Company Quick10K Filing
Bank of South Carolina
Price18.58 EPS1
Shares6 P/E14
MCap104 P/FCF39
Net Debt-58 EBIT10
TEV46 TEV/EBIT5
TTM 2019-09-30, in MM, except price, ratios
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8-K 2018-01-11

BKSC 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1: Nature of Business and Basis of Presentation
Note 2: Investment Securities
Note 3: Loans and Allowance for Loan Losses
Note 4: Leases
Note 5: Disclosure Regarding Fair Value of Financial Statements
Note 6: Income per Common Share
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Bank of South Carolina Earnings 2020-09-30

Balance SheetIncome StatementCash Flow

10-Q 1 bksc-10q_093020.htm QUARTERLY REPORT

 

 

 

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 September 30, 2020

 

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

 

Commission file number: 0-27702

 

Bank of South Carolina Corporation

(Exact name of registrant issuer as specified in its charter)

 

South Carolina   57-1021355
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification Number)

 

256 Meeting Street, Charleston, SC 29401

(Address of principal executive offices)

 

(843) 724-1500

(Registrant’s telephone number)

 

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, 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 (Check one):

 

Large accelerated filer    Accelerated filer
Non-accelerated filer   Smaller reporting company
(Do not check if a 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

 

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 NASDAQ

 

As of October 15, 2020, there were 5,520,469 Common Shares outstanding.

 

 

 

 

 

 

 

Part I. Financial Information Page
   
Item 1. Financial Statements  
Consolidated Balance Sheets – September 30, 2020 and December 31, 2019 3
Consolidated Statements of Income – Three and Nine months ended September 30, 2020 and 2019  4
Consolidated Statements of Comprehensive Income – Three and Nine months ended September 30, 2020 and 2019 6
Consolidated Statements of Shareholders’ Equity – Nine months ended September 30, 2020 and 2019 7
Consolidated Statements of Cash Flows – Nine months ended September 30, 2020 and 2019 8
Notes to Consolidated Financial Statements 9
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Off-Balance Sheet Arrangements 27
Liquidity 28
Capital Resources 28
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
   
Item 4. Controls and Procedures 29
   
Part II. Other Information  
   
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Mine Safety Disclosure 30
Item 5. Other Information 30
Item 6. Exhibits 30
   
Signatures 31
Certifications 32

 

 

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

   (Unaudited)   (Audited) 
   September 30,   December 31, 
   2020   2019 
ASSETS          
Cash and due from banks  $5,740,658   $9,773,893 
Interest-bearing deposits at the Federal Reserve   38,757,226    39,320,526 
Investment securities available for sale   135,307,515    100,449,956 
Mortgage loans to be sold   12,728,519    5,062,398 
Loans   320,752,641    274,072,560 
Less: Allowance for loan losses   (4,153,814)   (4,003,758)
Net loans   316,598,827    270,068,802 
Premises, equipment and leasehold improvements, net   4,127,621    4,290,435 
Right of use asset   12,850,962    13,209,217 
Accrued interest receivable   1,428,042    1,309,772 
Other assets   1,560,720    1,527,521 
           
Total assets  $529,100,090   $445,012,520 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Liabilities          
Deposits:          
Non-interest bearing demand  $177,951,432   $125,621,031 
Interest bearing demand   131,972,555    125,175,935 
Money market accounts   86,752,645    68,964,879 
Time deposits over $250,000   3,985,632    5,967,559 
Other time deposits   16,509,276    16,215,228 
Other savings deposits   41,984,129    37,247,023 
Total deposits   459,155,669    379,191,655 
           
Accrued interest payable and other liabilities   2,563,442    1,443,616 
Lease liability   12,850,962    13,209,217 
Total liabilities   474,570,073    393,844,488 
           
Shareholders’ equity          
Common stock - no par 12,000,000 shares authorized; Issued 5,817,725 shares at September 30, 2020 and 5,799,637 shares at December 31, 2019. Shares outstanding 5,519,259 and 5,530,001 at September 30, 2020 and December 31, 2019, respectively.        
Additional paid in capital   47,370,912    47,131,034 
Retained earnings   7,896,793    5,879,409 
Treasury stock: 298,466 and 269,636 shares at September 30, 2020 and December 31, 2019, respectively.   (2,787,898)   (2,325,225)
Accumulated other comprehensive income, net of income taxes   2,050,210    482,814 
Total shareholders’ equity   54,530,017    51,168,032 
           
Total liabilities and shareholders’ equity  $529,100,090   $445,012,520 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Three Months Ended 
   September 30, 
   2020   2019 
Interest and fee income          
Loans, including fees  $3,760,212   $4,059,536 
Taxable securities   433,280    369,803 
Tax-exempt securities   82,550    129,986 
Other   16,303    268,359 
Total interest and fee income   4,292,345    4,827,684 
           
Interest expense          
Deposits   72,198    213,876 
Total interest expense   72,198    213,876 
           
Net interest income   4,220,147    4,613,808 
Provision for loan losses   40,000    10,000 
Net interest income after provision for loan losses   4,180,147    4,603,808 
           
Other income          
Service charges and fees   275,318    295,908 
Mortgage banking income   694,045    291,082 
Other non-interest income   8,689    9,080 
Total other income   978,052    596,070 
           
Other expense          
Salaries and employee benefits   1,775,498    1,664,631 
Net occupancy expense   566,949    419,465 
Other operating expenses   275,468    213,832 
Professional fees   158,640    128,426 
Data processing fees   158,443    155,469 
Total other expense   2,934,998    2,581,823 
           
Income before income tax expense   2,223,201    2,618,055 
Income tax expense   519,930    603,264 
           
Net income  $1,703,271   $2,014,791 
           
Weighted average shares outstanding          
Basic   5,527,696    5,526,233 
Diluted   5,696,247    5,595,056 
           
Basic income per common share  $0.31   $0.36 
Diluted income per common share  $0.30   $0.36 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Nine Months Ended 
   September 30, 
   2020   2019 
Interest and fee income          
Loans, including fees  $11,152,378   $12,101,678 
Taxable securities   1,179,712    1,256,468 
Tax-exempt securities   289,958    428,822 
Other   174,934    546,894 
Total interest and fee income   12,796,982    14,333,862 
           
Interest expense          
Deposits   242,275    702,860 
Total interest expense   242,275    702,860 
           
Net interest income   12,554,707    13,631,002 
Provision for loan losses   40,000    155,000 
Net interest income after provision for loan losses   12,514,707    13,476,002 
           
Other income          
Service charges and fees   801,245    876,394 
Mortgage banking income   1,486,247    671,123 
Gain on sales of securities       28,900 
Other non-interest income   21,813    21,175 
Total other income   2,309,305    1,597,592 
           
Other expense          
Salaries and employee benefits   5,360,111    4,985,591 
Net occupancy expense   1,646,790    1,233,844 
Other operating expenses   718,881    759,277 
Professional fees   449,475    447,208 
Data processing fees   486,485    450,046 
Total other expense   8,661,742    7,875,966 
           
Income before income tax expense   6,162,270    7,197,628 
Income tax expense   1,436,845    1,652,726 
           
Net income  $4,725,425   $5,544,902 
           
Weighted average shares outstanding          
Basic   5,529,189    5,519,337 
Diluted   5,695,614    5,588,532 
           
Basic income per common share  $0.85   $1.00 
Diluted income per common share  $0.83   $0.99 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   Three Months Ended 
   September 30, 
   2020   2019 
Net income  $1,703,271   $2,014,791 
Other comprehensive (loss) income          
Unrealized (loss) gain on securities arising during the period   (5,467)   368,166 
Other comprehensive (loss) income before tax   (5,467)   368,166 
Income tax effect related to items of other comprehensive (loss) income before tax   1,149    (77,315)
Other comprehensive (loss) income after tax   (4,318)   290,851 
Total comprehensive income  $1,698,953   $2,305,642 

 

   Nine Months Ended 
   September 30, 
   2020   2019 
Net income  $4,725,425   $5,544,902 
Other comprehensive income          
Unrealized gain on securities arising during the period   1,984,046    2,967,317 
Reclassification adjustment for securities gains realized in net income       (28,897)
Other comprehensive income before tax   1,984,046    2,938,420 
Income tax effect related to items of other comprehensive income before tax   (416,650)   (617,068)
Other comprehensive income after tax   1,567,396    2,321,352 
Total comprehensive income  $6,292,821   $7,866,254 

 

See accompanying notes to consolidated financial statements.

