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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BKSC 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
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 2021-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 bksc-10q_033121.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 March 31, 2021

 

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 April 15, 2021, there were 5,524,616 Common Shares outstanding.

 

 

 

 

 

 

Part I. Financial Information Page
   
Item 1. Financial Statements  
Consolidated Balance Sheets – March 31, 2021 and December 31, 2020 3
Consolidated Statements of Income – Three months ended March 31, 2021 and 2020  4
Consolidated Statements of Comprehensive Income – Three months ended March 31, 2021 and 2020 5
Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2021 and 2020 6
Consolidated Statements of Cash Flows – Three months ended March 31, 2021 and 2020 7
Notes to Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Off-Balance Sheet Arrangements 28
Liquidity 28
Capital Resources 29
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
   
Item 4. Controls and Procedures 30
   
Part II. Other Information  
   
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Mine Safety Disclosure 31
Item 5. Other Information 31
Item 6. Exhibits 31
   
Signatures 32
Certifications 33

 

 

 

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

   (Unaudited)   (Audited) 
   March 31,   December 31, 
   2021   2020 
ASSETS          
Cash and due from banks  $6,211,365   $5,977,896 
Interest-bearing deposits at the Federal Reserve   53,223,741    42,348,085 
Investment securities available for sale   142,667,417    134,819,818 
Mortgage loans to be sold   13,230,017    12,965,733 
Loans   322,283,229    320,802,673 
 Less: Allowance for loan losses   (4,296,165)   (4,185,694)
Net loans   317,987,064    316,616,979 
Premises, equipment and leasehold improvements,  net   3,976,342    4,053,533 
Right of use asset   12,605,156    12,730,151 
Accrued interest receivable   1,375,181    1,595,629 
Other assets   2,823,077    1,386,775 
           
Total assets  $554,099,360   $532,494,599 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
  Deposits:          
     Non-interest bearing demand  $189,574,996   $169,170,751 
     Interest bearing demand   143,753,923    140,602,723 
     Money market accounts   81,912,767    84,681,783 
     Time deposits over $250,000   5,046,943    4,493,189 
     Other time deposits   15,168,276    16,205,942 
     Other savings deposits   49,189,107    47,043,243 
Total deposits   484,646,012    462,197,631 
           
Accrued interest payable and other liabilities   3,839,142    2,586,461 
Lease liability   12,605,156    12,730,151 
Total liabilities   501,090,310    477,514,243 
           
Shareholders' equity          
Common stock - no par 12,000,000 shares authorized; Issued 5,823,533 shares at March 31, 2021 and 5,818,935 shares at December 31, 2020. Shares outstanding 5,524,616 and 5,520,469 at March 31, 2021 and December 31, 2020, respectively.        
Additional paid in capital   47,467,455    47,404,869 
Retained earnings   9,011,948    8,693,519 
Treasury stock: 298,917 and 298,466 shares at March 31, 2021 and December 31, 2020, respectively.   (2,796,242)   (2,787,898)
Accumulated other comprehensive loss, net of income taxes   (674,111)   1,669,866 
Total shareholders' equity   53,009,050    54,980,356 
           
Total liabilities and shareholders' equity  $554,099,360   $532,494,599 

 

See accompanying notes to consolidated financial statements.

 

3 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Three Months Ended 
   March 31, 
   2021   2020 
Interest and fee income          
Loans, including fees  $4,106,171   $3,670,982 
Taxable securities   453,457    363,439 
Tax-exempt securities   69,606    124,625 
Other   11,881    142,380 
Total interest and fee income   4,641,115    4,301,426 
           
Interest expense          
Deposits   54,524    94,072 
Total interest expense   54,524    94,072 
           
Net interest income   4,586,591    4,207,354 
Provision for loan losses   120,000     
Net interest income after provision for loan losses   4,466,591    4,207,354 
           
Other income          
Service charges and fees   288,224    275,590 
Mortgage banking income   645,895    346,083 
Other non-interest income   5,795    5,958 
Total other income   939,914    627,631 
           
Other expense          
Salaries and employee benefits   1,799,006    1,771,781 
Net occupancy expense   612,268    525,307 
Other operating expenses   280,416    239,173 
Professional fees   176,591    160,876 
Data processing fees   162,434    159,384 
Total other expense   3,030,715    2,856,521 
           
Income before income tax expense   2,375,790    1,978,464 
Income tax expense   565,715    457,333 
           
Net income  $1,810,075   $1,521,131 
           
Weighted average shares outstanding          
Basic   5,521,707    5,530,256 
Diluted   5,685,151    5,585,622 
           
Basic income per common share  $0.33   $0.28 
Diluted income per common share  $0.32   $0.27 

 

See accompanying notes to consolidated financial statements.

 

4 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   Three Months Ended 
   March 31, 
   2021   2020 
Net income  $1,810,075   $1,521,131 
Other comprehensive (loss) income          
Unrealized (loss) gain on securities arising during the period   (2,967,059)   760,779 
Other comprehensive income before tax   (2,967,059)   760,779 
Income tax effect related to items of other comprehensive (loss) income before tax   623,082    (159,763)
Other comprehensive income after tax   (2,343,977)   601,016 
Total comprehensive income  $(533,902)  $2,122,147 

 

See accompanying notes to consolidated financial statements.

