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United
States
Securities and Exchange Commission
Washington, D.C. 20549
Form
(Mark One)
|
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
|
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number:
(Exact name of registrant issuer as specified in its charter)
|
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|
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification Number) |
(Address of principal executive offices)
(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 |
||
|
|
|
|
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.
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).
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 | ☐ | |
|
|
☒ | 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
☐
As of July 19, 2022, there were Common Shares outstanding.
Part I. Financial Information
Item 1. Financial Statements
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| (Unaudited) | (Audited) | |||||||
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ |
|
$ |
|
||||
| Interest-bearing deposits at the Federal Reserve |
|
|
||||||
| Investment securities available for sale |
|
|
||||||
| Mortgage loans to be sold |
|
|
||||||
| Loans |
|
|
||||||
| Less: Allowance for loan losses |
(
|
) |
(
|
) | ||||
| Net loans |
|
|
||||||
| Premises, equipment and leasehold improvements, net |
|
|
||||||
| Right of use asset |
|
|
||||||
| Accrued interest receivable |
|
|
||||||
| Other assets |
|
|
||||||
| Total assets | $ |
|
$ |
|
||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Non-interest bearing demand | $ |
|
$ |
|
||||
| Interest bearing demand |
|
|
||||||
| Money market accounts |
|
|
||||||
| Time deposits $250,000 and over |
|
|
||||||
| Other time deposits |
|
|
||||||
| Other savings deposits |
|
|
||||||
| Total deposits |
|
|
||||||
| Accrued interest payable and other liabilities |
|
|
||||||
| Lease liability |
|
|
||||||
| Total liabilities |
|
|
||||||
| Shareholders’ equity | ||||||||
| Common stock - par shares authorized; Issued shares at June 30, 2022 and shares at December 31, 2021. Shares outstanding and at June 30, 2022 and December 31, 2021, respectively. | ||||||||
| Additional paid in capital |
|
|
||||||
| Retained earnings |
|
|
||||||
| Treasury stock: shares at June 30, 2022 and December 31, 2021 |
(
|
) |
(
|
) | ||||
| Accumulated other comprehensive loss, net of income taxes |
(
|
) |
(
|
) | ||||
| Total shareholders’ equity |
|
|
||||||
| Total liabilities and shareholders’ equity | $ |
|
$ |
|
||||
See accompanying notes to consolidated financial statements.
3
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Interest and fee income | ||||||||
| Loans, including fees | $ |
|
$ |
|
||||
| Taxable securities |
|
|
||||||
| Tax-exempt securities |
|
|
||||||
| Other |
|
|
||||||
| Total interest and fee income |
|
|
||||||
| Interest expense | ||||||||
| Deposits |
|
|
||||||
| Total interest expense |
|
|
||||||
| Net interest income |
|
|
||||||
| Provision for loan losses | ||||||||
| Net interest income after provision for loan losses |
|
|
||||||
| Other income | ||||||||
| Service charges and fees |
|
|
||||||
| Mortgage banking income |
|
|
||||||
| Other non-interest income |
|
|
||||||
| Total other income |
|
|
||||||
| Other expense | ||||||||
| Salaries and employee benefits |
|
|
||||||
| Net occupancy expense |
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|
||||||
| Other operating expenses |
|
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||||||
| Professional fees |
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||||||
| Data processing fees |
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||||||
| Total other expense |
|
|
||||||
| Income before income tax expense |
|
|
||||||
| Income tax expense |
|
|
||||||
| Net income | $ |
|
$ |
|
||||
| Weighted average shares outstanding | ||||||||
| Basic |
|
|
||||||
| Diluted |
|
|
||||||
| Basic income per common share | $ |
|
$ |
|
||||
| Diluted income per common share | $ |
|
$ |
|
||||
See accompanying notes to consolidated financial statements.
4
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Interest and fee income | ||||||||
| Loans, including fees | $ |
|
$ |
|
||||
| Taxable securities |
|
|
||||||
| Tax-exempt securities |
|
|
||||||
| Other |
|
|
||||||
| Total interest and fee income |
|
|
||||||
| Interest expense | ||||||||
| Deposits |
|
|
||||||
| Total interest expense |
|
|
||||||
| Net interest income |
|
|
||||||
| Provision for loan losses |
(
|
) |
|
|||||
| Net interest income after provision for loan losses |
|
|
||||||
| Other income | ||||||||
| Service charges and fees |
|
|
||||||
| Mortgage banking income |
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|
||||||
| Gain on sales of securities |
|
|||||||
| Other non-interest income |
|
|
||||||
| Total other income |
|
|
||||||
| Other expense | ||||||||
| Salaries and employee benefits |
|
|
||||||
| Net occupancy expense |
|
|
||||||
| Other operating expenses |
|
|
||||||
| Professional fees |
|
|
||||||
| Data processing fees |
|
|
||||||
| Total other expense |
|
|
||||||
| Income before income tax expense |
|
|
||||||
| Income tax expense |
|
|
||||||
| Net income | $ |
|
$ |
|
||||
| Weighted average shares outstanding | ||||||||
| Basic |
|
|
||||||
| Diluted |
|
|
||||||
| Basic income per common share | $ |
|
$ |
|
||||
| Diluted income per common share | $ |
|
$ |
|
||||
See accompanying notes to consolidated financial statements.
