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BKSC Bank Of South Carolina

Filed: 4 May 21, 9:23am

 

 

 

United States
Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One) 

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

 

For the quarterly period ended March 31, 2021

 

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

 

Commission file number: 0-27702

 

Bank of South Carolina Corporation

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

 

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

 

256 Meeting Street, Charleston, SC 29401

(Address of principal executive offices)

 

(843) 724-1500

(Registrant’s telephone number)

 

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

 

Yes ☒  No ☐ 

 

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

 

Yes ☒  No ☐ 

 

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

 

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

 

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

 

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

 

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

 

Title of each classTrading symbol(s)Name of each exchange on which registered
Common stockBKSCNASDAQ

 

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

 

 

 

 

 

 

Part I. Financial InformationPage
  
Item 1.Financial Statements 
Consolidated Balance Sheets – March 31, 2021 and December 31, 20203
Consolidated Statements of Income – Three months ended March 31, 2021 and 2020 4
Consolidated Statements of Comprehensive Income – Three months ended March 31, 2021 and 20205
Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2021 and 20206
Consolidated Statements of Cash Flows – Three months ended March 31, 2021 and 20207
Notes to Consolidated Financial Statements8
  
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations22
Off-Balance Sheet Arrangements28
Liquidity28
Capital Resources29
  
Item 3.Quantitative and Qualitative Disclosures About Market Risk30
  
Item 4.Controls and Procedures30
  
Part II. Other Information 
  
Item 1.Legal Proceedings31
Item 1A.Risk Factors31
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds31
Item 3.Defaults Upon Senior Securities31
Item 4.Mine Safety Disclosure31
Item 5.Other Information31
Item 6.Exhibits31
  
Signatures32
Certifications33

 

 

 

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

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

 

See accompanying notes to consolidated financial statements.

 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

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

 

See accompanying notes to consolidated financial statements.

 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

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

 

See accompanying notes to consolidated financial statements.

 

 

 

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

 

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

 

 

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

 

See accompanying notes to consolidated financial statements.

 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(UNAUDITED)

 

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

 

See accompanying notes to consolidated financial statements.

 

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Organization:

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

 

Principles of Consolidation: 

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

 

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

 

Basis of Presentation: 

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

 

Accounting Estimates and Assumptions: 

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

 

Reclassification:

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

 

Income per share: 

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

 

Subsequent Events: 

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

 

Recent Accounting Pronouncements: 

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

 

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

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

 
2.Investment Securities AVAILABLE FOR SALE

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  March 31, 2021 
  Less Than 12 Months  12 Months or Longer  Total 
  #  Fair Value  Gross Unrealized Loss  #  Fair Value  Gross Unrealized Loss  #  Fair Value  Gross Unrealized Loss 
U.S. Treasury Notes  3  $15,008,785  $(203,727)    $  $   3  $15,008,785  $(203,727)
Government-Sponsored Enterprises  7   49,216,630   (2,240,264)           7   49,216,630   (2,240,264)
Municipal Securities  1   495,350   (14,246)           1   495,350   (14,246)
Total  11  $64,720,765  $(2,458,237)    $  $   11  $64,720,765  $(2,458,237)
                                     
  December 31, 2020 
  Less Than 12 Months  12 Months or Longer  Total 
  #  Fair
Value
  Gross Unrealized Loss  #  Fair
Value
  Gross Unrealized Loss  #  Fair
Value
  Gross Unrealized Loss 
U.S. Treasury Notes    $  $     $  $     $  $ 
Government-Sponsored Enterprises  4   29,839,740   (160,260)           4   29,839,740   (160,260)
Municipal Securities                           
                                     
Total  4  $29,839,740  $(160,260)    $  $   4  $29,839,740  $(160,260)

 

10 

 

  

 

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

 

3.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 Excellent (1) The borrowing entity has more than adequate cash flow, unquestionable strength, strong earnings and capital and, where applicable, no overdrafts.
   
 Good (2) The borrowing entity has dependable cash flow, better than average financial condition, good capital and usually no overdrafts.
   
 Satisfactory (3) The borrowing entity has adequate cash flow, satisfactory financial condition, and explainable overdrafts (if any).
   
 Watch (4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical earnings, weak capital, loan to/from stockholders, and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and growth.
   
 OAEM (5) The borrowing entity has marginal cash flow, occasional past dues, and frequent and unexpected working capital needs.

 

11 

 

 

 Substandard (6) The borrowing entity has a cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is possible. The borrowing entity has declining sales, rising costs, and may need to look for secondary source of repayment.
   
