recommendation, the calculation can be adjusted accordingly to reflect the current market and economic conditions.

 

The Company uses the loan purpose codes to segment loans based on similar purpose and risk characteristics. The Bank manages these loans on a collective basis. This segmentation is used for call report purposes and the Bank believes it is appropriate for the CECL calculations. Due to the size of the Bank’s loan portfolio, further segmentation would be granular and segments would be statistically insignificant.

 

Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated loan pools. Individual loan evaluations are generally performed for impaired loans, which includes nonaccrual loans. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral. The Company has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, which considers selling costs in the event of the sale of the collateral.

 

While the Company’s policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.

 

Allowance for Credit Losses - Accrued Interest Receivable

 

Accrued interest receivable related to loans totaled $1.8 million at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectable interest.

 

Allowance for Credit Loss - Unfunded Commitments

 

Effective with the adoption of CECL, the Company estimates expected credit losses on commitments to extend credit over the contractual period in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancelable by the Company. The allowance for off-balance sheet credit exposures, which is reflected within accrued interest payable and other liabilities on the consolidated balance sheet, is adjusted for as an increase or decrease to the provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.

 

The Company’s CECL allowances will fluctuate over time due to macroeconomic conditions and forecasts as well as the size and composition of the loan portfolios.

 

9

 

 

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 Company adopted the amendments in ASU 2022-02 upon the Company’s adoption of ASU 2016-13 as of January 1, 2023.

 

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.

 

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.

 

 

Note 2: Investment Securities

 

The amortized cost and fair value of investment securities available for sale are summarized as follows:

 

                             
   March 31, 2023 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair Value 
U.S. Treasury Notes  $180,171,098   $—   $(9,934,568)  $170,236,530 
Government-Sponsored Enterprises   67,332,674    —    (9,254,200)   58,078,474 
Municipal Securities   41,833,858    2,679    (2,711,617)   39,124,920 
Total  $289,337,630   $2,679   $(21,900,385)  $267,439,924 

 

There is no allowance for credit losses on available for sale securities at March 31, 2023.

 

                             
   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 
Government-Sponsored Enterprises   67,384,808    —    (10,310,084)   57,074,724 
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 

 

The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2023 and December 31, 2022, by contractual maturity are in the following table.

 

   March 31, 2023   December 31, 2022 
   Amortized Cost   Estimated Fair Value   Amortized Cost   Estimated Fair Value 
Due in one year or less  $63,661,723   $61,990,046   $42,722,655   $41,698,011 
Due in one year to five years   174,605,470    162,191,737    190,569,869    176,217,530 
Due in five years to ten years   41,765,078    35,399,509    53,995,700    45,386,818 
Due in ten years and over   9,305,359    7,858,632    9,709,926    7,869,867 
Total  $289,337,630   $267,439,924   $296,998,150   $271,172,226 

 

Securities pledged to secure deposits at March 31, 2023 and December 31, 2022, had a fair value of $30.6 million and $30.1 million, respectively. During the first quarter of 2023, the Federal Reserve established the Bank Term Funding Program in order to make available additional funding to eligible depository institutions so as to help assure banks have the ability to meet the needs of all their depositors. Securities pledged to secure funding made available by this program were $25.0 million at March 31, 2023.

 

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 March 31, 2023 and December 31, 2022. Unrealized losses have not been recognized into income as 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.

 

10

 

 

                                                                     
   March 31, 2023 
   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   2   $9,711,525   $(186,791)   23   $160,525,005   $(9,747,777)   25   $170,236,530   $(9,934,568)
Government-Sponsored Enterprises   1    1,294,810    (3,283)   10    56,783,664    (9,250,917)   11    58,078,474    (9,254,200)
Municipal Securities   5    9,004,486    (88,018)   66    29,583,232    (2,623,599)   71    38,587,718    (2,711,617)
Total   8   $20,010,821   $(278,092)   99   $246,891,901   $(21,622,293)   107   $266,902,722   $(21,900,385)

 

                                                                     
   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   2    6,212,285    (84,170)   9    50,862,439    (10,225,914)   11    57,074,724    (10,310,084)
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)

 

The tables below show the proceeds from sales of securities available for sale and gross realized gains and losses.

 

             
   Three Months Ended 
   March 31, 
   2023   2022 
Gross proceeds  $—   $15,120,000 
Gross realized gains   —    61,780 
Gross realized losses   —    — 

 

There was a tax provision of $12,974 related to gains for the three months ended March 31, 2022.

 

Note 3: Loans and Allowance for Credit Losses

 

Major classifications of loans (net of deferred loan fees of $144,055 and $159,434 at March 31,2023 and December 31, 2022, respectively) are shown in the table below.

 

   March 31, 2023   December 31, 2022 
Commercial  $46,212,003   $45,072,059 
Commercial real estate:          
Construction   20,146,368    17,524,260 
Other   174,860,808    172,897,387 
Consumer:          
Real estate   88,962,556    91,636,538 
Other   3,607,720    3,851,538 
    333,789,455    330,981,782 
Allowance for credit losses   (3,688,503)   (4,291,221)
Loans, net  $330,100,952   $326,690,561 

 

We had $107.9 million and $93.1 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2023 and at December 31, 2022, respectively.