 

6

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED September 30, 2020 AND 2019 (UNAUDITED) 

 

   Shares Outstanding   Additional Paid in Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive Income (Loss)   Total 
December 31, 2019   5,530,001   $47,131,034   $5,879,409   $(2,325,225)  $482,814   $51,168,032 
Net income           1,521,131            1,521,131 
Other comprehensive income                   601,016    601,016 
Stock option exercises   362    4,489                4,489 
Stock-based compensation expense       16,418                16,418 
Cash dividends ($0.16 per common share)           (884,859)           (884,859)
March 31, 2020   5,530,363   $47,151,941   $6,515,681   $(2,325,225)  $1,083,830   $52,426,227 
                               
Net income           1,501,023            1,501,023 
Other comprehensive income                   970,698    970,698 
Stock option exercises   9,619    108,757        (41,697)       67,060 
Stock-based compensation expense       29,305                29,305 
Repurchase of common shares   (9,300)           (148,550)       (148,550)
Cash dividends ($0.16 per common share)           (884,908)           (884,908)
June 30, 2020   5,530,682   $47,290,003   $7,131,796   $(2,515,472)  $2,054,528   $53,960,855 
                               
Net income           1,703,271            1,703,271 
Other comprehensive loss                   (4,318)   (4,318)
Stock option exercises   4,344    56,496        (22,108)       34,388 
Stock-based compensation expense       24,413                24,413 
Repurchase of common shares   (15,767)           (250,318)       (250,318)
Cash dividends ($0.17 per common share)           (938,274)           (938,274)
September 30, 2020   5,519,259   $47,370,912   $7,896,793   $(2,787,898)  $2,050,210   $54,530,017 

  

   Shares Outstanding   Additional Paid in Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive Income (Loss)   Total 
December 31, 2018   5,510,917   $46,857,734   $2,650,296   $(2,268,264)  $(1,777,205)  $45,462,561 
Net income           1,689,264            1,689,264 
Other comprehensive income                   991,936    991,936 
Stock option exercises   5,808    51,265                51,265 
Stock-based compensation expense       18,881                18,881 
Cash dividends ($0.16 per common share)           (882,676)           (882,676)
March 31, 2019   5,516,725   $46,927,880   $3,456,884   $(2,268,264)  $(785,269)  $47,331,231 
                               
Net income           1,840,847            1,840,847 
Other comprehensive income                   1,038,565    1,038,565 
Stock option exercises   8,553    94,977        (45,843)       49,134 
Stock-based compensation expense       18,882                18,882 
Cash dividends ($0.16 per common share)           (884,044)           (884,044)
June 30, 2019   5,525,278   $47,041,739   $4,413,687   $(2,314,107)  $253,296   $49,394,615 
                               
Net income           2,014,791            2,014,791 
Other comprehensive income                   290,851    290,851 
Stock option exercises   4,723    49,005        (11,118)       37,887 
Stock-based compensation expense       20,145                20,145 
Cash dividends ($0.26 per common share)           (1,437,798)           (1,437,798)
September 30, 2019   5,530,001   $47,110,889   $4,990,680   $(2,325,225)  $544,147   $50,320,491 

  

See accompanying notes to consolidated financial statements.

 

7

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(UNAUDITED)

 

   Nine Months Ended 
   September 30, 
   2020   2019 
Cash flows from operating activities:          
Net income  $4,725,425   $5,544,902 
Adjustments to reconcile net income net cash (used in) provided by operating activities:          
Depreciation expense   316,249    170,690 
Gain on sale of investment securities       (28,897)
Provision for loan losses   40,000    155,000 
Stock-based compensation expense   70,136    57,908 
Deferred income taxes   (449,849)   (29,329)
Net amortization of unearned discounts on investment securities available for sale   228,908    200,138 
Origination of mortgage loans held for sale   (121,792,079)   (48,507,050)
Proceeds from sale of mortgage loans held for sale   114,125,958    44,771,057 
(Increase) decrease in accrued interest receivable and other assets   (118,270)   20,120 
Increase in accrued interest payable and other liabilities   1,066,352    304,326 
Net cash (used in) provided by operating activities   (1,787,170)   2,658,865 
           
Cash flows from investing activities:          
Proceeds from calls and maturities of investment securities available for sale   15,158,000    7,423,835 
Proceeds from sale of investment securities available for sale       20,317,250 
Purchase of investment securities available for sale   (48,260,421)   (3,603,000)
Net increase in loans   (46,570,025)   (1,090,933)
Purchase of premises, equipment, and leasehold improvements, net   (153,435)   (1,493,686)
Net cash (used in) provided by investing activities   (79,825,881)   21,553,466 
           
Cash flows from financing activities:          
Net increase in deposit accounts   79,964,014    4,825,959 
Dividends paid   (2,654,567)   (2,593,358)
Stock options exercised   105,937    138,286 
Share repurchases   (398,868)    
Net cash provided by financing activities   77,016,516    2,370,887 
Net (decrease) increase in cash and cash equivalents   (4,596,535)   26,583,218 
Cash and cash equivalents at the beginning of the period   49,094,419    31,832,241 
Cash and cash equivalents at the end of the period  $44,497,884   $58,415,459 
           
Supplemental disclosure of cash flow data:          
Cash paid during the period for:          
Interest  $253,785   $819,131 
Income taxes  $500,000   $1,152,918 
          
Supplemental disclosures for non-cash investing and financing activity:          
Change in unrealized gain on securities available for sale, net of income taxes  $(1,567,396)  $(2,321,352)
Change in dividends payable  $53,474   $611,160 
Right of use assets obtained in exchange for lease obligations  $   $13,519,027 
Change in right of use assets and lease liabilities  $(358,255)  $(193,235)

 

See accompanying notes to consolidated financial statements.

 

8

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 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 6, 2020. 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 loan losses, impaired loans, other real estate owned, deferred tax assets, the fair value of financial instruments and other-than-temporary impairment of investment securities.

 

Reclassification

 

Certain amounts in the prior years’ financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.

 

Income per 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. Retroactive recognition has been given for the effects of all stock dividends.

 

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.

 

In September 2016, the FASB issued ASU 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to change the accounting for credit losses and modify the impairment model for certain debt securities. In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. In October 2019, the FASB voted to extend the implementation date for smaller reporting companies, non-SEC public companies, and private companies. The amendment will be effective for the Company for periods beginning after December 15, 2022. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. It will be influenced by the quality, composition, and characteristics of our loan and investment portfolios, as well as the expected economic conditions and forecasts at the time of enactment and future reporting periods.

 

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In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendment became effective for the Company on January 1, 2020 and did not have a material effect on the financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles and Goodwill and Other-Internal Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract),which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendment became effective for the Company on January 1, 2020 and did not have a material effect on the financial statements.

 

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The amendment became effective for the Company on January 1, 2020 and did not have a material effect on the financial statements.

 

In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for the reporting period beginning after December 15, 2019. The amendments related to hedging became effective January 1, 2019. The amendments related to recognition and measurement of financial instruments became effective for the Company on January 1, 2020 and did not have a material effect on the financial statements.

 

In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which provides guidance to simply accounting for income taxes by removing specific technical exceptions that can produce information investors do not understand. The amendments improve and simplify the application of GAAP for other areas of Topic 740 by clarifying and amending the existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on the financial statements.

 

In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

 

In February 2020, the FASB issued guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the current expected credit losses (CECL) guidance issued in 2016. The amendments related to conforming amendments. For public business entities, the amendments are effective upon issuance of this final ASU. The effective date of the amendments to ASU 2016-01 is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the amendments related to ASU 2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (SRCs) as defined by the SEC, should adopt the amendments in ASU 2016-13 during 2020. Early adoption will continue to be permitted. For entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its 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.

  

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Note 2: Investment Securities

 

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

 

   September 30, 2020 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair Value 
U.S. Treasury Notes  $23,047,674   $460,263   $   $23,507,937 
Government-Sponsored Enterprises   93,258,966    1,660,766    (43,210)   94,876,522 
Municipal Securities   16,405,672    517,384        16,923,056 
Total  $132,712,312   $2,638,413   $(43,210)  $135,307,515 

 

   December 31, 2019 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value
 
U.S. Treasury Notes  $23,080,465   $99,735   $   $23,180,200 
Government-Sponsored Enterprises   50,139,959    401,336    (43,100)   50,498,195 
Municipal Securities   26,618,375    169,640    (16,454)   26,771,561 
Total  $99,838,799   $670,711   $(59,554)  $100,449,956 

 

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2020 and December 31, 2019, by contractual maturity are in the following table.

