10-K

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended December 31, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from __________ to __________

 Commission file number: 0-27702

BANK OF SOUTH CAROLINA CORPORATION

(Exact name of registrant 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)	(Zip Code)

Issuer’s telephone number: (843) 724-1500

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

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

Securities registered under Section 12(b) of the Exchange Act:

Common Stock

 (Title of Class)

  Securities registered under Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

☐ Yes ☒  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

☐ Yes ☒  No

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, if any, 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 a shorter period that the registrant was required to submit). 

Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	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 by 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 ☒

Aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price of such stock on June 30, 2019 was $68,725,103.

As of February 14, 2020, the Registrant has outstanding 5,530,363 shares of common stock.  

 BANK OF SOUTH CAROLINA CORPORATION 

AND SUBSIDIARY

Table of Contents  

		Page
Item 1. Business	3
Item 1A. Risk Factors	9
Item 1B. Unresolved Staff Comments	9
Item 2. Properties	9
Item 3. Legal Proceedings	10
Item 4. Mine Safety Disclosures	10
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6. Selected Financial Data	13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	31
Item 8. Financial Statements and Supplementary Data	32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	67
Item 9A. Controls and Procedures	67
Item 9B. Other Information	67
PART III
Item 10. Directors, Executive Officers, and Corporate Governance	68
Item 11. Executive Compensation	68
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	68
Item 13. Certain Relationships and Related Transactions, and Director Independence	69
Item 14. Principal Accounting Fees and Services	69
PART IV
Item 15. Exhibits and Financial Statement Schedules	70

2

PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, including information included or incorporated by reference in this document, contains statements that 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 Bank of South Carolina Corporation (the “Company”) of protections of such safe harbor with respect to all “forward-looking statements” contained in this Form 10-K. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of the 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 heading “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (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 and changes 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

● Increased cybersecurity risk, including potential business disruptions or financial losses

● Ability to control expenses

● 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

● Pandemic risk

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.

Item 1. Business

General

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 the Company, effective April 17, 1995. At the time of the reorganization, each outstanding share of the Bank was exchanged for two shares of Company stock.

Market Area

The Bank operates as an independent, community oriented, commercial bank providing a broad range of financial services and products to the Charleston – North Charleston metro area, which includes Charleston, Berkeley, and Dorchester county. We have five banking house locations: 256 Meeting Street, Charleston, SC; 100 North Main Street, Summerville, SC; 1337 Chuck Dawley Boulevard, Mt. Pleasant, SC; 2027 Sam Rittenberg Boulevard, Charleston, SC; and 9403 Highway 78, North Charleston, SC. 

3

The Charleston – North Charleston metro area grew 33.11% between 2012 and 2017 according to the U.S. Bureau of Economic Analysis. From 2017 to 2018 alone, Charleston, Berkeley, and Dorchester county grew 3.2%, 5.1%, and 4.0%, respectively. Charleston and Berkeley county are ranked in the top ten economies in the state based on real gross domestic product according to the U.S. Bureau of Economic Analysis.  The primary economic drivers of our market area are manufacturing, hospitality, technology, and the healthcare industry. This includes manufacturing campuses for Boeing, Volvo Cars, and Mercedes-Benz Vans in the area. Hospitality has also contributed to the economic growth as both Conde Nast Traveler and Travel and Leisure Magazine have recognized the area as a top tourism destination. Additionally, Charleston is considered the number one mid-sized U.S. metro area for IT growth according to the U.S. Bureau of Labor Statistics.

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

The Company (ticker symbol: BKSC) is publicly traded on the National Association of Securities Dealers Automated Quotations (“NASDAQ”), and is under the reporting authority of the SEC. All of our electronic filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are accessible at no cost on our website, http://www.banksc.com, through the “Investor Relations” link. Our filings are also available through the SEC’s web site at http://www.sec.gov or by calling 1-800-SEC-0330.

Competition

The financial services industry is highly competitive. We face competition in attracting deposits and originating loans based upon a variety of factors including: 

● interest rates offered on deposit accounts

● interest rates charged on loans

● credit and service charges

● the quality of services rendered

● the convenience of banking facilities and other delivery channels

● relative lending limits in the case of loans

● increase in non-banking financial institutions providing similar services

● continued consolidation, and

● legislative, regulatory, economic, and technological changes

We compete with commercial banks, savings institutions, finance companies, credit unions and other financial services companies. Many of our larger commercial bank competitors have greater name recognition and offer certain services that we do not. However, we believe that we have developed an effective competitive advantage in our market area by emphasizing exceptional service and knowledge of local trends and conditions.

Lending Activities

We focus our lending activities on small and middle market businesses, professionals and individuals in our geographic markets and typically require personal guarantees. Our primary lending activities are for commercial, commercial real estate, and consumer purposes, with the largest category being commercial real estate. Most of our lending activity is to borrowers within our market area.

Commercial Loans

As of December 31, 2019, $52.8 million, or 19.28%, of our loan portfolio consisted of commercial loans. We originate various types of secured and unsecured commercial loans to customers in our market area in order to provide customers with working capital and funds for other general business purposes. The terms of these loans generally range from less than one year to 10 years. These loans bear either a fixed interest rate or an interest rate linked to a variable market index, depending on the individual loan, its purpose, and underwriting of that loan.

Commercial credit decisions are based upon our credit assessment of each applicant. We evaluate the applicant’s ability to repay in accordance with the proposed terms of the loan and assess the risks involved. In addition to evaluating the applicant’s financial statements, we consider the adequacy of the primary and secondary sources of repayment for the loan. Credit agency reports of the applicant’s personal credit history supplement our analysis of the applicant’s creditworthiness. In addition, collateral supporting a secured transaction is analyzed to determine its marketability. Commercial business loans generally have higher interest rates than residential loans of similar duration because they have a higher risk of default with repayment generally depending on the successful operation of the borrower’s business and the adequacy of any collateral.