 

5 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED March 31, 2021 AND 2020

 

   Shares Outstanding   Additional Paid in Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive Income (Loss)   Total 
December 31, 2020   5,520,469   $47,404,869   $8,693,519   $(2,787,898)  $1,669,866   $54,980,356 
Net income           1,810,075            1,810,075 
Other comprehensive loss                   (2,343,977)   (2,343,977)
Stock option exercises, net of surrenders   4,147    39,589        (8,344)       31,245 
Stock-based compensation expense       22,997                22,997 
Cash dividends ($0.27 per common share)           (1,491,646)           (1,491,646)
March 31, 2021   5,524,616   $47,467,455   $9,011,948   $(2,796,242)  $(674,111)  $53,009,050 

 

 

   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, net of surrenders   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 

 

See accompanying notes to consolidated financial statements.

 

6 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(UNAUDITED)

 

   Three Months Ended 
   March 31, 
   2021   2020 
Cash flows from operating activities:          
Net income  $1,810,075   $1,521,131 
Adjustments to reconcile net income net cash provided by operating activities:          
Depreciation expense   106,414    104,638 
Provision for loan losses   120,000     
Stock-based compensation expense   22,997    16,418 
Deferred income taxes and other assets   (813,220)   (476,772)
Net amortization of unearned discounts on investment securities available for sale   96,917    40,898 
Origination of mortgage loans held for sale   (48,008,560)   (23,150,204)
Proceeds from sale of mortgage loans held for sale   47,744,276    22,859,558 
Decrease in accrued interest receivable   220,448    76,188 
Increase in accrued interest payable and other liabilities   699,515    377,465 
Net cash provided by operating activities   1,998,862    1,369,320 
           
Cash flows from investing activities:          
Proceeds from calls and maturities of investment securities available for sale   4,817,000    8,754,000 
Purchase of investment securities available for sale   (15,728,575)    
Net increase in loans   (1,490,085)   (4,292,645)
Purchase of premises, equipment, and leasehold improvements, net   (29,223)   (78,537)
Net cash (used in) provided by investing activities   (12,430,883)   4,382,818 
           
Cash flows from financing activities:          
Net increase in deposit accounts   22,448,381    53,189,878 
Dividends paid   (938,480)   (884,800)
Stock options exercised   31,245    4,489 
Net cash provided by financing activities   21,541,146    52,309,567 
Net increase in cash and cash equivalents   11,109,125    58,061,705 
Cash and cash equivalents at the beginning of the period   48,325,981    49,094,419 
Cash and cash equivalents at the end of the period  $59,435,106   $107,156,124 
           
Supplemental disclosure of cash flow data:          
Cash paid during the period for:          
Interest  $75,231   $96,973 
Income taxes  $231,375   $ 
           
Supplemental disclosures for non-cash investing and financing activity:          
Change in unrealized gain on securities available for sale, net of income taxes  $2,343,977   $(601,016)
Change in dividends payable  $553,166   $59 
Change in right of use assets and lease liabilities  $(124,995)  $117,917 

 

See accompanying notes to consolidated financial statements.

 

7 

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Organization:

The Bank of South Carolina (the “Bank”) was organized on October 22, 1986 and opened for business as a state-chartered financial institution on February 26, 1987, in Charleston, South Carolina. The Bank was reorganized into a wholly-owned subsidiary of Bank of South Carolina Corporation (the “Company”), effective April 17, 1995. At the time of the reorganization, each outstanding share of the Bank was exchanged for two shares of Bank of South Carolina Corporation Stock.

 

Principles of Consolidation: 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. In consolidation, all significant intercompany balances and transactions have been eliminated.

 

References to “we”, “us”, “our”, “the Bank”, or “the Company” refer to the parent and its subsidiary that are consolidated for financial purposes.

 

Basis of Presentation: 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or (“GAAP”), for the interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2021. 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 June 2016, the FASB issued ASU 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to change the accounting for credit losses and modify the impairment model for certain debt securities. 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. On March 27, 2020, the Board of Governors of the Federal Reserve, FDIC, and Office of the Comptroller of Currency announced the interim final rule allowing banks to delay the effects of CECL until 2022 for filers scheduled to implement in 2020 and 2023 for all other filers. This amendment will become effective for the Company on January 1, 2023. 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.  

 

8 

 

 

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.

 

9 

 
2.Investment Securities AVAILABLE FOR SALE

 

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

 

   March 31, 2021 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair Value 
U.S. Treasury Notes  $35,238,051   $294,776   $(203,727)  $35,329,100 
Government-Sponsored Enterprises   96,551,696    979,928    (2,240,264)   95,291,360 
Municipal Securities   11,730,974    330,229    (14,246)   12,046,957 
Total  $143,520,721   $1,604,933   $(2,458,237)  $142,667,417 

 

   December 31, 2020 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair Value 
U.S. Treasury Notes  $20,036,549   $374,001   $   $20,410,550 
Government-Sponsored Enterprises   96,614,182    1,398,884    (160,260)   97,852,806 
Municipal Securities   16,055,332    501,130        16,556,462 
Total  $132,706,063   $2,274,015   $(160,260)  $134,819,818 

 

The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2021 and December 31, 2020, by contractual maturity are in the following table.