 

   September 30, 2020   December 31, 2019 
   Amortized
Cost
   Estimated Fair Value   Amortized
Cost
   Estimated Fair Value 
Due in one year or less  $25,221,775   $25,554,095   $9,185,615   $9,191,226 
Due in one year to five years   50,073,562    51,630,597    77,261,123    77,815,119 
Due in five years to ten years   47,416,975    48,166,033    13,392,061    13,443,611 
Due in ten years and over   10,000,000    9,956,790         
Total  $132,712,312   $135,307,515   $99,838,799   $100,449,956 

 

Securities pledged to secure deposits at both September 30, 2020 and December 31, 2019, had a fair value of $42.6 million and $37.6 million, respectively. 

 

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2020 and December 31, 2019. 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.

 

   September 30, 2020 
   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      $   $       $   $       $   $ 
Government-Sponsored Enterprises   1    9,956,790    (43,210)               1    9,956,790    (43,210)
Municipal Securities                                    
Total   1   $9,956,790   $(43,210)      $   $    1   $9,956,790   $(43,210)

 

   December 31, 2019 
   Less Than 12 Months   12 Months or Longer   Total 
Available for sale  #   Fair
Value
   Gross
Unrealized
Loss
   #   Fair
Value
   Gross
Unrealized
Loss
   #   Fair
Value
   Gross
Unrealized
Loss
 
U.S. Treasury Notes      $   $       $   $       $   $ 
Government-Sponsored Enterprises   1    5,039,550    (43,100)               1    5,039,550    (43,100)
Municipal Securities   9    3,199,517    (13,335)   1    330,880    (3,119)   10    3,530,397    (16,454)
Total   10   $8,239,067   $(56,435)   1   $330,880   $(3,119)   11   $8,569,947   $(59,554)

 

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

 

   Three Months Ended 
   September 30, 
   2020   2019 
Gross proceeds  $   $5,364,750 
Gross realized gains       14 
Gross realized losses       (14)

 

   Nine Months Ended 
   September 30, 
   2020   2019 
Gross proceeds  $   $20,317,250 
Gross realized gains       59,523 
Gross realized losses       (30,626)

 

There was no tax provision related to gains for the three and nine months ended September 30, 2020. There was no tax provision related to gains for the three months ended September 30, 2019. The tax provision related to these sales was $6,069 for the nine months ended September 30, 2019.

 

Note 3: Loans and Allowance for Loan Losses

 

Major classifications of loans (net of deferred loan fees and costs of $958,107 at September 30, 2020 and $155,697 at December 31, 2019, respectively) are as follows:

 

   September 30,
2020
   December 31,
2019
 
Commercial  $49,137,293   $52,848,455 
Commercial real estate:          
Construction   14,208,936    12,491,078 
Other   145,848,405    143,821,990 
Consumer:          
Real estate   70,225,264    59,533,045 
Other   4,610,569    5,377,992 
Paycheck Protection Program   36,722,174     
    320,752,641    274,072,560 
Allowance for loan losses   (4,153,814)   (4,003,758)
Loans, net  $316,598,827   $270,068,802 

 

We had $58.2 million and $85.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at September 30, 2020 and at December 31, 2019, respectively.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions. Under the program, the Small Business Administration (“SBA”) will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for Paycheck and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and as long as the borrower submits its loan forgiveness application within ten months of completion of the covered period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. The Bank received a processing fee ranging from 1% to 5% based on the size of the loan from the SBA. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. The Bank received $1.4 million of processing fees and has recognized $0.3 million during the nine months ended September 30, 2020. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/ HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized additional funding under the CARES Act of $310.0 billion for PPP loans to be issued by financial institutions through the SBA. The Bank has provided $37.8 million in funding to 266 customers through the PPP as of September 30, 2020. Because these loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve.

 

Our portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Our internal credit risk grading system is based on experience with similarly graded loans, industry best practices, and regulatory guidance. Our portfolio is graded in its entirety, with the exception of the PPP loans.

 

Our internally assigned grades pursuant to the Board-approved lending policy are as follows:

 

  Excellent (1) The borrowing entity has more than adequate cash flow, unquestionable strength, strong earnings and capital and, where applicable, no overdrafts.

 

  Good (2) The borrowing entity has dependable cash flow, better than average financial condition, good capital and usually no overdrafts.

 

  Satisfactory (3) The borrowing entity has adequate cash flow, satisfactory financial condition, and explainable overdrafts (if any).

 

  Watch (4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical earnings, weak capital, loan to/from stockholders, and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and growth.

 

  OAEM (5) The borrowing entity has marginal cash flow, occasional past dues, and frequent and unexpected working capital needs.

 

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  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 source of repayment.

 

  Doubtful (7) The borrowing entity has negative cash flow. Survival of the business is at risk, full repayment is unlikely, and there are frequent and unexplained overdrafts. The borrowing entity shows declining trends and no operating profits.

 

  Loss (8) The borrowing entity has negative cash flow with no alternatives. Survival of the business is unlikely.

 

The following tables illustrate credit quality by class and internally assigned grades at September 30, 2020 and December 31, 2019. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

September 30, 2020 
    Commercial   Commercial
Real Estate Construction
   Commercial
Real Estate
Other
   Consumer
Real Estate
   Consumer
Other
   Paycheck Protection Program   Total 
Pass   $42,305,036   $13,223,424   $121,750,858   $68,448,332   $4,299,844   $   $250,027,494 
Watch    3,724,838    985,512    18,032,014    866,450    220,303        23,829,117 
OAEM    1,041,844        3,987,438    623,226    48,526        5,701,034 
Substandard    2,065,575        2,078,095    287,256    41,896        4,472,822 
Doubtful                             
Loss                             
Unrated                        36,722,174    36,722,174 
Total   $49,137,293   $14,208,936   $145,848,405   $70,225,264   $4,610,569   $36,722,174   $320,752,641 

 

December 31, 2019 
    Commercial   Commercial
Real Estate Construction
   Commercial
Real Estate
Other
   Consumer
Real Estate
   Consumer
Other
   Paycheck Protection Program   Total 
Pass   $48,098,936   $12,005,834   $137,641,011   $56,034,247   $4,966,615   $   $258,746,643 
Watch    2,303,568    485,244    3,758,220    2,096,445    315,375        8,958,852 
OAEM    460,551        649,039    522,600    44,232        1,676,422 
Substandard    1,985,400        1,773,720    879,753    51,770        4,690,643 
Doubtful                             
Loss                             
Unrated                             
Total   $52,848,455   $12,491,078   $143,821,990   $59,533,045   $5,377,992   $   $274,072,560 

  

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

 

September 30, 2020
   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  $25,809   $7,845   $   $33,654   $49,103,639   $49,137,293   $ 
Commercial Real Estate Construction                   14,208,936    14,208,936     
Commercial Real Estate Other   805,548        643,711    1,449,259    144,399,146    145,848,405     
Consumer Real Estate           37,407    37,407    70,187,857    70,225,264     
Consumer Other   26,449            26,449    4,584,120    4,610,569     
Paycheck Protection Program                   36,722,174    36,722,174     
Total  $857,806   $7,845   $681,118   $1,546,769   $319,205,872   $320,752,641   $ 

 

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December 31, 2019
   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  $39,329   $   $178,975   $218,304   $52,630,151   $52,848,455   $ 
Commercial Real Estate Construction                   12,491,078    12,491,078     
Commercial Real Estate Other   620,837    300,240    582,419    1,503,496    142,318,494    143,821,990     
Consumer Real Estate       2,965    629,999    632,964    58,900,081    59,533,045     
Consumer Other   32,842            32,842    5,345,150    5,377,992     
Paycheck Protection Program                            
Total  $693,008   $303,205   $1,391,393   $2,387,606   $271,684,954   $274,072,560   $ 

 

There were no loans over 90 days past due and still accruing as of September 30, 2020 and December 31, 2019.

 

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

  

   Loans Receivable on Non-Accrual  
   September 30, 2020   December 31, 2019 
Commercial  $189,492   $178,975 
Commercial Real Estate Construction        
Commercial Real Estate Other   917,638    857,327 
Consumer Real Estate   37,407    629,999 
Consumer Other   12,847     
Paycheck Protection Program        
Total  $1,157,384   $1,666,301 

 

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The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by loan category for the three and nine months ended September 30, 2020 and 2019. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors. 