4

Commercial Real Estate Loans

As of December 31, 2019, commercial real estate construction loans comprised $12.5 million, or 4.56%, of our loan portfolio. We make construction loans for commercial properties to businesses. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. Loans are typically underwritten with a maximum loan to value ratio of 80% based on current appraisals with value defined as the purchase price, appraised value, or cost of construction, whichever is lower. Repayment of construction loans on non-residential and income-producing properties is normally attributable to rental income, income from the borrower’s operating entity, or the sale of the property. Construction loans are interest-only during the construction period, which typically does not exceed twelve months, and are often paid-off with permanent financing.

Before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state-licensed appraiser. We review and inspect properties before disbursement of funds during the term of the construction loan.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. Construction loans also expose us to risk that improvements will not be completed on time in accordance with specifications and projected costs.

As of December 31, 2019, $143.8 million, or 52.48%, of our loan portfolio consisted of other commercial real estate loans, excluding commercial construction loans. Properties securing our commercial real estate loans are primarily comprised of business owner-occupied properties, small office buildings and office suites, and income-producing real estate.

We base our decision to lend primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement computed after a deduction for an appropriate vacancy factor and reasonable expenses. We typically require property casualty insurance, title insurance, earthquake insurance, wind and hail coverage, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.

Commercial real estate loans generally carry higher credit risks, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions not within the control of the borrower or lender could affect the value of the underlying collateral or the future cash flow of the property.

Consumer Loans

Consumer real estate loans were $59.5 million, or 21.72%, of the loan portfolio as of December 31, 2019. Consumer real estate loans consist of consumer construction loans, HELOCs, and mortgage originations. We make construction loans for owner-occupied residential properties. Advances on construction loans are in accordance with a schedule reflecting the cost of construction, but are limited to a maximum loan-to-value ratio of 80%. Before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state-licensed appraiser. We review and inspect properties before disbursement of funds during the term of the construction loan. Similar to commercial real estate construction financing, consumer construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. Construction loans also expose us to risk that improvements will not be completed on time in accordance with plans, specifications, and projected costs.

This category of loans consists of loans secured by first or second mortgages on primary residences, and originate as adjustable-rate or fixed-rate loans. Owner-occupied properties located in the Company’s market area serve as the collateral for these loans. The Company currently originates residential mortgage loans for our portfolio with a maximum loan-to-value ratio of 80% for traditional owner-occupied homes.

We offer home equity loans and lines of credit secured by the borrower’s primary or secondary residence. Our home equity loans and lines of credit currently originate with an adjustable- rate with a floor. We generally underwrite home equity loans and lines of credit with the same criteria that we use to underwrite mortgage loans to be sold. For a borrower’s primary and secondary residences, home equity loans and lines of credit are typically underwritten with a maximum loan-to-value ratio of 80% when combined with the principal balance of the existing mortgage loan. We require a current appraisal or internally prepared real estate evaluations on home equity loans and lines of credit. At the time we close a home equity loan or line of credit, we record a mortgage to perfect our security interest in the underlying collateral.

5

Other consumer loans totaled $5.4 million and were 1.96% of the loan portfolio as of December 31, 2019. These loans are originated for various purposes, including the purchase of automobiles, boats, and other personal purposes.

Consumer loans may entail greater credit risk than mortgage loans to be sold, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. The application of various federal and state laws, including bankruptcy and insolvency laws, may also limit the amount which can be recovered on such loans.

Loan Approval Procedures and Authority

Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Board of Directors of the Bank. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment, credit history, and information on the historical and projected income and expenses of the borrower.

The objectives of our lending program are to: 

1. Establish a sound asset structure

2. Provide a sound and profitable loan portfolio to:

a) Protect the depositor’s funds

b) Maximize the shareholders’ return on their investment

3. Promote the stable economic growth and development of the market area served by the Bank

4. Comply with all regulatory agency requirements and applicable law

The underwriting standards and loan origination procedures include officer lending limits, which are approved by the Board of Directors. The individual secured/unsecured lending authority of the President/Chief Executive Officer of the Bank is set at $1,500,000 and the individual secured/unsecured lending authority of the Senior Lender/Executive Vice President is set at $750,000. The President/Chief Executive Officer of the Bank and the Senior Lender/Executive Vice President may jointly lend up to 10% of the Bank’s unimpaired capital for the previous quarter end. In the absence of either of the above, the other may, jointly with the approval of either the Chairman of the Board of Directors or a majority of the Loan Committee of the Board of Directors, lend up to 10% of the Bank’s unimpaired capital for the previous quarter end. The Board of Directors, with two-thirds vote, may approve the aggregate credit in excess of this limit but may not exceed 15% of the Bank’s unimpaired capital. Loan limits apply to the total direct and indirect liability of the borrower. All loans above the loan officer’s authority must have the approval of a loan officer with the authority to approve a loan of that amount. Pooling of loan authority is not allowed except as outlined above for the President/Chief Executive Officer, Senior Lender/Executive Vice President, Chairman of the Board of Directors, and a majority of the Loan Committee or two-thirds of the Board of Directors.

All new credit which results in aggregate direct, indirect, and related credit, not under an approved line of credit of a threshold set forth in our loan policy, with the exceptions of mortgage loans in the process of being sold to investors and loans secured by properly margined negotiable securities traded on an established market or other cash collateral, are reviewed in detail on a monthly basis by the Loan Committee. Certain new credits that meet a higher threshold than required for the Loan Committee are reviewed by the Board of Directors of the Bank at its regular monthly meeting.

Employees

At December 31, 2019, we employed 79 people, with four individuals considered part time and one individual considered hourly, none of whom are subject to a collective bargaining agreement. We provide a variety of benefit programs including an Employee Stock Ownership Plan and Trust, Stock Incentive Plan, health, life, disability and other insurance. We believe our relationship with our employees is excellent.

Supervision and Regulation

We are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions and provide for general regulatory oversight of virtually all aspects of operations. The regulations are primarily intended to protect depositors, customers, and the integrity of the U.S. banking system and capital markets. The following information describes some of the more significant laws and regulations applicable to us. The description is qualified in its entirety by reference to the applicable laws and regulations. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, state legislatures, and with the various bank regulatory agencies. Changes in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on our business operations and earnings.