 

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.

 

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.

 

11

 

 

●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, loans 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 a cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is possible. The borrowing entity has declining sales, rising costs, and may need to look for secondary sources 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.

 

The following table illustrates credit quality by class indicators by year of origination at March 31, 2023:

 

                         
   Term Loans by Year of Origination   
   2023  2022  2021  2020  2019  Prior  Revolving  Total
Commercial                        
Pass  $6,126,737   $15,777,976   $5,724,744   $5,283,844   $954,143   $436,185   $9,651,873   $43,955,503 
Watch   193,968    517,215    38,787    101,971    —    —    183,423    1,035,364 
OAEM   —    824    15,845    —    —    —    130,000    146,670 
Substandard   —    939,656    —    134,810    —    —    —    1,074,466 
Doubtful   —    —    —    —    —    —    —    — 
Loss   —    —    —    —    —    —    —    — 
Total  $6,320,705   $17,235,671   $5,779,376   $5,520,626   $954,143   $436,185   $9,965,297   $46,212,003 
Current period gross charge-offs  $—   $—   $—   $—   $—   $46,341   $—   $46,341 
                                         
Commercial Real Estate Construction                                        
Pass  $2,717,256   $9,691,545   $3,159,648   $4,577,919   $—   $—   $—   $20,146,368 
Watch   —    —    —    —    —    —    —    — 
OAEM   —    —    —    —    —    —    —    — 
Substandard   —    —    —    —    —    —    —    — 
Doubtful   —    —    —    —    —    —    —    — 
Loss   —    —    —    —    —    —    —    — 
Total  $2,717,256   $9,691,545   $3,159,648   $4,577,919   $—   $—   $—   $20,146,368 
Current period gross charge-offs  $—   $—   $—   $—   $—   $—   $—   $— 
                                         
Commercial Real Estate Other                                        
Pass  $6,648,022   $56,736,163   $52,765,365   $25,416,225   $10,612,328   $8,085,081   $5,573,442   $165,836,625 
Watch   3,621,749    442,699    779,071    933,712    —    —    248,029    6,025,260 
OAEM   863,683    —    648,343    14,244    —    —    297,909    1,824,180 
Substandard   —    —    863,493    —    —    311,249    —    1,174,743 
Doubtful   —    —    —    —    —    —    —    — 
Loss   —    —    —    —    —    —    —    — 
Total  $11,133,454   $57,178,862   $55,056,273   $26,364,181   $10,612,328   $8,396,330   $6,119,380   $174,860,808 
Current period gross charge-offs  $—   $—   $—   $—   $—   $—   $—   $— 
                                         
Consumer Real Estate                                        
Pass  $4,439,050   $29,475,217   $8,479,952   $9,320,267   $291,943   $29,311   $34,899,380   $86,935,121 
Watch   —    —    —    —    —    —    1,503,232    1,503,232 
OAEM   —    —    —    —    —    —    274,445    274,445 
Substandard   —    —    —    —    —    —    249,758    249,758 
Doubtful   —    —    —    —    —    —    —    — 
Loss   —    —    —    —    —    —    —    — 
Total  $4,439,050   $29,475,217   $8,479,952   $9,320,267   $291,943   $29,311   $36,926,815   $88,962,556 
Current period gross charge-offs  $—   $—   $—   $—   $—   $—   $—   $— 
                                         
Consumer Other                                        
Pass  $633,324   $1,204,254   $626,934   $359,183   $116,129   $51,352   $389,933   $3,381,110 
Watch   4,055    87,544    21,822    40,864    —    —    28,469    182,755 
OAEM   —    —    —    6,324    —    —    —    6,324 
Substandard   37,530    —    —    —    —    —    —    37,530 
Doubtful   —    —    —    —    —    —    —    — 
Loss   —    —    —    —    —    —    —    — 
Total  $674,909   $1,291,799   $648,757   $406,372   $116,129   $51,352   $418,402   $3,607,720 
Current period gross charge-offs  $—   $—   $1,977   $—   $—   $—   $—   $1,977 

 

 

12

 

The following table illustrates credit quality by class and internally assigned grades at December 31, 2022. "Pass" includes loans internally graded as excellent, good and satisfactory.

 

December 31, 2022 
    Commercial   Commercial
Real Estate Construction		   Commercial
Real Estate
Other		   Consumer
Real Estate		   Consumer
Other		   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 

 

The following tables include an aging analysis of the recorded investment in loans segregated by class.