 

Three Months Ended September 30, 2020  
   Commercial    Commercial Real Estate Construction    Commercial Real Estate Other    Consumer Real Estate    Consumer Other    Paycheck Protection Program    Total  
Allowance for Loan Losses:                                   
Beginning balance  $1,018,550   $150,807   $1,477,019   $883,300   $580,954   $   $4,110,630 
Charge-offs                            
Recoveries                   3,184        3,184 
Provisions   197,766    28,766    312,806    (35,302)   (464,036)       40,000 
Ending balance  $1,216,316   $179,573   $1,789,825   $847,998   $120,102   $   $4,153,814 

 

Nine Months Ended September 30, 2020  
   Commercial    Commercial Real Estate Construction    Commercial Real Estate Other    Consumer Real Estate    Consumer Other    Paycheck Protection Program    Total  
Allowance for Loan Losses:                                   
Beginning balance  $1,429,917   $109,235   $1,270,445   $496,221   $697,940   $   $4,003,758 
Charge-offs                   (116,002)       (116,002)
Recoveries   87,011        99,801        39,246        226,058 
Provisions   (300,612)   70,338    419,579    351,777    (501,082)       40,000 
Ending balance  $1,216,316   $179,573   $1,789,825   $847,998   $120,102   $   $4,153,814 

 

Three Months Ended September 30, 2019  
   Commercial    Commercial Real Estate Construction    Commercial Real Estate Other    Consumer Real Estate    Consumer Other    Paycheck Protection Program    Total  
Allowance for Loan Losses:                                   
Beginning balance  $1,539,652   $97,987   $1,332,803   $528,529   $631,577   $   $4,130,548 
Charge-offs                            
Recoveries                   867        867 
Provisions   (494,762)   (1,281)   (39,630)   (27,382)   573,055        10,000 
Ending balance  $1,044,890   $96,706   $1,293,173   $501,147   $1,205,499   $   $4,141,415 

 

Nine Months Ended September 30, 2019  
   Commercial    Commercial Real Estate Construction    Commercial Real Estate Other    Consumer Real Estate    Consumer Other    Paycheck Protection Program    Total  
Allowance for Loan Losses:                                   
Beginning balance  $1,665,413   $63,876   $1,292,346   $386,585   $806,111   $   $4,214,331 
Charge-offs   (229,395)               (8,342)       (237,737)
Recoveries   6,000                3,821        9,821 
Provisions   (397,128)   32,830    827    114,562    403,909        155,000 
Ending balance  $1,044,890   $96,706   $1,293,173   $501,147   $1,205,499   $   $4,141,415 

 

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The following tables present, by portfolio segment and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans, for the periods indicated.

 

September 30, 2020  
   Commercial    Commercial Real Estate Construction    Commercial Real Estate Other    Consumer Real Estate    Consumer Other    Paycheck Protection Program    Total  
Allowance for Loan Losses                                   
Individually evaluated for impairment  $650,270   $   $35,116   $5,625   $41,896   $   $732,907 
Collectively evaluated for impairment   566,046    179,573    1,754,709    842,373    78,206        3,420,907 
Total Allowance for Loan Losses  $1,216,316   $179,573   $1,789,825   $847,998   $120,102   $   $4,153,814 
Loans Receivable                                   
Individually evaluated for impairment  $2,680,487   $   $5,361,814   $287,257   $41,896   $   $8,371,454 
Collectively evaluated for impairment   46,456,806    14,208,936    140,486,591    69,938,007    4,568,673    36,722,174    312,381,187 
Total Loans Receivable  $49,137,293   $14,208,936   $145,848,405   $70,225,264   $4,610,569   $36,722,174   $320,752,641 

 

December 31, 2019  
   Commercial    Commercial Real Estate Construction    Commercial Real Estate Other    Consumer Real Estate    Consumer Other    Paycheck Protection Program    Total  
Allowance for Loan Losses                                   
Individually evaluated for impairment  $683,278   $   $1,782   $   $90   $   $685,150 
Collectively evaluated for impairment   746,639    109,235    1,268,663    496,221    697,850        3,318,608 
Total Allowance for Loan Losses  $1,429,917   $109,235   $1,270,445   $496,221   $697,940   $   $4,003,758 
Loans Receivable                                   
Individually evaluated for impairment  $2,065,732   $   $1,679,872   $879,753   $51,770   $   $4,677,127 
Collectively evaluated for impairment   50,782,723    12,491,078    142,142,118    58,653,292    5,326,222        269,395,433 
Total Loans Receivable  $52,848,455   $12,491,078   $143,821,990   $59,533,045   $5,377,992   $   $274,072,560 

  

16

 

 

As of September 30, 2020 and December 31, 2019, loans individually evaluated and considered impaired are presented in the following table.

 

   Impaired Loans as of  
   September 30, 2020    December 31, 2019  
    Unpaid Principal Balance    Recorded Investment    Related Allowance    Unpaid Principal Balance    Recorded Investment    Related Allowance 
With no related allowance recorded:                              
Commercial  $1,409,220   $1,409,220   $   $1,355,875   $1,355,875   $ 
Commercial Real Estate Construction                        
Commercial Real Estate Other   5,020,362    5,020,362        1,432,988    1,432,988     
Consumer Real Estate   249,850    249,850        879,753    879,753     
Consumer Other                        
Paycheck Protection Program                        
Total   6,679,432    6,679,432        3,668,616    3,668,616     
                               
With an allowance recorded:                              
Commercial   1,271,267    1,271,267    650,270    709,857    709,857    683,278 
Commercial Real Estate Construction                        
Commercial Real Estate Other   341,452    341,452    35,116    346,685    246,884    1,782 
Consumer Real Estate   37,407    37,407    5,625             
Consumer Other   41,896    41,896    41,896    51,770    51,770    90 
Paycheck Protection Program                        
Total   1,692,022    1,692,022    732,907    1,108,312    1,008,511    685,150 
                               
                               
Commercial   2,680,487    2,680,487    650,270    2,065,732    2,065,732    683,278 
Commercial Real Estate Construction                        
Commercial Real Estate Other   5,361,814    5,361,814    35,116    1,779,673    1,679,872    1,782 
Consumer Real Estate   287,257    287,257    5,625    879,753    879,753     
Consumer Other   41,896    41,896    41,896    51,770    51,770    90 
Paycheck Protection Program                        
Total  $8,371,454   $8,371,454   $732,907   $4,776,928   $4,677,127   $685,150 

 

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 September 30,  
   2020    2019  
   Average Recorded Investment    Interest Income Recognized    Average Recorded Investment    Interest Income Recognized  
With no related allowance recorded:                    
Commercial  $1,420,335   $19,891   $1,475,751   $23,707 
Commercial Real Estate Construction                
Commercial Real Estate Other   5,024,801    56,189    1,136,872    11,832 
Consumer Real Estate   249,850    2,676    879,753    4,041 
Consumer Other                
Paycheck Protection Program                
    6,694,986    78,756    3,492,376    39,580 
                     
With an allowance recorded:                    
Commercial   1,299,038    26,910    178,975     
Commercial Real Estate Construction                
Commercial Real Estate Other   335,664        346,685     
Consumer Real Estate   36,449    2,197         
Consumer Other   41,896    686    57,540    898 
Paycheck Protection Program                
    1,713,047    29,793    583,200    898 
Total                    
Commercial   2,719,373    46,801    1,654,726    23,707 
Commercial Real Estate Construction                
Commercial Real Estate Other   5,360,465    56,189    1,483,557    11,832 
Consumer Real Estate   286,299    4,873    879,753    4,041 
Consumer Other   41,896    686    57,540    898 
Paycheck Protection Program                
   $8,408,033   $108,549   $4,075,576   $40,478 

  

17

 

 

   Nine Months Ended September 30,  
   2020    2019  
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                    
Commercial  $1,442,248   $55,882   $1,519,222   $73,276 
Commercial Real Estate - Construction                
Commercial Real Estate - Other   5,043,047    175,862    1,239,519    40,709 
Consumer Real Estate   249,801    9,148    879,753    26,676 
Consumer Other                
Paycheck Protection Program                
    6,735,096    240,892    3,638,494    140,661 
                     
With an allowance recorded:                    
Commercial   1,401,247    63,338    178,976    5,779 
Commercial Real Estate - Construction                
Commercial Real Estate - Other   335,578        246,884     
Consumer Real Estate   35,460             
Consumer Other   42,154    1,931    61,089    2,644 
Paycheck Protection Program                
    1,814,439    65,269    486,949    8,423 
Total                    
Commercial   2,843,495    119,220    1,698,198    79,055 
Commercial Real Estate - Construction                
Commercial Real Estate - Other   5,378,625    175,862    1,486,403    40,709 
Consumer Real Estate   285,261    9,148    879,753    26,676 
Consumer Other   42,154    1,931    61,089    2,644 
Paycheck Protection Program                
   $8,549,535   $306,161   $4,125,443   $149,084 

 

In general, the modification or restructuring of a loan is considered a troubled debt restructuring (“TDR”) if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of September 30, 2020, there were 13 TDRs with a balance of $5.5 million compared to 3 TDRs with a balance of $573,473 as of December 31, 2019. These TDRs were granted extended payment terms with no principal reduction. The structure of two of the loans changed to interest only. All TDRs were performing as agreed as of September 30, 2020. No TDRs defaulted during the three and nine months ended September 30, 2020 and 2019, which were modified within the previous twelve months.

