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

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

For the quarterly period ended ~~September~~June 30, ~~2022~~2023

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

For the transition period from _____ to _____

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

Commission file number: ~~0-27702~~000-27702

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)~~No.)

256 Meeting Street, Charleston, SC		29401
(Address of principal executive offices)		(Zip Code)

~~256 Meeting Street~~, ~~Charleston~~, SC~~29401~~
~~(Address of principal executive offices)~~

(843) 724-1500

(Registrant’s telephone ~~number)~~number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class	Trading Symbol(s)		~~Trading symbol(s)~~		Name of each exchange on which registered
Common stock		BKSC		The NASDAQ Stock Market LLC

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, a 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):~~Act:

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

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

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

As of ~~October 20, 2022,~~July 28, 2023, there were ~~5,552,351~~5,547,439 Common Shares outstanding.

Part I. Financial Information	Page

Item 1. Financial Statements	3
Consolidated Balance Sheets – ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022	3
Consolidated Statements of Income – Three and ~~Nine~~Six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	4
Consolidated Statements of Comprehensive Income (Loss) – Three and ~~Nine~~Six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	6
Consolidated Statements of Shareholders’ Equity – ~~Nine~~Three and Six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	7
Consolidated Statements of Cash Flows – ~~Nine~~Six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	8

Notes to Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2425

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3031

Item 4. Controls and Procedures	3031

Part II. Other Information

Item 1. Legal Proceedings	3132
Item 1A. Risk Factors	3132
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3132
Item 3. Defaults Upon Senior Securities	3132
Item 4. Mine Safety Disclosures	3132
Item 5. Other Information	3132
Item 6. Exhibits	3132

Signatures	3233
Certifications	3334

Part I. Financial Information

Item 1. Financial Statements

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	(Unaudited)			(Audited)			(Unaudited)
	September 30,			December 31,			June 30,			December 31,
	2022			2021			2023			2022
ASSETS
Cash and due from banks	$	5,597,144		$	11,140,559		$	7,767,122		$	14,772,564
Interest-bearing deposits at the Federal Reserve		3,456,566			128,971,429			17,611,921			12,999,135
Investment securities available for sale		269,386,643			212,347,489			255,698,103			271,172,226
Mortgage loans to be sold		654,944			2,774,388			2,868,776			866,594
Loans		328,284,273			306,632,229			341,338,873			330,981,782
Less: Allowance for loan losses		(4,329,221	)		(4,376,987	)
Less: Allowance for credit losses								(3,689,863	)		(4,291,221	)
Net loans		323,955,052			302,255,242			337,649,010			326,690,561
Premises, equipment and leasehold improvements, net		3,723,404			3,782,936			4,049,079			3,988,607
Right of use asset		13,585,730			14,041,843			13,116,779			13,433,692
Accrued interest receivable		1,755,179			1,404,227			1,871,425			2,145,522
Other assets		8,015,143			2,502,533			7,773,633			7,276,708

Total assets	$	630,129,805		$	679,220,646		$	648,405,848		$	653,345,609

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest bearing demand	$	234,757,823		$	255,783,644		$	206,034,702		$	223,117,903
Interest bearing demand		161,299,986			165,335,038			154,348,295			195,143,514
Money market accounts		103,909,416			98,113,942			104,930,669			100,014,125
Time deposits $250,000 and over		4,901,501			7,417,864			30,596,097			5,303,509
Other time deposits		12,300,498			13,870,356			11,106,990			11,266,099
Other savings deposits		60,943,285			68,670,732			57,736,509			63,825,108
Total deposits		578,112,509			609,191,576			564,753,262			598,670,258

Short-term borrowings								25,000,000			—
Accrued interest payable and other liabilities		2,418,321			2,069,594			2,964,455			2,430,272
Lease liability		13,585,730			14,041,843			13,116,779			13,433,692
Total liabilities		594,116,560			625,303,013			605,834,496			614,534,222

Shareholders' equity
Common stock - no par 12,000,000 shares authorized; Issued 5,852,325 shares at September 30, 2022 and 5,841,240 shares at December 31, 2021. Shares outstanding 5,552,351 and 5,541,266 at September 30, 2022 and December 31, 2021, respectively.		—			—
Shareholders’ equity
Common stock - no par 12,000,000 shares authorized; Issued 5,852,325 shares at both June 30, 2023 and December 31, 2022. Shares outstanding 5,548,239 and 5,552,351 at June 30, 2023 and December 31, 2022, respectively								—			—
Additional paid in capital		47,997,431			47,745,285			48,086,624			48,028,689
Retained earnings		13,138,685			11,122,710			14,981,966			14,002,571
Treasury stock: 299,974 shares at September 30, 2022 and December 31, 2021		(2,817,392	)		(2,817,392	)
Treasury stock: 304,086 shares and 299,974 shares at June 30, 2023 and December 31, 2022, respectively								(2,874,682	)		(2,817,392	)
Accumulated other comprehensive loss, net of income taxes		(22,305,479	)		(2,132,970	)		(17,622,556	)		(20,402,481	)
Total shareholders' equity		36,013,245			53,917,633
Total liabilities and shareholders' equity	$	630,129,805		$	679,220,646
Total shareholders’ equity								42,571,352			38,811,387

Total liabilities and shareholders’ equity							$	648,405,848		$	653,345,609

See accompanying notes to consolidated financial statements.

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

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

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

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

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

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

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

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

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

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

~~See accompanying notes to consolidated financial statements.~~

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

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

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

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

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

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

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

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

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


	Three Months Ended
	June 30,
	2023		2022
Interest and fee income
Loans, including fees	$	5,012,744	$	3,738,061
Taxable securities		689,410		613,978
Tax-exempt securities		119,723		132,927
Other		205,183		98,285
Total interest and fee income		6,027,060		4,583,251

Interest expense
Deposits		1,111,987		37,824
Short-term borrowings		308,093		—
Total interest expense		1,420,080		37,824

Net interest income		4,606,980		4,545,427
Provision for credit losses		—		—
Net interest income after provision for credit losses		4,606,980		4,545,427

Other income
Service charges and fees		334,259		343,030
Mortgage banking income		94,194		239,832
Other non-interest income		8,668		10,836
Total other income		437,121		593,698

Other expense
Salaries and employee benefits		2,033,679		1,864,139
Net occupancy expense		681,474		626,488
Other operating expenses		351,752		345,477
Professional fees		159,827		165,154
Data processing fees		159,290		137,157
Total other expense		3,386,022		3,138,415

Income before income tax expense		1,658,079		2,000,710
Income tax expense		380,362		457,728

Net income	$	1,277,717	$	1,542,982

Weighted average shares outstanding
Basic		5,551,502		5,550,951
Diluted		5,640,937		5,693,808

Basic income per common share	$	0.23	$	0.28
Diluted income per common share	$	0.23	$	0.27

See accompanying notes to consolidated financial statements.

5 4

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Six Months Ended
	June 30,
	2023		2022
Interest and fee income
Loans, including fees	$	9,680,843	$	7,289,936
Taxable securities		1,379,734		1,173,649
Tax-exempt securities		281,167		242,056
Other		317,150		132,571
Total interest and fee income		11,658,894		8,838,212

Interest expense
Deposits		2,043,088		74,621
Short-term borrowings		308,093		—
Total interest expense		2,351,181		74,621

Net interest income		9,307,713		8,763,591
Provision for credit losses		45,000		(75,000	)
Net interest income after provision for credit losses		9,262,713		8,838,591

Other income
Service charges and fees		661,332		650,623
Mortgage banking income		206,354		498,728
Gain on sales of securities		—		61,780
Other non-interest income		18,636		17,121
Total other income		886,322		1,228,252

Other expense
Salaries and employee benefits		4,000,202		3,676,295
Net occupancy expense		1,335,536		1,247,430
Other operating expenses		656,933		640,209
Professional fees		327,604		304,797
Data processing fees		316,108		286,247
Total other expense		6,636,383		6,154,978

Income before income tax expense		3,512,652		3,911,865
Income tax expense		646,156		904,777

Net income	$	2,866,496	$	3,007,088

Weighted average shares outstanding
Basic		5,551,924		5,547,767
Diluted		5,646,547		5,682,968

Basic income per common share	$	0.52	$	0.54
Diluted income per common share	$	0.51	$	0.53

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


	Three Months Ended						Three Months Ended
	September 30,						June 30,
	2022			2021			2023			2022
Net income	$	1,840,267		$	1,726,937		$	1,277,717		$	1,542,982
Other comprehensive loss
Unrealized loss on securities arising during the period		(8,267,860	)		(845,754	)		(1,569,020	)		(5,052,465	)
Reclassification adjustment for securities gains realized in net income		—			(266,944	)
Other comprehensive loss before tax		(8,267,860	)		(1,112,698	)		(1,569,020	)		(5,052,465	)
Income tax effect related to items of other comprehensive loss before tax		1,736,251			233,667			327,539			1,061,018
Other comprehensive loss after tax		(6,531,609	)		(879,031	)		(1,241,481	)		(3,991,447	)
Total comprehensive (loss) income	$	(4,691,342	)	$	847,906
Total comprehensive income (loss)							$	36,236		$	(2,448,465	)

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

Six Months Ended
June 30,
2023 2022
Net income $ 2,866,496 $ 3,007,088
Other comprehensive income
Unrealized gain (loss) on securities arising during the period 2,356,723 (17,205,181 )
Reclassification adjustment for securities gains realized in net income — (61,780 )
Other comprehensive income (loss) before tax 2,356,723 (17,266,961 )
Income tax effect related to items of other comprehensive income (loss) before tax 423,202 3,626,061
Other comprehensive income (loss) after tax 2,779,925 (13,640,900 )
Total comprehensive income (loss) $ 5,646,421 $ (10,633,812 )
See accompanying notes to consolidated financial statements.
6

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE ~~NINE~~THREE AND SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30,, 2023 AND 2022 (UNAUDITED) ~~AND 2021 (UNAUDITED)~~

