BANK OF SOUTH CAROLINA CORP - Quarter Report: 2022 September (Form 10-Q)

United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

☐	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)

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

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 ☒

As of October 20, 2022, there were 5,552,351 Common Shares outstanding.

Part I. Financial Information	Page

Item 1. Financial Statements	3
Consolidated Balance Sheets – September 30, 2022 and December 31, 2021	3
Consolidated Statements of Income – Three and Nine months ended September 30, 2022 and 2021	4
Consolidated Statements of Comprehensive Income (Loss) – Three and Nine months ended September 30, 2022 and 2021	6
Consolidated Statements of Shareholders’ Equity – Nine months ended September 30, 2022 and 2021	7
Consolidated Statements of Cash Flows – Nine months ended September 30, 2022 and 2021	8
Notes to Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

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 Disclosures	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)
	September 30,			December 31,
	2022			2021
ASSETS
Cash and due from banks	$	5,597,144		$	11,140,559
Interest-bearing deposits at the Federal Reserve		3,456,566			128,971,429
Investment securities available for sale		269,386,643			212,347,489
Mortgage loans to be sold		654,944			2,774,388
Loans		328,284,273			306,632,229
Less: Allowance for loan losses		(4,329,221	)		(4,376,987	)
Net loans		323,955,052			302,255,242
Premises, equipment and leasehold improvements, net		3,723,404			3,782,936
Right of use asset		13,585,730			14,041,843
Accrued interest receivable		1,755,179			1,404,227
Other assets		8,015,143			2,502,533
Total assets	$	630,129,805		$	679,220,646

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing demand	$	234,757,823		$	255,783,644
Interest bearing demand		161,299,986			165,335,038
Money market accounts		103,909,416			98,113,942
Time deposits $250,000 and over		4,901,501			7,417,864
Other time deposits		12,300,498			13,870,356
Other savings deposits		60,943,285			68,670,732
Total deposits		578,112,509			609,191,576

Accrued interest payable and other liabilities		2,418,321			2,069,594
Lease liability		13,585,730			14,041,843
Total liabilities		594,116,560			625,303,013

Shareholders' equity
Common stock - no par 12,000,000 shares authorized; Issued 5,852,325 shares at September 30, 2022 and 5,841,240 shares at December 31, 2021. Shares outstanding 5,552,351 and 5,541,266 at September 30, 2022 and December 31, 2021, respectively.		—			—
Additional paid in capital		47,997,431			47,745,285
Retained earnings		13,138,685			11,122,710
Treasury stock: 299,974 shares at September 30, 2022 and December 31, 2021		(2,817,392	)		(2,817,392	)
Accumulated other comprehensive loss, net of income taxes		(22,305,479	)		(2,132,970	)
Total shareholders' equity		36,013,245			53,917,633
Total liabilities and shareholders' equity	$	630,129,805		$	679,220,646

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended
	September 30,
	2022		2021
Interest and fee income
Loans, including fees	$	4,037,017	$	3,610,842
Taxable securities		675,306		468,862
Tax-exempt securities		156,104		90,176
Other		179,325		31,189
Total interest and fee income		5,047,752		4,201,069

Interest expense
Deposits		37,519		39,319
Total interest expense		37,519		39,319

Net interest income		5,010,233		4,161,750
Provision for loan losses		—		—
Net interest income after provision for loan losses		5,010,233		4,161,750

Other income
Service charges and fees		324,610		338,854
Mortgage banking fees		107,798		524,016
Gain on sales of securities		—		266,944
Other non-interest income		10,932		8,617
Total other income		443,340		1,138,431

Other expense
Salaries and employee benefits		1,875,576		1,849,254
Net occupancy expense		641,547		587,682
Other operating expenses		289,579		302,863
Professional fees		120,103		149,125
Data processing fees		140,928		158,610
Total other expense		3,067,733		3,047,534

Income before income tax expense		2,385,840		2,252,647
Income tax expense		545,573		525,710

Net income	$	1,840,267	$	1,726,937

Weighted average shares outstanding
Basic		5,552,351		5,535,906
Diluted		5,650,799		5,686,250

Basic income per common share	$	0.33	$	0.31
Diluted income per common share	$	0.33	$	0.30

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Nine Months Ended
	September 30,
	2022			2021
Interest and fee income
Loans, including fees	$	11,326,953		$	11,518,472
Taxable securities		1,848,955			1,407,040
Tax-exempt securities		398,160			222,530
Other		311,896			58,052
Total interest and fee income		13,885,964			13,206,094

Interest expense
Deposits		112,140			136,160
Total interest expense		112,140			136,160

Net interest income		13,773,824			13,069,934
Provision (recovery) for loan losses		(75,000	)		120,000
Net interest income after provision for loan losses		13,848,824			12,949,934

Other income
Service charges and fees		975,233			931,617
Mortgage banking fees		606,526			1,805,262
Gain on sales of securities		61,780			266,944
Other non-interest income		28,053			21,473
Total other income		1,671,592			3,025,296

Other expense
Salaries and employee benefits		5,551,871			5,502,178
Net occupancy expense		1,888,977			1,815,587
Other operating expenses		929,787			965,188
Professional fees		424,901			397,160
Data processing fees		427,175			482,732
Total other expense		9,222,711			9,162,845

Income before income tax expense		6,297,705			6,812,385
Income tax expense		1,450,350			1,606,689

Net income	$	4,847,355		$	5,205,696

Weighted average shares outstanding
Basic		5,549,312			5,528,868
Diluted		5,642,262			5,684,484

Basic income per common share	$	0.87		$	0.94
Diluted income per common share	$	0.86		$	0.92

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


	Three Months Ended
	September 30,
	2022			2021
Net income	$	1,840,267		$	1,726,937
Other comprehensive loss
Unrealized loss on securities arising during the period		(8,267,860	)		(845,754	)
Reclassification adjustment for securities gains realized in net income		—			(266,944	)
Other comprehensive loss before tax		(8,267,860	)		(1,112,698	)
Income tax effect related to items of other comprehensive loss before tax		1,736,251			233,667
Other comprehensive loss after tax		(6,531,609	)		(879,031	)
Total comprehensive (loss) income	$	(4,691,342	)	$	847,906


	Nine Months Ended
	September 30,
	2022			2021
Net income	$	4,847,355		$	5,205,696
Other comprehensive loss
Unrealized loss on securities arising during the period		(25,473,041	)		(3,035,326	)
Reclassification adjustment for securities gains realized in net income		(61,780	)		(266,944	)
Other comprehensive loss before tax		(25,534,821	)		(3,302,270	)
Income tax effect related to items of other comprehensive loss before tax		5,362,312			693,477
Other comprehensive loss after tax		(20,172,509	)		(2,608,793	)
Total comprehensive (loss) income	$	(15,325,154	)	$	2,596,903

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)