 Doubtful (7) The borrowing entity has negative cash flow. Survival of the business is at risk, full repayment is unlikely, and there are frequent and unexplained overdrafts. The borrowing entity shows declining trends and no operating profits.
   
 Loss (8) The borrowing entity has negative cash flow with no alternatives. Survival of the business is unlikely.
   

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

 

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

 

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

  

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

 

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

 

12 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

14 

 

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

 

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

 

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

 

15 

 

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

 

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

 

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

 

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

 

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

 

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

 

4.LEASES

 

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

 

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

 

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

 

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

 

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

 

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

 

5.DISCLOSURE REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

17 

 

 

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

 

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

 

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

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

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

 

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

 

Investment Securities Available for Sale

 

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

 

Derivative Instruments

 

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

 

We had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments as interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on short term fair value of the mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of March 31, 2021 and December 31, 2020.

 

18 

 

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

 

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

 

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

 

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

 

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three ended March 31, 2021 and 2020: 

 

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

 

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

 

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

 

Impaired Loans

 

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

 

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

 

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

 

Mortgage Loans to be Sold

 

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

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

  

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

 

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

   

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

 

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

 

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

 

    Inputs
  Valuation Technique Unobservable Input General Range of Inputs
Impaired Loans Appraisal Value/ Comparison Sales/Other Estimates Appraisals and/or Sales of Comparable Properties Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs
       

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

 

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

 

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

 

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

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

 

 b.Investment securities available for sale

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

 

 c.Loans, net

The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. Additionally, in accordance with ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, this consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio.

 

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated based on the fair value of the underlying collateral. Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value.

 

 d.Deposits

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

 

 e.Accrued interest receivable and payable

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

 

 f.Loan commitments

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

  

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

 

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

  

 

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

 

6.INCOME PER COMMON SHARE

 

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

 

The following table is a summary of the reconciliation of weighted average shares outstanding for the three months ended March 31:

 

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

 

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

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including information included or incorporated by reference in this document, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1934. We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1996 and are including this statement for the express purpose of availing the Company of protections of such safe harbor with respect to all “forward-looking statements” contained in this Form 10-Q. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors that are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitations, those described under the “Cautionary Statement Regarding Forward-Looking Statements” section of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC and the following:

 

 Risk from changes in economic, monetary policy, and industry conditions
 Changes in interest rates, shape of the yield curve, deposit rates, the net interest margin and funding sources
 Market risk (including net income at risk analysis and economic value of equity risk analysis) and inflation
 Risk inherent in making loans including repayment risks and changes in the value of collateral
 Loan growth, the adequacy of the allowance for loan losses, provisions for loan losses, and the assessment of problem loans
 Level, composition, and re-pricing characteristics of the securities portfolio
 Deposit growth, change in the mix or type of deposit products and services
 Continued availability of senior management and ability to attract and retain key personnel
 Technological changes
 

Ability to control expenses

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

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

Pandemic risk, including COVID-19, and related quarantine and/or stay-at home policies and restrictions

Impact of COVID-19 on the collectability of loans

Changes in legislation as related to PPP loans

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

 

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

 

Overview

Bank of South Carolina Corporation (the “Company”) is a financial institution holding company headquartered in Charleston, South Carolina, with $554.1 million in assets as of March 31, 2021. The Company offers a broad range of financial services through its wholly-owned subsidiary, The Bank of South Carolina (the “Bank”). The Bank is a state-chartered commercial bank which operates primarily in the Charleston, Dorchester and Berkeley counties of South Carolina. The Bank’s original and current concept is to be a full-service financial institution specializing in personal service, responsiveness, and attention to detail to foster long standing relationships.

 

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

 

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

 

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In addition to earning interest on loans and investments, we earn income through fees and other expenses we charge to the customer. The various components of non-interest income as well as non-interest expense are described in the following discussion. The discussion and analysis also identify significant factors that have affected our financial position and operating results as of and for the periods ending March 31, 2021 and December 31, 2020, and should be read in conjunction with the financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion.

 

COVID-19

 

On March 11, 2020, the World Health Organization (“WHO”) declared COVID-19 a pandemic. Due to orders issued by the governor of South Carolina and in an abundance of caution for the health of our customers and employees, on March 23, 2020 the Bank closed lobbies to all 5 offices but remained fully operational.