 

Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. The Bank processed approximately $0.7 million in principal deferments to 84 customers, with an aggregate loan of $29.7 million, during the nine months ended September 30, 2020. The principal deferments represent 0.22% of our total loan portfolio as of September 30, 2020. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 8 loans, with an aggregate loan balance of $3.9 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. All other borrowers were current prior to relief, were not experiencing financial difficulty prior to COVID-19, and the Bank determined they were not considered TDRs. Additionally, of the 76 customers that received payment accommodations that are not classified as TDRs, 5 customers, with an aggregate loan balance of $0.3 million, have paid their loan in full, 8 customers, with an aggregate loan balance of $2.3 million, are past due, and 63 customers, with an aggregate loan balance of $23.2 million, have commenced paying as agreed. The Bank will continue to examine payment accommodations periodically.

 

Note 4: Leases

 

As of September 30, 2020 and December 31, 2019, the Company had operating right of use (“ROU”) assets of $12.9 million and $13.2 million, respectively, and operating lease liabilities of $12.9 million and $13.2 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.

 

The weighted average remaining lease term is 17.31 years. The weighted average incremental borrowing rate is 4.35%.

 

The table below shows lease expense components for the three months ended September 30, 2020.

 

Lease Expense Components        
Operating lease expense   $ 243,298   
Short-term lease expense      
Total lease expense   $ 243,298   

 

18

 

 

The table below shows lease expense components for the nine months ended September 30, 2020.

 

Lease Expense Components        
Operating lease expense   $ 727,379   
Short-term lease expense      
Total lease expense   $ 727,379  

 

Total rental expense was $243,298 and $160,919 for the three months ended September 30, 2020 and 2019, respectively, and $727,379 and $478,778 for the nine months ended September 30, 2020 and 2019, respectively, and was included in net occupancy expense within the consolidated statements of income.

 

As of September 30, 2020 and December 31, 2019, we did not maintain any finance leases, and we determined that the number and dollar amount of equipment leases was immaterial. As of September 30, 2020 and December 31, 2019, we have no additional operating leases that have not yet commenced.

 

Note 5: Disclosure 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. The fair value standard 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 affect significantly the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

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

 

Investment Securities Available for Sale

 

Investment securities are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed 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. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments as 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 short term fair value of the mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of September 30, 2020 and December 31, 2019.

 

19

 

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 are as follows:

 

   September 30, 2020 
   Level 1   Level 2   Level 3   Total 
U.S. Treasury Notes  $23,507,937   $   $   $23,507,937 
Government-Sponsored Enterprises       94,876,522        94,876,522 
Municipal Securities       10,888,485    6,034,571    16,923,056 
Total  $23,507,937   $105,765,007   $6,034,571   $135,307,515 

 

   December 31, 2019 
   Level 1   Level 2   Level 3   Total 
U.S. Treasury Notes  $23,180,200   $   $   $23,180,200 
Government-Sponsored Enterprises       50,498,195        50,498,195 
Municipal Securities       14,817,110    11,954,451    26,771,561 
Total  $23,180,200   $65,315,305   $11,954,451   $100,449,956 

 

There were no liabilities recorded at fair value on a recurring basis as of September 30, 2020 or December 31, 2019.

 

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 and nine months ended September 30, 2020 and 2019:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
Beginning balance  $6,086,342   $4,534,517   $11,954,451   $6,241,955 
Total gains or (losses) (realized/unrealized)                    
Included in other comprehensive income   18,229    11,660    128,120    113,057 
Purchases, issuances, and settlements net of maturities   (70,000)   3,533,000    6,048,000   1,724,165 
Ending balance  $6,034,571   $8,079,177   $6,034,571   $8,079,177 

 

There were no transfers between fair value levels during the three and nine months ended September 30, 2020 or 2019.

 

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

 

Other Real Estate Owned (“OREO”)

 

Loans secured by real estate are adjusted to the lower of the recorded investment in the loan or the fair value of the real estate upon transfer to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, or our estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraisal, we record the asset as nonrecurring Level 2. When an appraised value is not available or we determine the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the asset as nonrecurring Level 3.

 

The Bank did not have any OREO as of September 30, 2020 or December 31, 2019.

 

Impaired Loans

 

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, we review the most recent appraisal and if it is over 12 to 18 months old, we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically, as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired. However, as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These valuations are reviewed and updated on a quarterly basis.

 

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

 

Mortgage Loans to be Sold

 

Mortgage loans to be sold are carried at the lower of cost or market value. The fair values of mortgage loans to be sold are based on current market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates fair value. These loans are classified as Level 2.

  

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments 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).

 

20

 

 

The following table presents information about certain assets measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019:

 

   September 30, 2020 
   Level 1   Level 2   Level 3   Total 
Impaired loans  $   $   $5,339,863   $5,339,863 
Mortgage loans to be sold       12,728,519        12,728,519 
Total  $   $12,728,519   $5,339,863   $18,068,382 

  

   December 31, 2019 
   Level 1   Level 2   Level 3   Total 
Impaired loans  $   $   $2,657,644   $2,657,644 
Mortgage loans to be sold       5,062,398        5,062,398 
Total  $   $5,062,398   $2,657,644   $7,720,042 

 

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2020 or December 31, 2019.

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2020 and December 31, 2019:

 

        Inputs
    Valuation Technique   Unobservable Input   General Range of Inputs
             
Impaired Loans   Appraisal Value/ Comparison Sales/Other Estimates   Appraisals and/or Sales of Comparable Properties   Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs
             

Accounting standards require disclosure of fair value information for all of our assets and liabilities that are considered financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate fair value.

 

Under the accounting standard, fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of the assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts of existing financial instruments do not represent the underlying value of those instruments on our books.

 

The following paragraphs describe the methods and assumptions we use in estimating the fair values of financial instruments:

 

  a. Cash and due from banks, interest-bearing deposits at the Federal Reserve

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, net

The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. Additionally, in accordance with ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, this consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio.

 

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated based on the fair value of the underlying collateral. Impaired 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.

 

21

 

  

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of September 30, 2020 and December 31, 2019.

 

   Fair Value Measurements at September 30, 2020 
   Carrying
Amount
   Estimated
Fair Value
   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and due from banks  $5,740,658   $5,740,658   $5,740,658   $   $ 
Interest-bearing deposits at the Federal Reserve   38,757,226    38,757,226    38,757,226         
Investment securities available for sale   135,307,515    135,307,515    23,507,937    105,765,007    6,034,571 
Mortgage loans to be sold   12,728,519    12,728,519        12,728,519     
Loans, net   316,598,827    308,959,704            308,959,704 
Accrued interest receivable   1,428,042    1,428,042        1,428,042     
Financial Liabilities:                         
Demand deposits   438,660,761    438,660,761        438,660,761     
Time deposits   20,494,908    20,423,255        20,423,255     
Accrued interest payable   27,238    27,238        27,238     

  

   Fair Value Measurements at December 31, 2019 
  

Carrying

Amount

  

Estimated

Fair Value 

   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and due from banks  $9,773,893   $9,773,893   $9,773,893   $   $ 
Interest-bearing deposits at the Federal Reserve   39,320,526    39,320,526    39,320,526         
Investment securities available for sale   100,449,956    100,449,956    23,180,200    65,315,305    11,954,451 
Mortgage loans to be sold   5,062,398    5,062,398        5,062,398     
Loans, net   270,068,802    271,736,572            271,736,572 
Accrued interest receivable   1,309,772    1,309,772        1,309,772     
Financial Liabilities:                         
Demand deposits   357,008,868    357,008,868        357,008,868     
Time deposits   22,182,787    21,962,039        21,962,039     
Accrued interest payable   38,748    38,748        38,748     

 

Note 6: Income Per Common Share

 

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and potential common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock.