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

Net income		—		—		1,542,982			—			—			1,542,982
Other comprehensive loss		—		—		—			—			(3,991,447	)		(3,991,447	)
Stock option exercises, net of surrenders		1,875		20,022		—			—			—			20,022
Stock-based compensation expense		—		31,258		—			—			—			31,258
Cash dividends ($0.17 per common share)		—		—		(943,900	)		—			—			(943,900	)
June 30, 2022		5,552,351	$	47,966,172	$	12,242,318		$	(2,817,392	)	$	(15,773,870	)	$	41,617,228

Net income		—		—		1,840,267			—			—			1,840,267
Other comprehensive loss		—		—		—			—			(6,531,609	)		(6,531,609	)
Stock-based compensation expense		—		31,259		—			—			—			31,259
Cash dividends ($0.17 per common share)		—		—		(943,900	)		—			—			(943,900	)
September 30, 2022		5,552,351		47,997,431		13,138,685			(2,817,392	)		(22,305,479	)		36,013,245

	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

Net income		—		—		1,668,684			—			—			1,668,684
Other comprehensive income		—		—		—			—			614,215			614,215
Stock option exercises, net of surrenders		9,383		103,495		—			(21,150	)		—			82,345
Stock-based compensation expense		—		29,648		—			—			—			29,648
Cash dividends ($0.17 per common share)		—		—		(940,781	)		—			—			(940,781	)
June 30, 2021		5,533,999	$	47,600,598	$	9,739,851		$	(2,817,392	)	$	(59,896	)	$	54,463,161

Net income		—		—		1,726,937			—			—			1,726,937
Other comprehensive loss		—		—		—			—			(879,031	)		(879,031	)
Stock option exercises		2,662		24,438		—			—			—			24,438
Stock-based compensation expense		—		28,605		—			—			—			28,605
Cash dividends ($0.17 per common share)		—		—		(941,232	)		—			—			(941,232	)
September 30, 2021		5,536,661	$	47,653,641	$	10,525,556		$	(2,817,392	)	$	(938,927	)	$	54,422,878

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Nine Months Ended
	September 30,
	2022			2021
Cash flows from operating activities:
Net income	$	4,847,355		$	5,205,696
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		277,223			315,492
Gain on sale of investment securities		(61,780	)		(266,944	)
Provision (recovery) for loan losses		(75,000	)		120,000
Stock-based compensation expense		90,506			81,250
Deferred income taxes and other assets		(150,299	)		(365,317	)
Net amortization of unearned discounts on investment securities available for sale		655,923			386,724
Origination of mortgage loans held for sale		(50,913,927	)		(134,399,394	)
Proceeds from sale of mortgage loans held for sale		53,033,371			141,603,775
(Increase) decrease in accrued interest receivable		(350,952	)		172,588
Increase (decrease) in accrued interest payable and other liabilities		346,842			(379,960	)
Net cash provided by operating activities		7,699,262			12,473,910

Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale		3,539,000			26,967,000
Proceeds from sale of investment securities available for sale		15,120,000			15,572,500
Purchase of investment securities available for sale		(101,827,117	)		(104,335,011	)
Net (increase) decrease in loans		(21,624,810	)		8,030,641
Purchase of premises, equipment, and leasehold improvements, net		(217,691	)		(116,722	)
Net cash used in investing activities		(105,010,618	)		(53,881,592	)

Cash flows from financing activities:
Net (decrease) increase in deposit accounts		(31,079,067	)		160,593,648
Dividends paid		(2,829,495	)		(3,370,906	)
Stock options exercised, net of surrenders		161,640			138,028
Net cash (used in) provided by financing activities		(33,746,922	)		157,360,770
Net (decrease) increase in cash and cash equivalents		(131,058,278	)		115,953,088
Cash and cash equivalents at the beginning of the period		140,111,988			48,325,981
Cash and cash equivalents at the end of the period	$	9,053,710		$	164,279,069

Supplemental disclosure of cash flow data:
Cash paid during the period for:
Interest	$	112,138		$	156,380
Income taxes, net	$	1,100,502		$	2,345,420

Supplemental disclosures for non-cash investing and financing activity:
Change in unrealized loss on securities available for sale, net of income taxes	$	20,172,509		$	2,608,793
Change in dividends payable	$	1,885		$	2,753

See accompanying notes to consolidated financial statements.

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 (“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 4, 2022. 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.

Income Per Common Share:

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

Subsequent Events:

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. We have reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.

Recent Accounting Pronouncements:

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure of financial information by the Company.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU 2016-13 changes the impairment model for most financial assets to a current expected credit loss (“CECL”) model, replacing the incurred loss model that is currently in use. The new guidance requires an entity to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. The CECL model will apply to financial assets measured at amortized cost, such as loans and investments, as well as certain off-balance sheet credit exposures. In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. In October 2019, the FASB voted to extend the implementation date for smaller reporting companies, non-SEC public companies, and private companies. This amendment will become effective for the Company on January 1, 2023. In connection with its efforts to implement ASU 2016-13, the Company internally developed and tested a model to apply the provisions of this guidance upon adoption. The Company is currently in the process of evaluating the impact on the consolidated financial statements of adopting ASU 2016-13. The actual impact of adopting ASU 2016-13 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.

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

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-402 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amendments in ASU 2022-02 are effective upon the Company’s adoption of ASU 2016-13.

In March 2020, the FASB issued 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 consolidated financial statements.

In November 2021, the FASB added a topic to the Accounting Standards Codification, Government Assistance, to require certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy to other accounting guidance. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The amendment became effective January 1, 2022 and did not have a material effect on the consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on our financial position, results of operations or cash flows.

Note 2: Investment Securities

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


	September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	180,427,400	$	—	$	(13,114,300	)	$	167,313,100
Government-Sponsored Enterprises		66,138,873		—		(10,797,720	)		55,341,153
Municipal Securities		51,055,152		34		(4,322,796	)		46,732,390
Total	$	297,621,425	$	34	$	(28,234,816	)	$	269,386,643


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	101,269,851	$	68,848	$	(1,276,399	)	$	100,062,300
Government-Sponsored Enterprises		76,355,720		275,123		(1,909,834	)		74,721,009
Municipal Securities		37,421,880		335,912		(193,612	)		37,564,180
Total	$	215,047,451	$	679,883	$	(3,379,845	)	$	212,347,489

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2022 and December 31, 2021, by contractual maturity are in the following table.

	September 30, 2022				December 31, 2021
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	27,376,382	$	26,827,999	$	12,756,176	$	12,859,086
Due in one year to five years		189,340,366		175,487,805		116,602,790		115,896,465
Due in five years to ten years		72,507,681		60,788,617		76,531,464		74,575,862
Due in ten years and over		8,396,996		6,282,222		9,157,021		9,016,076
Total	$	297,621,425	$	269,386,643	$	215,047,451	$	212,347,489

Securities pledged to secure deposits at September 30, 2022 and December 31, 2021, had a fair value of $28.4 million and $33.3 million, respectively.