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

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

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

	Shares Outstanding			Additional Paid in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
December 31, 2022		5,552,351		$	48,028,689	$	14,002,571		$	(2,817,392	)	$	(20,402,481	)	$	38,811,387
Adoption of ASU 2016-13		—			—		—			—			—			—
Net income		—			—		1,588,779			—			—			1,588,779
Other comprehensive income		—			—		—			—			4,021,406			4,021,406
Stock-based compensation expense		—			30,147		—			—			—			30,147
Cash dividends ($0.17 per common share)		—			—		(943,901	)		—			—			(943,901	)
March 31, 2023		5,552,351		$	48,058,836	$	14,647,449		$	(2,817,392	)	$	(16,381,075	)	$	43,507,818

Net income		—			—		1,277,717			—			—			1,277,717
Other comprehensive loss		—			—		—			—			(1,241,481	)		(1,241,481	)
Stock-based compensation expense		—			27,788		—			—			—			27,788
Repurchase of common shares		(4,112	)		—		—			(57,290	)					(57,290	)
Cash dividends ($0.17 per common share)		—			—		(943,200	)		—			—			(943,200	)
June 30, 2023		5,548,239		$	48,086,624	$	14,981,966		$	(2,874,682	)	$	(17,622,556	)	$	42,571,352

	Shares Outstanding		Additional Paid in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total			Shares Outstanding		Additional Paid in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
December 31, 2020		5,520,469	$	47,404,869	$	8,693,519		$	(2,787,898	)	$	1,669,866		$	54,980,356
December 31, 2021																		5,541,266	$	47,745,285	$	11,122,710		$	(2,817,392	)	$	(2,132,970	)	$	53,917,633
Net income		—		—		1,810,075			—			—			1,810,075			—		—		1,464,106			—			—			1,464,106
Other comprehensive loss		—		—		—			—			(2,343,977	)		(2,343,977	)		—		—		—			—			(9,649,453	)		(9,649,453	)
Stock option exercises, net of surrenders		4,147		39,589		—			(8,344	)		—			31,245			9,210		141,618		—			—			—			141,618
Stock-based compensation expense		—		22,997		—			—			—			22,997			—		27,989		—			—			—			27,989
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
Cash dividends ($0.17 per common share)																		—		—		(943,580	)		—			—			(943,580	)
March 31, 2022																		5,550,476	$	47,914,892	$	11,643,236		$	(2,817,392	)	$	(11,782,423	)	$	44,958,313

Net income		—		—		1,668,684			—			—			1,668,684			—		—		1,542,982			—			—			1,542,982
Other comprehensive income		—		—		—			—			614,215			614,215
Other comprehensive loss																		—		—		—			—			(3,991,447	)		(3,991,447	)
Stock option exercises, net of surrenders		9,383		103,495		—			(21,150	)		—			82,345			1,875		20,022		—			—			—			20,022
Stock-based compensation expense		—		29,648		—			—			—			29,648			—		31,258		—			—			—			31,258
Cash dividends ($0.17 per common share)		—		—		(940,781	)		—			—			(940,781	)		—		—		(943,900	)		—			—			(943,900	)
June 30, 2021		5,533,999	$	47,600,598	$	9,739,851		$	(2,817,392	)	$	(59,896	)	$	54,463,161

Net income		—		—		1,726,937			—			—			1,726,937
Other comprehensive loss		—		—		—			—			(879,031	)		(879,031	)
Stock option exercises		2,662		24,438		—			—			—			24,438
Stock-based compensation expense		—		28,605		—			—			—			28,605
Cash dividends ($0.17 per common share)		—		—		(941,232	)		—			—			(941,232	)
September 30, 2021		5,536,661	$	47,653,641	$	10,525,556		$	(2,817,392	)	$	(938,927	)	$	54,422,878
June 30, 2022																		5,552,351	$	47,966,172	$	12,242,318		$	(2,817,392	)	$	(15,773,870	)	$	41,617,228

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended						Six Months Ended
	September 30,						June 30,
	2022			2021			2023			2022
Cash flows from operating activities:
Net income	$	4,847,355		$	5,205,696		$	2,866,496		$	3,007,088
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income net cash provided by operating activities:
Depreciation expense		277,223			315,492			164,195			188,251
Gain on sale of investment securities		(61,780	)		(266,944	)		—			(61,780	)
Provision (recovery) for loan losses		(75,000	)		120,000
Provision for credit losses								45,000			(75,000	)
Stock-based compensation expense		90,506			81,250			57,935			59,247
Deferred income taxes and other assets		(150,299	)		(365,317	)		(76,198	)		(555,359	)
Net amortization of unearned discounts on investment securities available for sale		655,923			386,724			400,321			438,786
Origination of mortgage loans held for sale		(50,913,927	)		(134,399,394	)		(22,155,531	)		(40,505,723	)
Proceeds from sale of mortgage loans held for sale		53,033,371			141,603,775			20,153,349			39,187,661
(Increase) decrease in accrued interest receivable		(350,952	)		172,588
Increase (decrease) in accrued interest payable and other liabilities		346,842			(379,960	)
Decrease (increase) in accrued interest receivable								274,097			(257,211	)
Increase in accrued interest payable and other liabilities								534,883			248,555
Net cash provided by operating activities		7,699,262			12,473,910			2,264,547			1,674,515

Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale		3,539,000			26,967,000			17,433,000			3,539,000
Proceeds from sale of investment securities available for sale		15,120,000			15,572,500			—			15,120,000
Purchase of investment securities available for sale		(101,827,117	)		(104,335,011	)		—			(94,659,022	)
Net (increase) decrease in loans		(21,624,810	)		8,030,641
Net increase in loans								(11,003,449	)		(9,898,641	)
Purchase of premises, equipment, and leasehold improvements, net		(217,691	)		(116,722	)		(224,667	)		(115,413	)
Net cash used in investing activities		(105,010,618	)		(53,881,592	)
Net cash provided by (used in) investing activities								6,204,884			(86,014,076	)

Cash flows from financing activities:
Net (decrease) increase in deposit accounts		(31,079,067	)		160,593,648
Net decrease in deposit accounts								(33,916,996	)		(11,401,415	)
Net increase in short term borrowings								25,000,000			—
Dividends paid		(2,829,495	)		(3,370,906	)		(1,887,801	)		(1,885,596	)
Stock options exercised, net of surrenders		161,640			138,028			—			161,640
Net cash (used in) provided by financing activities		(33,746,922	)		157,360,770
Net (decrease) increase in cash and cash equivalents		(131,058,278	)		115,953,088
Share repurchases								(57,290	)		—
Net cash used in financing activities								(10,862,087	)		(13,125,371	)
Net decrease in cash and cash equivalents								(2,392,656	)		(97,464,932	)
Cash and cash equivalents at the beginning of the period		140,111,988			48,325,981			27,771,699			140,111,988
Cash and cash equivalents at the end of the period	$	9,053,710		$	164,279,069		$	25,379,043		$	42,647,056

Supplemental disclosure of cash flow data:
Cash paid during the period for:
Interest	$	112,138		$	156,380		$	1,637,005		$	74,825
Income taxes, net	$	1,100,502		$	2,345,420		$	1,375,039		$	634,402

Supplemental disclosures for non-cash investing and financing activity:
Change in unrealized loss on securities available for sale, net of income taxes	$	20,172,509		$	2,608,793
Change in unrealized gain (loss) on securities available for sale, net of income taxes							$	2,779,925		$	(13,640,900	)
Change in dividends payable	$	1,885		$	2,753		$	(700	)	$	1,884

See accompanying notes to consolidated financial statements.

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.NATURE OF BUSINESS AND BASIS OF PRESENTATION

~~Organization~~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~~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.~~stock.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the Company and its ~~wholly-owned~~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 ~~4, 2022.~~2, 2023. 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~~credit losses, impaired loans, other real estate owned, deferred tax assets, and the fair value of financial ~~instruments and other-than-temporary impairment of investment securities.~~instruments.

Income Per Common Share:

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. ~~Dilutive~~Diluted 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 the Company’s common stock.

Subsequent Events:

Subsequent events are events or transactions that occur after the balance sheet date but before the 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 the 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”~~(the “FASB”) issued ~~Accounting Standards Update (“ASU”)~~ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)~~: Measurement~~. The Accounting Standards Update, or ASU, introduced a new credit loss methodology, the Current Expected Credit Loss (“CECL”) methodology, which requires earlier recognition of ~~Credit Losses on Financial Instruments~~,credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to ~~change~~ the ~~accounting~~original ASU.

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities, and other receivables at the time the financial asset is originated or acquired. It also applies to off-balance sheet credit exposures such as unfunded commitments to extend credit. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and ~~modify the impairment model~~adjusted each period for ~~certain debt securities. ASU 2016-13~~ changes ~~the impairment model for most financial assets to a current expected~~in 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. risk.

~~In March 2020,~~On January 1, 2023, the ~~FASB issued~~Company adopted the guidance prospectively. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the previously applicable incurred loss accounting methodology. The adoption of CECL resulted in an increase in the allowance for unfunded commitments of $600,000, a decrease in the allowance for credit losses of $600,000 and no change to the Company’s investment securities portfolio. There was no adjustment to retained earnings as of January 1, 2023. Federal banking regulatory agencies provided optional relief to delay the adverse regulatory capital impact of CECL at adoption. The Company did not elect to use this optional relief.

Significant Accounting Policy Changes

Upon adoption of ASC 326, the Company revised the accounting policy for the Allowance for Credit Losses as detailed below.

Allowance for Credit Losses - Securities Available for Sale

For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that ~~makes narrow-scope improvements~~it will be required to ~~various aspects~~sell the security before recovery of the ~~financial instrument guidance, including~~amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with the establishment of an allowance under CECL compared to a direct write down of the security under Incurred Loss. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2023, there was no allowance for credit losses related to the available-for-sale portfolio.

Accrued interest receivable on available for sale debt securities totaled $443,464 at June 30, 2023 and was excluded from the estimate of credit losses.