 

The following table is a summary of the reconciliation of weighted average shares outstanding for the three months ended September 30:

 

   2020   2019 
Net income  $1,703,271   $2,014,791 
           
Weighted average shares outstanding   5,527,696    5,526,233 
Effect of dilutive shares   168,551    68,823 
Weighted average shares outstanding - diluted   5,696,247    5,595,056 
           
Earnings per share - basic  $0.31   $0.36 
Earnings per share - diluted  $0.30   $0.36 

 

The following table is a summary of the reconciliation of weighted average shares outstanding for the nine months ended September 30:

 

   2020   2019 
Net income  $4,725,425   $5,544,902 
           
Weighted average shares outstanding   5,529,189    5,519,337 
Effect of dilutive shares   166,425    69,195 
Weighted average shares outstanding - diluted   5,695,614    5,588,532 
           
Earnings per share - basic  $0.85   $1.00 
Earnings per share - diluted  $0.83   $0.99 

 

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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 27A of the Securities Act of 1934. We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1996 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 heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 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 loan losses, provisions for loan losses, and the assessment of problem loans

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

  Deposit growth, change in the mix or type of deposit products and services

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

  Technological changes

  Ability to control expenses

  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
  Reputational risk
 

Pandemic risk, including COVID-19, and related quarantine and/or stay-at home policies and restrictions

Impact of COVID-19 on the collectability of loans

Changes in legislation as related to PPP loans

  Risks related to litigation related to processing PPP loans
  Credit risks, determination of deficiency, or complete loss if SBA denies PPP loans

 

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 financial institution holding company headquartered in Charleston, South Carolina, with $529.1 million in assets as of September 30, 2020. 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.

 

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 loan losses (the “allowance”) and a reserve for unfunded commitments (the “unfunded reserve”). The allowance provides for probable and estimable losses inherent in our loan portfolio while the unfunded reserve provides for potential losses related to unfunded lending commitments.

  

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 September 30, 2020 and December 31, 2019, 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.

 

COVID-19

 

On March 11, 2020, the World Health Organization (“WHO”) declared COVID-19 a pandemic. Due to orders issued by the governor of South Carolina and in an abundance of caution for the health of our customers and employees, on March 23, 2020 the Bank closed lobbies to all 5 offices but remained fully operational.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions. Under the program, the Small Business Administration (“SBA”) will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for Paycheck and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and as long as the borrower submits its loan forgiveness application within ten months of completion of the covered period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. The Bank received a processing fee ranging from 1% to 5% based on the size of the loan from the SBA. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/ HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized additional funding under the CARES Act of $310.0 billion for PPP loans to be issued by financial institutions through the SBA. The Bank has provided $37.8 million in funding to 266 customers through the PPP as of September 30, 2020. Because these loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve. The SBA began accepting PPP Forgiveness Applications on August 10, 2020. Borrowers must submit the application within ten months of the completion of the covered period. Once the borrower has submitted the application, the Bank has 60 days to review, issue a lender decision, and submit to the SBA. Once the application is submitted, the SBA has 90 days to review and remit the appropriate forgiveness amount to the Bank plus any interest accrued through the date of payment.

 

As of September 30, 2020, the Bank has received six PPP Forgiveness applications with a total loan balance of $0.8 million and is in the process of reviewing them. The Bank will recognize the deferred fee income in accordance with ASC 310-20. The Bank received $1.4 million of processing fees and has recognized $0.3 million during the nine months ended September 30, 2020.

  

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Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. The Bank processed approximately $0.7 million in principal deferments to 84 customers, with an aggregate loan balance of $29.7 million, during the nine months ended September 30, 2020. The principal deferments represent 0.22% of our total loan portfolio as of September 30, 2020. In accordance with the FDIC guidance, borrowers who were current prior to becoming affected by COVID-19, that received payment accommodations as a result of the pandemic, generally should not be reported as past due. There were no interest deferments granted and all loans given payment accommodations are still paying interest. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 8 loans, with an aggregate loan balance of $3.9 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. All other borrowers were current prior to relief, were not experiencing financial difficulty prior to COVID-19, and the Bank determined they were not considered TDRs. Additionally, of the 76 customers that received payment accommodations that are not classified as TDRs, 5 customers, with an aggregate loan balance of $0.3 million, have paid their loan in full, 8 customers, with an aggregate loan balance of $2.3 million, are past due, and 63 customers, with an aggregate loan balance of $23.2 million, have commenced paying as agreed. The Bank will continue to examine payment accommodations periodically. The Bank is tracking all payment accommodations to customers to identify and quantify any impact they might have on the Bank.

 

While the effects of COVID-19 have impacted all industries to varying degrees, the Bank believes the retail and/or service, food and beverage, and short term rental industries in our geographic area are considered a higher risk due to the primary source of repayment. These industries are dependent upon the hospitality industry and were affected by the mandates issued by the Governor of South Carolina to limit occupancy or close for a period of time.

 

The table below shows the total loans receivable for these segments as a percentage of total gross loans as of September 30, 2020.

 

   September 30, 2020 
   Amount   Percent 
Retail and/or Service  $1,793,999    0.56%
Food and Beverage   1,714,331    0.53%
Short Term Rental   12,030,774    3.75%
   $15,539,104    4.84%

  

These loans have been temporarily downgraded to our "Watch" category, the Bank is continuing to monitor the effects of COVID-19 on these segments of our loan portfolio. During the second quarter of 2020, the Bank granted payment accommodations of approximately $6.0 million, or 33.59%, of these loans. As of September 30, 2020, the loans in these segments that received payment accommodations are paying as agreed. The Bank will reevaluate these loans in the fourth quarter of 2020 based on actual performance.

 

Effects of COVID-19 may negatively impact management assumptions and estimates, such as the allowance for loan losses. However, it is difficult to assess or predict how, and to what extent, COVID-19 will affect the Bank in the future.

 

Critical Accounting Policies

Our critical accounting policies, which involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities, and used in the preparation of the Consolidated Financial Statements as of September 30, 2020, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Balance Sheet

 

Cash and Cash Equivalents 

Total cash and cash equivalents decreased 9.37% or $4.6 million to $44.5 million as of September 30, 2020, from $49.1 million as of December 31, 2019. The decrease in total cash and cash equivalents is due to an increase in investment securities available for sale and loans.

 

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 for several purposes. It serves 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 September 30, 2020, our available for sale investment portfolio included U.S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $135.3 million and an amortized cost of $132.7 million for a net unrealized gain of approximately $2.6 million. As of September 30, 2020 and December 31, 2019, our investment securities portfolio represented approximately 25.57% and 22.57% of our total assets, respectively. The average yield on our investment securities was 1.66% and 2.00% at September 30, 2020 and December 31, 2019, respectively.

 

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During the third quarter of 2020, the Bank purchased $30.0 million in Government-Sponsored Enterprise securities. One Goverment-Sponsored Enterprise security in the amount of $5.0 million matured and one Municipal security in the amount of $70,000 was called during the same period. During the second quarter of 2020, three Municipal Securities totaling $1.0 million were called and one Municipal Security totaling $.4 million matured. During the first quarter of 2020, five Municipal Securities totaling $3.4 million were called and five Municipal Securities totaling $5.4 million matured. The Bank purchased $16.7 million in Government-Sponsored Enterprise securities during the second quarter of 2020.

 

During the first quarter of 2019, five Municipal Securities totaling $3.0 million matured and one Municipal Security in the amount of $0.5 million was called. During the second quarter of 2019, six Municipal Securities totaling $1.4 million were called, two Municipal Securities totaling $0.9 million matured, two Government-Sponsored Enterprise securities were sold for $10.0 million, and one U.S. Treasury Note in the amount of $5.0 was sold. During the third quarter of 2019, four Municipal Securities totaling $1.6 million were called, one Municipal Security in the amount of $70,000 matured, two Government-Sponsored Enterprise securities were sold for $5.0 million, and one Municipal Security was purchased for $3.6 million.

  

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 $46.5 million, or 17.23%, to $316.6 million as of September 30, 2020 from $270.1 million as of December 31, 2019. The increase is primarily related to the PPP loans originated by the Bank as well as the growth experienced in Consumer Real Estate lending activity.

 

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, 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 new mortgage product has been well-received by the Bank’s customers, and the associated volume of originations through the year has contributed to the increase in Consumer Real Estate lending.

  

The following table is a summary of our loan portfolio composition (net of deferred fees and costs of $958,107 at September 30, 2020 and $155,697 at December 31, 2019, respectively) and the corresponding percentage of total loans as of the dates indicated.