 

   March 31, 2021   December 31, 2020 
   Amortized Cost   Estimated Fair Value   Amortized Cost   Estimated Fair Value 
Due in one year or less  $31,687,606   $31,945,118   $32,245,646   $32,622,890 
Due in one year to five years   46,328,992    47,178,658    40,022,194    41,258,370 
Due in five years to ten years   64,994,527    63,048,291    50,438,223    50,968,288 
Due in ten years and over   509,596    495,350    10,000,000    9,970,270 
Total  $143,520,721   $142,667,417   $132,706,063   $134,819,818 

 

Securities pledged to secure deposits at both March 31, 2021 and December 31, 2020, had a fair value of $41.4 million and $42.4 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 March 31, 2021 and December 31, 2020. 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.

 

   March 31, 2021 
   Less Than 12 Months   12 Months or Longer   Total 
   #   Fair Value   Gross Unrealized Loss   #   Fair Value   Gross Unrealized Loss   #   Fair Value   Gross Unrealized Loss 
U.S. Treasury Notes   3   $15,008,785   $(203,727)      $   $    3   $15,008,785   $(203,727)
Government-Sponsored Enterprises   7    49,216,630    (2,240,264)               7    49,216,630    (2,240,264)
Municipal Securities   1    495,350    (14,246)               1    495,350    (14,246)
Total   11   $64,720,765   $(2,458,237)      $   $    11   $64,720,765   $(2,458,237)
                                              
   December 31, 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   4    29,839,740    (160,260)               4    29,839,740    (160,260)
Municipal Securities                                    
                                              
Total   4   $29,839,740   $(160,260)      $   $    4   $29,839,740   $(160,260)

 

10 

 

  

 

There were no sales of investment securities for the three months ended March 31, 2021 and 2020.

 

3.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Major classifications of loans (net of deferred loan fees of $830,945 at March 31, 2021 and $676,155 at December 31, 2020, respectively) are shown in the table below.:

 

   March 31, 2021   December 31, 2020 
Commercial  $42,201,186   $51,041,397 
Commercial real estate:          
Construction   10,373,102    14,813,726 
Other   156,377,427    146,187,886 
Consumer:          
Real estate   81,231,579    71,836,041 
Other   4,163,221    4,480,491 
Paycheck Protection Program   27,936,714    32,443,132 
    322,283,229    320,802,673 
Allowance for loan losses   (4,296,165)   (4,185,694)
Loans, net  $317,987,064   $316,616,979 

 

We had $91.0 million and $76.0 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2021 and at December 31, 2020, 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 payroll 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 related to the first round of PPP. The Bank recognized $0.6 million during the year ended December 31, 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 provided $37.8 million in funding to 266 customers through the PPP as of March 31, 2021. 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.

 

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) was enacted, which reauthorized lending under the PPP program through March 31, 2021, with an additional $325 billion. On March 31, 2021, the PPP Extension Act of 2021 was signed into law, which formally changed the PPP application deadline from March 31, 2021 to May 31, 2021. Under the Economic Aid Act, the SBA will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for payroll and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00% and a term of five 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 will receive a processing fee based on the size of the loan from the SBA, and a tiered structure. For loans up to $50,000 in principal, the lender processing fee will be the lesser of 50% of the principal amount or $2,500. For loans between $50,000 and $350,000 in principal, the lender processing fee will be 5% of the principal amount. For loans $350,000 and above, the lender processing fee will be 3% of the principal amount. For loans of at least $2.0 million, the lender processing fee will be 1% of the principal amount. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. As of March 31, 2021, the Bank received 193 applications with a total loan amount of $16.1 million. Of those 193 applications, the SBA approved 184 applications in the aggregate amount of $15.7 million. The Bank funded 176 loans in the aggregate amount of $15.5 million. The Bank received $0.8 million of processing fees related to the second round of PPP. During the three months ended March 31, 2021, the Bank recognized $0.6 million in PPP processing fees for the first and second round of PPP.

 

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.

 

11 

 

 

  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 March 31, 2021 and December 31, 2020. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

March 31, 2021 
    Commercial   Commercial
Real Estate Construction
   Commercial
Real Estate
Other
   Consumer
Real Estate
   Consumer
Other
   Paycheck Protection Program   Total 
Pass   $37,770,275   $9,915,067   $136,296,189   $80,012,464   $3,762,913   $27,936,714   $295,693,622 
Watch    2,030,528    458,035    14,155,587    346,231    314,336        17,304,717 
OAEM    710,385        1,248,150    623,127    44,237        2,625,899 
Substandard    1,689,998        4,677,501    249,757    41,735        6,658,991 
Doubtful                             
Loss                             
Total   $42,201,186   $10,373,102   $156,377,427   $81,231,579   $4,163,221   $27,936,714   $322,283,229 

 

December 31, 2020 
    Commercial   Commercial
Real Estate Construction
   Commercial
Real Estate
Other
   Consumer
Real Estate
   Consumer
Other
   Paycheck Protection Program   Total 
Pass   $44,903,134   $14,349,065   $125,111,378   $70,454,909   $4,171,858   $32,443,132   $291,433,476 
Watch    3,415,408    464,661    15,200,992    467,163    219,954        19,768,178 
OAEM    1,039,647        1,784,296    623,226    46,783        3,493,952 
Substandard    1,683,208        4,091,220    290,743    41,896        6,107,067 
Doubtful                             
Loss                             
Total   $51,041,397   $14,813,726   $146,187,886   $71,836,041   $4,480,491   $32,443,132   $320,802,673 

