10-Q 1 bksc-10q_033121.htm QUARTERLY REPORT

United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

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

Commission file number: 0-27702

Bank of South Carolina Corporation

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

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

256 Meeting Street, Charleston, SC 29401

(Address of principal executive offices)

(843) 724-1500

(Registrant’s telephone number)

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
(Do not check if a smaller reporting company)		Emerging growth company	☐

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

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

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock	BKSC	NASDAQ

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

Part I. Financial Information		Page

Item 1.	Financial Statements
Consolidated Balance Sheets – March 31, 2021 and December 31, 2020		3
Consolidated Statements of Income – Three months ended March 31, 2021 and 2020		4
Consolidated Statements of Comprehensive Income – Three months ended March 31, 2021 and 2020		5
Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2021 and 2020		6
Consolidated Statements of Cash Flows – Three months ended March 31, 2021 and 2020		7
Notes to Consolidated Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Off-Balance Sheet Arrangements		28
Liquidity		28
Capital Resources		29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

Part II. Other Information

Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosure	31
Item 5.	Other Information	31
Item 6.	Exhibits	31

Signatures		32
Certifications		33

Part I. Financial Information

Item 1. Financial Statements

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	(Unaudited)			(Audited)
	March 31,			December 31,
	2021			2020
ASSETS
Cash and due from banks	$	6,211,365		$	5,977,896
Interest-bearing deposits at the Federal Reserve		53,223,741			42,348,085
Investment securities available for sale		142,667,417			134,819,818
Mortgage loans to be sold		13,230,017			12,965,733
Loans		322,283,229			320,802,673
Less: Allowance for loan losses		(4,296,165	)		(4,185,694	)
Net loans		317,987,064			316,616,979
Premises, equipment and leasehold improvements, net		3,976,342			4,053,533
Right of use asset		12,605,156			12,730,151
Accrued interest receivable		1,375,181			1,595,629
Other assets		2,823,077			1,386,775

Total assets	$	554,099,360		$	532,494,599

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing demand	$	189,574,996		$	169,170,751
Interest bearing demand		143,753,923			140,602,723
Money market accounts		81,912,767			84,681,783
Time deposits over $250,000		5,046,943			4,493,189
Other time deposits		15,168,276			16,205,942
Other savings deposits		49,189,107			47,043,243
Total deposits		484,646,012			462,197,631

Accrued interest payable and other liabilities		3,839,142			2,586,461
Lease liability		12,605,156			12,730,151
Total liabilities		501,090,310			477,514,243

Shareholders' equity
Common stock - no par 12,000,000 shares authorized; Issued 5,823,533 shares at March 31, 2021 and 5,818,935 shares at December 31, 2020. Shares outstanding 5,524,616 and 5,520,469 at March 31, 2021 and December 31, 2020, respectively.		—			—
Additional paid in capital		47,467,455			47,404,869
Retained earnings		9,011,948			8,693,519
Treasury stock: 298,917 and 298,466 shares at March 31, 2021 and December 31, 2020, respectively.		(2,796,242	)		(2,787,898	)
Accumulated other comprehensive loss, net of income taxes		(674,111	)		1,669,866
Total shareholders' equity		53,009,050			54,980,356

Total liabilities and shareholders' equity	$	554,099,360		$	532,494,599

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended
	March 31,
	2021		2020
Interest and fee income
Loans, including fees	$	4,106,171	$	3,670,982
Taxable securities		453,457		363,439
Tax-exempt securities		69,606		124,625
Other		11,881		142,380
Total interest and fee income		4,641,115		4,301,426

Interest expense
Deposits		54,524		94,072
Total interest expense		54,524		94,072

Net interest income		4,586,591		4,207,354
Provision for loan losses		120,000		—
Net interest income after provision for loan losses		4,466,591		4,207,354

Other income
Service charges and fees		288,224		275,590
Mortgage banking income		645,895		346,083
Other non-interest income		5,795		5,958
Total other income		939,914		627,631

Other expense
Salaries and employee benefits		1,799,006		1,771,781
Net occupancy expense		612,268		525,307
Other operating expenses		280,416		239,173
Professional fees		176,591		160,876
Data processing fees		162,434		159,384
Total other expense		3,030,715		2,856,521

Income before income tax expense		2,375,790		1,978,464
Income tax expense		565,715		457,333

Net income	$	1,810,075	$	1,521,131

Weighted average shares outstanding
Basic		5,521,707		5,530,256
Diluted		5,685,151		5,585,622

Basic income per common share	$	0.33	$	0.28
Diluted income per common share	$	0.32	$	0.27

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

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

See accompanying notes to consolidated financial statements.