6

Dodd-Frank Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became effective. This law has broadly affected the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services industry. This legislation will continue to significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including the Company and the Bank.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”) to centralize responsibility for consumer financial protection, including implementing, examining and enforcing compliance with federal consumer financial laws. The CFPB exercises supervisory review of banks under its jurisdiction. The CFPB focuses its rulemaking in several areas, particularly in the areas of mortgage reform involving the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act. There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based. Governmental intervention and new regulations could materially and adversely affect our business, financial condition and results of operations.

Volcker Rule

Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” prohibits any bank, bank holding company, or affiliate (referred to collectively as “banking entities”) from engaging in two types of activities: proprietary trading and the ownership or sponsorship of private equity or hedge funds that are referred to as covered funds. Proprietary trading, in general, is trading in securities on a short-term basis for a banking entity’s own account. In December 2013, federal banking agencies, the SEC and the Commodity Futures Trading Commission, finalized a regulation to implement the Volcker Rule. At December 31, 2019, the Company has evaluated our securities portfolio and has determined that we do not hold any covered funds.

Bank Holding Company Act

The Company is a one-bank holding company under the Federal Bank Holding Company Act of 1956, as amended. As a result, the Company is primarily subject to the supervision, examination and reporting requirements of the Board of Governors (the “Federal Reserve Board”) of the Federal Reserve Bank (the “Federal Reserve”) under the act and its regulations promulgated thereunder.

Capital Requirements

The Federal Reserve Board imposes certain capital requirements on the Company under the Bank Holding Company Act, including a minimum leverage ratio and minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are essentially the same as those that apply to the Bank and are described under “Regulatory Capital Requirements” in the notes to the financial statements (see Note 19). The ability of the Company to pay dividends to shareholders depends on the Bank’s ability to pay dividends to the Company, which is subject to regulatory restrictions as described below in “Dividends.”

Standards for Safety and Soundness

The Federal Deposit Insurance Act requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to (1) internal controls, information systems and internal audit systems, (2) loan documentation, (3) credit underwriting, (4) interest rate risk exposure, and (5) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees, and benefits. The federal banking agencies have adopted regulations and “Interagency Guidelines Establishing Standards for Safety and Soundness” to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.

Regulatory Examination

All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate banking agency against each institution or affiliate, as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the Federal Deposit Insurance Corporation (“FDIC”), their federal regulatory agency, and state supervisor when applicable. As a state chartered bank located in South Carolina, the Bank is also subject to the regulations of the South Carolina State Board of Financial Institutions.

7

The federal banking regulatory agencies prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating to, among other things, the following:

● Internal controls

● Information systems and audit systems

● Loan documentation

● Credit underwriting

● Interest rate risk exposure

● Asset quality

● Liquidity

● Capital adequacy

● Bank Secrecy Act

● Sensitivity to market risk

Transactions with Affiliates and Insiders

We are subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Such extensions of credit must be made on substantially the same terms, including interest rates, and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of repayment or present other unfavorable features.

Dividends

The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years. A depository institution may not pay any dividend, without regulatory approval, if payment would cause the institution to become undercapitalized or if it already is undercapitalized.

Consumer Protection Regulations

Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected by the Bank are subject to state usury laws and federal laws concerning interest rates. Our loan operations are also subject to federal laws applicable to credit transactions, such as:

● The federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers

● The Home Mortgage Disclosure Act of 1975, which requires financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves

● The Fair Lending Act, which requires fair, equitable, and nondiscriminatory access to credit for consumers

● The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit

● The Fair Credit Reporting Act of 1978, which governs the use and provision of information to credit reporting agencies

● The Fair Debt Collection Act, which governs the manner in which consumer debt may be collected by collection agencies

● The rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

● The Gramm - Leach - Bliley Act, which governs the protection of consumer information.

The deposit operations of the Bank also are subject to:

● The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records

● The Electronic Funds Transfer Act and the Federal Reserve Board issued Regulation E to implement the act, which governs automatic deposits to and withdrawals from deposit accounts and customer’s rights and liabilities arising from the use of automated teller machines and other electronic banking services

● Regulation DD, which implements the Truth in Savings Act to enable consumers to make informed decisions about deposit accounts at depository institutions.

8

Enforcement Powers

The Company is subject to supervision and examination by the FDIC, the Federal Reserve and the South Carolina State Board of Financial Institutions. The Bank is subject to extensive federal and state regulations that significantly affect business and activities. These regulatory bodies have broad authority to implement standards and to initiate proceedings designed to prohibit depository institutions from engaging in activities that represent unsafe or unsound banking practices or constitute violations of applicable laws, rules, regulations, administrative orders, or written agreements with regulators. These regulatory bodies are authorized to take action against institutions that fail to meet such standards, including the assessment of civil monetary penalties, the issuance of cease-and-desist orders, and other actions.

Bank Secrecy Act/Anti-Money Laundering

We are subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001 (“USA Patriot Act”). We must maintain a Bank Secrecy Act Program that includes established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee-training program; and testing of the program by an independent audit function. The enactment of the USA Patriot Act amended and expanded the focus of the Bank Secrecy Act to facilitate information sharing among governmental entities and the Company for the purpose of combating terrorism and money laundering. It improves anti-money laundering and financial transparency laws, information collection tools and the enforcement mechanics for the U.S. government. These provisions include (a) standards for verifying customer identification at account opening; (b) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (c) reports by nonfinancial trades and businesses filed with the U.S. Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10,000; (d) suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws; and (e) regulations and enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.

Similar in purpose to the Bank Secrecy Act, the Office of Foreign Assets Control (“OFAC”), a division of the U.S. Department of Treasury, controls and imposes economic and trade sanctions based on U.S. foreign policy and national security goals against targeted countries and individuals based on threats to foreign policy, national security, or the U.S. economy. OFAC has and will send banking regulatory agencies lists of names of individuals and organizations suspected of aiding, concealing, or engaging in terrorist acts. Among other things, the Bank must block transactions with or accounts of sanctioned persons and report those transactions after their occurrence.

Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

Privacy and Credit Reporting

In connection with our lending activities, we are subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act (the “CRA”). The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.” In addition, federal banking regulators, pursuant to the Gramm-Leach-Bliley Act, have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with nonaffiliated third parties.

Item 1A. Risk Factors

Under the filer category of “smaller reporting company”, as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide information requested by Part I, Item 1A of its Form 10-K.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company’s headquarters is located at 256 Meeting Street in downtown Charleston, South Carolina. This site is also the location of the main office of the Bank. The Bank also operates from four additional locations: 100 North Main Street, Summerville, SC; 1337 Chuck Dawley Boulevard, Mount Pleasant, SC; 2027 Sam Rittenberg Boulevard, Charleston, SC; and 9403 Highway 78, North Charleston, SC. The Bank’s mortgage department was located at 1071 Morrison Drive, Charleston, SC for part of the year but relocated to 9403 Highway 78, North Charleston, SC during the second half of 2019. The Company owns the 2027 Sam Rittenberg Boulevard location, which houses the Operations Department of the Bank as well as a banking office. The Company leases all other locations. The owned location is not encumbered and all of the leases have renewal options. Each banking location is suitable and adequate for banking operations.

9

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

10

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

At December 31, 2019, there were 5,799,637 shares issued and 5,530,001 shares outstanding of the 12,000,000 authorized shares of common stock of the Company. Our common stock is traded on the NASDAQ under the trading symbol “BKSC”.

Information regarding the historical market prices of our common stock and dividends declared on that stock is shown below.

	High		Low		Dividends
2019
Quarter ended March 31, 2019	$	19.30	$	18.12	$	0.16
Quarter ended June 30, 2019	$	20.01	$	17.52	$	0.16
Quarter ended September 30, 2019	$	19.32	$	18.34	$	0.26
Quarter ended December 31, 2019	$	18.99	$	18.27	$	0.16
2018
Quarter ended March 31, 2018	$	21.45	$	18.90	$	0.15
Quarter ended June 30, 2018	$	21.90	$	17.55	$	0.15
Quarter ended September 30, 2018	$	21.15	$	19.50	$	0.25
Quarter ended December 31, 2018	$	20.90	$	17.89	$	0.15
2017
Quarter ended March 31, 2017	$	21.85	$	19.28	$	0.14
Quarter ended June 30, 2017	$	21.15	$	18.80	$	0.14
Quarter ended September 30, 2017	$	19.95	$	17.47	$	0.15
Quarter ended December 31, 2017	$	19.35	$	18.00	$	0.15

The future payment of cash dividends is subject to the discretion of the Board of Directors and depends upon a number of factors including future earnings, financial condition, cash requirements, and general business conditions. Cash dividends, when declared, are paid by the Bank to the Company for distribution to shareholders of the Company. Certain regulatory requirements restrict the amount of dividends that the Bank can pay to the Company.

At our December 1995 Board Meeting, the Board of Directors authorized the repurchase of up to 140,918 shares of its common stock on the open market. At our October 1999 Board Meeting, the Board of Directors authorized the repurchase of up to 45,752 shares of its common stock on the open market and again at our September 2001 Board meeting, the Board of Directors authorized the repurchase of up to 54,903 shares of its common stock on the open market. As of the date of this report, the Company owns 269,636 shares, adjusted for five 10% stock dividends and a 25% stock dividend. At the Annual Meeting in April 2007, the shareholders voted to increase the number of authorized shares from 6,000,000 to 12,000,000.

As of February 14, 2020, there were approximately 2,405 shareholders of record with shares held by individuals and in nominee names. The market price for our common stock as of February 14, 2020 was $18.84. As of February 14, 2020, there were 5,799,999 shares of common stock issued and 5,530,363 shares of common stock outstanding.

THE BANK OF SOUTH CAROLINA EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

During 1989, the Board of Directors of the Bank adopted an Employee Stock Ownership Plan and Trust Agreement (“ESOP”) to provide retirement benefits to eligible employees of the Bank for long and faithful service. An amendment and restatement was made to the ESOP effective January 1, 2007 and approved by the Board of Directors on January 18, 2007. Periodically, the Internal Revenue Service (“IRS”) requires a restatement of a qualified retirement plan to ensure that the plan document includes provisions required by legislative and regulatory changes made since the last restatement. There have been no substantive changes to the plan; however, to comply with the IRS rules, the Board of Directors approved a restated plan on January 26, 2012 (incorporated as Exhibit 10.5 in the 2011 10-K) and submitted the plan to the IRS for approval. The IRS issued a determination letter on September 26, 2013, stating that the plan satisfied the requirements of Code Section 4975 (e) (7). On January 26, 2017, the Board of Directors approved a restated plan (incorporated as Exhibit 10.6 in the 2016 10-K). The restated Plan was submitted to the IRS for approval and a determination letter was issued November 17, 2017, stating that the plan satisfies the requirements of Code Section 4975 (e) (7).

11

The Board of Directors of the Bank approved a cash contribution of $510,000 to the ESOP for the fiscal year ended December 31, 2019. The Board of Directors of the Bank approved cash contributions of $420,000 and $375,000 for the fiscal years ended December 31, 2018 and 2017, respectively. The contributions were made during the respective fiscal years.

An employee of the Bank who is not a member of an ineligible class of employees is eligible to participate in the plan upon reaching 21 years of age and being credited with one year of service (1,000 hours of service). All employees are eligible employees except for the following ineligible classes of employees:

● Employees whose employment is governed by a collective bargaining agreement between employee representatives and the Company in which retirement benefits were the subject of good faith bargaining unless the collective bargaining agreement expressly provides for the inclusion of such employees in the plan

● Employees who are non-resident aliens who do not receive earned income from the Company which constitutes income from sources within the United States

● Any person who becomes an employee as the result of certain asset or stock acquisitions, mergers, or similar transactions (but only during a transitional period)

● Certain leased employees

● Employees who are employed by an affiliated company that does not adopt the plan

● Any person who is deemed by the Company to be an independent contractor on his or her employment commencement date and on the first day of each subsequent plan year, even if such person is later determined by a court or a governmental agency to be or to have been an employee.