  

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

 

March 31, 2021
   30-59 Days Past Due   60-89 Days Past Due   Greater than 90 Days   Total Past Due   Current   Total Loans Receivable   Recorded Investment ≥
90 Days and Accruing
 
Commercial  $11,000   $19,681   $   $30,681   $42,170,505   $42,201,186   $ 
Commercial Real Estate Construction                   10,373,102    10,373,102     
Commercial Real Estate Other   900,000        921,580    1,821,580    154,555,847    156,377,427     
Consumer Real Estate                   81,231,579    81,231,579     
Consumer Other   5,092    14,580        19,672    4,143,549    4,163,221     
Paycheck Protection Program                   27,936,714    27,936,714     
Total  $916,092   $34,261   $921,580   $1,871,933   $320,411,296   $322,283,229   $ 

 

12 

 

 

December 31, 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  $144,999   $27,855   $   $172,854   $50,868,543   $51,041,397   $ 
Commercial Real Estate Construction                   14,813,726    14,813,726     
Commercial Real Estate Other   61,597        923,828    985,425    145,202,461    146,187,886     
Consumer Real Estate           40,893    40,893    71,795,148    71,836,041     
Consumer Other                   4,480,491    4,480,491     
Paycheck Protection Program                   32,443,132    32,443,132     
Total  $206,596   $27,855   $964,721   $1,199,172   $319,603,501   $320,802,673   $ 

 

There were no loans over 90 days past due and still accruing as of March 31, 2021 and December 31, 2020.

 

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

 

    Loans Receivable on Non-Accrual  
    March 31, 2021    December 31, 2020 
Commercial  $178,975   $178,975 
Commercial Real Estate Construction        
Commercial Real Estate Other   921,580    923,828 
Consumer Real Estate       40,893 
Consumer Other   11,609    12,234 
Paycheck Protection Program        
Total  $1,112,164   $1,155,930 

 

13 

 

 

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 months ended March 31, 2021 and 2020. 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 March 31, 2021
   Commercial   Commercial Real Estate Construction   Commercial Real Estate Other   Consumer Real Estate   Consumer Other   Paycheck Protection Program   Total 
Allowance for Loan Losses:                                   
Beginning balance  $1,029,310   $199,266   $1,909,121   $925,077   $122,920   $   $4,185,694 
Charge-offs                   (8,152)   (6,479)   (14,631)
Recoveries                   4,812    290    5,102 
Provisions   (126,428)   (54,721)   168,648    127,083    (771)   6,189    120,000 
Ending balance  $902,882   $144,545   $2,077,769   $1,052,160   $118,809   $   $4,296,165 

 

Three Months Ended March 31, 2020
   Commercial   Commercial Real Estate Construction   Commercial Real Estate Other   Consumer Real Estate   Consumer Other   Paycheck Protection Program   Total 
Allowance for Loan Losses:                                   
Beginning balance  $1,429,917   $109,235   $1,270,445   $496,221   $697,940   $   $4,003,758 
Charge-offs                   (39,592)       (39,592)
Recoveries   15,500                34,547        50,047 
Provisions   (29,150)   13,834    (57,798)   65,779    7,335         
Ending balance  $1,416,267   $123,069   $1,212,647   $562,000   $700,230   $   $4,014,213 

 

14 

 

 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.

 

   March 31, 2021 
   Commercial   Commercial Real Estate Construction   Commercial Real Estate Other   Consumer Real Estate   Consumer Other   Paycheck Protection Program   Total 
Allowance for Loan Losses                                   
Individually evaluated for impairment  $338,237   $   $   $   $41,735   $   $379,972 
Collectively evaluated for impairment   564,645    144,545    2,077,769    1,052,160    77,074        3,916,193 
Total Allowance for Loan Losses  $902,882   $144,545   $2,077,769   $1,052,160   $118,809   $   $4,296,165 
Loans Receivable                                   
Individually evaluated for impairment  $1,978,615   $   $5,479,899   $249,758   $41,735   $   $7,750,007 
Collectively evaluated for impairment   40,222,571    10,373,102    150,897,528    80,981,821    4,121,486    27,936,714    314,533,222 
Total Loans Receivable  $42,201,186   $10,373,102   $156,377,427   $81,231,579   $4,163,221   $27,936,714   $322,283,229 

 

   December 31, 2020 
   Commercial   Commercial Real Estate Construction   Commercial Real Estate Other   Consumer Real Estate   Consumer Other   Paycheck Protection Program   Total 
Allowance for Loan Losses                                   
Individually evaluated for impairment  $357,657   $   $36,747   $9,111   $41,896   $   $445,411 
Collectively evaluated for impairment   671,653    199,266    1,872,374    915,966    81,024        3,740,283 
Total Allowance for Loan Losses  $1,029,310   $199,266   $1,909,121   $925,077   $122,920   $   $4,185,694 
Loans Receivable                                   
Individually evaluated for impairment  $2,298,120   $   $5,174,841   $290,743   $41,896   $   $7,805,600 
Collectively evaluated for impairment   48,743,277    14,813,726    141,013,045    71,545,298    4,438,595    32,443,132    312,997,073 
Total Loans Receivable  $51,041,397   $14,813,726   $146,187,886   $71,836,041   $4,480,491   $32,443,132   $320,802,673 

 

15 

 

As of March 31, 2021 and December 31, 2020, loans individually evaluated and considered impaired are presented in the following table.