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

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

	Shares Outstanding		Additional Paid in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Total
December 31, 2019		5,530,001	$	47,131,034	$	5,879,409		$	(2,325,225	)	$	482,814	$	51,168,032
Net income		—		—		1,521,131			—			—		1,521,131
Other comprehensive income		—		—		—			—			601,016		601,016
Stock option exercises, net of surrenders		362		4,489		—			—			—		4,489
Stock-based compensation expense		—		16,418		—			—			—		16,418
Cash dividends ($0.16 per common share)		—		—		(884,859	)		—			—		(884,859	)
March 31, 2020		5,530,363	$	47,151,941	$	6,515,681		$	(2,325,225	)	$	1,083,830	$	52,426,227

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended
	March 31,
	2021			2020
Cash flows from operating activities:
Net income	$	1,810,075		$	1,521,131
Adjustments to reconcile net income net cash provided by operating activities:
Depreciation expense		106,414			104,638
Provision for loan losses		120,000			—
Stock-based compensation expense		22,997			16,418
Deferred income taxes and other assets		(813,220	)		(476,772	)
Net amortization of unearned discounts on investment securities available for sale		96,917			40,898
Origination of mortgage loans held for sale		(48,008,560	)		(23,150,204	)
Proceeds from sale of mortgage loans held for sale		47,744,276			22,859,558
Decrease in accrued interest receivable		220,448			76,188
Increase in accrued interest payable and other liabilities		699,515			377,465
Net cash provided by operating activities		1,998,862			1,369,320

Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale		4,817,000			8,754,000
Purchase of investment securities available for sale		(15,728,575	)		—
Net increase in loans		(1,490,085	)		(4,292,645	)
Purchase of premises, equipment, and leasehold improvements, net		(29,223	)		(78,537	)
Net cash (used in) provided by investing activities		(12,430,883	)		4,382,818

Cash flows from financing activities:
Net increase in deposit accounts		22,448,381			53,189,878
Dividends paid		(938,480	)		(884,800	)
Stock options exercised		31,245			4,489
Net cash provided by financing activities		21,541,146			52,309,567
Net increase in cash and cash equivalents		11,109,125			58,061,705
Cash and cash equivalents at the beginning of the period		48,325,981			49,094,419
Cash and cash equivalents at the end of the period	$	59,435,106		$	107,156,124

Supplemental disclosure of cash flow data:
Cash paid during the period for:
Interest	$	75,231		$	96,973
Income taxes	$	231,375		$	—

Supplemental disclosures for non-cash investing and financing activity:
Change in unrealized gain on securities available for sale, net of income taxes	$	2,343,977		$	(601,016	)
Change in dividends payable	$	553,166		$	59
Change in right of use assets and lease liabilities	$	(124,995	)	$	117,917

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NATURE OF BUSINESS AND BASIS OF PRESENTATION

Organization:

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

Principles of Consolidation:

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

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

Basis of Presentation:

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or (“GAAP”), for the interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2021. In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

Accounting Estimates and Assumptions:

The consolidated financial statements are prepared in conformity with GAAP, which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ significantly from these estimates and assumptions. Material estimates generally susceptible to significant change are related to the determination of the allowance for loan losses, impaired loans, other real estate owned, deferred tax assets, the fair value of financial instruments and other-than-temporary impairment of investment securities.

Reclassification:

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

Income per share:

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Dilutive income per share is computed by dividing net income by the weighted-average number of common shares and potential common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock. Retroactive recognition has been given for the effects of all stock dividends.

Subsequent Events:

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

Recent Accounting Pronouncements:

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

In June 2016, the FASB issued ASU 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to change the accounting for credit losses and modify the impairment model for certain debt securities. In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. In October 2019, the FASB voted to extend the implementation date for smaller reporting companies, non-SEC public companies, and private companies. On March 27, 2020, the Board of Governors of the Federal Reserve, FDIC, and Office of the Comptroller of Currency announced the interim final rule allowing banks to delay the effects of CECL until 2022 for filers scheduled to implement in 2020 and 2023 for all other filers. This amendment will become effective for the Company on January 1, 2023. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. It will be influenced by the quality, composition, and characteristics of our loan and investment portfolios, as well as the expected economic conditions and forecasts at the time of enactment and future reporting periods.