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2022 and December 31, 2021. We believe that all unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.


	September 30, 2022
	Less Than 12 Months							12 Months or Longer							Total
	#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss
U.S. Treasury Notes		13	$	103,560,555	$	(6,300,118	)		12	$	63,752,545	$	(6,814,182	)		25	$	167,313,100	$	(13,114,300	)
Government-Sponsored Enterprises		1		4,921,565		(75,999	)		9		50,419,588		(10,721,722	)		10		55,341,153		(10,797,721	)
Municipal Securities		54		34,629,937		(2,086,548	)		23		11,947,419		(2,236,248	)		77		46,577,356		(4,322,796	)
Total		68	$	143,112,057	$	(8,462,665	)		44	$	126,119,552	$	(19,772,152	)		112	$	269,231,609	$	(28,234,817	)


	December 31, 2021
	Less Than 12 Months							12 Months or Longer							Total
	#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss
U.S. Treasury Notes		15	$	94,994,915	$	(1,276,399	)		—	$	—	$	—			15	$	94,994,915	$	(1,276,399	)
Government-Sponsored Enterprises		3		19,480,595		(519,405	)		6		39,909,134		(1,390,429	)		9		59,389,729		(1,909,834	)
Municipal Securities		19		11,384,462		(193,612	)		—		—		—			19		11,384,462		(193,612	)
Total		37	$	125,859,972	$	(1,989,416	)		6	$	39,909,134	$	(1,390,429	)		43	$	165,769,106	$	(3,379,845	)

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


	Three Months Ended
	September 30,
	2022		2021

Gross proceeds	$	—	$	15,572,500
Gross realized gains		—		266,944
Gross realized losses		—		—


	Nine Months Ended
	September 30,
	2022		2021

Gross proceeds	$	15,120,000	$	15,572,500
Gross realized gains		61,780		266,944
Gross realized losses		—		—

There was a tax provision of $12,974 related to gains for the nine months ended September 30, 2022. There was a tax provision of $56,058 related to gains for the three and nine months September 30, 2021.

Note 3: Loans and Allowance for Loan Losses

Major classifications of loans (net of deferred loan fees of $157,002 and $488,481 at September 30, 2022 and December 31, 2021, respectively) are shown in the table below.

	September 30, 2022			December 31, 2021
Commercial	$	52,323,412		$	45,804,434
Commercial real estate:
Construction		16,339,084			12,054,095
Other		171,043,155			165,719,078
Consumer:
Real estate		84,706,632			71,307,488
Other		3,871,990			3,768,531
Paycheck Protection Program		—			7,978,603
		328,284,273			306,632,229
Allowance for loan losses		(4,329,221	)		(4,376,987	)
Loans, net	$	323,955,052		$	302,255,242

We had $91.2 million and $94.7 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at September 30, 2022 and at December 31, 2021, respectively.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions. 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. In 2020 and 2021, the Bank provided $55.3 million in funding to 480 customers through the PPP and received a total of $2.4 million in processing fees. The processing fees were deferred and are being amortized over the life of the loans in accordance with ASC 310-20. During the three months ended September 30, 2022 and 2021, the Bank recognized $0.1 million and $0.1 million, respectively, in processing fees for the PPP. During the nine months ended September 30, 2022 and 2021, the Bank recognized $0.4 million and $1.0 million, respectively, in processing fees for the 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. Because the 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.

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.

●

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

●

Substandard (6) The borrowing entity has a cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is possible. The borrowing entity has declining sales, rising costs, and may need to look for secondary source of repayment.

●

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

●

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

The following tables illustrate credit quality by class and internally assigned grades at September 30, 2022 and December 31, 2021. “Pass” includes loans internally graded as excellent, good and satisfactory.

September 30, 2022
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	50,147,494	$	16,339,084	$	165,720,219	$	80,529,554	$	3,590,328	$	316,326,679
Watch		601,185		—		3,149,899		3,654,235		234,836		7,640,155
OAEM		272,911		—		978,517		274,445		8,350		1,534,223
Substandard		1,301,822		—		1,194,520		248,398		38,476		2,783,216
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	52,323,412	$	16,339,084	$	171,043,155	$	84,706,632	$	3,871,990	$	328,284,273

December 31, 2021
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Pass	$	43,853,889	$	11,616,118	$	159,825,281	$	69,920,347	$	3,565,716	$	7,978,603	$	296,759,954
Watch		450,319		437,977		3,082,408		862,938		133,418		—		4,967,060
OAEM		36,749		—		1,158,268		274,445		29,244		—		1,498,706
Substandard		1,463,477		—		1,653,121		249,758		40,153		—		3,406,509
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	45,804,434	$	12,054,095	$	165,719,078	$	71,307,488	$	3,768,531	$	7,978,603	$	306,632,229

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

September 30, 2022
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment ≥ 90 Days and Accruing
Commercial	$	199,690	$	—	$	—	$	199,690	$	52,123,722	$	52,323,412	$	—
Commercial Real Estate Construction		—		—		—		—		16,339,084		16,339,084		—
Commercial Real Estate Other		411,866		60,653		634,048		1,106,566		169,936,589		171,043,155		—
Consumer Real Estate		—		—		—		—		84,706,632		84,706,632		—
Consumer Other		—		—		—		—		3,871,990		3,871,990		—
Total	$	611,556	$	60,653	$	634,048	$	1,306,256	$	326,978,017	$	328,284,273	$	—

December 31, 2021
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment ≥ 90 Days and Accruing
Commercial	$	88,659	$	—	$	—	$	88,659	$	45,715,775	$	45,804,434	$	—
Commercial Real Estate Construction		—		—		—		—		12,054,095		12,054,095		—
Commercial Real Estate Other		59,269		288,464		337,490		685,223		165,033,855		165,719,078		—
Consumer Real Estate		—		—		—		—		71,307,488		71,307,488		—
Consumer Other		23,971		—		—		23,971		3,744,560		3,768,531		—
Paycheck Protection Program		—		—		—		—		7,978,603		7,978,603		—
Total	$	171,899	$	288,464	$	337,490	$	797,853	$	305,834,376	$	306,632,229	$	—

There were no loans over 90 days past due and still accruing as of September 30, 2022 and December 31, 2021.

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

	September 30, 2022		December 31, 2021

Commercial	$	—	$	178,975
Commercial Real Estate Other		634,048		625,953
Consumer Other		—		9,686
Total	$	634,048	$	814,614

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by class for the three and nine months ended September 30, 2022 and 2021. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.