 

   Impaired Loans as of 
   March 31, 2021   December 31, 2020 
    Unpaid Principal Balance    Recorded Investment    Related Allowance    Unpaid Principal Balance    Recorded Investment    Related Allowance 
With no related allowance recorded:                              
Commercial  $1,511,021   $1,511,021   $   $1,721,818   $1,721,818   $ 
Commercial Real Estate Construction                        
Commercial Real Estate Other   5,479,899    5,479,899        4,831,757    4,831,757     
Consumer Real Estate   249,758    249,758        249,850    249,850     
Consumer Other                        
Paycheck Protection Program                        
Total   7,240,678    7,240,678        6,803,425    6,803,425     
                               
With an allowance recorded:                              
Commercial   467,594    467,594    338,237    576,302    576,302    357,657 
Commercial Real Estate Construction                        
Commercial Real Estate Other               343,084    343,084    36,747 
Consumer Real Estate               40,893    40,893    9,111 
Consumer Other   41,735    41,735    41,735    41,896    41,896    41,896 
Paycheck Protection Program                        
Total   509,329    509,329    379,972    1,002,175    1,002,175    445,411 
                               
                               
Commercial   1,978,615    1,978,615    338,237    2,298,120    2,298,120    357,657 
Commercial Real Estate Construction                        
Commercial Real Estate Other   5,479,899    5,479,899        5,174,841    5,174,841    36,747 
Consumer Real Estate   249,758    249,758        290,743    290,743    9,111 
Consumer Other   41,735    41,735    41,735    41,896    41,896    41,896 
Paycheck Protection Program                        
Total  $7,750,007   $7,750,007   $379,972   $7,805,600   $7,805,600   $445,411 

 

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

 

   Three Months Ended March 31, 
   2021   2020 
   Average Recorded Investment   Interest Income Recognized   Average Recorded Investment   Interest Income Recognized 
With no related allowance recorded:                    
Commercial  $1,563,106   $25,815   $1,345,166   $20,499 
Commercial Real Estate Construction                
Commercial Real Estate Other   5,482,702    49,760    2,093,392    16,136 
Consumer Real Estate   249,833    3,491    879,753    3,580 
Consumer Other                
Paycheck Protection Program                
    7,295,641    79,066    4,318,311    40,215 
                     
With an allowance recorded:                    
Commercial   472,422    7,519    707,965    7,147 
Commercial Real Estate Construction                
Commercial Real Estate Other           246,884     
Consumer Real Estate                
Consumer Other   41,848    672    49,758    783 
Paycheck Protection Program                
    514,270    8,191    1,004,607    7,930 
Total                    
Commercial   2,035,528    33,334    2,053,131    27,646 
Commercial Real Estate Construction                
Commercial Real Estate Other   5,482,702    49,760    2,340,276    16,136 
Consumer Real Estate   249,833    3,491    879,753    3,580 
Consumer Other   41,848    672    49,758    783 
Paycheck Protection Program                
   $7,809,911   $87,257   $5,322,918   $48,145 

 

16 

 

 

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 March 31, 2021, there were 12 TDRs with a balance of $5.3 million compared to 14 TDRs with a balance of $5.8 million as of December 31, 2020. 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 March 31, 2021. No TDRs defaulted during the three months ended March 31, 2021 and 2020, 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 loans, with an aggregate loan balance of $25.9 million, during the year ended December 31, 2020. The principal deferments represent 0.24% of our total loan portfolio as of December 31, 2020. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 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. As of March 31, 2021, 6 loans remain classified as TDRs with an aggregate balance of $3.5 million. 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 75 loans that received payment accommodations that are not classified as TDRs, 22 loans, with an aggregate loan balance of $5.1 million, have paid their loan in full, 7 loans, with an aggregate loan balance of $0.8 million, are past due less than 30 days, and 46 loans, with an aggregate loan balance of $21.6 million, have commenced paying as agreed as of March 31, 2021. There are no loans that received payment accommodation past due greater than 30 days. The Bank will continue to examine payment accommodations as requested by borrowers. 

 

4.LEASES

 

As of March 31, 2021 and December 31, 2020, the Company had operating right of use (“ROU”) assets of $12.6 million and $12.7 million, respectively, and operating lease liabilities of $12.6 million and $12.7 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 March 31, 2021 and 2020.

 

   March 31, 2021   March 31, 2020 
Operating lease expense  $301,537   $233,959 
Short-term lease expense        
Total lease expense  $301,537   $233,959 

 

Total rental expense was $301,537 and $233,959 for the three months ended March 31, 2021 and 2020, respectively and was included in net occupancy expense within the consolidated statements of income.

 

As of March 31, 2021, and December 31, 2020, we did not maintain any finance leases, and we determined that the number and dollar amount of equipment leases was immaterial. As of March 31, 2021, and December 31, 2020, we have no additional operating leases that have not yet commenced.

 

5.DISCLOSURE REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. 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.

 

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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 March 31, 2021 and December 31, 2020.