Allowance for Credit Losses - Loans

Under the current expected credit loss model, the allowance for credit losses ~~(CECL) guidance issued~~on loans is a valuation allowance estimated at each balance sheet date in ~~2016.~~accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

Management assesses the adequacy of the allowance on a quarterly basis. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The ~~amendments~~level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through a provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off, or negative provisions, when appropriate.

The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. The Company uses the Loss Rate Approach to estimate the current expected credit losses. The Bank calculates the annual loss rate by dividing the annual net charge-offs by the average balance of loans. The Bank used the simple average of the prior year and current year balance to get the average balance by segment and is adjusted by the estimated prepayment rate to get the lifetime historical loss rate, which is further adjusted by qualitative and forecast adjustments to get the estimated lifetime loss rate.

The forecast adjustments (House Price Index, Vacancy Rate, and Unemployment Rate) are discussed by the Management Asset Liability Committee (ALCO) on a periodic basis. Upon ALCO’s recommendation, the calculation can be adjusted accordingly to reflect the current market and economic conditions.

The Company uses the loan purpose codes to segment loans based on similar purpose and risk characteristics. The Bank manages these loans on a collective basis. This segmentation is used for call report purposes, and the Bank believes it is appropriate for the CECL calculations. Due to the size of the Bank’s loan portfolio, further segmentation would be granular and segments would be statistically insignificant.

Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated loan pools. Individual loan evaluations are generally performed for impaired loans, which includes nonaccrual loans. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral. The Company has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, which considers selling costs in the event of the sale of the collateral.

While the Company’s policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.

Allowance for Credit Losses - Accrued Interest Receivable

Accrued interest receivable related to ~~conforming amendments. For public business entities,~~loans totaled $1.0 million at June 30, 2023 and was reported in accrued interest receivable on the ~~amendments~~consolidated balance sheets. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are ~~effective upon issuance~~placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this ~~final ASU. For~~policy results in the ~~amendments related~~timely reversal of uncollectable interest.

Allowance for Credit Loss - Unfunded Commitments

Effective with the adoption of CECL, the Company estimates expected credit losses on commitments to ~~ASU 2016-13, public business entities that meet~~extend credit over the ~~definition of an SEC filer, excluding eligible smaller reporting companies (SRCs) as defined~~contractual period in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancelable by the ~~SEC, should adopt~~Company. The allowance for off-balance sheet credit exposures, which is reflected within accrued interest payable and other liabilities on the ~~amendments in ASU 2016-13 during 2020. Early adoption~~consolidated balance sheet, is adjusted for as an increase or decrease to the provision for credit losses. The estimate includes consideration of the likelihood that funding will ~~continue~~occur and an estimate of expected credit losses on commitments expected 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~~funded over its estimated life. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.

The Company’s CECL allowances will fluctuate over time due to macroeconomic conditions and forecasts as well as the ~~effective date~~size and ~~transition requirements in ASU 2016-13. The Company does not expect these amendments to have a material effect on its consolidated financial statements.~~composition of the loan portfolios.

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 Company adopted the amendments in ASU 2022-02 ~~are effective~~ upon the Company’s adoption of ASU ~~2016-13.~~2016-13 as of January 1, 2023.

In March 2020, the FASB issued ~~guidance to provide~~ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. ~~The amendments are effective as~~In December 2022, the FASB extended the sunset date of ~~March 12, 2020 through~~ASC 848 from December 31, ~~2022.~~2022 to December 31, 2024. The Company does not expect these amendments to have a material effect on its ~~consolidated financial statements.~~

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

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

Note 2: Investment Securities

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

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


	June 30, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	180,043,022	$	—	$	(10,701,742	)	$	169,341,280
Government-Sponsored Enterprises		62,280,287		—		(9,686,791	)		52,593,496
Municipal Securities		36,843,995		35		(3,080,703	)		33,763,327
Total	$	279,167,304	$	35	$	(23,469,236	)	$	255,698,103

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

1011

There is no allowance for credit losses on available for sale securities at June 30, 2023.


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	180,298,301	$	—	$	(12,110,986	)	$	168,187,315
Government-Sponsored Enterprises		67,384,808		—		(10,310,084	)		57,074,724
Municipal Securities		49,315,041		2,510		(3,407,364	)		45,910,187
Total	$	296,998,150	$	2,510	$	(25,828,434	)	$	271,172,226

The amortized cost and estimated fair value of investment securities available for sale as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, by contractual maturity are in the following table.

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

	June 30, 2023				December 31, 2022
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	79,001,495	$	76,773,388	$	42,722,655	$	41,698,011
Due in one year to five years		149,566,797		136,484,763		190,569,869		176,217,530
Due in five years to ten years		41,799,253		35,124,767		53,995,700		45,386,818
Due in ten years and over		8,799,759		7,315,185		9,709,926		7,869,867
Total	$	279,167,304	$	255,698,103	$	296,998,150	$	271,172,226

Securities pledged to secure deposits at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, had a fair value of $~~28.4~~30.2 million and $~~33.3~~30.1 million, respectively. During the first quarter of 2023, the Federal Reserve established the Bank Term Funding Program in order to make available additional funding to eligible depository institutions so as to help assure banks have the ability to meet the needs of all their depositors. Securities pledged to secure funding made available by this program at amortized cost were $35.0 million at June 30, 2023.

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021. We~~2022. Unrealized losses have not been recognized into income as 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, 2023
	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		1	$	4,797,852	$	(144,652	)		24	$	164,543,428	$	(10,557,090	)		25	$	169,341,280	$	(10,701,742	)
Government-Sponsored Enterprises		1		1,272,596		(25,560	)		9		51,320,900		(9,661,231	)		10		52,593,496		(9,686,791	)
Municipal Securities		5		4,835,657		(143,538	)		65		28,822,633		(2,937,165	)		70		33,658,290		(3,080,703	)
Total		7	$	10,906,105	$	(313,750	)		98	$	244,686,961	$	(23,155,486	)		105	$	255,593,066	$	(23,469,236	)


	September 30, 2022																					December 31, 2022
	Less Than 12 Months							12 Months or Longer							Total							Less Than 12 Months							12 Months or Longer							Total
	#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss			#		Fair Value		Gross Unrealized Loss
U.S. Treasury Notes		13	$	103,560,555	$	(6,300,118	)		12	$	63,752,545	$	(6,814,182	)		25	$	167,313,100	$	(13,114,300	)		7	$	38,181,255	$	(1,790,134	)		18	$	130,006,060	$	(10,320,852	)		25	$	168,187,315	$	(12,110,986	)
Government-Sponsored Enterprises		1		4,921,565		(75,999	)		9		50,419,588		(10,721,722	)		10		55,341,153		(10,797,721	)		2		6,212,285		(84,170	)		9		50,862,439		(10,225,914	)		11		57,074,724		(10,310,084	)
Municipal Securities		54		34,629,937		(2,086,548	)		23		11,947,419		(2,236,248	)		77		46,577,356		(4,322,796	)		46		26,068,218		(932,565	)		31		14,859,459		(2,474,799	)		77		40,927,677		(3,407,364	)
Total		68	$	143,112,057	$	(8,462,665	)		44	$	126,119,552	$	(19,772,152	)		112	$	269,231,609	$	(28,234,817	)		55	$	70,461,758	$	(2,806,869	)		58	$	195,727,958	$	(23,021,565	)		113	$	266,189,716	$	(25,828,434	)

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

1112

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


	Three Months Ended				Three Months Ended
	September 30,				June 30,
	2022		2021		2023		2022

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


	Six Months Ended
	June 30,
	2023		2022

Gross proceeds	$	—	$	15,120,000
Gross realized gains		—		61,780
Gross realized losses		—		—

Nine Months Ended
September 30,
2022 2021

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

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

Note 3: Loans and Allowance for ~~Loan~~Credit Losses

Major classifications of loans (net of deferred loan fees of $~~157,002~~178,278 and $~~488,481~~159,434 at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively) are shown in the table below.

	June 30, 2023			December 31, 2022
Commercial	$	46,173,490		$	45,072,059
Commercial real estate:
Construction		23,752,103			17,524,260
Other		174,739,069			172,897,387
Consumer:
Real estate		92,895,470			91,636,538
Other		3,778,741			3,851,538
		341,338,873			330,981,782
Allowance for credit losses		(3,689,863	)		(4,291,221	)
Loans, net	$	337,649,010		$	326,690,561

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

We had $~~91.2~~84.2 million and $~~94.7~~93.1 million of loans pledged as collateral to secure funding with the Federal Reserve Bank ~~(“FRB”)~~ Discount Window at ~~September~~June 30, ~~2022~~2023 and at December 31, ~~2021,~~2022, respectively.

~~On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349~~.0 billion of loans to be issued by financial institutions. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/ HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized additional funding under the CARES Act of $~~310.0 billion for PPP loans to be issued by financial institutions through the SBA. In 2020 and 2021, the Bank provided $55.3~~ ~~million in funding to~~ ~~480~~ ~~customers through the PPP and received a total of $2.4~~ million in processing fees. The processing fees were deferred and are being amortized over the life of the loans in accordance with ASC 310-20. During the three months ended September 30, 2022 and 2021, the Bank recognized $~~0.1~~ ~~million and $0.1 million, respectively, in processing fees for the PPP. During the nine months ended September 30, 2022 and 2021, the Bank recognized $0.4 million~~ ~~and $~~1~~.0 million, respectively, in processing fees for the PPP.~~

Our portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Our internal credit risk grading system is based on experience with similarly graded loans, industry best practices, and regulatory guidance. Our portfolio is graded in its ~~entirety, with the exception of the PPP loans. Because the PPP loans are~~ ~~100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve.~~entirety.

1213

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~~loans to/from stockholders, and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and growth.