 

March 31, 2023
   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  $—   $—   $—   $—   $46,212,003   $46,212,003   $— 
Commercial Real Estate Construction   —    —    —    —    20,146,368    20,146,368    — 
Commercial Real Estate Other   360,029    —    627,927    987,956    173,872,852    174,860,808    — 
Consumer Real Estate   —    274,444    —    274,444    88,688,112    88,962,556    — 
Consumer Other   —    —    —    —    3,607,720    3,607,720    — 
Total  $360,029   $274,444   $627,927   $1,262,400   $332,527,055   $333,789,455   $— 

 

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    — 
Total  $336,321   $178,975   $631,453   $1,146,749   $329,835,033   $330,981,782   $— 

 

There were no loans over 90 days past due and still accruing as of March 31, 2023 and December 31, 2022.

 

The following table summarizes the balances of non-accrual loans:

 

   CECL  Incurred Loss
   March 31, 2023  December 31, 2022
   Nonaccrual Loans with No Allowance  Nonaccrual Loans with an Allowance  Total Nonaccrual Loans  Nonaccrual Loans
Commercial  $—     $—     $—     $—   
Commercial Real Estate Construction   —      —      —      —   
Commercial Real Estate Other   627,927    —      627,927    631,453 
Consumer Real Estate   —      —      —      —   
Consumer Other   —      —      —      —   
Total  $627,927   $—     $627,927   $631,453 

 

 

We designate individually evaluated loans on nonaccrual status as collateral dependent loans, as well other loans that management designates as having higher risk. Collateral dependent loans are loans for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, we adopted the practical expedient to measure the allowance for credit losses based on the fair value of the collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The following table details the amortized cost of collateral dependent loans:

 

   March 31, 2023 
Commercial  $— 
Commercial Real Estate Construction   — 
Commercial Real Estate Other   1,188,986 
Consumer Real Estate   249,758 
Consumer Other   — 
Total  $1,438,744 

 

 

13

 

The following table set forth the changes in the allowance for credit losses and an allocation of the allowance for credit losses by class for the three months ended March 31, 2023 under the CECL methodology.

 

                                             
Three Months Ended March 31, 2023
   Commercial   Commercial Real Estate Construction   Commercial Real Estate Other   Consumer Real Estate   Consumer Other   Total 
Allowance for Credit Losses:                              
Beginning balance  $735,759   $230,625   $2,216,484   $1,014,777   $93,576   $4,291,221 
Adoption of ASU 2016-13   (82,001)    (36,509)    (314,522)    (160,802)    (6,166)    (600,000) 
Charge-offs   (46,341)   —    —    —    (1,977)   (48,318)
Recoveries   600    —    —    —    —    600 
Provisions   (93,936)   42,873    98,558    6,524    (9,019)   45,000 
Ending balance  $514,081   $236,989   $2,000,520   $860,498   $76,415   $3,688,503 

 

Prior to the adoption of ASC 326 on January 1, 2023, we calculated the allowance for loan losses under the incurred loss methodology. The following table sets forth the changes in the allowance for loan losses for the three months ended March 31, 2022.

 

                                                     
Three Months Ended March 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   —    —    —    (2,035)   —    (10)   (2,045)
Recoveries   —    —    —    —    4,200    360    4,560 
Provisions   (7,596)   28,075    (82,296)   (2,777)   (10,056)   (350)   (75,000)
Ending balance  $788,093   $203,568   $2,294,010   $919,972   $98,859   $—   $4,304,502 

 

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The tables are are disclosures related to the allowance for loan losses in prior periods.

 

                              
   December 31, 2022
   Commercial  Commercial Real Estate Construction  Commercial Real Estate Other  Consumer Real Estate  Consumer Other  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 

 

14

 

As of December 31, 2022, loans individually evaluated and considered impaired are presented in the following table.

 

   Impaired Loans as of 
   December 31, 2022 
   Unpaid Principal Balance   Recorded Investment   Related Allowance 
With no related allowance recorded:               
Commercial  $317,553   $317,553   $— 
Commercial Real Estate Construction   —    —    — 
Commercial Real Estate Other   1,202,412    1,202,412    — 
Consumer Real Estate   249,758    249,758    — 
Consumer Other   —    —    — 
Total   1,769,723    1,769,723    — 
                
With an allowance recorded:               
Commercial   958,448    958,448    179,230 
Commercial Real Estate Construction   —    —    — 
Commercial Real Estate Other   —    —    — 
Consumer Real Estate   —    —    — 
Consumer Other   37,889    37,889    37,889 
Total   996,337    996,337    217,119 
                
                
Commercial   1,276,001    1,276,001    179,230 
Commercial Real Estate Construction   —    —    — 
Commercial Real Estate Other   1,202,412    1,202,412    — 
Consumer Real Estate   249,758    249,758    — 
Consumer Other   37,889    37,889    37,889 
Total  $2,766,060   $2,766,060   $217,119 

 

The following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for the periods indicated.