5
BANK OF SOUTH CAROLINA CORPORATION AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net income | $ |
|
$ |
|
||||
| Other comprehensive (loss) income | ||||||||
| Unrealized (loss) gain on securities arising during the period |
(
|
) |
|
|||||
| Other comprehensive (loss) income before tax |
(
|
) |
|
|||||
| Income tax effect related to items of other comprehensive (loss) income before tax |
|
(
|
) | |||||
| Other comprehensive (loss) income after tax |
(
|
) |
|
|||||
| Total comprehensive (loss) income | $ |
(
|
) | $ |
|
|||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net income | $ |
|
$ |
|
||||
| Other comprehensive loss | ||||||||
| Unrealized loss on securities arising during the period |
(
|
) |
(
|
) | ||||
| Reclassification adjustment for securities gains realized in net income |
(
|
) |
|
|||||
| Other comprehensive loss before tax |
(
|
) |
(
|
) | ||||
| Income tax effect related to items of other comprehensive loss before tax |
|
|
||||||
| Other comprehensive loss after tax |
(
|
) |
(
|
) | ||||
| Total comprehensive (loss) income | $ |
(
|
) | $ |
|
|||
See accompanying notes to consolidated financial statements.
6
BANK OF SOUTH CAROLINA CORPORATION AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30
, 2022
AND 2021 (UNAUDITED)
| Shares Outstanding | Additional Paid in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||
| December 31, 2021 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||
| Net income | — |
|
|
|||||||||||||||||||||
| Other comprehensive loss | — |
(
|
) |
(
|
) | |||||||||||||||||||
| Stock option exercises, net of surrenders |
|
|
|
|||||||||||||||||||||
| Stock-based compensation expense | — |
|
|
|||||||||||||||||||||
| Cash dividends ($ per common share) | — |
(
|
) |
(
|
) | |||||||||||||||||||
| March 31, 2022 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||
| Net income | — |
|
|
|||||||||||||||||||||
| Other comprehensive loss | — |
(
|
) |
(
|
) | |||||||||||||||||||
| Stock option exercises, net of surrenders |
|
|
|
|||||||||||||||||||||
| Stock-based compensation expense | — |
|
|
|||||||||||||||||||||
| Cash dividends ($ per common share) | — |
(
|
) |
(
|
) | |||||||||||||||||||
| June 30, 2022 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||
| Shares Outstanding | Additional Paid in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||
| December 31, 2020 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
|
||||||||||||
| Net income | — |
|
|
|||||||||||||||||||||
| Other comprehensive loss | — |
(
|
) |
(
|
) | |||||||||||||||||||
| Stock option exercises, net of surrenders |
|
|
(
|
) |
|
|||||||||||||||||||
| Stock-based compensation expense | — |
|
|
|||||||||||||||||||||
| Cash dividends ($ per common share) | — |
(
|
) |
(
|
) | |||||||||||||||||||
| March 31, 2021 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||
| Net income | — |
|
|
|||||||||||||||||||||
| Other comprehensive loss | — |
|
|
|||||||||||||||||||||
| Stock option exercises, net of surrenders |
|
|
(
|
) |
|
|||||||||||||||||||
| Stock-based compensation expense | — |
|
|
|||||||||||||||||||||
| Cash dividends ($ per common share) | — |
(
|
) |
(
|
) | |||||||||||||||||||
| June 30, 2021 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||
See accompanying notes to consolidated financial statements.
7
BANK OF SOUTH CAROLINA CORPORATION AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ |
|
$ |
|
||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation expense |
|
|
||||||
| Gain on sale of investment securities |
(
|
) | ||||||
| Provision for loan losses |
(
|
) |
|
|||||
| Stock-based compensation expense |
|
|
||||||
| Deferred income taxes and other assets |
(
|
) |
(
|
) | ||||
| Net amortization of unearned discounts on investment securities available for sale |
|
|
||||||
| Origination of mortgage loans held for sale |
(
|
) |
(
|
) | ||||
| Proceeds from sale of mortgage loans held for sale |
|
|
||||||
| (Increase) decrease in accrued interest receivable |
(
|
) |
|
|||||
| Increase (decrease) in accrued interest payable and other liabilities |
|
(
|
) | |||||
| Net cash provided by operating activities |
|
|
||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from calls and maturities of investment securities available for sale |
|
|
||||||
| Proceeds from sale of investment securities available for sale |
|
|||||||
| Purchase of investment securities available for sale |
(
|
) |
(
|
) | ||||
| Net (increase) decrease in loans |
(
|
) |
|
|||||
| Purchase of premises, equipment, and leasehold improvements, net |
(
|
) |
(
|
) | ||||
| Net cash used in investing activities |
(
|
) |
(
|
) | ||||
| Cash flows from financing activities: | ||||||||
| Net (decrease) increase in deposit accounts |
(
|
) |
|
|||||
| Dividends paid |
(
|
) |
(
|
) | ||||
| Stock options exercised, net of surrenders |
|
|
||||||
| Net cash (used in) provided by financing activities |
(
|
) |
|
|||||
| Net (decrease) increase in cash and cash equivalents |
(
|
) |
|
|||||
| Cash and cash equivalents at the beginning of the period |
|
|
||||||
| Cash and cash equivalents at the end of the period | $ |
|
$ |
|
||||
| Supplemental disclosure of cash flow data: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ |
|
$ |
|
||||
| Income taxes, net | $ |
|
$ |
|
||||
| Supplemental disclosures for non-cash investing and financing activity: | ||||||||
| Change in unrealized gain on securities available for sale, net of income taxes | $ |
|
$ |
|
||||
| Change in dividends payable | $ |
|
$ |
|
||||
| Change in right of use assets and lease liabilities | $ |
(
|
) | $ |
(
|
) | ||
See accompanying notes to consolidated financial statements.