●

~~Other Assets Especially Mentioned (OAEM)~~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~~sources 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~~table illustrates credit quality by class indicators by year of origination at June 30, 2023:


	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial
Pass	$	13,049,996	$	10,476,013	$	3,788,504	$	4,839,889	$	872,396	$	340,617	$	10,676,946	$	44,044,361
Watch		252,510		420,129		36,046		78,087		10,043		—		163,645		960,460
OAEM		—		—		—		—		—		—		250,000		250,000
Substandard		—		918,669		—		—		—		—		—		918,669
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	13,302,506	$	11,814,811	$	3,824,550	$	4,917,976	$	882,439	$	340,617	$	11,090,591	$	46,173,490
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	46,341	$	—	$	46,341
Commercial Real Estate Construction
Pass	$	6,969,784	$	9,069,212	$	3,180,288	$	4,532,819	$	—	$	—	$	—	$	23,752,103
Watch		—		—		—		—		—		—		—		—
OAEM		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	6,969,784	$	9,069,212	$	3,180,288	$	4,532,819	$	—	$	—	$	—	$	23,752,103
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate Other
Pass	$	15,329,626	$	52,001,958	$	51,702,663	$	24,834,035	$	10,322,784	$	7,098,224	$	5,261,579	$	166,550,869
Watch		4,220,722		437,855		826,882		660,779		—		—		—		6,146,238
OAEM		863,683		—		—		11,232		—		—		—		874,915
Substandard		—		—		858,798		—		—		308,249		—		1,167,047
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	20,414,031	$	52,439,813	$	53,388,343	$	25,506,046	$	10,322,784	$	7,406,473	$	5,261,579	$	174,739,069
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer Real Estate
Pass	$	10,555,232	$	27,200,902	$	8,432,544	$	8,652,828	$	320,524	$	78,623	$	36,021,347	$	91,262,000
Watch		—		—		—		—		—		—		1,383,712		1,383,712
OAEM		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		249,758		249,758
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	10,555,232	$	27,200,902	$	8,432,544	$	8,652,828	$	320,524	$	78,623	$	37,654,817	$	92,895,470
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer Other
Pass	$	1,203,875	$	1,013,675	$	500,250	$	236,503	$	81,325	$	15,922	$	509,913	$	3,561,463
Watch		34,110		80,392		19,934		12,300		—		—		28,168		174,904
OAEM		—		—		—		5,290		—		—		—		5,290
Substandard		37,084		—		—		—		—		—		—		37,084
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	1,275,069	$	1,094,067	$	520,184	$	254,093	$	81,325	$	15,922	$	538,081	$	3,778,741
Current period gross charge-offs	$	—	$	—	$	1,977	$	—	$	—	$	—	$	—	$	1,977

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

December 31, 2022
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	42,724,289	$	17,524,260	$	167,518,577	$	86,183,899	$	3,597,886	$	317,548,911
Watch		976,966		—		3,223,532		4,928,437		208,417		9,337,352
OAEM		94,803		—		968,611		274,445		7,345		1,345,204
Substandard		1,276,001		—		1,186,667		249,757		37,890		2,750,315
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	45,072,059	$	17,524,260	$	172,897,387	$	91,636,538	$	3,851,538	$	330,981,782

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

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

1315

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

June 30, 2023
	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	$	49,974	$	—	$	—	$	49,974	$	46,123,516	$	46,173,490	$	—
Commercial Real Estate Construction		—		—		—		—		23,752,103		23,752,103		—
Commercial Real Estate Other		1,003,204		—		625,677		1,628,881		173,110,188		174,739,069		—
Consumer Real Estate		640,726		—		—		640,726		92,254,744		92,895,470		—
Consumer Other		9,696		—		—		9,696		3,769,045		3,778,741		—
Total	$	1,703,600	$	—	$	625,677	$	2,329,277	$	339,009,596	$	341,338,873	$	—

December 31, 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	$	16,451	$	178,975	$	—	$	195,426	$	44,876,633	$	45,072,059	$	—
Commercial Real Estate Construction		—		—		—		—		17,524,260		17,524,260		—
Commercial Real Estate Other		45,425		—		631,453		676,878		172,220,509		172,897,387		—
Consumer Real Estate		274,445		—		—		274,445		91,362,093		91,636,538		—
Consumer Other		—		—		—		—		3,851,538		3,851,538		—
Total	$	336,321	$	178,975	$	631,453	$	1,146,749	$	329,835,033	$	330,981,782	$	—

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

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

There were no loans over 90 days past due and still accruing as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

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

	CECL						Incurred Loss
	June 30, 2023						December 31, 2022
	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Nonaccrual Loans

Commercial	$	—	$	—	$	—	$	—
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		625,677		—		625,677		631,453
Consumer Real Estate		—		—		—		—
Consumer Other				—		—		—
Total	$	625,677	$	—	$	625,677	$	631,453

We designate individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management designates as having higher risk. Collateral dependent loans are loans for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, we adopted the practical expedient to measure the allowance for credit losses based on the fair value of the collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The following table details the amortized cost of collateral dependent loans:

	June 30, 2023

Commercial	$	—
Commercial Real Estate Construction		—
Commercial Real Estate Other		1,178,278
Consumer Real Estate		249,758
Consumer Other		—
Total	$	1,428,036

The following tables set forth the changes in the allowance for credit losses and an allocation of the allowance for credit losses by class for the three and six months ended June 30, 2023 under the CECL methodology.

September 30, 2022 December 31, 2021

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


Three Months Ended June 30, 2023
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate		Consumer Other			Total
Allowance for Loan Losses:
Beginning balance	$	514,081		$	236,989	$	2,000,520		$	860,498	$	76,415		$	3,688,503
Charge-offs		—			—		—			—		—			—
Recoveries		600			—		—			—		760			1,360
Provisions		(11,236	)		35,398		(37,909	)		15,610		(1,863	)		—
Ending balance	$	503,445		$	272,387	$	1,962,611		$	876,108	$	75,312		$	3,689,863


Six Months Ended June 30, 2023
	Commercial			Commercial Real Estate Construction			Commercial Real Estate Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses:
Beginning balance	$	735,759		$	230,625		$	2,216,484		$	1,014,777		$	93,576		$	4,291,221
Adoption of ASU 2016-13		(82,001	)		(36,509	)		(314,522	)		(160,802	)		(6,166	)		(600,000	)
Charge-offs		(46,341	)		—			—			—			(1,977	)		(48,318	)
Recoveries		1,200			—			—			—			760			1,960
Provisions		(105,172	)		78,271			60,649			22,133			(10,881	)		45,000
Ending balance	$	503,445		$	272,387		$	1,962,611		$	876,108		$	75,312		$	3,689,863

Prior to the adoption of ASC 326 on January 1, 2023, we calculated the allowance for loan losses under the incurred loss methodology. The following tables set forth the changes in the allowance for loan losses for the three and ~~an allocation~~six months ended June 30, 2022.


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	$	788,093	$	203,568	$	2,294,010		$	919,972		$	98,859		$	—		$	4,304,502
Charge-offs		—		—		—			—			—			—			—
Recoveries		—		—		—			—			2,024			339			2,363
Provisions		94,901		26,802		(83,699	)		(29,588	)		(8,077	)		(339	)		—
Ending balance	$	882,994	$	230,370	$	2,210,311		$	890,384		$	92,806		$	—		$	4,306,865


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	$	795,689	$	175,493	$	2,376,306		$	924,784		$	104,715		$	—		$	4,376,987
Charge-offs		—		—		—			(2,035	)		—			(10	)		(2,045	)
Recoveries		—		—		—			—			6,224			699			6,923
Provisions		87,305		54,877		(165,995	)		(32,365	)		(18,133	)		(689	)		(75,000	)
Ending balance	$	882,994	$	230,370	$	2,210,311		$	890,384		$	92,806		$	—		$	4,306,865

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses ~~by class for~~under the ~~three and nine months ended September 30, 2022 and 2021.~~ The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historicalincurred loss ~~experience adjusted for current economic factors.~~

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

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

Three Months Ended September 30, 2021
Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Paycheck Protection Program Total
Allowance for Loan Losses:
Beginning balance $ 801,548 $ 154,276 $ 2,206,215 $ 1,025,506 $ 118,758 $ — $ 4,306,303
Charge-offs — — — — — (903 ) (903 )
Recoveries 10,746 — — 47,711 4,600 — 63,057
Provisions (9,338 ) 1,248 72,060 (65,539 ) 666 903 —
Ending balance $ 802,956 $ 155,524 $ 2,278,275 $ 1,007,678 $ 124,024 $ — $ 4,368,457

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

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


	Decenber 31, 2022
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	179,230	$	—	$	—	$	—	$	37,889	$	217,119
Collectively evaluated for impairment		556,529		230,625		2,216,484		1,014,777		55,687		4,074,102
Total Allowance for Loan Losses	$	735,759	$	230,625	$	2,216,484	$	1,014,777	$	93,576	$	4,291,221
Loans Receivable
Individually evaluated for impairment	$	1,276,001	$	—	$	1,202,412	$	249,758	$	37,889	$	2,766,060
Collectively evaluated for impairment		43,796,058		17,524,260		171,694,975		91,386,780		3,813,649		328,215,722
Total Loans Receivable	$	45,072,059	$	17,524,260	$	172,897,387	$	91,636,538	$	3,851,538	$	330,981,782

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

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

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

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

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

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

	Impaired Loans as of
	December 31, 2022
	Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	317,553	$	317,553	$	—
Commercial Real Estate Construction		—		—		—
Commercial Real Estate Other		1,202,412		1,202,412		—
Consumer Real Estate		249,758		249,758		—
Consumer Other		—		—		—
Total		1,769,723		1,769,723		—

With an allowance recorded:
Commercial		958,448		958,448		179,230
Commercial Real Estate Construction		—		—		—
Commercial Real Estate Other		—		—		—
Consumer Real Estate		—		—		—
Consumer Other		37,889		37,889		37,889
Total		996,337		996,337		217,119


Commercial		1,276,001		1,276,001		179,230
Commercial Real Estate Construction		—		—		—
Commercial Real Estate Other		1,202,412		1,202,412		—
Consumer Real Estate		249,758		249,758		—
Consumer Other		37,889		37,889		37,889
Total	$	2,766,060	$	2,766,060	$	217,119