Three Months Ended September 30, 2022
	Commercial			Commercial Real Estate Construction			Commercial Real Estate Other		Consumer Real Estate		Consumer Other			Paycheck Protection Program			Total
Allowance for Loan Losses:
Beginning balance	$	882,994		$	230,370		$	2,210,311	$	890,384	$	92,806		$	—		$	4,306,865
Charge-offs		—			—			—		—		—			—			—
Recoveries		200			—			18,000		—		4,000			156			22,356
Provisions		(51,621	)		(12,590	)		11,049		54,991		(1,673	)		(156	)		—
Ending balance	$	831,573		$	217,780		$	2,239,360	$	945,375	$	95,133		$	—		$	4,329,221


Nine Months Ended September 30, 2022
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate			Consumer Other			Paycheck Protection Program			Total
Allowance for Loan Losses:
Beginning balance	$	795,689	$	175,493	$	2,376,306		$	924,784		$	104,715		$	—		$	4,376,987
Charge-offs		—		—		—			(2,035	)		—			(10	)		(2,045	)
Recoveries		200		—		18,000			—			10,224			855			29,279
Provisions		35,684		42,287		(154,946	)		22,626			(19,806	)		(845	)		(75,000	)
Ending balance	$	831,573	$	217,780	$	2,239,360		$	945,375		$	95,133		$	—		$	4,329,221


Three Months Ended September 30, 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	$	801,548		$	154,276	$	2,206,215	$	1,025,506		$	118,758	$	—		$	4,306,303
Charge-offs		—			—		—		—			—		(903	)		(903	)
Recoveries		10,746			—		—		47,711			4,600		—			63,057
Provisions		(9,338	)		1,248		72,060		(65,539	)		666		903			—
Ending balance	$	802,956		$	155,524	$	2,278,275	$	1,007,678		$	124,024	$	—		$	4,368,457


Nine Months Ended September 30, 2021
	Commercial			Commercial Real Estate Construction			Commercial Real Estate Other		Consumer Real Estate		Consumer Other			Paycheck Protection Program			Total
Allowance for Loan Losses:
Beginning balance	$	1,029,310		$	199,266		$	1,909,121	$	925,077	$	122,920		$	—		$	4,185,694
Charge-offs		—			—			—		—		(11,439	)		(8,879	)		(20,318	)
Recoveries		21,329			—			—		47,711		14,041			—			83,081
Provisions		(247,683	)		(43,742	)		369,154		34,890		(1,498	)		8,879			120,000
Ending balance	$	802,956		$	155,524		$	2,278,275	$	1,007,678	$	124,024		$	—		$	4,368,457

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


	September 30, 2022
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	179,891	$	—	$	—	$	—	$	38,475	$	—	$	218,366
Collectively evaluated for impairment		651,682		217,780		2,239,360		945,375		56,658		—		4,110,855
Total Allowance for Loan Losses	$	831,573	$	217,780	$	2,239,360	$	945,375	$	95,133	$	—	$	4,329,221
Loans Receivable
Individually evaluated for impairment	$	1,301,822	$	—	$	1,214,827	$	248,398	$	38,475	$	—	$	2,803,522
Collectively evaluated for impairment		51,021,590		16,339,084		169,828,328		84,458,234		3,833,515		—		325,480,751
Total Loans Receivable	$	52,323,412	$	16,339,084	$	171,043,155	$	84,706,632	$	3,871,990	$	—	$	328,284,273


	December 31, 2021
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	179,988	$	—	$	—	$	—	$	40,153	$	—	$	220,141
Collectively evaluated for impairment		615,701		175,493		2,376,306		924,784		64,562		—		4,156,846
Total Allowance for Loan Losses	$	795,689	$	175,493	$	2,376,306	$	924,784	$	104,715	$	—	$	4,376,987
Loans Receivable
Individually evaluated for impairment	$	1,463,477	$	—	$	1,653,121	$	249,758	$	40,153	$	—	$	3,406,509
Collectively evaluated for impairment		44,340,957		12,054,095		164,065,957		71,057,730		3,728,378		7,978,603		303,225,720
Total Loans Receivable	$	45,804,434	$	12,054,095	$	165,719,078	$	71,307,488	$	3,768,531	$	7,978,603	$	306,632,229

As of September 30, 2022 and December 31, 2021, loans individually evaluated and considered impaired are presented in the following table.

	Impaired Loans as of
	September 30, 2022						December 31, 2021
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	947,035	$	947,035	$	—	$	1,096,407	$	1,096,407	$	—
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,214,827		1,214,827		—		1,653,121		1,653,121		—
Consumer Real Estate		248,398		248,398		—		249,758		249,758		—
Consumer Other		—		—		—		—		—		—
Paycheck Protection Program		—		—		—		—		—		—
Total		2,410,260		2,410,260		—		2,999,286		2,999,286		—

With an allowance recorded:
Commercial		354,787		354,787		179,891		367,070		367,070		179,988
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		—		—		—		—		—		—
Consumer Real Estate		—		—		—		—		—		—
Consumer Other		38,475		38,475		38,475		40,153		40,153		40,153
Paycheck Protection Program		—		—		—		—		—		—
Total		393,262		393,262		218,366		407,223		407,223		220,141

Commercial		1,301,822		1,301,822		179,891		1,463,477		1,463,477		179,988
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,214,827		1,214,827		—		1,653,121		1,653,121		—
Consumer Real Estate		248,398		248,398		—		249,758		249,758		—
Consumer Other		38,475		38,475		38,475		40,153		40,153		40,153
Paycheck Protection Program		—		—		—		—		—		—
Total	$	2,803,522	$	2,803,522	$	218,366	$	3,406,509	$	3,406,509	$	220,141

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

	Three Months Ended September 30,
	2022				2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	958,895	$	14,703	$	1,327,590	$	20,140
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		1,222,909		7,486		1,954,514		14,402
Consumer Real Estate		249,684		3,773		249,758		2,675
Consumer Other		—		—		—		—
Paycheck Protection Program		—		—		—		—
		2,431,488		25,962		3,531,862		37,217

With an allowance recorded:
Commercial		354,787		6,063		178,975		4,564
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		—		—		—		—
Consumer Real Estate		—		—		—		—
Consumer Other		38,685		634		40,921		670
Paycheck Protection Program		—		—		—		—
		393,472		6,697		219,896		5,234
Total
Commercial		1,313,682		20,766		1,506,565		24,704
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		1,222,909		7,486		1,954,514		14,402
Consumer Real Estate		249,684		3,773		249,758		2,675
Consumer Other		38,685		634		40,921		670
Paycheck Protection Program		—		—		—		—
	$	2,824,960	$	32,659	$	3,751,758	$	42,451

	Nine Months Ended September 30,
	2022				2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	979,852	$	44,877	$	1,357,025	$	64,253
Commercial Real Estate - Construction		—		—		—		—
Commercial Real Estate - Other		1,237,330		24,678		1,948,369		45,482
Consumer Real Estate		249,724		11,338		249,783		8,842
Consumer Other		—		—		—		—
Paycheck Protection Program		—		—		—		—
		2,466,906		80,893		3,555,177		118,577