 

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Assets and liabilities measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020 are as follows:

 

   March 31, 2021 
   Level 1   Level 2   Level 3   Total 
U.S. Treasury Notes  $35,329,100   $   $   $35,329,100 
Government-Sponsored Enterprises       95,291,360        95,291,360 
Municipal Securities       10,078,081    1,968,876    12,046,957 
Total  $35,329,100   $105,369,441   $1,968,876   $142,667,417 

 

   December 31, 2020 
   Level 1   Level 2   Level 3   Total 
U.S. Treasury Notes  $20,410,550   $   $   $20,410,550 
Government-Sponsored Enterprises       97,852,806        97,852,806 
Municipal Securities       10,872,532    5,683,930    16,556,462 
Total  $20,410,550   $108,725,338   $5,683,930   $134,819,818 

 

There were no liabilities recorded at fair value on a recurring basis as of March 31, 2021 or December 31, 2020.

 

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 ended March 31, 2021 and 2020: 

 

   Three Months Ended March 31, 
   2021   2020 
Beginning balance  $5,683,930   $11,954,451 
Total gains or (losses) (realized/unrealized)          
Included in other comprehensive income   (78,054)   28,269 
Purchases, issuances, and settlements net of maturities   (3,637,000)   (5,579,000)
Ending balance  $1,968,876   $6,403,720 

 

There were no transfers between fair value levels during the three months ended March 31, 2021 or 2020.

 

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

 

Impaired Loans

 

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, we review the most recent appraisal and if it is over 12 to 18 months old, we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically, as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired.

 

However, as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These valuations are reviewed and updated on a quarterly basis.

 

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).

  

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The following tables present information about certain assets measured at fair value on a nonrecurring basis at March 31, 2021 and December 31, 2020.

 

   March 31, 2021 
   Level 1   Level 2   Level 3   Total 
Impaired loans  $   $   $5,729,657   $5,729,657 
Mortgage loans to be sold       13,230,017        13,230,017 
Total  $   $13,230,017   $5,729,657   $18,959,674 

   

   December 31, 2020 
   Level 1   Level 2   Level 3   Total 
Impaired loans  $   $   $5,419,726   $5,419,726 
Mortgage loans to be sold       12,965,733        12,965,733 
Total  $   $12,965,733   $5,419,726   $18,385,459 

 

There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2021 or December 31, 2020.

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2021 and December 31, 2020:

 

        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.

  

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The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of March 31, 2021 and December 31, 2020.

 

   Fair Value Measurements at March 31, 2021 
   Carrying Amount   Estimated Fair Value   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and due from banks  $6,211,365   $6,211,365   $6,211,365   $   $ 
Interest-bearing deposits at the Federal Reserve   53,223,741    53,223,741    53,223,741         
Investment securities available for sale   142,667,417    142,667,417    35,329,100    105,369,441    1,968,876 
Mortgage loans to be sold   13,230,017    13,230,017        13,230,017     
Loans, net   317,987,064    309,683,584            309,683,584 
Accrued interest receivable   1,375,181    1,375,181        1,375,181     
Financial Liabilities:                         
Demand deposits   464,430,793    464,430,793        464,430,793     
Time deposits   20,215,219    19,953,662        19,953,662     
Accrued interest payable   19,088    19,088        19,088     

  

 

   Fair Value Measurements at December 31, 2020 
   Carrying
Amount
   Estimated
Fair Value
   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and due from banks  $5,977,896   $5,977,896   $5,977,896   $   $ 
Interest-bearing deposits at the Federal Reserve   42,348,085    42,348,085    42,348,085         
Investment securities available for sale   134,819,818    134,819,818    20,410,550    108,725,338    5,683,930 
Mortgage loans to be sold   12,965,733    12,965,733        12,965,733     
Loans, net   316,616,979    308,721,680            308,721,680 
Accrued interest receivable   1,595,629    1,595,629        1,595,629      
Financial Liabilities:                         
Demand deposits   441,498,500    441,498,500        441,498,500     
Time deposits   20,699,131    20,294,852        20,294,852     
Accrued interest payable   20,707    20,707        20,707     

 

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 March 31:

 

   Three Months Ended March 31, 
   2021   2020 
Net income  $1,810,075   $1,521,131 
           
Weighted average shares outstanding   5,521,707    5,530,256 
Effect of dilutive shares   163,444    55,366 
Weighted average shares outstanding - diluted   5,685,151    5,585,622 
           
Earnings per share - basic  $0.33   $0.28 
Earnings per share - diluted  $0.32   $0.27 

 

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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 “Cautionary Statement Regarding Forward-Looking Statements” section of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2020 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

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

  Changes in compensation
  Risks associated with income taxes including potential for adverse adjustments
  Changes in accounting policies and practices
  Changes in regulatory actions, including the potential for adverse adjustments
  Recently enacted or proposed legislation and changes in political conditions
  Reputational risk
 

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

  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 $554.1 million in assets as of March 31, 2021. 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.

 

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In addition to earning interest on loans and investments, we earn income through fees and other expenses we charge to the customer. The various components of non-interest income as well as non-interest expense are described in the following discussion. The discussion and analysis also identify significant factors that have affected our financial position and operating results as of and for the periods ending March 31, 2021 and December 31, 2020, 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 payroll 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 provided $37.8 million in funding to 266 customers through the first round of PPP as of March 31, 2021. 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.