 

              
   Three Months Ended March 31,
   2022
   Average
Recorded
Investment		  Interest
Income
Recognized
With no related allowance recorded:          
Commercial  $181,347   $2,720 
Commercial Real Estate Construction   —    — 
Commercial Real Estate Other   1,226,665    7,706 
Consumer Real Estate   249,758    2,617 
Consumer Other   —    — 
    1,657,770    13,043 
           
With an allowance recorded:          
Commercial   1,186,718    19,382 
Commercial Real Estate Construction   —    — 
Commercial Real Estate Other   —    — 
Consumer Real Estate   —    — 
Consumer Other   39,822    638 
    1,226,540    20,020 
Total          
Commercial   1,368,065    22,102 
Commercial Real Estate Construction   —    — 
Commercial Real Estate Other   1,226,665    7,706 
Consumer Real Estate   249,758    2,617 
Consumer Other   39,822    638 
   $2,884,310   $33,063 

 

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. We use the loss rate approach to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

 

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, we modify loans by providing principal forgiveness on certain real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

 

In some cases, we will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

There were no loans modified during the first quarter of 2023. As of March 31, 2023, there were five loans with a balance of $1.0 million that were granted extended payment terms with no principal reduction. The structure of two of the loans changed to interest only. One loan was performing as agreed as of March 31, 2023, while the other loan was not performing and we are considering further collection actions, including potential foreclosure proceedings.

15

 

The following table shows the amortized cost basis as of March 31, 2023 of the loans modified for borrowers experiencing financial difficulty, disaggregated by class of loans and describes the financial effect of the modifications made for borrowers experiencing financial difficulty: 

 

   Term Extension
   Amortized Cost Basis   % of Total
Loan Type		   Financial Effect
Commercial  $303,143    0.7%  Reduced monthly payment
Commercial Real Estate Other   613,682    0.4%  Forbearance agreement signed for one loan and provided eleven months deferral to second borrower and added to the end of the original term loan
Consumer Other   37,529    1.0%  Reduced monthly payment
Total  $954,354         

 

We maintain an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded loan commitments of $644,912 at March 31, 2023 and December 31, 2022 is classified on the balance sheet within Accrued interest payable and other liabilities.

 

Note 4: Leases

 

As of March 31, 2023 and December 31, 2022, the Company had operating right of use (“ROU”) assets of $13.3 million and $13.4 million, respectively, and had operating lease liabilities of $13.3 million and $13.4 million, respectively. The Company maintains operating leases on land, branch facilities, and parking. 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 March 31, 2023, the weighted average remaining lease term was 15.3 years and the weighted average incremental borrowing rate was 4.18%.

 

The table below shows lease expense components for the three months ended March 31, 2023 and 2022.

 

             
   March 31, 
   2023   2022 
Operating lease expense  $302,645   $299,571 
Short-term lease expense   —    — 
Total lease expense  $302,645   $299,571 

 

Total rental expense was $302,645 and $299,571 for the three months ended March 31, 2023 and 2022, respectively and was included in net occupancy expense within the consolidated statements of income.

 

As of March 31, 2023 and 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 March 31, 2023, we had no operating leases that had not yet commenced.

 

Note 5: Disclosures Regarding Fair Value of Financial Statements

 

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 also 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.

 

16 

 

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 municipal securities in less liquid markets.

 

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 as of March 31, 2023 and December 31, 2022. 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 contracts), our derivative instruments were immaterial to our consolidated financial statements as of March 31, 2023 and December 31, 2022.

 

The following table presents information about assets measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:

 

   March 31, 2023 
   Level 1   Level 2   Level 3   Total 
U.S. Treasury Notes  $170,236,530   $—   $—   $170,236,530 
Government-Sponsored Enterprises   —    58,078,474    —    58,078,474 
Municipal Securities   —    16,575,620    22,549,300    39,124,920 
Total  $170,236,530   $74,654,094   $22,549,300   $267,439,924 

 

   December 31, 2022 
   Level 1   Level 2   Level 3   Total 
U.S. Treasury Notes  $168,187,315   $—   $—   $168,187,315 
Government-Sponsored Enterprises   —    57,074,724    —    57,074,724 
Municipal Securities   —    16,448,375    29,461,812    45,910,187 
Total  $168,187,315   $73,523,099   $29,461,812   $271,172,226 

 

There were no liabilities recorded at fair value on a recurring basis as of March 31, 2023 or December 31, 2022.

 

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2023 and 2022:

 

               
   Three Months Ended March 31, 
   2023   2022 
Beginning balance  $29,461,812   $24,484,047 
Total gains or (losses) (realized/unrealized)          
Included in other comprehensive income (loss)    549,488    (1,444,393)
Purchases, issuances, and settlements net of maturities   (7,462,000)   (2,413,000)
Ending balance  $22,549,300   $20,626,654 

 

There were no transfers between fair value levels during the three months ended March 31, 2023 or 2022.

 

The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis.

 

Individually Assessed Loans

 

Individually assessed 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.

 

In accordance with ASC 820, Fair Value Measurement, individually assessed loans, where an allowance is established based on the fair value of collateral, require classification in the fair value hierarchy. These individually assessed loans are classified as Level 3. Individually assessed loans measured using discounted future cash flows are not deemed to be measured at fair value.