With an allowance recorded:
Commercial		358,450		13,341		178,975		8,173
Commercial Real Estate - Construction		—		—		—		—
Commercial Real Estate - Other		—		—		—		—
Consumer Real Estate		—		—		—		—
Consumer Other		39,241		1,923		41,384		2,047
Paycheck Protection Program		—		—		—		—
		397,691		15,264		220,359		10,220
Total
Commercial		1,338,302		58,218		1,536,000		72,426
Commercial Real Estate - Construction		—		—		—		—
Commercial Real Estate - Other		1,237,330		24,678		1,948,369		45,482
Consumer Real Estate		249,724		11,338		249,783		8,842
Consumer Other		39,241		1,923		41,384		2,047
Paycheck Protection Program		—		—		—		—
	$	2,864,597	$	96,157	$	3,775,536	$	128,797

In general, the modification or restructuring of a debt is considered a troubled debt restructuring (“TDR”) if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of both September 30, 2022 and December 31, 2021, there were 5 TDRs with an aggregate balance of $1.0 million. These TDRs were granted extended payment terms with no principal reduction. The structure of two of the loans changed to interest only. All TDRs were performing as agreed as of September 30, 2022. No TDRs defaulted during the three and nine months ended September 30, 2022 and 2021, which were modified within the previous twelve months. There were no TDRs added during the three and nine months ended September 30, 2022 and 2021.

Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. During 2020, the Bank processed approximately $0.7 million in principal deferments to 84 loans, with an aggregate loan balance of $25.9 million. The principal deferments represented 0.24% of our total loan portfolio as of December 31, 2020. The Bank did not process any principal deferments after December 31, 2020. As of September 30, 2022, there was one outstanding loan with a balance of $0.1 million in TDR status. There were two loans outstanding with a balance of $0.5 million in TDR status as of December 31, 2021. All other remaining outstanding loans were paying as agreed as of September 30, 2022 and December 31, 2021.

Note 4: Leases

As of September 30, 2022 and December 31, 2021, the Company had operating right of use (“ROU”) assets of $13.6 million and $14.0 million, respectively, and had operating lease liabilities of $13.6 million and $14.0 million, respectively. The Company maintains operating leases on land, branch facilities, and parking. Most of the leases include one or more options to renew, with renewal terms extending up to 20 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized in lease expense.

As of September 30, 2022, the weighted average remaining lease term was 15.8 years and the weighted average incremental borrowing rate was 4.17%.

The table below shows lease expense components for the three months ended September 30, 2022 and 2021.


	September 30,
	2022		2021
Operating lease expense	$	296,800	$	269,592
Short-term lease expense		—		—
Total lease expense	$	296,800	$	269,592

The table below shows lease expense components for the nine months ended September 30, 2022 and 2021.


	September 30,
	2022		2021
Operating lease expense	$	894,135	$	852,624
Short-term lease expense		—		—
Total lease expense	$	894,135	$	852,624

Total rental expense was included in net occupancy expense within the consolidated statements of income.

As of September 30, 2022 and December 31, 2021, we did not maintain any finance leases, and we determined that the number and dollar amount of equipment leases was immaterial. As of September 30, 2022, we had no operating leases that had not yet commenced.

Note 5: Disclosures Regarding Fair Value of Financial Statements

Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would use in pricing an asset or liability.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

●

Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

●

Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

●

Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

Fair value estimates are made at a specific point of time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale our entire holdings of a particular financial instrument. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value also would also significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

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

Investment Securities Available for Sale

Investment securities are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include municipal securities in less liquid markets.

Derivative Instruments

Derivative instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on the change in the value of the underlying loan between the commitment date and the end of the period. We classify these instruments as Level 3.

We had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments with interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on the short-term nature of mortgage loans to be sold (derivative contracts), our derivative instruments were immaterial to our consolidated financial statements as of September 30, 2022 and December 31, 2021.

The following table presents information about assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:

	September 30, 2022
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	167,313,100	$	—	$	—	$	167,313,100
Government-Sponsored Enterprises		—		55,341,153		—		55,341,153
Municipal Securities		—		17,894,895		28,837,495		46,732,390
Total	$	167,313,100	$	73,236,048	$	28,837,495	$	269,386,643

	December 31, 2021
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	100,062,300	$	—	$	—	$	100,062,300
Government-Sponsored Enterprises		—		74,721,009		—		74,721,009
Municipal Securities		—		13,080,133		24,484,047		37,564,180
Total	$	100,062,300	$	87,801,142	$	24,484,047	$	212,347,489

There were no liabilities recorded at fair value on a recurring basis as of September 30, 2022 or December 31, 2021.

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Beginning balance	$	24,290,239		$	6,960,115		$	24,484,047		$	5,683,930
Included in other comprehensive loss		(277,744	)		(33,656	)		(1,737,552	)		(120,471	)
Purchases, issuances, and settlements net of maturities		4,825,000			12,142,000			6,091,000		$	13,505,000
Ending balance	$	28,837,495		$	19,068,459		$	28,837,495		$	19,068,459

There were no transfers between fair value levels during the three and nine months ended September 30, 2022 or 2021.

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 not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following tables present information about certain assets measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	1,463,225	$	1,463,225
Mortgage loans to be sold		—		654,944		—		654,944
Total	$	—	$	654,944	$	1,463,225	$	2,118,169


	December 31, 2021
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	1,902,879	$	1,902,879
Other real estate owned		—		—		—		—
Mortgage loans to be sold		—		2,774,388		—		2,774,388
Total	$	—	$	2,774,388	$	1,902,879	$	4,677,267

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2022 or December 31, 2021.

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2022 and December 31, 2021:

		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:

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

The carrying value approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.

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.

Loans

The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, 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.

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).

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.

Loan commitments

Estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of September 30, 2022 and December 31, 2021, respectively.


	September 30, 2022
			Estimated Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and due from banks	$	5,597,144	$	5,597,144	$	—	$	—	$	5,597,144

Interest-bearing deposits at the Federal Reserve		3,456,566		3,456,566		—		—		3,456,566
Investment securities available for sale		269,386,643		167,313,100		73,236,048		28,837,495		269,386,643
Mortgage loans to be sold		654,944		—		654,944		—		654,944
Loans, net		323,955,052		—		—		305,520,421		305,520,421
Accrued interest receivable		1,755,179		—		1,755,179		—		1,755,179
Financial Liabilities:
Demand deposits		560,910,510		—		560,910,510		—		560,910,510
Time deposits		17,201,999		—		16,940,516		—		16,940,516
Accrued interest payable		14,916		—		14,916		—		14,916