8
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.
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.
9
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:
| June 30, 2022 | ||||||||||||||||
|
Amortized
Cost |
Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| U.S. Treasury Notes | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| Government-Sponsored Enterprises |
|
(
|
) |
|
||||||||||||
| Municipal Securities |
|
|
(
|
) |
|
|||||||||||
| Total | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| December 31, 2021 | ||||||||||||||||
|
Amortized
Cost |
Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| U.S. Treasury Notes | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| Government-Sponsored Enterprises |
|
|
(
|
) |
|
|||||||||||
| Municipal Securities |
|
|
(
|
) |
|
|||||||||||
| Total | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
10
The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2022 and December 31, 2021, by contractual maturity are in the following table.
| June 30, 2022 | December 31, 2021 | |||||||||||||||
|
Amortized
Cost |
Estimated Fair Value |
Amortized
Cost |
Estimated Fair Value | |||||||||||||
| Due in one year or less | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Due in one year to five years |
|
|
|
|
||||||||||||
| Due in five years to ten years |
|
|
|
|
||||||||||||
| Due in ten years and over |
|
|
|
|
||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
Securities pledged to secure deposits at
June 30, 2022 and December 31, 2021, had a fair value of $
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 June 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.
| June 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 |
|
$ |
|
$ |
(
|
) |
|
$ |
|
$ |
(
|
) |
|
$ |
|
$ |
(
|
) | ||||||||||||||||||
| Government-Sponsored Enterprises |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) | ||||||||||||||||||||||||
| Municipal Securities |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) | ||||||||||||||||||||||||
| Total |
|
$ |
|
$ |
(
|
) |
|
$ |
|
$ |
(
|
) |
|
$ |
|
$ |
(
|
) | ||||||||||||||||||
| 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 |
|
$ |
|
$ |
(
|
) | $ | $ |
|
$ |
|
$ |
(
|
) | ||||||||||||||||||||||
| Government-Sponsored Enterprises |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) | ||||||||||||||||||||||||
| Municipal Securities |
|
|
(
|
) |
|
|
(
|
) | ||||||||||||||||||||||||||||
| Total |
|
$ |
|
$ |
(
|
) |
|
$ |
|
$ |
(
|
) |
|
$ |
|
$ |
(
|
) | ||||||||||||||||||
The tables below show the proceeds from sales of securities available for sale and gross realized gains and losses.
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Gross proceeds | $ | $ | ||||||
| Gross realized gains | ||||||||
| Gross realized losses | ||||||||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Gross proceeds | $ |
|
$ | |||||
| Gross realized gains |
|
|||||||
| Gross realized losses | ||||||||
11
There was a tax provision of $
Note 3: Loans and Allowance for Loan Losses
Major
classifications of loans
(net of deferred loan fees of $
| June 30, 2022 | December 31, 2021 | |||||||
| Commercial | $ |
|
$ |
|
||||
| Commercial real estate: | ||||||||
| Construction |
|
|
||||||
| Other |
|
|
||||||
| Consumer: | ||||||||
| Real estate |
|
|
||||||
| Other |
|
|
||||||
| Paycheck Protection Program |
|
|
||||||
|
|
|
|||||||
| Allowance for loan losses |
(
|
) |
(
|
) | ||||
| Loans, net | $ |
|
$ |
|
||||
We had $
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 $
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
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. |
12
| ● | 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 June 30, 2022 and December 31, 2021. “Pass” includes loans internally graded as excellent, good and satisfactory.