 

17 

 

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 March 31, 2023 and December 31, 2022:

 

                               
   March 31, 2023 
   Level 1   Level 2   Level 3   Total 
Individually assessed loans  $—   $—   $1,438,744   $1,438,744 
Mortgage loans to be sold   —    1,278,158    —    1,278,158 
Total  $—   $1,278,158   $1,438,744   $2,716,902 

 

                               
   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 

 

There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2023 or December 31, 2022.

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2023 and December 31, 2022:

 

 

     Inputs
   Valuation Technique  Unobservable Input  General Range of Inputs
Individually Assessed 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

 

18 

 

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 and interest-bearing deposits at the Federal Reserve Bank

 

The carrying value approximates fair value. All 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.

 

c.Loans

 

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, individually assessed 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 individually assessed loans are estimated based on the fair value of the underlying collateral. Individually assessed loans measured using discounted future cash flows are not deemed to be measured at fair value.

 

d.Deposits

 

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 to be a reasonable estimate of fair value.

 

f.Loan commitments

 

 

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 of the counterparties.

 

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of March 31, 2023 and December 31, 2022, respectively.

 

19 

 

 

                                     
   March 31, 2023 
       Estimated Fair Value 
   Carrying Value   Level 1   Level 2   Level 3   Total 
Financial Assets:                         
Cash and due from banks  $7,099,250   $7,099,250   $—   $—   $7,099,250 
Interest-bearing deposits at the Federal Reserve   14,885,733    14,885,733    —    —    14,885,733 
Investment securities available for sale   267,439,924    170,236,530    74,654,094    22,549,300    267,439,924 
Mortgage loans to be sold   1,278,158    —    1,278,158    —    1,278,158 
Loans, net   330,100,952    —    —    305,598,199    305,598,199 
Accrued interest receivable   1,842,995    —    1,842,995    —    1,842,995 
Financial Liabilities:                         
Demand deposits   523,037,875    —    523,037,875    —    523,037,875 
Time deposits   64,554,584    —    65,658,921    —    65,658,921 
Accrued interest payable   393,852    —    393,852    —    393,852 

 

                                     
   December 31, 2022
      Estimated Fair Value
   Carrying Value  Level 1  Level 2  Level 3  Total
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    168,187,315    73,523,099    29,461,812    271,172,226 
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 

 

 

Note 6: Income Per Common Share

 

The following table is a summary of the reconciliation of weighted average shares outstanding:

 

               
   Three Months Ended March 31, 
   2023   2022 
Net income  $1,588,779   $1,464,106 
           
Weighted average shares outstanding   5,552,351    5,544,546 
Effect of dilutive shares   87,962    144,073 
Weighted average shares outstanding - diluted   5,640,313    5,688,619 
           
Earnings per share - basic  $0.29   $0.26 
Earnings per share - diluted  $0.28   $0.26 

 

 

20 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including information included or incorporated by reference in this document, contains statements which constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 and are including this statement for the express purpose of availing the Company of protections of such safe harbor with respect to all “forward-looking statements” contained in this Form 10-Q. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors that are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitations, those described under the “Cautionary Statement Regarding Forward-Looking Statements” section of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC and the following:

 

●Risk from changes in economic, monetary policy, and industry conditions

 

●Changes in interest rates, shape of the yield curve, deposit rates, the net interest margin and funding sources

 

●Market risk (including net income at risk analysis and economic value of equity risk analysis) and inflation

 

●Risk inherent in making loans including repayment risks and changes in the value of collateral

 

●Loan growth, the adequacy of the allowance for credit losses, provisions for credit losses, and the assessment of problem loans

 

●Level, composition, and re-pricing characteristics of the securities portfolio

 

●Competition for deposits, which may result in a change in the mix or type of deposit products and services we offer and/or in the rates that we are required to pay to attract or retain deposits

 

●Continued availability of senior management and ability to attract and retain key personnel

 

●Technological changes

 

●Ability to control expense

 

●Ability to compete in our industry and competitive pressures among depository and other financial institutions

 

●Changes in compensation

 

●Risks associated with income taxes including potential for adverse adjustments

 

●Changes in accounting policies and practices

 

●Changes in regulatory actions, including the potential for adverse adjustments

 

●Recently enacted or proposed legislation and changes in political conditions

 

●Reputational risk

 

●Recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory response to these developments.

 

We will undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings with the SEC, in our press releases, and in oral and written statements, which are not statements of historical fact, constitute forward-looking statements.

 

Overview

 

Bank of South Carolina Corporation (the “Company”) is a bank holding company headquartered in Charleston, South Carolina, with $647.4 million in assets as of March 31, 2023. The Company offers a broad range of financial services through its wholly-owned subsidiary, The Bank of South Carolina (the “Bank”). The Bank is a state-chartered commercial bank which operates primarily 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 investments (interest-earning assets). The primary source of funding for making these loans and investments is our interest 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 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.

 

21 

 

 

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 and lease 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 credit 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.