The employee may enter the Plan on the January 1^st that occurs nearest the date on which the employee first satisfies the age and service requirements described above. No contributions by employees are permitted. The amount and time of contributions are at the sole discretion of the Board of Directors of the Bank. The contribution for all participants is based solely on each participant’s respective regular or base salary and wages paid by the Bank including commissions, bonuses and overtime, if any.

A participant becomes vested in the ESOP based upon the employee’s credited years of service. The vesting schedule is as follows:

●	1 Year of Service	0% Vested
●	2 Years of Service	25% Vested
●	3 Years of Service	50% Vested
●	4 Years of Service	75% Vested
●	5 Years of Service	100% Vested

The Bank is the Plan Administrator. Eugene H. Walpole, IV, Fleetwood S. Hassell, Sheryl G. Sharry and Douglas H. Sass, currently serve as the Plan Administrative Committee and Trustees for the Plan. At December 31, 2019, the Plan owned 313,703 shares of common stock of the Company.

THE BANK OF SOUTH CAROLINA STOCK INCENTIVE PLAN

We have a Stock Incentive Plan, which was approved in 1998, with 180,000 (329,422 adjusted for four 10% stock dividends, and a 25% stock dividend) shares reserved, and a Stock Incentive Plan, which was approved in 2010, with 300,000 (363,000 adjusted for two 10% stock dividends) shares reserved. Under both plans, options are periodically granted to employees at a price not less than the fair market value of the shares at the date of grant. Participating employees become 20% vested after five years and then vest 20% each year until fully vested. The right to exercise each such 20% of the options is cumulative and will not expire until the tenth anniversary of the date of the grant. Employees are eligible to participate in this plan if the Executive/Long-Range Planning Committee, in its sole discretion, and the Compensation Committee as to Executive Officers who are members of the Executive/Long-Range Planning Committee, determines that an employee has contributed or can be expected to contribute to our profits or growth.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of our common stock. The expected term of the options granted will not exceed ten years from the date of grant (the amount of time options granted are expected to be outstanding). The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

12

Item 6. Selected Financial Data

The following table sets forth certain selected financial information concerning the Company and its wholly-owned subsidiary. The information was derived from audited consolidated financial statements. The information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which follows, and the audited consolidated financial statements and notes, which are presented elsewhere in this report.

	2019			2018			2017			2016			2015
For December 31:
Net income	$	7,318,433		$	6,922,934		$	4,901,825		$	5,247,063		$	4,884,288
Selected Year End Balances:
Total assets		445,012,520			429,135,198			446,566,498			413,949,636			399,172,512
Total loans(1)		279,134,958			275,863,705			272,274,363			264,962,325			248,442,944
Investment securities available for sale		100,449,956			119,668,874			139,250,250			119,978,944			119,997,585
Interest-bearing deposits at the Federal Reserve		39,320,526			25,506,784			24,034,194			18,101,300			23,898,862
Earning assets		418,905,440			421,039,363			435,558,807			403,042,569			392,339,391
Total deposits		379,191,655			382,378,388			402,888,300			372,522,851			358,718,612
Total shareholders’ equity		51,168,032			45,462,561			42,764,635			40,612,974			39,151,712
Weighted Average Shares Outstanding - basic		5,522,025			5,500,027			5,471,001			5,428,884			5,403,749
Weighted Average Shares Outstanding - diluted		5,588,090			5,589,012			5,568,493			5,561,739			5,573,794
For the Year:
Selected Average Balances:
Total assets		440,615,140			430,495,412			428,174,359			410,581,560			379,527,104
Total loans(1)		281,508,711			277,223,600			264,881,222			265,151,258			243,729,630
Investment securities available for sale		106,421,507			123,347,669			130,161,937			110,762,289			110,633,399
Interest-bearing deposits at the Federal Reserve		34,713,982			20,151,823			23,558,893			26,474,258			17,549,903
Earning assets		422,644,200			420,723,092			418,602,052			402,387,805			371,912,932
Total deposits		381,687,960			386,025,147			384,524,305			367,822,900			337,969,217
Total shareholders’ equity		49,242,545			43,691,359			43,121,778			41,479,755			38,631,718
Performance Ratios:
Return on average equity		14.86	%		15.85	%		11.37	%		12.65	%		12.64	%
Return on average assets		1.66	%		1.61	%		1.14	%		1.28	%		1.29	%
Average equity to average assets		11.18	%		10.15	%		10.07	%		10.10	%		10.18	%
Net interest margin		4.28	%		4.15	%		3.76	%		3.71	%		3.72	%
Net (recoveries) charge-offs to average loans		0.14	%		(0.01	)%		0.01	%		0.05	%		0.04	%
Allowance for loan losses as a percentage of total loans(2)		1.46	%		1.53	%		1.43	%		1.48	%		1.41	%
Per Share:
Basic income per common share(3)	$	1.33		$	1.26		$	0.90		$	0.96		$	0.90
Diluted income per common share(3)	$	1.31		$	1.24		$	0.88		$	0.94		$	0.88
Year end book value(3)	$	9.25		$	8.25		$	7.79		$	7.45		$	7.24
Dividends per common share	$	0.74		$	0.70		$	0.58		$	0.54		$	0.52
Dividend payout ratio		55.88	%		54.68	%		58.87	%		50.86	%		49.94	%
Full time employee equivalents		79			79			77			74			81

⁽¹⁾ Including mortgage loans to be sold.

⁽²⁾ Excluding mortgage loans to be sold.

⁽³⁾ Adjusted to retroactively reflect 10% stock dividend issued during the year ended December 31, 2018.

13

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis is included to assist the shareholder in understanding our financial condition, results of operations, and cash flow. This discussion should be reviewed in conjunction with the audited consolidated financial statements and accompanying notes presented in Item 8 of this report and the supplemental financial data appearing throughout this report. Since the primary asset of the Company is its wholly-owned subsidiary, most of the discussion and analysis relates to the Bank.