	December 31, 2021
			Estimated Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and due from banks	$	11,140,559	$	11,140,559	$	—	$	—	$	11,140,559
Interest-bearing deposits at the Federal Reserve		128,971,429		128,971,429		—		—		128,971,429
Investment securities available for sale		212,347,489		100,062,300		87,801,142		24,484,047		212,347,489
Mortgage loans to be sold		2,774,388		—		2,774,388		—		2,774,388
Loans, net		302,255,242		—		—		293,731,997		293,731,997
Accrued interest receivable		1,404,227		—		1,404,227				1,404,227
Financial Liabilities:
Demand deposits		587,903,356		—		587,903,356		—		587,903,356
Time deposits		21,288,220		—		21,428,310		—		21,428,310
Accrued interest payable		14,914		—		14,914				14,914

Note 6: Income Per Common Share

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

	2022		2021
Net income	$	1,840,267	$	1,726,937

Weighted average shares outstanding		5,552,351		5,535,906
Effect of dilutive shares		98,448		150,344
Weighted average shares outstanding - diluted		5,650,799		5,686,250

Earnings per share - basic	$	0.33	$	0.31
Earnings per share - diluted	$	0.33	$	0.30

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

	2022		2021
Net income	$	4,847,355	$	5,205,696

Weighted average shares outstanding		5,549,312		5,528,868
Effect of dilutive shares		92,950		155,616
Weighted average shares outstanding - diluted		5,642,262		5,684,484

Earnings per share - basic	$	0.87	$	0.94
Earnings per share - diluted	$	0.86	$	0.92

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 1933. 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, 2021 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 expense

●

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

●

Changes in compensation

●

Risks associated with income taxes including potential for adverse adjustments

●

Changes in accounting policies and practices

●

Changes in regulatory actions, including the potential for adverse adjustments

●

Recently enacted or proposed legislation and changes in political conditions

●

Reputational risk

●

Pandemic risk

●

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 bank holding company headquartered in Charleston, South Carolina, with $630.1 million in assets as of September 30, 2022. The Company offers a broad range of financial services through its wholly-owned subsidiary, The Bank of South Carolina (the “Bank”). The Bank is a state-chartered commercial bank which operates primarily in the Charleston, Dorchester and Berkeley counties of South Carolina. The Bank’s original and current concept is to be a full-service financial institution specializing in personal service, responsiveness, and attention to detail to foster long standing relationships.

We derive most of our income from interest on loans and investments (interest-earning assets). The primary source of funding for making these loans and investments is our interest and non-interest-bearing deposits. Consequently, one of the key measures of our success is the amount of net interest income, or the difference between the income on our interest-earning assets and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The reserve for credit losses consists of the allowance for loan losses (the “allowance”) and a reserve for unfunded commitments (the “unfunded reserve”). The allowance provides for probable and estimable losses inherent in our loan portfolio while the unfunded reserve provides for potential losses related to unfunded lending commitments.

In addition to earning interest on loans and investments, we earn income through fees and other expenses we charge to the customer. The various components of non-interest income as well as non-interest expense are described in the following discussion. The discussion and analysis also identify significant factors that have affected our financial position and operating results as of and for the periods ending September 30, 2022 and December 31, 2021, 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.

Macroeconomic Conditions

Various macroeconomic challenges have adversely impacted economic conditions in the United States. The United States has experienced significantly elevated levels of inflation, resulting in central banks, including the Federal Reserve Bank (“FRB”). implementing a series of increases to the federal funds target rate, with potential additional increases in the near term. Our results have been impacted by higher interest rates in the following manners:

●

Lower mortgage volumes resulting from the impact of higher interest rates on new and existing home sales.

●

Increased levels of unrealized losses in our investment portfolio.

●

Increases in asset yields on our excess cash held at the FRB.

●

Increases in interest rates on variable rate loans, as well as higher interest rates on new originations and renewals of fixed rate loans.

●

Higher non-interest expenses due to temporary discretionary wage increases for non-executive staff to help offset inflation.

These macroeconomic conditions could potentially further adversely affect our customers and our results during the remainder of 2022 and beyond.

COVID-19

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. Refer to Note 3: Loans and Allowance for Loan Losses for additional information about COVID-19 and programs that were established to assist borrowers.

Critical Accounting Policies

Our critical accounting policies, which involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities and used in the preparation of the Consolidated Financial Statements as of September 30, 2022, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2021.

Balance Sheet

Cash and Cash Equivalents

Total cash and cash equivalents decreased 93.5% or $131.0 million to $9.1 million as of September 30, 2022, from $140.1 million as of December 31, 2021. The decrease in total cash and cash equivalents is primarily due to purchases of investment securities available for sale, net of proceeds from sales, calls and maturities, and to a lesser extent, a net increase in loans and a net decrease in deposit accounts.

Investment Securities Available for Sale

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

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

As of September 30, 2022, our available for sale investment portfolio included U.S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $269.4 million and an amortized cost of $297.6 million for a net unrealized loss of approximately $28.2 million. As of September 30, 2022 and December 31, 2021, our investment securities portfolio represented approximately 42.75% and 31.26% of our total assets, respectively. The average yield on our investment securities was 1.17% and 1.02% at September 30, 2022 and December 31, 2021, respectively.

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

Net loans increased $21.7 million, or 7.2%, to $324.0 million as of September 30, 2022 from $302.3 million as of December 31, 2021. The increase is primarily related to growth in Consumer and Commercial Real Estate loans offset by a decrease in PPP loans.

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

The following table is a summary of our loan portfolio composition (net of deferred fees and costs of $157,002 and $488,481 at September 30, 2022 and December 31, 2021, respectively) and the corresponding percentage of total loans as of the dates indicated.

	September 30, 2022						December 31, 2021
	Amount			Percent			Amount			Percent

Commercial	$	52,323,412			15.94	%	$	45,804,434			14.94	%
Commercial Real Estate Construction		16,339,084			4.98	%		12,054,095			3.93	%
Commercial Real Estate Other		171,043,155			52.10	%		165,719,078			54.04	%
Consumer Real Estate		84,706,632			25.80	%		71,307,488			23.26	%
Consumer Other		3,871,990			1.18	%		3,768,531			1.23	%
Payroll Protection Program		—			0.00	%		7,978,603			2.60	%
Total loans		328,284,273			100.00	%		306,632,229			100.00	%
Allowance for loan losses		(4,329,221	)					(4,376,987	)

Total loans, net	$	323,955,052					$	302,255,242

The decrease in the deferred fees is primarily associated with the recognition of 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 September 30, 2022, there were no loans 90 days past due still accruing interest.

The following table is a summary of our Nonperforming Assets:

	September 30, 2022		December 31, 2021
Commercial	$	—	$	178,975
Commercial Real Estate Other		634,048		625,953
Consumer Other		—		9,686
Total nonaccruing loans		634,048		814,614
Total nonperforming assets	$	634,048	$	814,614

Allowance for Loan Losses

The allowance for loan losses was $4.3 million as of September 30, 2022 and $4.4 million as of December 31, 2021, or 1.32% and 1.47%, respectively, of outstanding loans, net of PPP loans. Because PPP loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve. At September 30, 2022 and December 31, 2021, the allowance for loan losses represented 682.79% and 537.31%, respectively, of the total amount of nonperforming loans. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses at September 30, 2022 is adequate.