 

Borrowers must submit a forgiveness 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 the decision and application 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. The SBA began accepting PPP Forgiveness Applications on August 10, 2020. As of March 31, 2021, the Bank received 215 PPP forgiveness applications, in the amount of $34.3 million in principal, and submitted 209 applications and decisions to the SBA, in the amount of $26.6 million in principal. Of the 209 PPP submissions, 200 loans, in the amount of $25.2 million, were forgiven as of March 31, 2021. Upon forgiveness the Bank will recognize the deferred fee income in accordance with ASC 310-20. The Bank received processing fees of $1.4 million related to the first round of PPP. The Bank recognized $0.6 million during the year ended December 31, 2020. The Bank recognized $0.6 million during the three months ended March 31, 2021.

 

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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, 2020, 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 $0.8 million in principal deferments to 84 loans, with an aggregate loan balance of $29.7 million, during year ended December 31, 2020. The principal deferments represent 0.24% of our total loan portfolio as of December 31, 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. As of March 31, 2021, 6 loans remain classified as TDRs with an aggregate balance of $3.5 million. Additionally, of the 75 loans that received payment accommodations that are not classified as TDRs, 22 loans, with an aggregate loan balance of $5.1 million, have paid their loan in full, 7 loans, with an aggregate loan balance of $0.8 million, are past due less than 30 days, and 46 loans, with an aggregate loan balance of $21.6 million, have commenced paying as agreed as of March 31, 2021. There are no loans that received payment accommodation past due greater than 30 days. The Bank will continue to examine payment accommodations as requested by our borrowers. The Bank will continue to examine payment accommodations as requested by our borrowers.

 

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) was enacted, which reauthorized lending under the PPP program through March 31, 2021, with an additional $325 billion. On March 31, 2021, the PPP Extension Act of 2021 was signed into law, which formally changed the PPP application deadline from March 31, 2021 to May 31, 2021. Under the Economic Aid Act, the SBA will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for payroll and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00% and a term of five 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 will receive a processing fee based on the size of the loan from the SBA, and a tiered structure. For loans up to $50,000 in principal, the lender processing fee will be the lesser of 50% of the principal amount or $2,500. For loans between $50,000 and $350,000 in principal, the lender processing fee will be 5% of the principal amount. For loans $350,000 and above, the lender processing fee will be 3% of the principal amount. For loans of at least $2.0 million, the lender processing fee will be 1% of the principal amount. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. As of March 31, 2021, the Bank received 193 applications with a total loan amount of $16.1 million. Of those 193 applications, the SBA approved 184 applications in the aggregate amount of $15.7 million. The Bank funded 176 loans in the aggregate amount of $15.5 million. The Bank received $0.8 million in processing fees related to the second round of PPP. During the three months ended March 31, 2021, the Bank recognized $0.6 million in PPP processing fees for the first and second round of PPP.

 

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 March 31, 2021.

 

   March 31, 2021 
   Amount   Percent 
Retail and/or Service  $1,514,473    0.47%
Food and Beverage   1,148,218    0.36%
Short Term Rental   8,598,889    2.67%
   $11,261,580    3.50%

  

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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 $0.1 million to loans with an aggregate balance of $6.0 million, or 33.59% of the loan portfolio segment, of these loans. As of March 31, 2021, the loans in these segments that received payment accommodations are paying as agreed.

 

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 March 31, 2021, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

Balance Sheet

 

Cash and Cash Equivalents 

Total cash and cash equivalents increased 22.99% or $11.1 million to $59.4 million as of March 31, 2021, from $48.3 million as of December 31, 2020. The increase in total cash and cash equivalents is due to an increase in deposits of $22.4 million offset by purchases of investment securities available for sale.

 

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 March 31, 2021, our available for sale investment portfolio included U.S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $142.7 million and an amortized cost of $143.5 million for a net unrealized gain of approximately $0.8 million. As of March 31, 2021, and December 31, 2020, our investment securities portfolio represented approximately 25.75% and loss of our total assets, respectively. The average yield on our investment securities was 1.49% and 1.59% at March 31, 2021 and December 31, 2020, respectively.

  

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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 $1.4 million, or 0.43%, to $318.0 million as of March 31, 2021 from $316.6 million as of December 31, 2020. The increase is primarily related to the growth in Commercial Real Estate Other and Consumer Real Estate offset by a decrease in PPP and Commercial loans.

 

In January 2020, the Bank began originating 30-year, fixed rate consumer mortgage loans in excess of the conforming loan amount which are held for investment rather than for sale in the secondary market. Prior to January, 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 $830,945 at March 31, 2021 and $676,155 at December 31, 2020, respectively) and the corresponding percentage of total loans as of the dates indicated.

 

   March 31, 2021   December 31, 2020 
   Amount   Percent   Amount   Percent 
                 
Commercial  $42,201,186    13.09%  $51,041,397    15.91%
Commercial Real Estate Construction   10,373,102    3.22%   14,813,726    4.62%
Commercial Real Estate Other   156,377,427    48.52%   146,187,886    45.57%
Consumer Real Estate   81,231,579    25.21%   71,836,041    22.39%
Consumer Other   4,163,221    1.29%   4,480,491    1.40%
Payroll Protection Program   27,936,714    8.67%   32,443,132    10.11%
Total loans   322,283,229    100.00%   320,802,673    100.00%
Allowance for loan losses   (4,296,165)        (4,185,694)     
Total loans, net  $317,987,064        $316,616,979      

  

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.