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

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

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

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

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

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

Investment Securities AVAILABLE FOR SALE

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

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

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

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

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

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

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2021 and December 31, 2020. We believe that all unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

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

	December 31, 2020
	Less Than 12 Months							12 Months or Longer						Total
	#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss		#		Fair Value		Gross Unrealized Loss
U.S. Treasury Notes		—	$	—	$	—			—	$	—	$	—		—	$	—	$	—
Government-Sponsored Enterprises		4		29,839,740		(160,260	)		—		—		—		4		29,839,740		(160,260	)
Municipal Securities		—		—		—			—		—		—		—		—		—

Total		4	$	29,839,740	$	(160,260	)		—	$	—	$	—		4	$	29,839,740	$	(160,260	)

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

LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

We had $91.0 million and $76.0 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2021 and at December 31, 2020, respectively.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions. Under the program, the Small Business Administration (“SBA”) will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for payroll and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and as long as the borrower submits its loan forgiveness application within ten months of completion of the covered period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. The Bank received a processing fee ranging from 1% to 5% based on the size of the loan from the SBA. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. The Bank received $1.4 million of processing fees related to the first round of PPP. The Bank recognized $0.6 million during the year ended December 31, 2020. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/ HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized additional funding under the CARES Act of $310.0 billion for PPP loans to be issued by financial institutions through the SBA. The Bank provided $37.8 million in funding to 266 customers through the PPP as of March 31, 2021. Because these loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) was enacted, which reauthorized lending under the PPP program through March 31, 2021, with an additional $325 billion. On March 31, 2021, the PPP Extension Act of 2021 was signed into law, which formally changed the PPP application deadline from March 31, 2021 to May 31, 2021. Under the Economic Aid Act, the SBA will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for payroll and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00% and a term of five years, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and as long as the borrower submits its loan forgiveness application within ten months of completion of the covered period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. The Bank will receive a processing fee based on the size of the loan from the SBA, and a tiered structure. For loans up to $50,000 in principal, the lender processing fee will be the lesser of 50% of the principal amount or $2,500. For loans between $50,000 and $350,000 in principal, the lender processing fee will be 5% of the principal amount. For loans $350,000 and above, the lender processing fee will be 3% of the principal amount. For loans of at least $2.0 million, the lender processing fee will be 1% of the principal amount. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. As of March 31, 2021, the Bank received 193 applications with a total loan amount of $16.1 million. Of those 193 applications, the SBA approved 184 applications in the aggregate amount of $15.7 million. The Bank funded 176 loans in the aggregate amount of $15.5 million. The Bank received $0.8 million of processing fees related to the second round of PPP. During the three months ended March 31, 2021, the Bank recognized $0.6 million in PPP processing fees for the first and second round of PPP.

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

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

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

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

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

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

●

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

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

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

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

The following tables illustrate credit quality by class and internally assigned grades at March 31, 2021 and December 31, 2020. “Pass” includes loans internally graded as excellent, good and satisfactory.

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

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

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

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

December 31, 2020
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment ≥ 90 Days and Accruing
Commercial	$	144,999	$	27,855	$	—	$	172,854	$	50,868,543	$	51,041,397	$	—
Commercial Real Estate Construction		—		—		—		—		14,813,726		14,813,726		—
Commercial Real Estate Other		61,597		—		923,828		985,425		145,202,461		146,187,886		—
Consumer Real Estate		—		—		40,893		40,893		71,795,148		71,836,041		—
Consumer Other		—		—		—		—		4,480,491		4,480,491		—
Paycheck Protection Program		—		—		—		—		32,443,132		32,443,132		—
Total	$	206,596	$	27,855	$	964,721	$	1,199,172	$	319,603,501	$	320,802,673	$	—

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

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

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

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by loan category for the three months ended March 31, 2021 and 2020. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.