| June 30, 2022 | |||||||||||||||||||||||||||||
| Commercial |
Commercial
Real Estate Construction |
Commercial
Real Estate Other |
Consumer
Real Estate |
Consumer
Other |
Paycheck
Protection Program |
Total | |||||||||||||||||||||||
| Pass | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Watch |
|
|
|
|
|
— |
|
||||||||||||||||||||||
| OAEM |
|
— |
|
|
|
— |
|
||||||||||||||||||||||
| Substandard |
|
— |
|
|
|
— |
|
||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Commercial |
Commercial
Real Estate Construction |
Commercial
Real Estate Other |
Consumer
Real Estate |
Consumer
Other |
Paycheck
Protection Program |
Total | |||||||||||||||||||||||
| Pass | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Watch |
|
|
|
|
|
— |
|
||||||||||||||||||||||
| OAEM |
|
— |
|
|
|
— |
|
||||||||||||||||||||||
| Substandard |
|
— |
|
|
|
— |
|
||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The following tables include an aging analysis of the recorded investment in loans segregated by class.
| June 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 | $ | — | $ | — | $ |
|
$ |
|
$ |
|
$ |
|
$ | — | ||||||||||||||
| Commercial Real Estate Construction | — | — | — | — |
|
|
— | |||||||||||||||||||||
| Commercial Real Estate Other |
|
|
|
|
|
|
— | |||||||||||||||||||||
| Consumer Real Estate | — | — | — | — |
|
|
— | |||||||||||||||||||||
| Consumer Other |
|
— | — |
|
|
|
— | |||||||||||||||||||||
| Paycheck Protection Program | — | — | — | — |
|
|
— | |||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | — | ||||||||||||||
13
| 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 | $ |
|
$ | — | $ | — | $ |
|
$ |
|
$ |
|
$ | — | ||||||||||||||
| Commercial Real Estate Construction | — | — | — | — |
|
|
— | |||||||||||||||||||||
| Commercial Real Estate Other |
|
|
|
|
|
|
— | |||||||||||||||||||||
| Consumer Real Estate | — | — | — | — |
|
|
— | |||||||||||||||||||||
| Consumer Other |
|
— | — |
|
|
|
— | |||||||||||||||||||||
| Paycheck Protection Program | — | — | — | — |
|
|
— | |||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | — | ||||||||||||||
There were no loans over 90 days past due and still accruing as of June 30, 2022 and December 31, 2021.
The following table summarizes the balances of non-accrual loans:
| June 30, 2022 | December 31, 2021 | |||||||
| Commercial | $ |
|
$ |
|
||||
| Commercial Real Estate Construction | — | — | ||||||
| Commercial Real Estate Other |
|
|
||||||
| Consumer Real Estate | — | — | ||||||
| Consumer Other |
|
|
||||||
| Paycheck Protection Program | — | — | ||||||
| Total | $ |
|
$ |
|
||||
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 six months ended June 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 June 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 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
| Charge-offs | ||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|||||||||||||||||||||||||
| Provisions |
|
|
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
| Six Months Ended June 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 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
| Charge-offs |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Recoveries |
|
|
|
|||||||||||||||||||||||||
| Provisions |
|
|
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
14
| Three Months Ended June 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 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
| Charge-offs |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Recoveries |
|
|
|
|||||||||||||||||||||||||
| Provisions |
(
|
) |
|
|
(
|
) |
(
|
) |
|
|||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
| Six Months Ended June 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 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
| Charge-offs |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Recoveries |
|
|
|
|||||||||||||||||||||||||
| Provisions |
(
|
) |
(
|
) |
|
|
(
|
) |
|
|
||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
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.
| June 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 | $ |
|
$ | $ | $ | $ |
|
$ | $ |
|
||||||||||||||||||
| Collectively evaluated for impairment |
|
|
|
|
|
|
||||||||||||||||||||||
| Total Allowance for Loan Losses | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
| Loans Receivable | ||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ |
|
$ | $ |
|
$ |
|
$ |
|
$ | $ |
|
||||||||||||||||
| Collectively evaluated for impairment |
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Loans Receivable | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||
| 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 | $ |
|
$ | $ | $ | $ |
|
$ | $ |
|
||||||||||||||||||
| Collectively evaluated for impairment |
|
|
|
|
|
|
||||||||||||||||||||||
| Total Allowance for Loan Losses | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||||
| Loans Receivable | ||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ |
|
$ | $ |
|
$ |
|
$ |
|
$ | $ |
|
||||||||||||||||
| Collectively evaluated for impairment |
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Loans Receivable | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||
As of June 30, 2022 and December 31, 2021, loans individually evaluated and considered impaired are presented in the following table.