At September 30, 2022, impaired loans totaled $2.8 million, of which $0.4 million of these loans had a reserve of approximately $0.2 million allocated in the allowance for loan losses. Comparatively, impaired loans totaled $3.4 million as of December 31, 2021, and $0.4 million of these loans had a reserve of approximately $0.2 million allocated in the allowance for loan losses.

During the three months ended September 30, 2022, we recorded no charge-offs and $22,356 of recoveries on loans previously charged-off. During the nine months ended September 30, 2022, we recorded $2,045 in charge-offs and $29,279 of recoveries on loans previously charged-off, for net recoveries of $27,234.

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest-bearing deposits provided funding for 55.74% of average earning assets for the nine months ended September 30, 2022, and 56.67% for the nine months ended September 30, 2021. The Company encounters strong competition from other financial institutions as well as consumer and commercial finance companies, insurance companies and brokerage firms located in the primary service area of the Bank. However, the percentage of funding provided by deposits has remained stable.

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

	September 30, 2022					December 31, 2021
	Amount		Percent			Amount		Percent
Deposits
Non-interest bearing demand	$	234,757,823		40.61	%	$	255,783,644		41.98	%
Interest bearing demand		161,299,986		27.90	%		165,335,038		27.14	%
Money market accounts		103,909,416		17.97	%		98,113,942		16.11	%
Time deposits $250,000 and over		4,901,501		0.85	%		7,417,864		1.22	%
Other time deposits		12,300,498		2.13	%		13,870,356		2.28	%
Other savings deposits		60,943,285		10.54	%		68,670,732		11.27	%

Total deposits	$	578,112,509		100.00	%	$	609,191,576		100.00	%

Deposits decreased 5.1% or $31.1 million from December 31, 2021 to September 30, 2022 primarily due to a decrease in the balances of a related group of demand deposit accounts. The higher balance in 2021 for these demand deposit accounts was temporary in nature.

At September 30, 2022 and December 31, 2021, deposits with an aggregate deficit balance of $139,928 and $28,549, respectively, were re-classified as other loans.

Comparison of Three Months Ended September 30, 2022 to Three Months Ended September 30, 2021

Net income increased $0.1 million or 6.56% to $1.8 million, or basic and diluted earnings per share of $0.33 and $0.33, respectively, for the three months ended September 30, 2022, from $1.7 million, or basic and diluted earnings per share of $0.31 and $0.30, respectively, for the three months ended September 30, 2021. Our annualized returns on average assets and average equity for the three months ended September 30, 2022 were 1.11% and 11.24%, respectively, compared with 1.15% and 12.32%, respectively, for the three months ended September 30, 2021.

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 $0.8 million or 20.2% to $5.0 million for the three months ended September 30, 2022 from $4.2 million for the three months ended September 30, 2021. Average loans increased $6.0 million or 1.9% to $325.1 million for the three months ended September 30, 2022, compared to $319.1 million for the three months ended September 30, 2021. The yield on average loans (including fees) was 5.08% and 5.02% for the three months ended September 30, 2022 and September 30, 2021, respectively. Interest income on loans increased $0.4 million for the three months ended September 30, 2022 to $4.0 million from $3.6 million for the three months ended September 30, 2021.

The average balance of interest bearing deposits at the Federal Reserve decreased $46.0 million or 59.1% to $31.9 million for the three months ended September 30, 2022 with a yield of 2.23% as compared to $77.9 million for the three months ended September 30, 2021, with a yield of 0.16%.

Provision for Loan Losses

We have established an allowance for loan losses through a charge (credit) to the provision for loan losses on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of our allowance for loan losses. We did not recognize a provision during the three months ended September 30, 2022 and 2021. For additional information about the changes in the allowance and an allocation of the allowance by class, refer to Note 3. Loans and Allowance for Loan Losses.

Non-Interest Income

Other income decreased $0.7 million or 61.1% to $0.4 million for the three months ended September 30, 2022, from $1.1 million for the three months ended September 30, 2021. This decrease was primarily due to a $0.4 million decrease in mortgage banking income compared to the three months ended September 30, 2021 and gains on sales of securities of $0.3 million during the three months ended September 30, 2021.

Non-Interest Expense

Non-interest expense increased $0.1 million or 0.66% to $3.1 million for the three months ended September 30, 2022, from $3.0 million for the three months ended September 30, 2021. For the three months ended September 30, 2022, we experienced marginal increases in net occupancy costs and salaries which were largely offset by lower professional fees and other operating expenses.

Income Tax Expense

Income tax expense was $0.5 million for both the three months ended September 30, 2022 and 2021. Our effective tax rate was 22.87% and 23.34% for the three months ended September 30, 2022 and 2021, respectively.

Comparison of Nine Months Ended September 30, 2022 to Nine Months Ended September 30, 2021

Net income decreased $0.4 million or 6.88% to $4.8 million, or basic and diluted earnings per share of $0.87 and $0.86 for the nine months ended September 30, 2022, respectively, from $5.2 million, or basic and diluted earnings per share of $0.94 and $0.92, respectively, for the nine months ended September 30, 2021. Our annualized returns on average assets and average equity for the nine months ended September 30, 2022 were 0.98% and 14.11%, respectively, compared with 1.23% and 12.64%, respectively, for the nine months ended September 30, 2021.

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 $0.7 million or 5.39% to $13.8 million for the nine months ended September 30, 2022 from $13.1 million for the nine months ended September 30, 2021. Average loans decreased $9.0 million or 2.73% to $318.6 million for the nine months ended September 30, 2022, compared to $327.6 million for the nine months ended September 30, 2021. The yield on average loans (including fees) was 5.05% and 5.24% for the nine months ended September 30, 2022 and 2021, respectively. Interest income on loans decreased $0.2 million for the nine months ended September 30, 2022 to $11.3 million from $11.5 million for the nine months ended September 30, 2021.

The average balance of interest bearing deposits at the Federal Reserve decreased $10.2 million or 16.42% to $52.0 million for the nine months ended September 30, 2022, with a yield of 0.80% as compared to $62.2 million for the nine months ended September 30, 2021, with a yield of 0.12%.

Provision for Loan Losses

We have established an allowance for loan losses through a charge (credit) to the provision for loan losses on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of our allowance for loan losses. For the nine months ended September 30, 2022, we recorded a $75,000 reduction to the allowance for loan losses. For the nine months ended September 30, 2021, we had a provision of loan losses of $120,000. The net decrease in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses. For additional information about the changes in the allowance and an allocation of the allowance by class, refer to Note 3. Loans and Allowance for Loan Losses.