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				Six Months Ended June 30, 2022
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,155,583	$	17,526	$	1,171,504	$	35,605
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		1,215,823		7,278		1,220,878		18,037
Consumer Real Estate		249,758		2,905		249,758		6,321
Consumer Other		—		—		—		—
		2,621,164		27,709		2,642,140		59,963

With an allowance recorded:
Commercial		247,079		2,593		247,460		6,437
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		—		—		—		—
Consumer Real Estate		—		—		—		—
Consumer Other		39,246		636		39,518		1,286
		286,325		3,229		286,978		7,723
Total
Commercial		1,402,662		20,119		1,418,964		42,042
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		1,215,823		7,278		1,220,878		18,037
Consumer Real Estate		249,758		2,905		249,758		6,321
Consumer Other		39,246		636		39,518		1,286
	$	2,907,489	$	30,938	$	2,929,118	$	67,686

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

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

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

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

~~In general,~~The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the ~~modification or restructuring~~estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. We use the loss rate approach to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a ~~debt~~modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is ~~considered~~already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a ~~troubled debt restructuring (“TDR”) if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession~~change to the allowance for credit losses is generally not recorded upon modification. Occasionally, we modify loans by providing principal forgiveness on certain real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, we will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower ~~that we would not otherwise consider.~~continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

There were no loans modified during the six months ended June 30, 2023. As of ~~both September~~June 30, ~~2022 and December 31, 2021,~~2023, there were 5four ~~TDRs~~loans with ~~an aggregate~~a balance of $10.8~~.0 million. These TDRs~~ million that were granted extended payment terms with no principal reduction. The structure of two of the loans changed to interest only. ~~All TDRs were~~With respect to these two loans, one loan was performing as agreed as of ~~September~~June 30, ~~2022. No TDRs defaulted during~~2023, while the ~~three~~other loan was not performing and ~~nine months ended September~~we are considering further collection actions, including potential foreclosure proceedings.

The following table shows the amortized cost basis as of June 30, ~~2022 and 2021, which were modified within the previous twelve months. There were~~ no ~~TDRs added during the three and nine months ended September 30, 2022 and 2021.~~

Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because2023 of the ~~effects~~loans modified for borrowers experiencing financial difficulty, disaggregated by class of ~~COVID-19. In this statement,~~loans, and describes 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 4013financial effect of the ~~CARES Act or in accordance with ASC 310-40. Under Section 4013~~modifications made for borrowers experiencing financial difficulty:

	Term Extension
	Amortized Cost Basis		% of Total Loan Type			Financial Effect

Commercial	$	163,558		0.4	%	Reduced monthly payment
Commercial Real Estate Construction		—
Commercial Real Estate Other		614,445		0.4	%	Forbearance agreement signed for one loan and provided eleven months deferral to second borrower and added to the end of the original term loan.
Consumer Real Estate		—
Consumer Other		37,083		1.0	%	Reduced monthly payment
Total	$	815,086

We maintain an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the ~~CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed~~likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. During 2020, the Bank processed approximately $~~0.7~~ ~~million in principal deferments to~~ 84 ~~loans, with an aggregate loan balance~~commitments of $~~25.9~~644,912 ~~million. The principal deferments represented~~ and $~~0.24~~44,912~~% of our total loan portfolio as of December 31, 2020. The Bank did not process any principal deferments after December 31, 2020. As of September~~ at June 30, ~~2022, there was~~ ~~one~~ ~~outstanding loan with a balance of $0.1~~ ~~million in TDR status. There were~~ ~~two~~ ~~loans outstanding with a balance of $0.5~~ ~~million in TDR status as of December 31, 2021. All other remaining outstanding loans were paying as agreed as of September 30, 2022~~2023 and December 31, ~~2021.~~2022, respectively, is classified on the balance sheet within Accrued interest payable and other liabilities.

Note 4: Leases

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had operating right of use (“ROU”) assets of $~~13.6~~13.1 million and $~~14.0~~13.4 million, respectively, and had operating lease liabilities of $~~13.6~~13.1 million and $~~14.0~~13.4 million, respectively. The Company maintains operating leases on land, branch facilities, and parking. Most of the leases include one or more options to renew, with renewal terms extending up to 20 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized in lease expense.

As of ~~September~~June 30, ~~2022,~~2023, the weighted average remaining lease term was ~~15.8~~15.1 years and the weighted average incremental borrowing rate was ~~4.17~~4.18%.

The table below shows lease expense components for the three months ended June 30, 2023 and 2022.


	June 30,
	2023		2022
Operating lease expense	$	309,372	$	297,764
Short-term lease expense		—		—
Total lease expense	$	309,372	$	297,764

The table below shows lease expense components for the six months ended June 30, 2023 and 2022.


	June 30,
	2023		2022
Operating lease expense	$	612,017	$	597,335
Short-term lease expense		—		—
Total lease expense	$	612,017	$	597,335

Total rental expense was $309,372 and $297,764 for the three months ended ~~September~~June 30, 2023 and 2022, respectively, and ~~2021.~~$612,017

and $597,335

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

~~The table below shows lease expense components~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, respectively, and ~~2021.~~

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

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

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we did not maintain any finance leases, and we determined that the number and dollar amount of equipment leases was immaterial. As of ~~September~~June 30, ~~2022,~~2023, we had no operating leases that had not yet commenced.

Note 5: Disclosures Regarding Fair Value of Financial Statements

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

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

●

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

●

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

●

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

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

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

Investment Securities Available for Sale

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

Derivative Instruments

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

We had no embedded derivative instruments requiring separate accounting ~~treatment.~~treatment as of June 30, 2023 and December 31, 2022. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments with interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on the short-term nature of mortgage loans to be sold (derivative contracts), our derivative instruments were immaterial to our consolidated financial statements as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

The following table presents information about assets measured at fair value on a recurring basis as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:

	June 30, 2023
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	169,341,280	$	—	$	—	$	169,341,280
Government-Sponsored Enterprises		—		52,593,496		—		52,593,496
Municipal Securities		—		16,273,594		17,489,733		33,763,327
Total	$	169,341,280	$	68,867,090	$	17,489,733	$	255,698,103

	September 30, 2022								December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	167,313,100	$	—	$	—	$	167,313,100	$	168,187,315	$	—	$	—	$	168,187,315
Government-Sponsored Enterprises		—		55,341,153		—		55,341,153		—		57,074,724		—		57,074,724
Municipal Securities		—		17,894,895		28,837,495		46,732,390		—		16,448,375		29,461,812		45,910,187
Total	$	167,313,100	$	73,236,048	$	28,837,495	$	269,386,643	$	168,187,315	$	73,523,099	$	29,461,812	$	271,172,226

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

There were no liabilities recorded at fair value on a recurring basis as of ~~September~~June 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Beginning balance	$	22,549,300		$	20,626,654		$	29,461,812		$	24,484,047
Total gains or (losses) (realized/unrealized)
Included in other comprehensive income		(138,567	)		(15,415	)		410,921			(1,459,808	)
Purchases, issuances, and settlements net of maturities		(4,921,000	)		3,679,000			(12,383,000	)		1,266,000
Ending balance	$	17,489,733		$	24,290,239		$	17,489,733		$	24,290,239

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

There were no transfers between fair value levels during the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 or ~~2021.~~2022.

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

Individually Assessed Loans

~~Impaired Loans~~

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

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

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

Mor

tg~~Mortgage~~age Loans to be Sold

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

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following tables present information about certain assets measured at fair value on a nonrecurring basis as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:


	June 30, 2023
	Level 1		Level 2		Level 3		Total
Individually assessed loans	$	—	$	—	$	1,428,036	$	1,428,036
Mortgage loans to be sold		—		2,868,776		—		2,868,776
Total	$	—	$	2,868,776	$	1,428,036	$	4,296,812


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	1,452,170	$	1,452,170
Mortgage loans to be sold		—		866,594		—		866,594
Total	$	—	$	866,594	$	1,452,170	$	2,318,764

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

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

There were no liabilities measured at fair value on a nonrecurring basis as of ~~September~~June 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:

		Inputs
	Valuation Technique	Unobservable Input	General Range of Inputs
~~Impaired~~Individually Assessed Loans	Appraisal Value/Comparison Sales/Other Estimates	Appraisals and/or Sales of Comparable Properties	Appraisals Discounted 10% to20% for Sales Commissions and Other Holding Costs

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

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

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

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

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

Investment securities available for sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

2122

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~~individually assessed loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under ~~the new guidance,~~ASC 326, 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~~individually assessed loans are estimated based on the fair value of the underlying collateral. ~~Impaired~~Individually assessed loans measured using discounted future cash flows are not deemed to be measured at fair value.

Deposits

The estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is estimated by discounting contractual cash flows, using interest rates currently being offered on the deposit products. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities as compared to the cost of alternative forms of funding (deposit base intangibles).

Accrued interest receivable and payable

Since these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are deemed to be a reasonable estimate of fair value.

Loan commitments

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

Short-term borrowings

Due to the short-term nature of the borrowings, the carrying amount of such instruments are deemed to be a reasonable estimate of fair value.

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.