OVERVIEW

The Company is a bank holding company headquartered in Charleston, South Carolina, with $445.0 million in assets as of December 31, 2019 and net income of $7.3 million for the year ended December 31, 2019. The Company offers a broad range of financial services through its wholly owned subsidiary, the Bank. The Bank is a state-chartered commercial bank, which operates principally 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 investment securities. The primary source of funding for making these loans and investment securities is our interest-bearing 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, such as loans and investments, 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 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. For a detailed discussion on the allowance for loan losses, see “Allowance for Loan Losses”.

In addition to earning interest on loans and investment securities, we earn income through fees and other expenses we charge to the customer. The various components of other income and other expenses are described in the following discussion. The discussion and analysis also identifies significant factors that have affected our financial position and operating results for the year ended as of December 31, 2019 as compared to December 31, 2018 and our operating results for 2018 compared to 2017 and 2017 compared to 2016, and should be read in conjunction with the consolidated financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion.

CRITICAL ACCOUNTING POLICIES

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States (“GAAP”) and with general practices within the banking industry in the preparation of our consolidated financial statements. Our significant accounting policies are set forth in the notes to the consolidated financial statements of this report.

Certain accounting policies involve significant judgments and assumptions made by the Company that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on factors that we believe to be reasonable under the circumstances. Because of the number of judgments and assumptions that we make, actual results could differ and have a material impact on the carrying values of our assets and liabilities and our results of operations.

We consider our policy regarding the allowance for loan losses to be our most subjective accounting policy due to the significant degree of judgment. We have developed what we believe to be appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers, which were not known at the time of the issuance of the consolidated financial statements. For additional discussion concerning our allowance for loan losses and related matters, see “Allowance for Loan Losses”.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2019 TO DECEMBER 31, 2018

Net income increased $0.4 million or 5.71% to $7.3 million, or basic and diluted income per share of $1.33 and $1.31, respectively, for the year ended December 31, 2019 from $6.9 million or basic and diluted income per share of $1.26 and $1.24, respectively, for the year ended December 31, 2018. The increase in net income was primarily due to rising interest rates in the first half of the year on interest-earning assets and a decrease in other operating expenses. Our returns on average assets and average equity for the year ended December 31, 2019 were 1.66% and 14.86%, respectively, compared with 1.61% and 15.85%, respectively, for the year ended December 31, 2018.

 14

Net interest income increased $0.7 million or 3.75% to $18.1 million for the year ended December 31, 2019 from $17.4 million for the year ended December 31, 2018. This increase was primarily due to increases in interest and fees on loans. Interest and fees on loans increased $0.9 million or 5.74% to $16.0 million for the year ended December 31, 2019 from $15.1 million for the year ended December 31, 2018, as the result of the higher Federal Funds target rate set by the Federal Reserve during the first half of the year during an expansion of our loan portfolio.

Average earning assets increased $1.9 million or 0.46% to $422.6 million for the year ended December 31, 2019 from $420.7 million for the year ended December 31, 2018. This is primarily related to the increase in the average balance of loans and interest-bearing deposits at the Federal Reserve offset by decreases in average investment securities.

The provision to the allowance for loan losses for the year ended December 31, 2019 was $180,000 compared to $325,000 for the year ended December 31, 2018. The decrease was primarily driven by the composition of our loan portfolio in accordance with our allowance for loan loss methodology. The Board of Directors determined that this provision was appropriate based upon the adequacy of our reserve. Charge-offs of $407,027 and recoveries of $16,454, together with the provision to the allowance, resulted in an allowance for loan losses of $4.0 million or 1.46% of total loans at December 31, 2019.

Other income increased $0.2 million or 10.23% to $2.2 million for the year ended December 31, 2019, from $2.0 million for the year ended December 31, 2018. Our mortgage banking income increased $0.1 million or 19.54% to $0.9 million for the year ended December 31, 2019 from $0.8 million for the year ended December 31, 2018 due to increased volume. Mortgage banking income is highly influenced by mortgage interest rates and the housing market.

Other expense decreased $0.5 million or 4.14% to $10.6 million for the year ended December 31, 2019, from $11.1 million for the year ended December 31, 2018. Other operating expenses decreased $0.8 million to $2.2 million during the year ended December 31, 2019 from $3.0  million during the year ended December 31, 2018. This decrease is directly related to the amortization expense of $354,888 for our investment in a Federal Rehabilitation Tax Credit that was recorded during the year ended December 31, 2018.

For the year ended December 31, 2019, the Company’s effective tax rate was 22.91% compared to 13.81% during the year ended December 31, 2018. The increase in the effective tax rate is directly related to the expiration of our 2018 investment in a Federal Rehabilitation Tax Credit.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2018 TO DECEMBER 31, 2017

Net income increased $2.0 million or 41.23% to $6.9 million, or basic and diluted income per share of $1.26 and $1.24, respectively, for the year ended December 31, 2018 from $4.9 million or basic and diluted income per share of $0.90 and $0.88, respectively, for the year ended December 31, 2017. The increase in net income was primarily due to improved margins resulting from a lower corporate tax rate due to the enactment of the Tax Cuts and Jobs Act and rising interest rates on interest-earning assets. Our returns on average assets and average equity for the year ended December 31, 2018 were 1.61% and 15.85%, respectively, compared with 1.14% and 11.37%, respectively, for the year ended December 31, 2017.

Net interest income increased $1.7 million or 10.78% to $17.4 million for the year ended December 31, 2018 from $15.7 million for the year ended December 31, 2017. This increase was primarily due to increases in interest and fees on loans and investment securities. Interest and fees on loans increased $1.8 million or 13.84% to $15.1 million for the year ended December 31, 2018 from $13.3 million for the year ended December 31, 2017, as the result of the increases in the Federal Funds target rate set by the Federal Reserve. Interest income on investment securities increased $4,980 or 0.31% to $2.6 million for the year ended December 31, 2018.

Average earning assets increased $2.1 million or 0.51% to $420.7 million for the year ended December 31, 2018 from $418.6 million for the year ended December 31, 2017. This is primarily related to the increase in the average balance of loans offset by decreases in average investment securities and interest-bearing deposits at the Federal Reserve.