 

   September 30, 2020   December 31, 2019 
   Amount   Percent   Amount   Percent 
Commercial  $49,137,293    15.32%  $52,848,455    19.28%
Commercial Real Estate Construction   14,208,936    4.43%   12,491,078    4.56%
Commercial Real Estate Other   145,848,405    45.47%   143,821,990    52.48%
Consumer Real Estate   70,225,264    21.89%   59,533,045    21.72%
Consumer Other   4,610,569    1.44%   5,377,992    1.96%
Paycheck Protection Program   36,722,174    11.45%       0.00%
Total loans   320,752,641    100.00%   274,072,560    100.00%
Allowance for loan losses   (4,153,814)        (4,003,758)     
Total loans, net  $316,598,827        $270,068,802      

  

The increase in the deferred fees is directly associated with the processing fees the Bank received from the SBA for the PPP loans. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. The Bank received $1.4 million of processing fees and has recognized $0.3 million during the nine months ended September 30, 2020.

 

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 September 30, 2020, there were no loans 90 days past due still accruing interest.

 

The following table is a summary of our Nonperforming Assets:

 

   September 30, 2020   December 31, 2019 
Commercial  $189,492   $178,975 
Commercial Real Estate Other   917,638    857,327 
Consumer Real Estate   37,407    629,999 
Consumer Other   12,847     
Total nonaccruing loans   1,157,384    1,666,301 
Total nonperforming assets  $1,157,384   $1,666,301 

 

On March 18, 2020, in recognition of the difficulties of COVID-19, the Chief Justice of South Carolina declared a statewide moratorium on evictions and foreclosures until directed by subsequent order of the Chief Justice. The South Carolina Supreme Court lifted its moratorium effective May 15, 2020. On August 8, 2020, the President of the United States of America issued an executive order that allows the Secretary of Housing and Urban Development to take action, as appropriate and consistent with applicable law, to promote the ability of renters and homeowners to avoid foreclosure and eviction resulting from financial hardships related to COVID-19. On August 27, 2020, the Federal Housing Finance Authority and Department of Housing and Urban Development announced it would extend its foreclosure and eviction moratorium through the end of 2020, benefiting homeowners who have mortgages guaranteed by Fannie Mae and Freddie Mac.

   

Allowance for Loan Losses

The allowance for loan losses was $4.2 million as of September 30, 2020 and $4.0 million as of December 31, 2019, or 1.46% of outstanding loans, net of PPP loans, for each respective period. Because PPP loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve. At September 30, 2020 and December 31, 2019, the allowance for loan losses represented 358.90% and 240.28% of the total amount of nonperforming loans, respectively. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses at September 30, 2020 is adequate.

 

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At September 30, 2020, impaired loans totaled $8.0 million, for which $1.6 million of these loans had a reserve of approximately $0.7 million allocated in the allowance for loan losses. Included in impaired loans, the Bank classified 8 loans, with an aggregate loan balance of $3.9 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. Comparatively, impaired loans totaled $4.7 million at December 31, 2019, and $1.1 million of these loans had a reserve of approximately $0.7 million allocated in the allowance for loan losses.

 

During the three months ended September 30, 2020, we recorded no charge-offs and $3,184 of recoveries on loans previously charged-off, for net recoveries of $3,184. Comparatively, we recorded no charge-offs and $867 of recoveries on loans previously charged-off, for net recoveries of $867 for the three months ended September 30, 2019. During the nine months ended September 30, 2020, we recorded $116,002 of charge-offs and $226,058 of recoveries, for net recoveries of $110,056. Comparatively, we recorded $237,737 of charge-offs and $9,821 of recoveries on loans previously charged-off, for net charge-offs of $227,916 for the nine months ended September 30, 2019.

 

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest-bearing deposits provided funding for 56.62% of average earning assets for the nine months ended September 30, 2020, and 58.93% for the nine months ended September 30, 2019. The Company encounters strong competition from other financial institutions as well as consumer and commercial finance companies, insurance companies and brokerage firms located in the primary service area of the Bank. However, the percentage of funding provided by deposits has remained stable.

 

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

 

   September 30, 2020   December 31, 2019 
   Amount   Percent   Amount   Percent 
Deposits                
Non-interest bearing demand  $177,951,432    38.76%  $125,621,031    33.13%
Interest bearing demand   131,972,555    28.74%   125,175,935    33.01%
Money market accounts   86,752,645    18.89%   68,964,879    18.19%
Time deposits over $250,000   3,985,632    0.87%   5,967,559    1.57%
Other time deposits   16,509,276    3.60%   16,215,228    4.28%
Other savings deposits   41,984,129    9.14%   37,247,023    9.82%
Total deposits  $459,155,669    100.00%  $379,191,655    100.00%

 

Deposits increased 21.09% or $80.0 million from December 31, 2019 to September 30, 2020 due to an increase in deposits driven by a combination of various government stimulus programs and decreased consumer spending.

 

At September 30, 2020 and December 31, 2019, deposits with an aggregate deficit balance of $10,665 and $25,319, respectively, were re-classified as other loans.

 

Comparison of Three Months Ended September 30, 2020 to Three Months Ended September 30, 2019

Net income decreased $0.3 million or 15.46% to $1.7 million, or basic and diluted earnings per share of $0.31 and $0.30, respectively, for the three months ended September 30, 2020, from $2.0 million, or basic and diluted earnings per share of $0.36 for the three months ended September 30, 2019. Our annualized returns on average assets and average equity for the three months ended September 30, 2020 were 1.28% and 12.34%, respectively, compared with 1.78% and 15.76%, respectively, for the three months ended September 30, 2019.

 

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 decreased $0.4 million or 8.53% to $4.2 million for the three months ended September 30, 2020 from $4.6 million for the three months ended September 30, 2019. This decrease was primarily due to interest and fee income received on loans tied to changes in variable interest rates as a result of the significant decrease in interest rates at the Federal Reserve during the end of the first quarter of 2020, combined with below market interest rates on PPP loans. Average loans increased $43.0 million or 15.14% to $326.9 million for the three months ended September 30, 2020, compared to $283.9 million for the three months ended September 30, 2019. The yield on average loans (including fees) was 5.09% and 6.104% for the three months ended September 30, 2020 and September 30, 2019, respectively. Interest income on loans decreased $0.3 million for the three months ended September 30, 2020 to $3.8 million from $4.1 million for the three months ended September 30, 2019.

 

The average balance of interest bearing deposits at the Federal Reserve increased $10.4 million or 21.22% to $59.8 million for the three months ended September 30, 2020, with a yield of 0.11% as compared to $49.4 million for the three months ended September 30, 2019, with a yield of 2.16%.

 

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense 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 loan losses. For the three months ended September 30, 2020, we had a provision of loan losses of $40,000 compared to a provision of $10,000 for the same period in the prior year. The increase in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income increased $0.4 million or 64.08% to $1.0 million for the three months ended September 30, 2020, from $0.6 million for the three months ended September 30, 2019. This increase was primarily due to improved mortgage banking activity. Rates have remained consistently low, fueling demand for refinancing and new home purchases. Accordingly, mortgage banking income increased $0.4 million or 138.44% from $0.3 million for the three months ended September 30, 2019 to $0.7 million for the three months ended September 30, 2020.

 

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Non-Interest Expense

Non-interest expense increased $0.3 million or 13.68% to $2.9 million for the three months ended September 30, 2020 from $2.6 million for the three months ended September 30, 2019. This increase was primarily driven by salaries, employee benefits, and net occupancy expenses of our new North Charleston office, which opened in the fourth quarter of 2019.

 

Income Tax Expense

We incurred income tax expense of $0.5 million for the three months ended September 30, 2020 as compared to $0.6 million during the same period in 2019. Our effective tax rate was 23.39% and 23.04% for the three months ended September 30, 2020 and 2019, respectively.

 

Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019

Net income decreased $0.8 million or 14.78% to $4.7 million, or basic and diluted earnings per share of $0.85 and $0.83, respectively, for the nine months ended September 30, 2020, from $5.5 million, or basic and diluted earnings per share of $1.00 and $0.99, respectively, for the nine months ended September 30, 2019. Our annualized returns on average assets and average equity for the nine months ended September 30, 2020 were 1.28% and 11.77%, respectively, compared with 1.69% and 15.26%, respectively, for the nine months ended September 30, 2019.

 

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 decreased $1.0 million or 7.90% to $12.6 million for the nine months ended September 30, 2020 from $13.6 million for the nine months ended September 30, 2019. This decrease was primarily due to interest and fee income received on loans tied to changes in variable interest rates as a result of the significant decrease in interest rates at the Federal Reserve during the end of the first quarter of 2020, combined with below market interest rates on PPP loans originated in the second quarter. Average loans increased $24.1 million or 8.58% to $305.2 million for the nine months ended September 30, 2020, compared to $281.1 million for the nine months ended September 30, 2019. The yield on average loans (including fees) was 5.34% and 6.05% for the nine months ended September 30, 2020 and September 30, 2019, respectively. Interest income on loans decreased $0.9 million for the nine months ended September 30, 2020 to $11.2 million from $12.1 million for the nine months ended September 30, 2019.