	June 30, 2023
			Estimated Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and due from banks	$	7,767,122	$	7,767,122	$	—	$	—	$	7,767,122
Interest-bearing deposits at the Federal Reserve		17,611,921		17,611,921		—		—		17,611,921
Investment securities available for sale		255,698,103		169,341,280		68,867,090		17,489,733		255,698,103
Mortgage loans to be sold		2,868,776		—		2,868,776		—		2,868,776
Loans, net		337,649,010		—		—		312,922,133		312,922,133
Accrued interest receivable		1,871,425		—		1,871,425		—		1,871,425
Financial Liabilities:
Demand deposits		523,050,175		—		523,050,175		—		523,050,175
Time deposits		41,703,087		—		42,435,128		—		42,435,128
Accrued interest payable		549,348		—		549,348		—		549,348
Short-term borrowings		25,000,000		—		25,000,000		—		25,000,000

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

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

2223


	December 31, 2021										December 31, 2022
			Estimated Fair Value										Estimated Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total		Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and due from banks	$	11,140,559	$	11,140,559	$	—	$	—	$	11,140,559	$	14,772,564	$	14,772,564	$	—	$	—	$	14,772,564
Interest-bearing deposits at the Federal Reserve		128,971,429		128,971,429		—		—		128,971,429		12,999,135		12,999,135		—		—		12,999,135
Investment securities available for sale		212,347,489		100,062,300		87,801,142		24,484,047		212,347,489		271,172,226		168,187,315		73,523,099		29,461,812		271,172,226
Mortgage loans to be sold		2,774,388		—		2,774,388		—		2,774,388		866,594		—		866,594		—		866,594
Loans, net		302,255,242		—		—		293,731,997		293,731,997		326,690,561		—		—		304,249,626		304,249,626
Accrued interest receivable		1,404,227		—		1,404,227				1,404,227		2,145,522		—		2,145,522				2,145,522
Financial Liabilities:
Demand deposits		587,903,356		—		587,903,356		—		587,903,356		582,100,650		—		582,100,650		—		582,100,650
Time deposits		21,288,220		—		21,428,310		—		21,428,310		16,569,608		—		16,933,818		—		16,933,818
Accrued interest payable		14,914		—		14,914				14,914		41,007		—		41,007				41,007

Note 6: Income Per Common Share

The following table is a summary of the reconciliation of weighted average shares outstanding for the three months ended June 30, 2023 and 2022:

	2023		2022
Net income	$	1,277,717	$	1,542,982

Weighted average shares outstanding		5,551,502		5,550,951
Effect of dilutive shares		89,435		142,857
Weighted average shares outstanding - diluted		5,640,937		5,693,808

Earnings per share - basic	$	0.23	$	0.28
Earnings per share - diluted	$	0.23	$	0.27

The following table is a summary of the reconciliation of weighted average shares outstanding for the ~~three~~six months ended ~~September 30:~~June 30, 2023 and 2022:

	2023		2022
Net income	$	2,866,496	$	3,007,088

Weighted average shares outstanding		5,551,924		5,547,767
Effect of dilutive shares		94,623		135,201
Weighted average shares outstanding - diluted		5,646,547		5,682,968

Earnings per share - basic	$	0.52	$	0.54
Earnings per share - diluted	$	0.51	$	0.53

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

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

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

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

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

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

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

2324

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~~21E of the Securities Exchange Act of ~~1933.~~1934. We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of ~~1996~~1995 and are including this statement for the express purpose of availing the Company of the 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~~2022 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~~credit losses, provisions for ~~loan~~credit losses, and the assessment of problem loans

●

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

●

~~Deposit growth,~~Competition for deposits, which may result in a change in the mix or type of deposit products and services we offer and/or in the rates that we are required to pay to attract or retain deposits

●

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~~Recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory response to these developments.

●

~~Impact of COVID-19 on the collectability of loans~~

●

~~Changes in legislation as related to PPP loans~~

●

~~Credit risks, determination of deficiency, or complete loss if SBA denies PPP loans~~

We will undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings with the SEC, in our press releases, and in oral and written statements, which are not statements of historical fact, constitute forward-looking statements.

Overview

Bank of South Carolina Corporation (the “Company”) is a bank holding company headquartered in Charleston, South Carolina, with ~~$630.1~~$648.4 million in assets as of ~~September~~June 30, ~~2022.~~2023. 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~~credit 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.~~our customers. The various components of non-interest income as well as non-interest expense are described in the following discussion. The discussion and analysis also identify significant factors that have affected our financial position and operating results as of and for the periods ending ~~September~~June 30, 2023 and 2022 and December 31, ~~2021,~~2022, and should be read in conjunction with the financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion.

~~Macroeconomic Conditions~~

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

●

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

●

~~Increased levels of unrealized losses in our investment portfolio.~~

●

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

●

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

●

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

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

~~COVID-19~~

Effects of COVID-19 may negatively impact management assumptions and estimates, such as the allowance for loan losses. However, it is difficult to assess or predict how, and to what extent, COVID-19 will affect the Bank in the future. Refer to Note 3: Loans and Allowance for Loan Losses for additional information about COVID-19 and programs that were established to assist borrowers.

Critical ~~Accounting~~ Accounting Policies

Our critical accounting policies ~~which~~ involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities ~~and~~ used in the preparation of the Consolidated Financial Statements as of ~~September~~June 30, ~~2022,~~2023. With the exception of the adoption of ASC 326 as of January 1, 2023, as discussed in Note 1: Nature of Business and Basis of Presentation, our critical accounting policies have ~~remained~~remain unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Balance Sheet

Cash and Cash Equivalents (including interest-bearing deposits at the Federal Reserve)

Total cash and cash equivalents decreased ~~93.5%~~8.7% or ~~$131.0~~$2.4 million to ~~$9.1~~$25.4 million as of ~~September~~June 30, ~~2022,~~2023, from ~~$140.1~~$27.8 million as of December 31, ~~2021.~~2022. The decrease in total cash and cash equivalents is primarily due to ~~purchases~~a net decrease in deposit accounts of ~~investment securities available for sale, net of proceeds from sales, calls~~$33.9 million and ~~maturities, and to a lesser extent,~~ a net increase in loans of $11.0 million, partially offset by short term borrowings of $25.0 million, net proceeds from maturities of investment securities of $17.4 million and ~~a net decrease in deposit accounts.~~cash generated from operations.

Investment Securities Available for Sale

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

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

As of ~~September~~June 30, ~~2022,~~2023, our available for sale investment portfolio included U.S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of ~~$269.4~~$255.7 million and an amortized cost of ~~$297.6~~$279.2 million for a net unrealized loss of approximately ~~$28.2~~$23.5 million. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, our investment securities portfolio represented approximately ~~42.75%~~39.43% and ~~31.26%~~41.5% of our total assets, respectively. The average yield on our investment securities was ~~1.17%~~1.13% and ~~1.02%~~1.18% at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Loans

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

Net loans increased ~~$21.7~~$11.0 million, or ~~7.2%~~3.35%, to ~~$324.0~~$337.7 million as of ~~September~~June 30, ~~2022~~2023 from ~~$302.3~~$326.7 million as of December 31, ~~2021.~~2022. The increase is primarily related to growth in Consumer and Commercial Real Estate ~~loans offset by a decrease in PPP~~ loans.

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

The following table is a summary of our loan portfolio composition (net of deferred fees and costs of ~~$157,002~~$178,278 and ~~$488,481~~$159,434 at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively) and the corresponding percentage of total loans as of the dates indicated.

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

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

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

The decrease in the deferred fees is primarily associated with the recognition of the processing fees the Bank received from the SBA for the PPP loans. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20.

	June 30, 2023						December 31, 2022
	Amount			Percent			Amount			Percent

Commercial	$	46,173,490			13.53	%	$	45,072,059			13.62	%
Commercial Real Estate Construction		23,752,103			6.96	%		17,524,260			5.29	%
Commercial Real Estate Other		174,739,069			51.19	%		172,897,387			52.24	%
Consumer Real Estate		92,895,470			27.22	%		91,636,538			27.69	%
Consumer Other		3,778,741			1.10	%		3,851,538			1.16	%
Total loans		341,338,873			100.00	%		330,981,782			100.00	%
Allowance for credit losses		(3,689,863	)					(4,291,221	)

Total loans, net	$	337,649,010					$	326,690,561

Nonperforming Assets

Nonperforming Assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. As of ~~September~~June 30, ~~2022,~~2023, there were no loans 90 days past due still accruing interest.

The following table is a summary of our Nonperforming ~~Assets:~~Assets as of the dates indicated:

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

	June 30, 2023		December 31, 2022
Commercial	$	—	$	—
Commercial Real Estate Other		625,677		631,453
Consumer Real Estate		—		—
Consumer Other		—		—
Total nonaccruing loans		625,677		631,453
Total nonperforming assets	$	625,677	$	631,453

Allowance for ~~Loan~~Credit Losses

The allowance for ~~loan~~credit losses was $3.7 million and $4.3 million as of ~~September~~June 30, ~~2022~~2023 and ~~$4.4 million as of~~ December 31, ~~2021,~~2022, respectively, or ~~1.32%~~1.08% and ~~1.47%~~1.30%, respectively, of outstanding ~~loans, net of PPP~~ loans. ~~Because PPP loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve.~~ At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the allowance for ~~loan~~credit losses represented ~~682.79%~~589.74% and ~~537.31%~~679.58%, 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~~credit losses at ~~September~~June 30, ~~2022~~2023 is adequate.

At ~~September~~June 30, ~~2022, impaired~~2023, individually assessed loans totaled $2.4 million, of which $0.1 million of these loans had a reserve of approximately $0.1 million allocated in the allowance for credit losses. Comparatively, individually assessed loans totaled $2.8 million as of ~~which $0.4~~December 31, 2022, and $1.1 million of these loans had a reserve of approximately $0.2 million allocated in the allowance for ~~loan losses. Comparatively, impaired loans totaled $3.4 million as of December 31, 2021, and $0.4 million of these loans had a reserve of approximately $0.2 million allocated in the allowance for loan~~credit losses.

During the three months ended ~~September~~June 30, ~~2022,~~2023, we recorded ~~no charge-offs and $22,356~~$1,360 of recoveries on loans previously charged-off. During the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, we recorded ~~$2,045~~$48,138 in charge-offs and ~~$29,279~~$1,960 of recoveries on loans previously charged-off, for net ~~recoveries~~charge-offs of ~~$27,234.~~$46,358.

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest-bearing deposits provided funding for ~~55.74%~~59.23% of average earning assets for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, and ~~56.67%~~54.97% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The Company encounters strong competition for deposits from other financial institutions, ~~as well as consumer and commercial finance companies,~~ insurance companies, ~~and~~ brokerage firms ~~located in~~and the ~~primary service area of the Bank.~~U.S. Treasury. However, the percentage of funding provided by deposits has remained relatively stable.