The provision to the allowance for loan losses for the year ended December 31, 2018 was $325,000 compared to $55,000 for the year ended December 31, 2017. The increase was primarily driven by the growth of our loan portfolio in accordance with our allowance for loan loss methodology. The Board of Directors determined that this provision was appropriate based upon the adequacy of our reserve. Charge-offs of $115,887 and recoveries of $129,820, together with the provision to the allowance, resulted in an allowance for loan losses of $4,214,331 or 1.53% of total loans at December 31, 2018.

Other income decreased $273,846 or 12.07% to $2.0 million for the year ended December 31, 2018, from $2.3 million for the year ended December 31, 2017. Our mortgage banking income decreased $270,564 or 25.59% to $786,893 for the year ended December 31, 2018 from $1.1 million for the year ended December 31, 2017 due to decreased volume. We were also impacted by an increase in competition as new banks entered the market area. Mortgage banking income is highly influenced by mortgage interest rates and the housing market.

 15

Other expense increased $837,938 or 8.18% to $11.1 million for the year ended December 31, 2018, from $10.2 million for the year ended December 31, 2017. Salaries and employee benefits increased $427,398 or 7.05% from $6.1 million for the year ended December 31, 2017 to $6.5 million for the year ended December 31, 2018. Other operating expenses increased $435,726 to $3.0 million during the year ended December 31, 2018 from $2.5 million during the year ended December 31, 2017. This increase is directly related to the amortization expense of $354,888 for our investment in a Federal Rehabilitation Tax Credit.

For the year ended December 31, 2018, the Company’s effective tax rate was 13.81% compared to 36.48% during the year ended December 31, 2017. The decrease in the effective tax rate is directly related to the income tax expense recorded due to the revaluation of the deferred tax asset in 2017, as well as our investment in a Federal Rehabilitation Tax Credit in 2018. As a result of the enactment of the Tax Cuts and Jobs Act, which changed the corporate tax rate to 21% from 34%, the deferred tax asset was revalued on December 22, 2017. This revaluation resulted in additional income tax expense of $666,674 in 2017.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2017 TO DECEMBER 31, 2016

Net income decreased $345,238 or 6.58% to $4.9 million, or basic and diluted income per share of $0.90 and $0.88, respectively for the year ended December 31, 2017 from $5.2 million or basic and diluted income per share of $0.97 and $0.94, respectively for the year ended December 31, 2016. The decrease in net income was primarily due to the enactment of the Tax Cuts and Jobs Act on December 22, 2017 and the related revaluation of the deferred tax asset. Deferred tax assets and liabilities must be adjusted to legislation based on the enactment date not the effective date; therefore, the deferred tax asset was revalued at a corporate tax rate of 21% instead of 34% in accordance with GAAP at December 22, 2017. This revaluation resulted in additional income tax expense of $666,674. Our returns on average assets and average equity for the year ended December 31, 2017 were 1.14% and 11.37%, respectively, compared with 1.28% and 12.65%, respectively, for the year ended December 31, 2016.

Net interest income increased $828,427 or 5.55% to $15.7 million for the year ended December 31, 2017 from $14.9 million for the year ended December 31, 2016. This increase was primarily due to increases in interest and fees on loans and investment securities. Interest and fees on loans increased $435,418 or 3.89% to $13.3 million for the year ended December 31, 2017 from $12.9 million for the year ended December 31, 2016, as the result of the increases in the Federal Funds rate set by the Federal Reserve. Interest income on investment securities increased $306,944 or 13.32% to $2.6 million for the year ended December 31, 2017 from $2.3 million for the year ended December 31, 2016 a result of the increase in the average balance of investment securities from $110.8 million for the year ended December 31, 2016 to $130.2 million for the year ended December 31, 2017.

Average earning assets increased $16.2 million or 4.03% to $418.6 million for the year ended December 31, 2017 from $402.4 million for the year ended December 31, 2016. This is primarily related to the increase in the average balance of investment securities as stated in the previous paragraph.

The provision to the allowance for loan losses for the year ended December 31, 2017 was $55,000 compared to $570,000 for the year ended December 31, 2016. The decrease was primarily a result of slower loan growth in the first three quarters of the year and lower net charge-offs. The Board of Directors determined that this provision was appropriate based upon the adequacy of our reserve and the anticipation of continued loan growth and an improving economy. Charge-offs of $185,449 and recoveries of $154,230, together with the provision to the allowance, resulted in an allowance for loan losses of $3.9 million or 1.43% of total loans at December 31, 2017.

Other income decreased $592,612 or 20.71% to $2.3 million for the year ended December 31, 2017. Our mortgage banking income decreased $330,283 or 23.80% to $1.1 million for the year ended December 31, 2017 from $1.4 million for the year ended December 31, 2016 due to decreased volume. We were also impacted by an increase in competition as new banks enter the market area. Mortgage banking income is highly influenced by mortgage interest rates and the housing market. Mortgage loan originations decreased $20.2 million or 26.62% to $55.8 million for the year ended December 31, 2017 from $76.0 million for the year ended December 31, 2016. We also had gains of $380,904 on the sales of investment securities during the year ended December 31, 2016 compared to gains of $45,820 during the year ended December 31, 2017, a decrease of $335,084 or 87.97%. The decrease in gains was due to the little difference between short-term and long-term rates for bonds of the same credit quality in the current market.

Other expense decreased $30,148 or 0.29% to $10.2 million for the year ended December 31, 2017, from $10.3 million for the year ended December 31, 2016. Salaries and employee benefits decreased $27,098 or 0.45% from $6.1 million for the year ended December 31, 2016 to $6.1 million for the year ended December 31, 2017. Other operating expenses decreased $122,039 to $2.5 million during the year ended December 31, 2017 from $2.6 million during the year ended December 31, 2016. This decrease was primarily attributable to a decrease in state and FDIC insurance and fees. Our net occupancy expense increased $43,028 or 2.82% to $1.6 million for the year ended December 31, 2017, from $1.5 million for the year ended December 31, 2016. Our net occupancy expense includes rent and insurance on our banking locations as well as the cost of repairs and maintenance on these facilities. Occupancy expense increased primarily due to annual rent increases at our Meeting Street and Summerville banking locations as well as an increase in insurance on banking locations, offset by a decrease in the cost of maintenance and repairs and depreciation on furniture, fixtures and equipment.