 

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

 

Borrowers must submit a forgiveness application within ten months of the completion of the covered period. Once the borrower has submitted the application, the Bank has 60 days to review, issue a lender decision, and submit the decision and application to the SBA. Once the application is submitted, the SBA has 90 days to review and remit the appropriate forgiveness amount to the Bank plus any interest accrued through the date of payment. The SBA began accepting PPP Forgiveness Applications on August 10, 2020. As of March 31, 2021, the Bank received 215 PPP forgiveness applications, in the amount of $34.3 million in principal, and submitted 209 applications and decisions to the SBA, in the amount of $26.6 million in principal. Of the 209 PPP submissions, 200 loans, in the amount of $25.2 million, were forgiven as of March 31, 2021. Upon forgiveness the Bank will recognize the deferred fee income in accordance with ASC 310-20. The Bank received processing fees of $1.4 million related to the first round of PPP. The Bank recognized $0.6 million during the year ended December 31, 2020. The Bank recognized $0.6 million during the three months ended March 31, 2021.

 

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Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2020, and executed between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. The Bank processed approximately $0.8 million in principal deferments to 84 loans, with an aggregate loan balance of $29.7 million, during year ended December 31, 2020. The principal deferments represent 0.24% of our total loan portfolio as of December 31, 2020. In accordance with the FDIC guidance, borrowers who were current prior to becoming affected by COVID-19, that received payment accommodations as a result of the pandemic, generally should not be reported as past due. There were no interest deferments granted and all loans given payment accommodations are still paying interest. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 8 loans, with an aggregate loan balance of $3.9 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. All other borrowers were current prior to relief, were not experiencing financial difficulty prior to COVID-19, and the Bank. As of March 31, 2021, 6 loans remain classified as TDRs with an aggregate balance of $3.5 million. Additionally, of the 75 loans that received payment accommodations that are not classified as TDRs, 22 loans, with an aggregate loan balance of $5.1 million, have paid their loan in full, 7 loans, with an aggregate loan balance of $0.8 million, are past due less than 30 days, and 46 loans, with an aggregate loan balance of $21.6 million, have commenced paying as agreed as of March 31, 2021. There are no loans that received payment accommodation past due greater than 30 days. The Bank will continue to examine payment accommodations as requested by our borrowers. The Bank will continue to examine payment accommodations as requested by our borrowers.

 

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

 

While the effects of COVID-19 have impacted all industries to varying degrees, the Bank believes the retail and/or service, food and beverage, and short term rental industries in our geographic area are considered a higher risk due to the primary source of repayment. These industries are dependent upon the hospitality industry and were affected by the mandates issued by the Governor of South Carolina to limit occupancy or close for a period of time.

 

The table below shows the total loans receivable for these segments as a percentage of total gross loans as of March 31, 2021.

 

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

  

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These loans have been temporarily downgraded to our "Watch" category, the Bank is continuing to monitor the effects of COVID-19 on these segments of our loan portfolio. During the second quarter of 2020, the Bank granted payment accommodations of approximately $0.1 million to loans with an aggregate balance of $6.0 million, or 33.59% of the loan portfolio segment, of these loans. As of March 31, 2021, the loans in these segments that received payment accommodations are paying as agreed.

 

Effects of COVID-19 may negatively impact management assumptions and estimates, such as the allowance for loan losses. However, it is difficult to assess or predict how, and to what extent, COVID-19 will affect the Bank in the future.

 

Critical Accounting Policies

Our critical accounting policies, which involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities, and used in the preparation of the Consolidated Financial Statements as of March 31, 2021, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

Balance Sheet

 

Cash and Cash Equivalents 

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

 

Investment Securities Available for Sale

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

 

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

 

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

  

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Loans

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

 

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

 

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

 

The following table is a summary of our loan portfolio composition (net of deferred fees and costs of $830,945 at March 31, 2021 and $676,155 at December 31, 2020, respectively) and the corresponding percentage of total loans as of the dates indicated.

 

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

  

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

 

Nonperforming Assets

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

 

The following table is a summary of our Nonperforming Assets:

 

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

 

On March 18, 2020, in recognition of the difficulties of COVID-19, the Chief Justice of South Carolina declared a statewide moratorium on evictions and foreclosures until directed by subsequent order of the Chief Justice. The South Carolina Supreme Court lifted its moratorium effective May 15, 2020. On August 8, 2020, the President of the United States of America issued an executive order that allows the Secretary of Housing and Urban Development to take action, as appropriate and consistent with applicable law, to promote the ability of renters and homeowners to avoid foreclosure and eviction resulting from financial hardships related to COVID-19. On August 27, 2020, the Federal Housing Finance Authority and Department of Housing and Urban Development announced it would extend its foreclosure and eviction moratorium through the end of 2020, benefiting homeowners who have mortgages guaranteed by Fannie Mae and Freddie Mac. On March 29, 2021, the federal eviction moratorium was extended again through June 30, 2021.   