| Impaired Loans as of | ||||||||||||||||||||||||
| June 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 | $ |
|
$ |
|
$ | — | $ |
|
$ |
|
$ | — | ||||||||||||
| Commercial Real Estate Construction | — | — | — | — | — | — | ||||||||||||||||||
| Commercial Real Estate Other |
|
|
— |
|
|
— | ||||||||||||||||||
| Consumer Real Estate |
|
|
— |
|
|
— | ||||||||||||||||||
| Consumer Other | — | — | — | — | — | — | ||||||||||||||||||
| Paycheck Protection Program | — | — | — | — | — | — | ||||||||||||||||||
| Total |
|
|
— |
|
|
— | ||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||
| Commercial |
|
|
|
|
|
|
||||||||||||||||||
| Commercial Real Estate Construction | — | — | — | — | — | — | ||||||||||||||||||
| Commercial Real Estate Other | — | — | — | — | — | — | ||||||||||||||||||
| Consumer Real Estate | — | — | — | — | — | — | ||||||||||||||||||
| Consumer Other |
|
|
|
|
|
|
||||||||||||||||||
| Paycheck Protection Program | — | — | — | — | — | — | ||||||||||||||||||
| Total |
|
|
|
|
|
|
||||||||||||||||||
| Commercial |
|
|
|
|
|
|
||||||||||||||||||
| Commercial Real Estate Construction | — | — | — | — | — | — | ||||||||||||||||||
| Commercial Real Estate Other |
|
|
— |
|
|
— | ||||||||||||||||||
| Consumer Real Estate |
|
|
— |
|
|
— | ||||||||||||||||||
| Consumer Other |
|
|
|
|
|
|
||||||||||||||||||
| Paycheck Protection Program | — | — | — | — | — | — | ||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
15
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 June 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Commercial Real Estate Construction | — | — | — | — | ||||||||||||
| Commercial Real Estate Other |
|
|
|
|
||||||||||||
| Consumer Real Estate |
|
|
|
|
||||||||||||
| Consumer Other | — | — | — | — | ||||||||||||
| Paycheck Protection Program | — | — | — | — | ||||||||||||
|
|
|
|
|
|||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial |
|
|
|
|
||||||||||||
| Commercial Real Estate Construction | — | — | — | — | ||||||||||||
| Commercial Real Estate Other | — | — | — | — | ||||||||||||
| Consumer Real Estate | — | — | — | — | ||||||||||||
| Consumer Other |
|
|
|
|
||||||||||||
| Paycheck Protection Program | — | — | — | — | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total | ||||||||||||||||
| Commercial |
|
|
|
|
||||||||||||
| Commercial Real Estate Construction | — | — | — | — | ||||||||||||
| Commercial Real Estate Other |
|
|
|
|
||||||||||||
| Consumer Real Estate |
|
|
|
|
||||||||||||
| Consumer Other |
|
|
|
|
||||||||||||
| Paycheck Protection Program | — | — | — | — | ||||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
|||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Commercial Real Estate - Construction | — | — | — | — | ||||||||||||
| Commercial Real Estate - Other |
|
|
|
|
||||||||||||
| Consumer Real Estate |
|
|
|
|
||||||||||||
| Consumer Other | — | — | — | — | ||||||||||||
| Paycheck Protection Program | — | — | — | — | ||||||||||||
|
|
|
|
|
|||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial |
|
|
|
|
||||||||||||
| Commercial Real Estate - Construction | — | — | — | — | ||||||||||||
| Commercial Real Estate - Other | — | — | — | — | ||||||||||||
| Consumer Real Estate | — | — | — | — | ||||||||||||
| Consumer Other |
|
|
|
|
||||||||||||
| Paycheck Protection Program | — | — | — | — | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total | ||||||||||||||||
| Commercial |
|
|
|
|
||||||||||||
| Commercial Real Estate - Construction | — | — | — | — | ||||||||||||
| Commercial Real Estate - Other |
|
|
|
|
||||||||||||
| Consumer Real Estate |
|
|
|
|
||||||||||||
| Consumer Other |
|
|
|
|
||||||||||||
| Paycheck Protection Program | — | — | — | — | ||||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
|||||||||
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 June 30, 2022 and December
31, 2021, there were
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 $
16
Note 4: Leases
As of June 30, 2022 and December 31, 2021,
the Company had operating right of use (“ROU”) assets of $
million and $
million, respectively, and had operating
lease liabilities of $
million and $
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
As of June 30, 2022, the weighted average
remaining lease term was
The table below shows lease expense components for the three months ended June 30, 2022 and 2021.
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating lease expense | $ |
|
$ |
|
||||
| Short-term lease expense | ||||||||
| Total lease expense | $ |
|
$ |
|
||||
The table below shows lease expense components for the six months ended June 30, 2022 and 2021.
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating lease expense | $ |
|
$ |
|
||||
| Short-term lease expense | ||||||||
| Total lease expense | $ |
|
$ |
|
||||
Total rental expense was $
As of June 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 June 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 judgements regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value also would also significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
17
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.
18
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 June 30, 2022 and December 31, 2021.
The following table presents information about assets measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021:
| June 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| U.S. Treasury Notes | $ |
|
$ | — | $ | — | $ |
|
||||||||
| Government-Sponsored Enterprises | — |
|
— |
|
||||||||||||
| Municipal Securities | — |
|
|
|
||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| U.S. Treasury Notes | $ |
|
$ | — | $ | — | $ |
|
||||||||
| Government-Sponsored Enterprises | — |
|
— |
|
||||||||||||
| Municipal Securities | — |
|
|
|
||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
There were no liabilities recorded at fair value on a recurring basis as of June 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 six months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Beginning balance | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Total gains or (losses) (realized/unrealized) | ||||||||||||||||
| Included in other comprehensive income |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Purchases, issuances, and settlements net of maturities |
|
|
|
|
||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
There were no transfers between fair value levels during the three and six months ended June 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.