 

The average balance of interest bearing deposits at the Federal Reserve increased $28.0 million or 87.78% to $60.0 million for the nine months ended September 30, 2020, with a yield of 0.39% as compared to $31.9 million for the nine months ended September 30, 2019, with a yield of 2.28%.

 

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense 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 loan losses. For the nine months ended September 30, 2020, we had a provision of loan losses of $40,000 compared to a provision of $155,000 for the same period in the prior year. The decrease in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income increased $0.7 million or 44.55% to $2.3 million for the nine months ended September 30, 2020, from $1.6 million for the nine months ended September 30, 2019. This increase was primarily due to improved mortgage banking activity. Rates have remained consistently low, fueling demand for refinancing and new home purchases. Accordingly, mortgage banking income increased $0.8 million or 121.46% from $0.7 million for the nine months ended September 30, 2019 to $1.5 million for the nine months ended September 30, 2020.

 

Non-Interest Expense

Non-interest expense increased $0.8 million or 9.98% to $8.7 million for the nine months ended September 30, 2020 from $7.9 million for the nine months ended September 30, 2019. This increase was primarily driven by salaries, employee benefits, and net occupancy expenses of our new North Charleston office, which opened in the fourth quarter of 2019.

 

Income Tax Expense

We incurred income tax expense of $1.4 million for the nine months ended September 30, 2020 as compared to $1.7 million during the same period in 2019. Our effective tax rate was 23.32% and 22.96% for the nine months ended September 30, 2020 and 2019, respectively.

 

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 $124.6 million and $105.5 million at September 30, 2020 and December 31, 2019, 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. 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 September 30, 2020 and December 31, 2019 was $0.8 million and $1.1 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 $12.7 million and $5.1 million at September 30, 2020 and December 31, 2019, respectively. The fair value of these commitments was not significant at September 30, 2020 or December 31, 2019. We had no embedded derivative instruments requiring separate accounting treatment.

 

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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 $47.2 million at September 30, 2020 and $19.1 million at December 31, 2019. For the three and nine months ended September 30, 2020 and September 30, 2019, there were no loans repurchased.

 

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, stock repurchases, 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, interest-bearing deposits in other banks, federal funds sold, investments available for sale, other short-term investments and mortgage loans held for sale. Our primary liquid assets accounted for 36.39% and 34.74% of total assets at September 30, 2020 and December 31, 2019, 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 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 September 30, 2020, we had unused short-term lines of credit totaling approximately $23.0 million (which can be withdrawn at the lender’s option). Additional sources of funds available to us for additional liquidity needs 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 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 September 30, 2020, we could borrow up to $45.0 million. There have been no borrowings under this arrangement.

 

During the second quarter of 2020, we established an agreement with the Federal Reserve through the Paycheck Protection Program Liquidity Facility ("PPPLF"). Under this facility, the Bank can borrow from this arrangement on a non-recourse basis, using PPP loans as collateral. As of September 30, 2020, we could borrow up to $37.8 million. There have been no borrowings under this arrangement.

 

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 and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. At September 30, 2020 and December 31, 2019, our liquidity ratio was 37.75% and 36.18%, 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 September 30, 2020 was $54.5 million. The rate of asset growth since our inception has not negatively impacted this capital base.

 

On March 26, 2020, the Board of Directors of the Company approved a stock repurchase of up to $1.0 million through March 2021.

 

On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for US banks (“Basel III”). Following the actions by the Federal Reserve, the FDIC also approved regulatory capital requirements on July 9, 2013. The FDIC’s rule is identical in substance to the final rules issued by the Federal Reserve Bank.

 

Basel III became effective on January 1, 2015. The purpose 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 raises 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 also implements strict eligibility criteria for regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Full compliance with all of the final rule requirements has been phased in over a multi-year schedule. The Bank’s total risk-based capital ratio at December 31, 2019 was 16.46%.

 

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 will no longer be subject to other capital and leverage requirements. A CBLR bank meeting qualifying criteria is deemed to have met the “well capitalized” ratio requirements and be in appliance with the generally applicable capital rule. The Bank’s CBLR as of September 30, 2020 was 9.99%. As of September 30, 2020, the Company and the Bank were categorized as “well capitalized.”

 

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a material effect on the financial statements. We must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Current and previous quantitative measures established by regulation to ensure capital adequacy require that we maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and to average assets. Management expects that the capital and leverage ratios for the Company and the Bank under CBLR will enable each of the Company and the Bank to continue to be categorized as “well capitalized.”

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures and internal controls and procedures for financial reporting

 

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 September 30, 2020 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 September 30, 2020, 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.

 

The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

 

Under the supervision and with the participation of management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of September 30, 2020, based on the 2013 framework established in a report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2020. Based on this assessment, management believes that as of September 30, 2020, the Company’s internal control over financial reporting was effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2020, 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.

 

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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 

Not required.

 

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

The Company’s repurchases of its common stock during the third quarter of 2020 were as follows:

 

Period     Total Number of Shares Purchased    

Average Price Paid

Per Share

    Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs     Approximate Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)  
July 1 - July 31, 2020       5,000     15.65       5,000       982,033  
August 1 - August 31, 2020           $             982,033  
September 1 – September 30, 2020       10,767     $ 15.94       10,767       971,266  
Total       15,767     $ 15.85       15,767       971,266  

 

  (1) On March 26, 2020, the Company adopted a $1.0 million stock repurchase program.

 

Item 3. Defaults Upon Senior Securities 

None.

 

Item 4. Mine Safety Disclosure

None.

 

Item 5. Other Information 

None.

 

Item 6. Exhibits

1. The Consolidated Financial Statements are included in this Form 10-Q and listed on pages as indicated.
   
      Page
       
  (1) Consolidated Balance Sheets 3
  (2) Consolidated Statements of Income 4-5
  (3) Consolidated Statements of Comprehensive Income 6
  (4) Consolidated Statements of Shareholders’ Equity 7
  (5) Consolidated Statements of Cash Flows 8
  (6) Notes to Consolidated Financial Statements 9-22

 

Exhibits  
  2.0 Plan of Reorganization (Filed with 1995 10-KSB)
  3.0 Articles of Incorporation of the Registrant (Filed with 1995 10-KSB)
  3.1 By-laws of the Registrant (Filed with 1995 10-KSB)
  3.2 Amendments to the Articles of Incorporation of the Registrant (Filed with Form S on September 23, 2011)
  4.0 2020 Proxy Statement (Filed with 2019 10-K)
  10.0 Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB)
  10.1 Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB)
  10.2 Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB)
  10.3 Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB)
  10.4 Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with 2010 10-K)
    Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with September 30, 2013 10-Q)
  10.5 1998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A)
  10.6 Employee Stock Ownership Plan (Filed with 2008 10-K/A)
    Employee Stock Ownership Plan, Restated (Filed with 2011 Proxy Statement)
    Employee Stock Ownership Plan, Restated (Filed with 2016 10-K)
  10.7 2010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement)
  10.8 Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K)
  10.9 Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
  10.10 First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
  10.11 Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
  10.12 Extension to Lease Agreement for 256 Meeting Street (Filed with September 30, 2017 10-Q)
  10.13 North Charleston Lease Agreement (Filed with September 30, 2017 10-Q)
  10.14 Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed with September 30, 2017 10-Q)
  10.15 2020 Stock Incentive Plan (Filed with 2020 Proxy Statement)

 

  14.0 Code of Ethics (Filed with 2004 10-KSB)
  21.0 List of Subsidiaries of the Registrant (Filed with 1995 10-KSB)
    The Registrant’s only subsidiary is The Bank of South Carolina (Filed with 1995 10-KSB)
  31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer
  31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer
  32.1 Certification pursuant to Section 1350
  32.2 Certification pursuant to Section 1350
  101.INS XBRL Instance Document
  101.SCH XBRL Taxonomy Extension Schema Document
  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
  101.DEF XBRL Taxonomy Extension Definition Linkbase Document
  101.LAB XBRL Taxonomy Extension Label Linkbase Document
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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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
     
November 2, 2020    
  By: /s/ Fleetwood S. Hassell
    Fleetwood S. Hassell
    President/Chief Executive Officer
     
  By:  /s/ Eugene H. Walpole, IV
    Eugene H. Walpole, IV
    Chief Financial Officer/Executive Vice President

 

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