Non-Interest Income

Other income decreased $1.4 million or 44.75% to $1.7 million for the nine months ended September 30, 2022, from $3.0 million for the nine months ended September 30, 2021. This decrease was primarily due to a $1.2 million decrease in mortgage banking income and decrease of $0.2 million of gain on sales of investment securities. The Bank sold $53.0 million of mortgage loans held for sale during the nine months ended September 30, 2022 as compared with $141.6 million during the nine months ended September 30, 2021.

Non-Interest Expense

Non-interest expense was $9.2 million for both the nine months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022, marginal increases in professional fees, salaries and employee benefits, including temporary discretionary wage increases for non-executive staff to help offset inflation, and net occupancy expense were offset by decreases in data processing fees and other operating expense.

Income Tax Expense

Income tax expense was $1.5 million for the nine months ended September 30, 2022 as compared to $1.6 million during the same period in 2021. Our effective tax rate was 23.03% and 23.58% for the nine months ended September 30, 2022 and 2021, 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 $146.5 million and $117.5 million at September 30, 2022 and December 31, 2021, respectively.

Standby letters of credit represent our obligation to a third-party contingent upon the failure of our customer to perform under the terms of an underlying contract with the third party or obligates us to guarantee or stand as surety for the benefit of the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be drawn only when the underlying event fails to occur as intended. We can seek recovery of the amounts paid from the borrower. The majority of these standby letters of credit are unsecured.

Commitments under standby letters of credit are usually for one year or less. The maximum potential amount of undiscounted future payments related to standby letters of credit at September 30, 2022 and December 31, 2021 was $2.5 million and $0.6 million, respectively.

We originate certain fixed rate residential loans and commit these loans for sale. The commitments to originate fixed rate residential loans and the sales commitments are freestanding derivative instruments. We had forward sales commitments on mortgage loans held for sale totaling $0.7 million and $2.8 million at September 30, 2022 and December 31, 2021, respectively. The fair value of these commitments was not significant at September 30, 2022 or December 31, 2021. We had no embedded derivative instruments requiring separate accounting treatment.

Once we sell certain fixed rate residential loans, the loans are no longer reportable on our balance sheet. With most of these sales, we have an obligation to repurchase the loan in the event of a default of principal or interest on the loan. This recourse period ranges from three to nine months. Misrepresentation or fraud carries unlimited time for recourse. The unpaid principal balance of loans sold with recourse was $9.7 million at September 30, 2022. There were two loans repurchased during the nine months ended September 30, 2022 and one loan was repurchased during the nine months ended September 30, 2021.

Liquidity

Historically, we have maintained our liquidity at levels believed to be adequate to meet requirements of normal operations, potential deposit outflows and strong loan demand and still allow for optimal investment of funds and return on assets.

We manage our assets and liabilities to ensure there is sufficient liquidity to enable management to fund deposit withdrawals, loan demand, capital expenditures, reserve requirements, operating expenses, dividends and to manage daily operations on an ongoing basis. Funds are primarily provided by the Bank through customer deposits, principal and interest payments on loans, mortgage loan sales, the sale or maturity of securities, temporary investments and earnings.

Proper liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our primary liquid assets are cash and due from banks, investment securities available for sale, interest-bearing deposits at the Federal Reserve, and mortgage loans held for sale. Our primary liquid assets accounted for 44.29% and 52.30% of total assets at September 30, 2022 and December 31, 2021, respectively. Securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates and liquidity needs. All of the investment securities presently owned are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity. At September 30, 2022, we had unused short-term lines of credit totaling approximately $41.0 million (which can be withdrawn at the lender’s option). Additional sources of funds available to us for liquidity include borrowing on a short-term basis from the Federal Reserve System, increasing deposits by raising interest rates paid and sale of mortgage loans held for sale. We established a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits us to retain possession of assets pledged as collateral to secure advances from the Federal Reserve Discount Window. At September 30, 2022, we could borrow up to $77.2 million. There have been no borrowings under this arrangement.

Our core deposits consist of non-interest-bearing accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our level of certificates of deposit greater than $250,000 and other large deposits. We maintain a Contingency Funding Plan (“CFP’) that identifies liquidity needs and weighs alternate courses of action designed to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. At September 30, 2022 and December 31, 2021, our liquidity ratio was 45.97% and 56.43%, respectively.

Capital Resources

Our capital needs have been met to date through the $10.6 million in capital raised in our initial offering, the retention of earnings less dividends paid and the exercise of stock options to purchase stock. Total shareholders’ equity, which includes accumulated other comprehensive losses, was $36.0 million and $53.9 million as of September 30, 2022 and December 31, 2021, respectively. The year-to-date decrease was primarily the result of a $20.2 million change in the net unrealized loss on available-for-sale securities, net of tax, due to rising interest rates. Exclusive of accumulated other comprehensive losses of $22.3 million and $2.1 million as of September 30, 2022 and December 31, 2021, respectively, shareholders' equity was $58.3 million and $56.1 million as of September 30, 2022 and December 31, 2021, respectively. The rate of asset growth since our inception has not negatively impacted this capital base.

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

The purpose of Basel III is to improve the quality and increase the quantity of capital for all banking organizations. The minimum requirements for the quantity and quality of capital were increased. The rule includes a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and requires a minimum leverage ratio of 4%. In addition, the rule implemented a strict eligibility criteria for regulatory capital instruments and improved the methodology for calculating risk-weighted assets to enhance risk sensivitity.

At September 30, 2022, the Bank was categorized as “well capitalized”. To be categorized as “well capitalized,” the Bank must maintain total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 10.00%, 8.00%, 6.50% and 5.00%, respectively, and to be categorized as “adequately capitalized,” the Bank must maintain total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 8.00%, 6.00%, 4.50% and 4.00%, respectively. The Bank’s total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios as of September 30, 2022 were 16.75%, 15.58%, 15.58% and 8.70%, respectively.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

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

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 as amended (the “Act”) was carried out as of September 30, 2022 under the supervision and with the participation of Bank of South Carolina Corporation’s management, including its President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President and several other members of the Company’s senior management. Based upon that evaluation, Bank of South Carolina Corporation’s management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President concluded that, as of September 30, 2022, the Company’s disclosure controls and procedures were effective in ensuring that the information the Company is required to disclose in the reports filed or submitted under the Act has been (i) accumulated and communicated to management (including the President/Chief Executive Officer and Chief Financial Officer/Executive Vice President) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

Part II. Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not required.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer
32.1	Certification pursuant to Section 1350 (1)
32.2	Certification pursuant to Section 1350 (1)
101.SCH	XBRL Taxonomy Extension Schema Document (2)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (2)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (2)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (2)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (2)
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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

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

Signatures

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

	Bank of South Carolina Corporation

November 4, 2022	By:	/s/ Fleetwood S. Hassell
		Fleetwood S. Hassell
		President/Chief Executive Officer

November 4, 2022	By:	/s/ Eugene H. Walpole, IV
		Eugene H. Walpole, IV
		Chief Financial Officer/Executive Vice President