19
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 June 30, 2022 and December 31, 2021:
| June 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Impaired loans | $ | $ | $ |
|
$ |
|
||||||||||
| Mortgage loans to be sold |
|
|
||||||||||||||
| Total | $ | $ |
|
$ |
|
$ |
|
|||||||||
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Impaired loans | $ | $ | $ |
|
$ |
|
||||||||||
| Mortgage loans to be sold |
|
|
||||||||||||||
| Total | $ | $ |
|
$ |
|
$ |
|
|||||||||
There were no liabilities measured at fair value on a nonrecurring basis as of June 30, 2022 or December 31, 2021.
The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at June 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
|
|||
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.
20
The following paragraphs describe the methods and assumptions we use in estimating the fair values of financial instruments:
| a. | Cash and due from banks, interest-bearing deposits at the Federal Reserve Bank |
The carrying value approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.
| b. | Investment securities available for sale |
Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.
| c. | Loans |
The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. Additionally, in accordance with ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities , this consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio.
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated based on the fair value of the underlying collateral. Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value.
| d. | Deposits |
The estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is estimated by discounting contractual cash flows, using interest rates currently being offered on the deposit products. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities as compared to the cost of alternative forms of funding (deposit base intangibles).
| e. | Accrued interest receivable and payable |
Since these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are deemed to be a reasonable estimate of fair value.
| f. | Loan commitments |
Estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
21
The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of June 30, 2022 and December 31, 2021, respectively.
| June 30, 2022 | ||||||||||||||||||||
| Estimated Fair Value | ||||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and due from banks | $ |
|
$ |
|
$ | $ | $ |
|
||||||||||||
| Interest-bearing deposits at the Federal Reserve |
|
|
|
|||||||||||||||||
| Investment securities available for sale |
|
|
|
|
|
|||||||||||||||
| Mortgage loans to be sold |
|
|
|
|||||||||||||||||
| Loans, net |
|
|
|
|||||||||||||||||
| Accrued interest receivable |
|
|
|
|||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Demand deposits |
|
|
|
|||||||||||||||||
| Time deposits |
|
|
|
|||||||||||||||||
| Accrued interest payable |
|
|
|
|||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Estimated Fair Value | ||||||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and due from banks | $ |
|
$ |
|
$ | $ | $ |
|
||||||||||||
| Interest-bearing deposits at the Federal Reserve |
|
|
|
|||||||||||||||||
| Investment securities available for sale |
|
|
|
|
|
|||||||||||||||
| Mortgage loans to be sold |
|
|
|
|||||||||||||||||
| Loans, net |
|
|
|
|||||||||||||||||
| Accrued interest receivable |
|
|
|
|||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Demand deposits |
|
|
|
|||||||||||||||||
| Time deposits |
|
|
|
|||||||||||||||||
| Accrued interest payable |
|
|
|
|||||||||||||||||
| 2022 | 2021 | |||||||
| Net income | $ |
|
$ |
|
||||
| Weighted average shares outstanding |
|
|
||||||
| Effect of dilutive shares |
|
|
||||||
| Weighted average shares outstanding - diluted |
|
|
||||||
| Earnings per share - basic | $ |
|
$ |
|
||||
| Earnings per share - diluted | $ |
|
$ |
|
||||
22
The following table is a summary of the reconciliation of weighted average shares outstanding for the six months ended June 30:
| 2022 | 2021 | |||||||
| Net income | $ |
|
$ |
|
||||
| Weighted average shares outstanding |
|
|
||||||
| Effect of dilutive shares |
|
|
||||||
| Weighted average shares outstanding - diluted |
|
|
||||||
| Earnings per share - basic | $ |
|
$ |
|
||||
| Earnings per share - diluted | $ |
|
$ |
|
||||
23
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 |
24
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 $655.5 million in assets as of June 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 June 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.
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 June 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 69.6% or $97.5 million to $42.6 million as of June 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.
25
As of June 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 $270.7 million and an amortized cost of $290.7 million for a net unrealized loss of approximately $20.0 million. As of June 30, 2022 and December 31, 2021, our investment securities portfolio represented approximately 41.30% and 31.26% of our total assets, respectively. The average yield on our investment securities was 1.11% and 1.02% at June 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 $9.9 million, or 3.3%, to $312.2 million as of June 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 $257,281 and $488,481 at June 30, 2022 and December 31, 2021, respectively) and the corresponding percentage of total loans as of the dates indicated.
| June 30, 2022 | December 31, 2021 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| Commercial | $ | 50,891,563 | 16.08 | % | $ | 45,804,434 | 14.94 | % | ||||||||
| Commercial Real Estate Construction | 17,169,667 | 5.42 | % | 12,054,095 | 3.93 | % | ||||||||||
| Commercial Real Estate Other | 166,328,808 | 52.55 | % | 165,719,078 | 54.04 | % | ||||||||||
| Consumer Real Estate | 77,626,604 | 24.52 | % | 71,307,488 | 23.26 | % | ||||||||||
| Consumer Other | 3,630,394 | 1.15 | % | 3,768,531 | 1.23 | % | ||||||||||
| Payroll Protection Program | 888,712 | 0.28 | % | 7,978,603 | 2.60 | % | ||||||||||
| Total loans | 316,535,748 | 100.00 | % | 306,632,229 | 100.00 | % | ||||||||||
| Allowance for loan losses | (4,306,865 | ) | (4,376,987 | ) | ||||||||||||
| Total loans, net | $ | 312,228,883 | $ | 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 June 30, 2022, there were no loans 90 days past due still accruing interest.