 

In addition to earning interest on loans and investments, we earn income through fees and other expenses we charge to the customer. The various components of non-interest income as well as non-interest expense are described in the following discussion. The discussion and analysis also identify significant factors that have affected our financial position and operating results as of and for the periods ending March 31, 2023 and 2022 and December 31, 2022, and should be read in conjunction with the financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion. 

 

Critical Accounting Policies

 

Our critical accounting policies involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities, used in the preparation of the Consolidated Financial Statements as of March 31, 2023. With the exception of the adoption of ASC 326 as of January 1, 2023 as discussed in Note 1: Nature of Business and Basis of Presentation, our critical accounting policies have remain unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

Balance Sheet

 

Cash and Cash Equivalents

 

Total cash and cash equivalents decreased 51.9% or $7.7 million to $7.1 million as of March 31, 2023, from $14.8 million as of December 31, 2022. The decrease in total cash and cash equivalents is primarily due to a net decrease in deposit accounts, partially offset by net proceeds from maturities of investment securities and cash generated from operations.

 

Investment Securities Available for Sale

 

Our primary objective in managing the investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We are required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. We maintain investment balances based on continuing assessment of cash flows, the level of current and expected loan production, current interest rate risk strategies and the assessment of potential future direction of market interest rate changes. Investment securities differ in terms of default, interest rate, liquidity and expected rate of return risk.

 

We use the investment securities portfolio to serve as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income from investment of funds, to provide liquidity to meet funding requirements, and to provide collateral for pledging of public funds.

 

As of March 31, 2023, our available for sale investment portfolio included U.S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $267.4 million and an amortized cost of $289.3 million for a net unrealized loss of approximately $21.9 million. As of March 31, 2023 and December 31, 2022, our investment securities portfolio represented approximately 41.35% and 41.5% of our total assets, respectively. The average yield on our investment securities was 1.15% and 1.18% at March 31, 2023 and December 31, 2022, respectively.

 

Loans

 

We focus our lending activities on small and middle market businesses, professionals and individuals in our geographic markets. Substantially all of our loans are to borrowers located in our market area of Charleston, Dorchester and Berkeley counties of South Carolina.

 

Net loans increased $3.4 million, or 1.044%, to $330.1 million as of March 31, 2023 from $326.7 million as of December 31, 2022. The increase is primarily related to growth in Consumer and Commercial Real Estate loans offset by a decrease in Consumer Real Estate loans.

 

In January 2020, the Bank began originating 30-year, fixed rate consumer mortgage loans in excess of the conforming loan amount which are held for investment rather than for sale in the secondary market. Prior to January 2020, all consumer mortgage loans made by the Bank were originated for the purpose of sale and reflected on the consolidated balance sheet as mortgage loans held for sale. This mortgage product continues to be well-received by the Bank’s customers, and the associated volume of originations has continued to contribute to the increase in Consumer Real Estate lending, though we did experience a decrease in Consumer Real Estate Loans at March 31, 2023 compared to December 31, 2022.

 

The following table is a summary of our loan portfolio composition (net of deferred fees and costs of $144,055 and $159,434 at March 31, 2023 and December 31, 2022, respectively) and the corresponding percentage of total loans as of the dates indicated.

 

22 

 

 

   March 31, 2023   December 31, 2022 
   Amount   Percent   Amount   Percent 
Commercial  $46,212,003    13.84%  $45,072,059    13.62%
Commercial Real Estate Construction   20,146,368    6.04%   17,524,260    5.29%
Commercial Real Estate Other   174,860,808    52.39%   172,897,387    52.24%
Consumer Real Estate   88,962,556    26.65%   91,636,538    27.69%
Consumer Other   3,607,720    1.08%   3,851,538    1.16%
Total loans   333,789,455    100.0%   330,981,782    100.00%
Allowance for credit losses   (3,688,503)        (4,291,221)     
                     
Total loans, net  $330,100,952        $326,690,561      

 

Nonperforming Assets

Nonperforming Assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. As of March 31, 2023, there were no loans 90 days past due still accruing interest.

 

The following table is a summary of our Nonperforming Assets:

 

   March 31, 2023   December 31, 2022 
Commercial  $—   $— 
Commercial Real Estate Other   627,927    631,453 
Consumer Real Estate   —    — 
Consumer Other   —    — 
Total nonaccruing loans   627,927    631,453 
Total nonperforming assets  $627,927   $631,453 

 

Allowance for Credit Losses

The allowance for credit losses was $3.7 million as of March 31, 2023 and December 31, 2022, or 1.11% and 1.30%, respectively, of outstanding loans. At March 31, 2023 and December 31, 2022, the allowance for credit losses represented 587.41% and 679.58%, respectively, of the total amount of nonperforming loans. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for credit losses at March 31, 2023 is adequate.

 

At March 31, 2023, individually assessed loans totaled $2.6 million, of which $0.1 million of these loans had a reserve of approximately $0.1 million allocated in the allowance for credit losses. Comparatively, individually assessed loans totaled $2.8 million as of December 31, 2022, and $1.1 million of these loans had a reserve of approximately $0.2 million allocated in the allowance for credit losses.