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

	September 30, 2022					December 31, 2021					June 30, 2023					December 31, 2022
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Deposits
Non-interest bearing demand	$	234,757,823		40.61	%	$	255,783,644		41.98	%	$	206,034,702		36.49	%	$	223,117,903		37.26	%
Interest bearing demand		161,299,986		27.90	%		165,335,038		27.14	%		154,348,295		27.33	%		195,143,514		32.60	%
Money market accounts		103,909,416		17.97	%		98,113,942		16.11	%		104,930,669		18.58	%		100,014,125		16.71	%
Time deposits $250,000 and over		4,901,501		0.85	%		7,417,864		1.22	%		30,596,097		5.42	%		5,303,509		0.89	%
Other time deposits		12,300,498		2.13	%		13,870,356		2.28	%		11,106,990		1.97	%		11,266,099		1.88	%
Other savings deposits		60,943,285		10.54	%		68,670,732		11.27	%		57,736,509		10.21	%		63,825,108		10.66	%

Total deposits	$	578,112,509		100.00	%	$	609,191,576		100.00	%	$	564,753,262		100.00	%	$	598,670,258		100.00	%

Deposits decreased ~~5.1%~~5.67% or ~~$31.1~~$33.9 million from December 31, ~~2021~~2022 to ~~September~~June 30, ~~2022~~2023 primarily due to ~~a decrease~~scheduled maturities of brokered time deposits of $23.0 million and increased competition for deposits in the ~~balances~~financial industry. Decreases in interest bearing and non-interest bearing demand deposits were partially offset by a significant increase in time deposits $250,000 and over, which is the result of $24.6 million in brokered time deposits. The Bank acquired $47.8 million in brokered time deposits during three months ended March 31, 2023. During the three months ended June 30, 2023, $23.2 million of the brokered time deposits matured. These deposits were obtained to meet short-term liquidity needs of the Bank and are a ~~related group~~combination of ~~demand deposit accounts. The higher balance in 2021 for these demand deposit accounts was temporary in nature.~~90, 180 and 270-day maturities, which align with securities maturing within the Bank’s portfolio later this year. Brokered time deposits totaled 4.36% and 0% of total deposits at June 30, 2023 and December 31, 2022, respectively.

At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, deposits with an aggregate deficit balance of ~~$139,928~~$20,188 and ~~$28,549,~~$80,524, respectively, were re-classified as other loans.

Comparison of Three Months Ended ~~September~~June 30, ~~2022~~2023 to Three Months Ended ~~September~~June 30, ~~2021~~2022

Net income ~~increased $0.1~~decreased $0.2 million or ~~6.56%~~17.19% to ~~$1.8~~$1.3 million, or basic and diluted earnings per share of ~~$0.33 and $0.33, respectively,~~$0.23 for the three months ended ~~September~~June 30, ~~2022,~~2023, from ~~$1.7~~$1.5 million, or basic and diluted earnings per share of ~~$0.31~~$0.28 and ~~$0.30, respectively,~~$0.27 for the three months ended ~~September~~June 30, ~~2021.~~2022, respectively. Our annualized returns on average assets and average equity for the three months ended ~~September~~June 30, ~~2022~~2023 were ~~1.11%~~0.79% and 11.24%, respectively, compared with ~~1.15%~~0.93% and ~~12.32%~~11.24%, respectively, for the three months ended ~~September~~June 30, ~~2021.~~2022.

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is a measure of the difference between interest income on earning assets and interest paid on interest bearing liabilities relative to the amount of interest-bearing assets. Net interest income increased ~~$0.8~~$0.1 million or ~~20.2%~~1.35% to ~~$5.0~~$4.6 million for the three months ended ~~September~~June 30, ~~2022~~2023 from ~~$4.2~~$4.5 million for the three months ended ~~September~~June 30, ~~2021.~~2022. Average loans increased ~~$6.0~~$21.0 million or ~~1.9%~~6.56% to ~~$325.1~~$341.1 million for the three months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$319.1~~$320.1 million for the three months ended ~~September~~June 30, ~~2021.~~2022. The yield on average loans (including fees) was ~~5.08%~~6.07% and ~~5.02%~~5.07% for the three months ended ~~September~~June 30, 2023 and June 30, 2022, respectively. The increase in the yield on average loans was the result of interest rates on variable rate loans, as well as higher interest rates on new originations and ~~September 30, 2021, respectively.~~renewals of fixed rate loans. Interest income on loans increased ~~$0.4~~$1.3 million for the three months ended ~~September~~June 30, ~~2022~~2023 to ~~$4.0~~$5.0 million from ~~$3.6~~$3.7 million for the three months ended ~~September~~June 30, ~~2021.~~2022.

The average balance of interest bearing deposits at the Federal Reserve decreased ~~$46.0~~$37.4 million or ~~59.1%~~69.59% to ~~$31.9~~$16.3 million for the three months ended ~~September~~June 30, 2023, with a yield of 5.04% as compared to $53.7 million for the three months ended June 30, 2022, with a yield of ~~2.23% as compared~~0.73%.

The average balance of deposits decreased $34.7 million or 5.71% to ~~$77.9~~$574.1 million for the three months ended ~~September~~June 30, ~~2021,~~2023, with a yield of ~~0.16%~~0.85% as compared to $608.8 million for the three months ended June 30, 2022, with a yield of 0.02%. Deposit rates paid have increased as deposit rates paid from other sectors of the financial industry continue to create intense competition.

Provision for ~~Loan~~Credit Losses

Non-Interest Income

Other income decreased ~~$0.7~~$0.2 million or ~~61.1%~~26.37% to $0.4 million for the three months ended ~~September~~June 30, ~~2022,~~2023, from ~~$1.1~~$0.6 million for the three months ended ~~September~~June 30, ~~2021.~~2022. This decrease was primarily due to a ~~$0.4~~$0.1 million decrease in mortgage banking ~~income compared to~~income. The Bank sold $12.2 million of mortgage loans held for sale during the three months ended ~~September~~June 30, ~~2021 and gains on sales of securities of $0.3~~2023 as compared with $21.5 million during the three months ended ~~September~~June 30, ~~2021.~~2022.

Non-Interest Expense

Non-interest expense increased ~~$0.1~~$0.3 million or ~~0.66%~~7.89% to $3.4 million for the three months ended June 30, 2023, from $3.1 million for the three months ended ~~September~~June 30, ~~2022, from $3.0 million for the three months ended September 30, 2021. For the three months ended September 30, 2022, we experienced marginal~~2022. The increase in non-interest expense was primarily due to increases in salaries and employee benefits and net occupancy ~~costs and salaries which were largely offset by lower professional fees and other operating expenses.~~expense. The Bank opened its new James Island location in the second quarter of 2023.

Income Tax Expense

Income tax expense was ~~$0.5~~$0.4 million for ~~both~~ the three months ended ~~September~~June 30, ~~2022 and 2021.~~2023 as compared to $0.5 million during the same period in 2022. Our effective tax rate was ~~22.87%~~22.94% and ~~23.34%~~22.88% for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

Comparison of ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022

Net income decreased ~~$0.4~~$0.1 million or ~~6.88%~~4.68% to ~~$4.8~~$2.9 million, or basic and diluted earnings per share of ~~$0.87~~$0.52 and ~~$0.86~~$0.51, respectively, for the ~~nine~~six months ended ~~September~~June 30, ~~2022, respectively,~~2023, from ~~$5.2~~$3.0 million, or basic and diluted earnings per share of ~~$0.94~~$0.54 and ~~$0.92, respectively,~~$0.53 for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022, respectively. Our annualized returns on average assets and average equity for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were ~~0.98%~~0.89% and ~~14.11%~~13.61%, respectively, compared with ~~1.23%~~0.91% and ~~12.64%~~12.68%, respectively, for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is a measure of the difference between interest income on earning assets and interest paid on interest bearing liabilities relative to the amount of interest-bearing assets. Net interest income increased ~~$0.7~~$0.5 million or ~~5.39%~~6.21% to ~~$13.8~~$9.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 from ~~$13.1~~$8.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. Average loans ~~decreased $9.0~~increased $22.5 million or ~~2.73%~~7.13% to ~~$318.6~~$337.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$327.6~~$315.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The yield on average loans (including fees) was ~~5.05%~~5.97% and ~~5.24%~~5.03% for the ~~nine~~six months ended ~~September~~June 30, 2023 and June 30, 2022, respectively. The increase in the yield on average loans was the result of interest rates on variable rate loans, as well as higher interest rates on new originations and ~~2021, respectively.~~renewals of fixed rate loans. Interest income on loans ~~decreased $0.2~~increased $2.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 to ~~$11.3~~$9.7 million from ~~$11.5~~$7.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

The average balance of interest bearing deposits at the Federal Reserve decreased ~~$10.2~~$49.0 million or ~~16.42%~~78.81% to ~~$52.0~~$13.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, with a yield of ~~0.80%~~4.85% as compared to $62.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, with a yield of ~~0.12%~~0.43%.

The average balance of deposits decreased $26.6 million or 4.40% to $577.0 million for the six months ended June 30, 2023, with a yield of 0.71% as compared to $603.6 million for the six months ended June 30, 2022, with a yield of 0.02%. Deposit rates paid have increased as deposit rates paid from other sectors of the financial industry continue to create intense competition.

Provision for ~~Loan~~Credit Losses

We have established an allowance for ~~loan~~credit losses through a charge (credit) to the provision for ~~loan~~credit 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~~credit losses. For the ~~nine~~six months ended ~~September~~June 30, 2023, we recorded a $45,000 increase to the allowance for credit losses. For the six months ended June 30, 2022, we recorded a $75,000 reduction to the allowance for ~~loan~~credit losses. ~~For the nine months ended September 30, 2021, we had a provision of loan losses of $120,000.~~ The net ~~decrease~~increase in the provision for ~~loan~~credit losses was based on our analysis of the adequacy of the allowance for ~~loan~~credit 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.~~Credit Losses of our Notes to Consolidated Financial Statements included in Part I of this report.