The following table is a summary of our Nonperforming Assets:
| June 30, 2022 | December 31, 2021 | |||||||
| Commercial | $ | 68,104 | $ | 178,975 | ||||
| Commercial Real Estate Other | 616,858 | 625,953 | ||||||
| Consumer Real Estate | — | — | ||||||
| Consumer Other | 8,351 | 9,686 | ||||||
| Total nonaccruing loans | 693,313 | 814,614 | ||||||
| Total nonperforming assets | $ | 693,313 | $ | 814,614 | ||||
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Allowance for Loan Losses
The allowance for loan losses was $4.3 million as of June 30, 2022 and $4.4 million as of December 31, 2021, or 1.36% 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 June 30, 2022 and December 31, 2021, the allowance for loan losses represented 621.2% 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 June 30, 2022 is adequate.
At June 30, 2022, impaired loans totaled $2.9 million, of which $0.3 million of these loans had a reserve of approximately $0.3 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 June 30, 2022, we recorded no charge-offs and $2,363 of recoveries on loans previously charged-off. During the six months ended June 30, 2022, we recorded $2,045 in charge-offs and $6,923 of recoveries on loans previously charged-off, for net recoveries of $4,878.
Deposits
Deposits remain our primary source of funding for loans and investments. Average interest-bearing deposits provided funding for 54.97% of average earning assets for the six months ended June 30, 2022, and 56.77% for the six months ended June 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:
| June 30, 2022 | December 31, 2021 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| Deposits | ||||||||||||||||
| Non-interest bearing demand | $ | 241,473,757 | 40.40 | % | $ | 255,783,644 | 41.98 | % | ||||||||
| Interest bearing demand | 169,106,826 | 28.29 | % | 165,335,038 | 27.14 | % | ||||||||||
| Money market accounts | 102,506,579 | 17.15 | % | 98,113,942 | 16.11 | % | ||||||||||
| Time deposits $250,000 and over | 5,150,841 | 0.82 | % | 7,417,864 | 1.22 | % | ||||||||||
| Other time deposits | 12,861,837 | 2.19 | % | 13,870,356 | 2.28 | % | ||||||||||
| Other savings deposits | 66,690,321 | 11.15 | % | 68,670,732 | 11.27 | % | ||||||||||
| Total deposits | $ | 597,790,161 | 100.00 | % | $ | 609,191,576 | 100.00 | % | ||||||||
Deposits decreased 1.87% or $11.4 million from December 31, 2021 to June 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 June 30, 2022 and December 31, 2021, deposits with an aggregate deficit balance of $9,917 and $28,549, respectively, were re-classified as other loans.
Comparison of Three Months Ended June 30, 2022 to Three Months Ended June 30, 2021
Net income decreased $0.1 million or 7.53% to $1.5 million, or basic and diluted earnings per share of $0.28 and $0.27, respectively, for the three months ended June 30, 2022, from $1.7 million, or basic and diluted earnings per share of $0.30 and $0.29, respectively, for the three months ended June 30, 2021. Our annualized returns on average assets and average equity for the three months ended June 30, 2022 were 0.93% and 11.24%, respectively, compared with 1.17% and 12.34%, respectively, for the three months ended June 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 $0.2 million or 5.18% to $4.5 million for the three months ended June 30, 2022 from $4.3 million for the three months ended June 30, 2021. Average loans decreased $12.7 million or 3.8% to $320.1 million for the three months ended June 30, 2022, compared to $332.8 million for the three months ended June 30, 2021. The yield on average loans (including fees) was 5.07% and 5.23% for the three months ended June 30, 2022 and June 30, 2021, respectively. Interest income on loans decreased $0.1 million for the three months ended June 30, 2022 to $3.7 million from $3.8 million for the three months ended June 30, 2021.
The average balance of interest bearing deposits at the Federal Reserve decreased $7.2 million or 11.91% to $53.7 million for the three months ended June 30, 2022 with a yield of 0.73% as compared to $60.9 million for the three months ended June 30, 2021, with a yield of 0.10%.
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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 June 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 $0.3 million or 37.3% to $0.6 million for the three months ended June 30, 2022, from $0.9 million for the three months ended June 30, 2021. This decrease was primarily due to a $0.4 million decrease in mortgage banking income.