 

Nonperforming Assets

Nonperforming Assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. As of March 31, 2021, there were no loans 90 days past due still accruing interest.

 

The following table is a summary of our Nonperforming Assets:

 

   March 31, 2021   December 31, 2020 
Commercial  $178,975   $178,975 
Commercial Real Estate Other   921,580    923,828 
Consumer Real Estate       40,893 
Consumer Other   11,609    12,234 
Total nonaccruing loans   1,112,164    1,155,930 
Total nonperforming assets  $1,112,164   $1,155,930 

 

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. On March 29, 2021, the federal eviction moratorium was extended again through June 30, 2021.   

 

Allowance for Loan Losses

The allowance for loan losses was $4.3 million as of March 31, 2021 and $4.2 million as of December 31, 2020, or 1.46% and 1.45% 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 March 31, 2021 and December 31, 2020, the allowance for loan losses represented 386.29% and 362.11% 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 March 31, 2021 is adequate.

 

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At March 31, 2021, impaired loans totaled $7.8 million, for which $0.5 million of these loans had a reserve of approximately $0.4 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 $7.8 million as of December 31, 2020, and $1.0 million of these loans had a reserve of approximately $0.4 million allocated in the allowance for loan losses.

 

During the three months ended March 31, 2021, we recorded $14,631 in charge-offs and $5,102 of recoveries on loans previously charged-off, for net charge-offs of $9,529.

 

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest-bearing deposits provided funding for 56.60% of average earning assets for the three months ended March 31, 2021, and 59.04% for the three months ended March 31, 2020. 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:

 

   March 31, 2021   December 31, 2020 
   Amount   Percent   Amount   Percent 
Deposits                
     Non-interest bearing demand  $189,574,996    39.12%  $169,170,751    36.60%
     Interest bearing demand   143,753,923    29.66%   140,602,723    30.42%
     Money market accounts   81,912,767    16.90%   84,681,783    18.32%
     Time deposits over $250,000   5,046,943    1.04%   4,493,189    0.97%
     Other time deposits   15,168,276    3.13%   16,205,942    3.51%
     Other savings deposits   49,189,107    10.15%   47,043,243    10.18%
Total deposits  $484,646,012    100.00%  $462,197,631    100.00%

 

Deposits increased 4.90% or $22.4 million from December 31, 2020 to March 31, 2021 due to a combination of various government stimulus programs and decreased consumer spending.

 

At March 31, 2021 and December 31, 2020, deposits with an aggregate deficit balance of $11,743 and $100,304, respectively, were re-classified as other loans.

 

Comparison of Three Months Ended March 31, 2021 to Three Months Ended March 31, 2020 

Net income increased $0.3 million or 19.00% to $1.8 million, or basic and diluted earnings per share of $0.33 and $0.32, respectively, for the three months ended March 31, 2021, from $1.5 million, or basic and diluted earnings per share of $0.28 and $0.27, respectively, for the three months ended March 31, 2020. Our annualized returns on average assets and average equity for the three months ended March 31, 2021 were 1.37% and 13.26%, respectively, compared with 1.38% and 11.70%, respectively, for the three months ended March 31, 2020.

 

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is a measure of the difference between interest income on earning assets and interest paid on interest bearing liabilities relative to the amount of interest-bearing assets. Net interest income increased $0.4 million or 9.01% to $4.6 million for the three months ended March 31, 2021 from $4.2 million for the three months ended March 31, 2020. This increase was primarily due to PPP processing fees. Interest and fee income on loans increased $0.4 million for the three months ended March 31, 2021 to $4.1 million from $3.7 million for the three months ended March 31, 2020. Average loans increased $52.8 million or 19.02% to $330.9 million for the three months ended March 31, 2021, compared to $278.1 million for the three months ended March 31, 2020. The yield on average loans (including fees) was 5.52% and 5.63% for the three months ended March 31, 2021 and March 31, 2020, respectively.

  

The average balance of interest bearing deposits at the Federal Reserve increased $2.7 million or 5.91% to $47.5 million for the three months ended March 31, 2021, with a yield of 0.10% as compared to $44.8 million for the three months ended March 31, 2020, with a yield of 1.29%. The increase in the average balance of interest-bearing deposits is due to an increase in deposits of $22.4 million offset by purchases of investment securities available for sale.

 

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 March 31, 2021, we recognized a $120,000 provision of loan losses compared to no provision 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 $0.3 million or 49.76 % to $0.9 million for the three months ended March 31, 2021, from $0.6 million for the three months ended March 31, 2020. 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 $0.3 million or 86.63% from $0.3 million for the three months ended March 31, 2020 to $0.6 million for the three months ended March 31, 2021.

  

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Non-Interest Expense

Non-interest expense increased $0.1 million or 6.10% to $3.0 million for the three months ended March 31, 2021 from $2.9 million for the three months ended March 31, 2020. This increase was related to an increase in net occupancy expense.

 

Income Tax Expense

We incurred income tax expense of $0.6 million for the three months ended March 31, 2021 as compared to $0.5 million during the same period in 2020. Our effective tax rate was 23.81% and 23.12% for the three months ended March 31, 2021 and 2020, 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 $127.0 million and $122.8 million at March 31, 2021 and December 31, 2020, respectively.