Non-Interest Income

Other income decreased ~~$1.4~~$0.3 million or ~~44.75%~~27.84% to ~~$1.7~~$0.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, from ~~$3.0~~$1.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. This decrease was primarily due to a ~~$1.2~~$0.3 million decrease in mortgage banking income and decrease of ~~$0.2~~$0.1 million ~~of gain~~on gains on sales of investment securities. The Bank sold ~~$53.0~~$20.2 million of mortgage loans held for sale during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared with ~~$141.6~~$39.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

Non-Interest Expense

Non-interest expense ~~was $9.2~~increased $0.4 million or 7.82% to $6.6 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2022 and 2021. For~~2023, from $6.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022, marginal~~2022. The increase in non-interest expense was primarily due to 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~~expense. The Bank opened its new James Island location in ~~data processing fees and other operating expense.~~the second quarter of 2023.

Income Tax Expense

Income tax expense was ~~$1.5~~$0.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared to ~~$1.6~~$0.9 million during the same period in ~~2021.~~2022. Our effective tax rate was ~~23.03%~~18.40% and ~~23.58%~~23.13% for the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively. The lower effective rate is the result of the prior year tax provision calculation.

Off-Balance Sheet ~~Arrangements~~Arrangements

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on our credit evaluation of the borrower. Collateral held varies but may include accounts receivable, negotiable instruments, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to ~~$146.5~~$138.4 million and ~~$117.5~~$145.4 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

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

Commitments under standby letters of credit are usually for one year or less. The maximum potential amount of undiscounted future payments related to standby letters of credit at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$2.5~~$1.7 million and ~~$0.6~~$2.5 million, respectively.

We originate certain fixed rate residential loans and commit these loans for sale. The commitments to originate fixed rate residential loans and the sales commitments are freestanding derivative instruments. We had forward sales commitments on mortgage loans held for sale totaling ~~$0.7~~$2.9 million and ~~$2.8~~$0.9 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The fair value of these commitments was not significant at ~~September~~June 30, ~~2022~~2023 or December 31, ~~2021.~~2022. We had no embedded derivative instruments requiring separate accounting treatment.

Once we sell certain fixed rate residential loans, the loans are no longer reportable on our balance sheet. With most of these sales, we have an obligation to repurchase the loan in the event of a default of principal or interest on the loan. This recourse period ranges from three to nine months. Misrepresentation or fraud carries unlimited time for recourse. The unpaid principal balance of loans sold with recourse was ~~$9.7~~$11.7 million at ~~September~~June 30, ~~2022.~~2023. There were ~~two~~no loans repurchased during the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, ~~and one loan was repurchased during the nine months ended September 30, 2021.~~respectively.

Liquidity

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

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

Proper liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our primary liquid assets are cash and due from banks, investment securities available for sale, interest-bearing deposits at the Federal Reserve, and mortgage loans held for sale. Our primary liquid assets accounted for ~~44.29%~~43.79% and ~~52.30%~~45.89% of total assets at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates and liquidity needs. All of the investment securities presently owned are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity. At ~~September~~June 30, ~~2022,~~2023, 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 have established a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits us to retain possession of assets pledged as collateral to secure advances from the Federal Reserve Discount Window. At ~~September~~June 30, ~~2022,~~2023, we could borrow up to ~~$77.2~~$84.2 million. There have been no borrowings under this arrangement.

During the first quarter of 2023, the Federal Reserve authorized all twelve Reserve Banks to establish the Bank Term Funding Program (the “Program”) to make available additional funding to eligible depository institutions in order to help assure banks have the ability to meet the needs of all their depositors. The Program offers advances of up to one year in length to banks, savings associations, credit unions and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Bank in open market options, such as U.S. Treasuries, U.S. agency securities and U.S. agency mortgage-backed securities. Advances are limited to the par value of the eligible collateral pledged by the eligible borrower. The Bank established a $25.0 million credit line under the Program during the first quarter of 2023 and increased the credit line by an additional $10.0 million to $35.0 duiring the second quarter of 2023. As of June 30, 2023, there were $25.0 million in borrowings under the Program.

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.~~needs. At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, our liquidity ratio was ~~45.97%~~47.75% and ~~56.43%~~48.09%, respectively.

Capital Resources

Our capital needs have been met to date through the $10.6 million in capital raised in our initial offering, the retention of earnings less dividends paid and the exercise of stock options to purchase stock. Total shareholders’ equity ~~which includes accumulated other comprehensive losses, was $36.0 million and $53.9 million~~ as of ~~September~~June 30, ~~2022 and December 31, 2021, respectively. The year-to-date decrease~~2023 was primarily the result of a $20.2 million change in the net unrealized loss on available-for-sale securities, net of tax, due to rising interest rates. Exclusive of accumulated other comprehensive losses of $22.3 million and $2.1 million as of September 30, 2022 and December 31, 2021, respectively, shareholders' equity was $58.3 million and $56.1 million as of September 30, 2022 and December 31, 2021, respectively.$42.6 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 USU.S. 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.~~Reserve.

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

~~At September 30, 2022,~~

On November 4, 2019, the ~~Bank was categorized~~federal banking agencies jointly issued a final rule on an optional, simplified measure of capital adequacy for qualifying community banking organizations called the community bank leverage ratio (“CBLR”) framework effective on January 1, 2020. A qualifying community banking organization is defined as ~~“well capitalized”. To~~having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. Additionally, the qualifying community banking organization must be ~~categorized as “well capitalized,” the Bank must maintain total risk based,~~a non-advanced approaches FDIC supervised institution. The final rule adopts Tier 1 ~~risk based, common equity Tier 1 risk based~~ capital and ~~Tier 1~~existing leverage ~~ratios of 10.00%, 8.00%, 6.50% and 5.00%, respectively, and to be categorized as “adequately capitalized,”~~ratio into the CBLR framework. The Bank must maintain total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 8.00%, 6.00%, 4.50% and 4.00%, respectively. The Bank’s total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratiosadopted this rule as of September 30, ~~2022~~2020 and is no longer subject to other capital and leverage requirements. A CBLR bank meeting qualifying criterion is deemed to have met the “well capitalized” ratio requirements and be in compliance with the generally applicable capital rule. The Bank’s CBLR as of June 30, 2023 was 9.35%. As of June 30, 2023, the Company and the Bank were ~~16.75%, 15.58%, 15.58%~~categorized as “well capitalized.” We believe, as of June 30, 2023, that the Company and ~~8.70%, respectively.~~the Bank meet all capital adequacy requirements to which we are subject.

There are no current conditions or events that we are aware of that would change the Company’s or the Bank’s capital adequacy category.

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.~~Smaller reporting companies are not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of ~~disclosure controls~~Disclosure Controls and ~~procedures and internal controls and procedures for financial reporting~~Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the “Act”) was carried out as of ~~September~~June 30, ~~2022~~2023 under the supervision and with the participation of the Bank of South Carolina Corporation’s management, including its President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President and several other members of the Company’s senior management. Based upon that evaluation, Bank of South Carolina Corporation’s management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President concluded that, as of ~~September~~June 30, ~~2022,~~2023, 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.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~September~~June 30, ~~2022,~~2023, 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~~PART II. ~~Other Information~~OTHER INFORMATION

Item 1. Legal ~~Proceedings~~ 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~~Factors.

~~Not required.~~Smaller reporting companies are not required to provide the information required by this Item.

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

~~None.~~Sales of Unregistered Securities

None.

Issuer Repurchases of Equity Securities

The Company’s repurchases of its common stock during the second quarter of 2023 were as follows:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
April 1 - April 30, 2023		—		—		—	$	—
May 1 - May 31, 2023		1,762	$	13.86		1,762	$	1,975,571
June 1 - June 30, 2023		2,350	$	13.98		2,350	$	1,967,137
Total		4,112	$	13.93		4,112	$	1,942,710

(1)

On May 25, 2023, the Company’s board of directors authorized the repurchase of up to $2.0 million of the Company’s issued and outstanding common stock from time to time through May 2026. This new program replaces the prior stock repurchase program approved by the board of directors on March 26, 2020. The stock repurchases under the new program may be open market or private purchases, negotiated transactions, block purchases, or otherwise, in accordance with securities laws. The amount and timing of the stock repurchases will be based on various factors, such as management’s assessment of the Company’s liquidity, the market price of Company common stock compared to management’s assessment of such stock’s underlying value, and other applicable regulatory, legal and accounting factors. The Company has no obligation to repurchase any shares and may discontinue repurchases at any time.

Item 3. Defaults Upon Senior ~~Securities~~Securities.

None.

Item 4. Mine Safety ~~Disclosures~~Disclosures.

None.

Item 5. Other ~~Information~~Information.

None.

Item 6. ~~Exhibits~~Exhibits.

Exhibits

~~Exhibits~~31.1
~~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) ~~(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.

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

~~Signatures~~SIGNATURES

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

	Bank of South Carolina Corporation

~~November~~August 4, ~~2022~~2023	By:	/s/ Fleetwood S. Hassell
		Fleetwood S. Hassell
		President/Chief Executive Officer

~~November~~August 4, ~~2022~~2023	By:	/s/ Eugene H. Walpole, IV
		Eugene H. Walpole, IV
		Chief Financial Officer/Executive Vice President

3233


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


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


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


Three Months Ended September 30, 2021
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate			Consumer Other		Paycheck Protection Program			Total
Allowance for Loan Losses:
Beginning balance	$	801,548		$	154,276	$	2,206,215	$	1,025,506		$	118,758	$	—		$	4,306,303
Charge-offs		—			—		—		—			—		(903	)		(903	)
Recoveries		10,746			—		—		47,711			4,600		—			63,057
Provisions		(9,338	)		1,248		72,060		(65,539	)		666		903			—
Ending balance	$	802,956		$	155,524	$	2,278,275	$	1,007,678		$	124,024	$	—		$	4,368,457


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

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

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

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

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