Non-Interest Expense
Non-interest expense increased $0.1 million or 1.75% to $3.1 million for the three months ended June 30, 2022, from $3.0 million for the three months ended June 30, 2021. For the three months ended June 30, 2022, we experienced marginal increases in professional fees and other operating expenses.
Income Tax Expense
Income tax expense was $0.5 million for the three months ended June 30, 2022 as compared to $0.5 million during the same period in 2021. Our effective tax rate was 22.88% and 23.59% for the three months ended June 30, 2022 and 2021, respectively.
Comparison of Six Months Ended June 30, 2022 to Six Months Ended June 30, 2021
Net income decreased $0.5 million or 13.56% to $3.0 million, or basic and diluted earnings per share of $0.54 and $0.53 for the six months ended June 30, 2022, respectively, from $3.5 million, or basic and diluted earnings per share of $0.63 and $0.61, respectively, for the six months ended June 30, 2021. Our annualized returns on average assets and average equity for the six months ended June 30, 2022 were 0.91% and 12.68%, respectively, compared with 1.27% and 12.80%, respectively, for the six months ended June 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 decreased $0.1 million or 1.62% to $8.8 million for the six months ended June 30, 2022 from $8.9 million for the six months ended June 30, 2021. Average loans decreased $16.5 million or 4.98% to $315.3 million for the six months ended June 30, 2022, compared to $331.8 million for the six months ended June 30, 2021. The yield on average loans (including fees) was 5.03% and 5.36% for the six months ended June 30, 2022 and 2021, respectively. Interest income on loans decreased $0.6 million for the six months ended June 30, 2022 to $7.3 million from $7.9 million for the six months ended June 30, 2021.
The average balance of interest bearing deposits at the Federal Reserve increased $8.0 million or 14.73% to $62.2 million for the six months ended June 30, 2022, with a yield of 0.43% as compared to $54.2 million for the six months ended June 30, 2021, with a yield of 0.10%.
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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 six months ended June 30, 2022, we recorded a $75,000 reduction to the allowance for loan losses. We did not recognize a provision during the six months ended June 30, 2021. 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 $0.7 million or 34.9% to $1.2 million for the six months ended June 30, 2022, from $1.9 million for the six months ended June 30, 2021. This decrease was primarily due to a $0.8 million decrease in mortgage banking income, partially offset by $0.1 million of gain on sales of investment securities. The Bank sold $39.2 million of mortgage loans held for sale during the six months ended June 30, 2022 as compared with $102.2 million during the six months ended June 30, 2021.
Non-Interest Expense
Non-interest expense was $6.1 and $6.0 million for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 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.
Income Tax Expense
Income tax expense was $0.9 million for the six months ended June 30, 2022 as compared to $1.1 million during the same period in 2021. Our effective tax rate was 23.13% and 23.71% for the six months ended June 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 $137.9 million and $117.5 million at June 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 June 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 $4.1 million and $2.8 million at June 30, 2022 and December 31, 2021, respectively. The fair value of these commitments was not significant at June 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 $21.9 million at June 30, 2022. There were two loans repurchased during the six months ended June 30, 2022 and no loans repurchased during the six months ended June 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.
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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 48.43% and 52.30% of total assets at June 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 June 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 June 30, 2022, we could borrow up to $68.1 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 June 30, 2022 and December 31, 2021, our liquidity ratio was 50.84% 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 as of June 30, 2022 was $41.6 million. The rate of asset growth since our inception has not negatively impacted this capital base.
On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for 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 Bank adopted the community bank leverage ratio (“CBLR”) framework, a simplified measure of capital adequacy for qualifying community banking organizations, as of March 31, 2020 and upon adoption is no longer subject to other capital and leverage requirements. To be considered well capitalized, the required CBLR was 8.5% for the year ended December 31, 2021 and will be 9.0% thereafter. Additionally, the qualifying community banking institution must be a non-advanced approaches FDIC supervised institution. If an electing bank later does not meet any of the eligibility criteria, it would have a two-quarter “grace” period to return to CBLR compliance or revert to the generally applicable rule. If an electing bank’s leverage ratio falls below 9.0%, the bank would be deemed well capitalized during the grace period as long as the bank’s leverage ratio remains above 8.0%. If an electing bank’s leverage ratio falls to 8.0% or less, it would be required to revert immediately to the generally applicable rule. As of December 31, 2021, the Bank’s CBLR of 8.66% was above the required CBLR of 8.5% to be categorized as “well capitalized.” As of June 30, 2022, the Bank’s CBLR was 8.48%, which was above the required 8.0% during the two-quarter grace period.
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 June 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 June 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.
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There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 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
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| 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.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Bank of South Carolina Corporation | ||
| August 5, 2022 | By: | /s/ Fleetwood S. Hassell |
| Fleetwood S. Hassell | ||
| President/Chief Executive Officer | ||
| August 5, 2022 | By: | /s/ Eugene H. Walpole, IV |
| Eugene H. Walpole, IV | ||
| Chief Financial Officer/Executive Vice President | ||
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