 

Allowance for Loan Losses

The allowance for loan losses was $4.3 million as of March 31, 2021 and $4.2 million as of December 31, 2020, or 1.46% and 1.45% of outstanding loans, net of PPP loans, for each respective period. Because PPP loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve. At March 31, 2021 and December 31, 2020, the allowance for loan losses represented 386.29% and 362.11% of the total amount of nonperforming loans, respectively. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses at March 31, 2021 is adequate.

 

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At March 31, 2021, impaired loans totaled $7.8 million, for which $0.5 million of these loans had a reserve of approximately $0.4 million allocated in the allowance for loan losses. Included in impaired loans, the Bank classified 8 loans, with an aggregate loan balance of $3.9 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. Comparatively, impaired loans totaled $7.8 million as of December 31, 2020, and $1.0 million of these loans had a reserve of approximately $0.4 million allocated in the allowance for loan losses.

 

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

 

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest-bearing deposits provided funding for 56.60% of average earning assets for the three months ended March 31, 2021, and 59.04% for the three months ended March 31, 2020. The Company encounters strong competition from other financial institutions as well as consumer and commercial finance companies, insurance companies and brokerage firms located in the primary service area of the Bank. However, the percentage of funding provided by deposits has remained stable.

 

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

 

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

 

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

 

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

 

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

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

 

Net Interest Income

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

  

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

 

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of our allowance for loan losses. For the three months ended March 31, 2021, we recognized a $120,000 provision of loan losses compared to no provision for the same period in the prior year. The increase in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income increased $0.3 million or 49.76 % to $0.9 million for the three months ended March 31, 2021, from $0.6 million for the three months ended March 31, 2020. This increase was primarily due to improved mortgage banking activity. Rates have remained consistently low, fueling demand for refinancing and new home purchases. Accordingly, mortgage banking income increased $0.3 million or 86.63% from $0.3 million for the three months ended March 31, 2020 to $0.6 million for the three months ended March 31, 2021.

  

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Non-Interest Expense

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

 

Income Tax Expense

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

  

Off-Balance Sheet Arrangements

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on our credit evaluation of the borrower. Collateral held varies but may include accounts receivable, negotiable instruments, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to $127.0 million and $122.8 million at March 31, 2021 and December 31, 2020, respectively.

 

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 March 31, 2021 and December 31, 2020 was $0.9 million and $0.8 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 $13.2 million and $13.0 million at March 31, 2021 and December 31, 2020, respectively. The fair value of these commitments was not significant at March 31, 2021 or December 31, 2020. 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 $48.0 million at March 31, 2021 and $57.2 million at December 31, 2020. For the three months ended March 31, 2021 and March 31, 2020, there were no loans repurchased.

 

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, interest-bearing deposits in other banks, federal funds sold, investments available for sale, other short-term investments and mortgage loans held for sale. Our primary liquid assets accounted for 38.86% and 36.83% of total assets at March 31, 2021 and December 31, 2020, 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 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 March 31, 2021, we had unused short-term lines of credit totaling approximately $24.0 million (which can be withdrawn at the lender’s option). Additional sources of funds available to us for additional liquidity needs include borrowing on a short-term basis from the Federal Reserve System, increasing deposits by raising interest rates paid and sale of mortgage loans held for sale. We established a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits us to retain possession of assets pledged as collateral to secure advances from the Federal Reserve Discount Window. At March 31, 2021, we could borrow up to $72.0 million. There have been no borrowings under this arrangement.

 

During the second quarter of 2020, we established an agreement with the Federal Reserve through the Paycheck Protection Program Liquidity Facility (“PPPLF”). Under this facility, the Bank can borrow from this arrangement on a non-recourse basis, using PPP loans as collateral. There have been no loans pledged and borrowings under this arrangement. 

  

Our core deposits consist of non-interest-bearing accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our level of certificates of deposit greater than $250,000 and other large deposits. We maintain a Contingency Funding Plan (“CFP’) that identifies liquidity needs and weighs alternate courses of action designed to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. At March 31, 2021 and December 31, 2020, our liquidity ratio was 41.32% and 38.63%, respectively.

  

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Capital Resources

Our capital needs have been met to date through the $10.0 million in capital raised in our initial offering, the retention of earnings less dividends paid and the exercise of stock options to purchase stock. Total shareholders’ equity as of March 31, 2021 was $53.0 million. The rate of asset growth since our inception has not negatively impacted this capital base.

 

On March 26, 2020, the Board of Directors of the Company approved a stock repurchase of up to $1.0 million through March 2021. This plan expired in March 2021.