 

During the three months ended March 31, 2023, we recorded $48,138 in charge-offs and $600 of recoveries on loans previously charged-off, for net charge-offs of $47,718.

 

Deposits

 

Deposits remain our primary source of funding for loans and investments. Average interest-bearing deposits provided funding for 60.01% of average earning assets for the three months ended March 31, 2023, and 53.85% for the three months ended March 31, 2022. The Company encounters strong competition for deposits from other financial institutions, insurance companies, brokerage firms and the U.S. Treasury. However, the percentage of funding provided by deposits has remained relatively stable.

 

The breakdown of total deposits by type and the respective percentage of total deposits are as follows:

 

23 

 

 

   March 31, 2023   December 31, 2022 
   Amount   Percent   Amount   Percent 
Deposits                
Non-interest bearing demand  $211,238,078    35.95%  $223,117,903    37.26%
Interest bearing demand   149,605,230    25.46%   195,143,514    32.60%
Money market accounts   102,387,646    17.42%   100,014,125    16.71%
Time deposits $250,000 and over   52,635,553    8.96%   5,303,509    0.89%
Other time deposits   11,919,031    2.03%   11,266,099    1.88%
Other savings deposits   59,806,921    10.18%   63,825,108    10.66%
                     
Total deposits  $587,592,459    100.00%  $598,670,258    100.00%

 

Deposits decreased 1.85% or $11.1 million from December 31, 2022 to March 31, 2023 primarily due to a net decrease in the balances of a related group of demand deposit accounts. Decreases in interest bearing and non-interest bearing demand deposits were partially offset by a significant increase in time deposits $250,000 and over, which is the result of the Bank's acquisition of $47.8 million in brokered time deposits during the quarter. These deposits were obtained to meet short-term liquidity needs of the Bank and are a combination of 90, 180 and 270-day maturities, which align with securities maturing within the Bank's portfolio later this year. Brokered time deposits totaled 8.15% and 0% of total deposits at March 31, 2023 and December 31, 2022, respectively.

 

At March 31, 2023 and December 31, 2022, deposits with an aggregate deficit balance of $11,766 and $80,524, respectively, were re-classified as other loans.

 

Comparison of Three Months Ended March 31, 2023 to Three Months Ended March 31, 2022

Net income increased $0.1 million or 8.52% to $1.6 million, or basic and diluted earnings per share of $0.29 and $0.28, respectively, for the three months ended March 31, 2023, from $1.5 million, or basic and diluted earnings per share of $0.26 for the three months ended March 31, 2022. Our annualized returns on average assets and average equity for the three months ended March 31, 2023 were 1.00% and 15.73%, respectively, compared with 0.89% and 11.40%, respectively, for the three months ended March 31, 2022.

 

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is a measure of the difference between interest income on earning assets and interest paid on interest bearing liabilities relative to the amount of interest-bearing assets. Net interest income increased $1.4 million or 32.36% to $5.6 million for the three months ended March 31, 2023 from $4.2 million for the three months ended March 31, 2022. Average loans increased $24.0 million or 7.72% to $334.5 million for the three months ended March 31, 2023, compared to $310.5 million for the three months ended March 31, 2022. The yield on average loans (including fees) was 5.86% and 4.99% for the three months ended March 31, 2023 and March 31, 2022, respectively. The increase in the yield on average loans was the result of interest rates on variable rate loans, as well as higher interest rates on new originations and renewals of fixed rate loans. Interest income on loans increased $1.1 million for the three months ended March 31, 2023 to $4.7 million from $3.6 million for the three months ended March 31, 2022.

 

The average balance of interest bearing deposits at the Federal Reserve decreased $60.9 million or 85.87% to $10.0 million for the three months ended March 31, 2023, with a yield of 4.53% as compared to $70.9 million for the three months ended March 31, 2022, with a yield of 0.20%.

 

Provision for Credit Losses

We have established an allowance for credit losses through a charge (credit) to the provision for credit losses on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of our allowance for credit losses. For the three months ended March 31, 2023, we recorded a $45,000 increase to the allowance for credit losses as compared with a reduction to the allowance for credit losses of $75,000 for the same period in the prior year. The net increase in the provision for credit losses was based on our analysis of the adequacy of the allowance for credit losses. For additional information about the changes in the allowance and an allocation of the allowance by class, refer to Note 3. Loans and Allowance for Credit Losses.

 

Non-Interest Income

Other income decreased $0.2 million or 29.21% to $0.4 million for the three months ended March 31, 2023, from $0.6 million for the three months ended March 31, 2022. This decrease was primarily due to a $0.1 million decrease in mortgage banking income and decrease of $0.1 million on gains on sales of investment securities. The Bank sold $8.0 million of mortgage loans held for sale during the three months ended March 31, 2023 as compared with $17.7 million during the three months ended March 31, 2022.

 

Non-Interest Expense

Non-interest expense increased $0.2 million or 7.75% to $3.2 million for the three months ended March 31, 2023, from $3.0 million for the three months ended March 31, 2022. The increase in non-interest expense was primarily due to increases in salaries and employee benefits and net occupancy expense.. The Bank intends to open its new James Island location in the second quarter of 2023.