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

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

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

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

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

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

	Impaired Loans as of
	March 31, 2021						December 31, 2020
		Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	1,511,021	$	1,511,021	$	—	$	1,721,818	$	1,721,818	$	—
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		5,479,899		5,479,899		—		4,831,757		4,831,757		—
Consumer Real Estate		249,758		249,758		—		249,850		249,850		—
Consumer Other		—		—		—		—		—		—
Paycheck Protection Program		—		—		—		—		—		—
Total		7,240,678		7,240,678		—		6,803,425		6,803,425		—

With an allowance recorded:
Commercial		467,594		467,594		338,237		576,302		576,302		357,657
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		—		—		—		343,084		343,084		36,747
Consumer Real Estate		—		—		—		40,893		40,893		9,111
Consumer Other		41,735		41,735		41,735		41,896		41,896		41,896
Paycheck Protection Program		—		—		—		—		—		—
Total		509,329		509,329		379,972		1,002,175		1,002,175		445,411


Commercial		1,978,615		1,978,615		338,237		2,298,120		2,298,120		357,657
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		5,479,899		5,479,899		—		5,174,841		5,174,841		36,747
Consumer Real Estate		249,758		249,758		—		290,743		290,743		9,111
Consumer Other		41,735		41,735		41,735		41,896		41,896		41,896
Paycheck Protection Program		—		—		—		—		—		—
Total	$	7,750,007	$	7,750,007	$	379,972	$	7,805,600	$	7,805,600	$	445,411

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

	Three Months Ended March 31,
	2021				2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,563,106	$	25,815	$	1,345,166	$	20,499
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		5,482,702		49,760		2,093,392		16,136
Consumer Real Estate		249,833		3,491		879,753		3,580
Consumer Other		—		—		—		—
Paycheck Protection Program		—		—		—		—
		7,295,641		79,066		4,318,311		40,215

With an allowance recorded:
Commercial		472,422		7,519		707,965		7,147
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		—		—		246,884		—
Consumer Real Estate		—		—		—		—
Consumer Other		41,848		672		49,758		783
Paycheck Protection Program		—		—		—		—
		514,270		8,191		1,004,607		7,930
Total
Commercial		2,035,528		33,334		2,053,131		27,646
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		5,482,702		49,760		2,340,276		16,136
Consumer Real Estate		249,833		3,491		879,753		3,580
Consumer Other		41,848		672		49,758		783
Paycheck Protection Program		—		—		—		—
	$	7,809,911	$	87,257	$	5,322,918	$	48,145

In general, the modification or restructuring of a loan is considered a troubled debt restructuring (“TDR”) if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of March 31, 2021, there were 12 TDRs with a balance of $5.3 million compared to 14 TDRs with a balance of $5.8 million as of December 31, 2020. These TDRs were granted extended payment terms with no principal reduction. The structure of two of the loans changed to interest only. All TDRs were performing as agreed as of March 31, 2021. No TDRs defaulted during the three months ended March 31, 2021 and 2020, which were modified within the previous twelve months.

Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. The Bank processed approximately $0.7 million in principal deferments to 84 loans, with an aggregate loan balance of $25.9 million, during the year ended December 31, 2020. The principal deferments represent 0.24% of our total loan portfolio as of December 31, 2020. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 8 loans, with an aggregate loan balance of $3.9 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. As of March 31, 2021, 6 loans remain classified as TDRs with an aggregate balance of $3.5 million. All other borrowers were current prior to relief, were not experiencing financial difficulty prior to COVID-19, and the Bank determined they were not considered TDRs. Additionally, of the 75 loans that received payment accommodations that are not classified as TDRs, 22 loans, with an aggregate loan balance of $5.1 million, have paid their loan in full, 7 loans, with an aggregate loan balance of $0.8 million, are past due less than 30 days, and 46 loans, with an aggregate loan balance of $21.6 million, have commenced paying as agreed as of March 31, 2021. There are no loans that received payment accommodation past due greater than 30 days. The Bank will continue to examine payment accommodations as requested by borrowers.

LEASES

As of March 31, 2021 and December 31, 2020, the Company had operating right of use (“ROU”) assets of $12.6 million and $12.7 million, respectively, and operating lease liabilities of $12.6 million and $12.7 million, respectively. The Company maintains operating leases on land, branch facilities, and parking. Most of the leases include one or more options to renew, with renewal terms extending up to 20 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized in lease expense.

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

The table below shows lease expense components for the three months ended March 31, 2021 and 2020.

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

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

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

DISCLOSURE REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair val

SEC Form 10-Q filed by Bank of South Carolina Corp.