 

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

 

On November 4, 2019, the 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 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 institution must be a non-advanced approaches FDIC supervised institution. The final rule adopts Tier 1 capital and existing leverage ratio into the CBLR framework. The Bank adopted this rule as of March 31, 2021 and will no longer be subject to other capital and leverage requirements. A bank meeting CBLR qualifying criteria 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 March 31, 2021 and December 31, 2020, was 10.18% and 10.19%, respectively. As of March 31, 2021, the Company and the Bank were categorized as “well capitalized.”

 

We are subject to various regulatory capital requirements administered by the federal banking agencies. 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. We must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Current and previous quantitative measures established by regulation to ensure capital adequacy require that we maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and to average assets. Management expects that the capital and leverage ratios for the Company and the Bank under CBLR will enable each of the Company and the Bank to continue to be categorized as “well capitalized.”

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

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

 

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934 as amended (the “Act”) was carried out as of March 31, 2021 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 March 31, 2021, 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.

 

The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

 

Under the supervision and with the participation of management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of March 31, 2021, based on the 2013 framework established in a report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2021. Based on this assessment, management believes that as of March 31, 2021, the Company’s internal control over financial reporting was effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2021, 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 (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.

 

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Part II. Other Information

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors 

Not required.

 

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

The Company’s repurchases of its common stock during the first quarter of 2021 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  Approximate Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) 
January 1 – March 31, 2021     $     $601,132 
Total     $   25,067   $601,132 

 

(1) On March 26, 2020, the Company adopted a $1.0 million stock repurchase program.

 

Item 3. Defaults Upon Senior Securities 

None.

 

Item 4. Mine Safety Disclosure

None.

 

Item 5. Other Information 

None.

 

Item 6. Exhibits  

1.The Consolidated Financial Statements are included in this Form 10-Q and listed on pages as indicated.
  
   Page
    
 (1)Consolidated Balance Sheets3
 (2)Consolidated Statements of Income4
 (3)Consolidated Statements of Comprehensive Income5
 (4)Consolidated Statements of Shareholders’ Equity6
 (5)Consolidated Statements of Cash Flows7
 (6)Notes to Consolidated Financial Statements8-21

 

Exhibits 
 2.0Plan of Reorganization (Filed with 1995 10-KSB)
 3.0Articles of Incorporation of the Registrant (Filed with 1995 10-KSB)
 3.1By-laws of the Registrant (Filed with 1995 10-KSB)
 3.2Amendments to the Articles of Incorporation of the Registrant (Filed with Form S on September 23, 2011)
 4.02020 Proxy Statement (Filed with 2019 10-K)
 10.0Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB)
 10.1Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB)
 10.2Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB)
 10.3Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB)
 10.4Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with 2010 10-K)
  Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with September 30, 2013 10-Q)
 10.51998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A)
 10.6Employee Stock Ownership Plan (Filed with 2008 10-K/A)
  Employee Stock Ownership Plan, Restated (Filed with 2011 Proxy Statement)
  Employee Stock Ownership Plan, Restated (Filed with 2016 10-K
 10.72010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement)
 10.8Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K)
 10.9Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
 10.10First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
 10.11Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
 10.12Extension to Lease Agreement for 256 Meeting Street (Filed with September 30, 2017 10-Q)
 10.13North Charleston Lease Agreement (Filed with September 30, 2017 10-Q)
 10.14Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed with September 30, 2017 10-Q)
 10.152020 Stock Incentive Plan (Filed with 2020 Proxy Statement)
 10.162021 Stock Incentive Plan for Independent Directors (filed with 2021 Proxy Statement)

 14.0Code of Ethics (Filed with 2004 10-KSB)
 21.0List of Subsidiaries of the Registrant (Filed with 1995 10-KSB)
  The Registrant’s only subsidiary is The Bank of South Carolina (Filed with 1995 10-KSB)
 31.1Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer
 31.2Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer
 32.1Certification pursuant to Section 1350
 32.2Certification pursuant to Section 1350
 101.INSXBRL Instance Document
 101.SCHXBRL Taxonomy Extension Schema Document
 101.CALXBRL Taxonomy Extension Calculation Linkbase Document
 101.DEFXBRL Taxonomy Extension Definition Linkbase Document
 101.LABXBRL Taxonomy Extension Label Linkbase Document
 101.PREXBRL Taxonomy Extension Presentation Linkbase Document

 

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Signatures

 

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

 

 Bank of South Carolina Corporation
   
May 4, 2021  
 By:/s/ Fleetwood S. Hassell
  Fleetwood S. Hassell
  President/Chief Executive Officer
   
 By: /s/ Eugene H. Walpole, IV
  Eugene H. Walpole, IV
  Chief Financial Officer/Executive Vice President

 

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