 

Income Tax Expense

Income tax expense was $0.3 million for the three months ended March 31, 2023 as compared to $0.4 million during the same period in 2022. Our effective tax rate was 14.33% and 23.39% for the three months ended March 31, 2023 and 2022, respectively. The lower effective rate is the result of the prior year tax provision calculation.

 

Off-Balance Sheet Arrangements

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 $141.1 million and $145.4 million at March 31, 2023 and December 31, 2022, 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. The majority of these standby letters of credit are unsecured.

 

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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 March 31, 2023 and December 31, 2022 was $1.7 million and $2.5 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 on mortgage loans held for sale totaling $1.3 million and $0.9 million at March 31, 2023 and December 31, 2022, respectively. The fair value of these commitments was not significant at March 31, 2023 or December 31, 2022. 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 $8.5 million at March 31, 2023. There were no loans repurchased during the three months ended March 31, 2023 and 2022.

 

Liquidity

Historically, we have maintained our liquidity at levels believed 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.

 

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, 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.

 

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 44.95% and 45.89% of total assets at March 31, 2023 and December 31, 2022, respectively. 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 March 31, 2023, we had unused short-term lines of credit totaling approximately $41.0 million (which can be withdrawn at the lender’s option). Additional sources of funds available to us for liquidity include borrowing on a short-term basis from the Federal Reserve System, increasing deposits by raising interest rates paid and sale of mortgage loans held for sale. We have 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 March 31, 2023, we could borrow up to $107.9 million. There have been no borrowings under this arrangement.

 

During the first quarter of 2023, the Federal Reserve authorized all twelve Reserve Banks to establish the Bank Term Funding Program (the “Program”) to make available additional funding to eligible depository institutions in order to help assure banks have the ability to meet the needs of all their depositors. The Program offers advances of up to one year in length to banks, savings associations, credit unions and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Bank in open market options, such as U.S. Treasuries, U.S. agency securities and U.S. agency mortgage-backed securities. Advances are limited to the par value of the eligible collateral pledged by the eligible borrower. The Bank established a $25.0 million credit line under the Program during the first quarter of 2023. As of March 31, 2023, there were no borrowings under the Program. 

 

Our core deposits consist of non-interest-bearing accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our level of 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. At March 31, 2023 and December 31, 2022, our liquidity ratio was 57.82% and 48.09%, respectively.

 

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 stock options to purchase stock. Total shareholders’ equity as of March 31, 2023 was $43.5 million. The rate of asset growth since our inception has not negatively impacted this 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.

 

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 March 31, 2023 was 9.42%. As of March 31, 2023, the Company and the Bank were categorized as “well capitalized.” We believe, as of March 31, 2023, 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.

 

Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a material effect on the financial statements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Smaller reporting companies are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934 as amended (the “Act”) was carried out as of March 31, 2023 under the supervision and with the participation of the Bank of South Carolina Corporation’s management, including its President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President and several other members of the Company’s senior management. Based upon that evaluation, Bank of South Carolina Corporation’s management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President concluded that, as of March 31, 2023, the Company’s disclosure controls and procedures were effective in ensuring that the information the Company is required to disclose in the reports filed or submitted under the Act has been (i) accumulated and communicated to management (including the President/Chief Executive Officer and Chief Financial Officer/Executive Vice President) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

The Audit and Compliance Committee, composed entirely of independent Directors, meets periodically with management, the Bank’s Audit and Compliance Officer, and Elliott Davis, LLC (separately and jointly) to discuss audit, financial and related matters. Elliott Davis, LLC and the Audit and Compliance Officer have direct access to the Audit and Compliance Committee.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

In our opinion, there are no other legal proceedings pending other than routine litigation incidental to our business involving amounts which are not material to our financial condition.

 

Item 1A. Risk Factors.  

Smaller reporting companies are not required to provide the information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  

None.  

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Mine Safety Disclosures.

None.

 

Item 5. Other Information.

None.

 

Item 6. Exhibits.

 

Exhibits

31.1Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer

31.2Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer

32.1Certification pursuant to Section 1350 (1)

32.2Certification pursuant to Section 1350 (1)

 

101.SCHXBRL Taxonomy Extension Schema Document (2)

101.CALXBRL Taxonomy Extension Calculation Linkbase Document (2)
101.DEFXBRL Taxonomy Extension Definition Linkbase Document (2)
101.LABXBRL Taxonomy Extension Label Linkbase Document (2)
101.PREXBRL Taxonomy Extension Presentation Linkbase Document (2)
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

(1)This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any file of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

(2)In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Bank of South Carolina Corporation
     
May 11, 2023 By: /s/ Fleetwood S. Hassell
    Fleetwood S. Hassell
    President/Chief Executive Officer
     
May 11, 2023 By: /s/ Eugene H. Walpole, IV
    Eugene H. Walpole, IV
    Chief Financial Officer/Executive Vice President

 

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