 16

For the year ended December 31, 2017, the Company’s effective tax rate was 36.48% compared to 24.34% during the year ended December 31, 2016. The increase in the effective tax rate is directly related to the income tax expense recorded due to the revaluation of the deferred tax asset. As a result of the enactment of the Tax Cuts and Jobs Act changing the corporate tax rate to 21% from 34%, the deferred tax asset was revalued on December 22, 2017. This revaluation resulted in additional income tax expense of $666,674.

ASSET AND LIABILITY MANAGEMENT

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, and 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. The Asset Liability/Investment Committee (“ALCO”) manages asset and liability procedures though the ultimate responsibility rests with the President/Chief Executive Officer. At December 31, 2019, total assets increased 3.70% to $445.0 million from $429.1 million as of December 31, 2018 and total deposits decreased 0.83% to $379.2 million from $382.4 million as of December 31, 2018.

As of December 31, 2019, earning assets, which are composed of U.S. Treasury, Government Sponsored Enterprises and Municipal Securities in the amount of $100.4 million, interest-bearing deposits at the Federal Reserve in the amount of $39.3 million and total loans, including mortgage loans held for sale, in the amount of $279.1 million, constituted approximately 34.74% of our total assets.

The yield on a majority of our earning assets adjusts in tandem with changes in the general level of interest rates. Some of the Company’s liabilities are issued with fixed terms and can be repriced only at maturity.

MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and interest rates. Our risk consists primarily of interest rate risk in our lending and investing activities as they relate to the funding by deposit and borrowing activities.

Our policy is to minimize interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities and to attempt to maintain an asset sensitive position over a one-year period. By adhering to this policy, we anticipate that our net interest margins will not be materially affected, unless there is an extraordinary and or precipitous change in interest rates. The average net interest rate margin for 2019 increased to 4.28% from 4.15% for 2018. At December 31, 2019 and 2018, our net cumulative gap was liability sensitive for periods less than one year and asset sensitive for periods of one year or more. The reason for the shift in sensitivity is the direct result of management’s strategic decision to invest excess funds held at the Federal Reserve into fixed rate investment securities that match our investment policy objectives. Management is aware of this departure from policy and will continue to closely monitor our sensitivity position going forward.

Since the rates on most of our interest-bearing liabilities can vary on a daily basis, we continue to maintain a loan portfolio priced predominately on a variable rate basis. However, in an effort to protect future earnings in a declining rate environment, we offer certain fixed rates, interest rate floors, and terms primarily associated with real estate transactions. We seek stable, long-term deposit relationships to fund our loan portfolio. Furthermore, we do not have any brokered deposits or internet deposits.

At December 31, 2019, the average maturity of the investment portfolio was 2.96 years with an average yield of 2.00% compared to 3.69 years with an average yield of 2.08% at December 31, 2018.

We do not take foreign exchange or commodity risks. In addition, we do not own mortgage-backed securities nor do we have any exposure to the sub-prime market or any other distressed debt instruments.

 17

The following table summarizes our interest sensitivity position as of December 31, 2019.

	One Day			Less than three months			Three months to less than six months			Six months to less than one year			One year to less than five years		Five years or more		Total		Estimated Fair Value
(in thousands)
Interest-earning assets
Loans(1)	$	126,870		$	19,393		$	16,001		$	23,697		$	92,847	$	327	$	279,135	$	275,740
Investment securities available for sale(2)		—			5,885			1,334			3,403			80,247		8,969		99,838		100,450
Interest-bearing deposits at the Federal Reserve		39,321			—			—			—			—		—		39,321		39,321
Total	$	166,191		$	25,278		$	17,335		$	27,100		$	173,094	$	9,296	$	418,294	$	415,511
Interest-bearing liabilities
CD’s and other time deposits less than $250,000	$	—		$	6,406		$	3,459		$	4,295		$	2,055	$	—	$	16,215	$	17,598
CD’s and other time deposits $250,000 and over		—			1,387			2,064			2,517			—		—		5,968		4,364
Money market and interest-bearing demand accounts		194,141			—			—			—			—		—		194,141		194,141
Savings		37,247			—			—			—			—		—		37,247		37,247
Total	$	231,388		$	7,793		$	5,523		$	6,812		$	2,055	$	—	$	253,571	$	253,350
Net	$	(65,197	)	$	17,485		$	11,812		$	20,288		$	171,039	$	9,296	$	164,723
Cumulative					(47,712	)		(35,900	)		(15,612	)		155,427		164,723

(1)	Including mortgage loans to be sold and deferred fees.
(2)	At amortized cost.

LIQUIDITY

Historically, we have maintained our liquidity at levels believed by management 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.

The following table summarizes future contractual obligations as of December 31, 2019.

	Payment Due by Period
	Total		Less than one year		One to five years		After five years
Contractual Obligations
(in thousands)
Time deposits	$	22,183	$	20,128	$	2,055	$	—
Operating leases		15,405		902		3,763		10,740
Total contractual cash obligations	$	37,588	$	21,030	$	5,818	$	10,740

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, investments available for sale, interest-bearing deposits at the Federal Reserve, and mortgage loans held for sale. Our primary liquid assets accounted for 34.74% and 35.58% of total assets at December 31, 2019 and 2018, respectively. Investment securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates and liquidity needs. All of the investment securities presently owned are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity. At December 31, 2018, we had unused short-term lines of credit totaling approximately $23.0 million (which can be withdrawn at the lender’s option). Additional sources of funds available to us for liquidity include increasing deposits by raising interest rates paid and selling mortgage loans held for sale. We also 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 December 31, 2019, we could borrow up to $56.8 million. There have been no borrowings under this arrangement.

Our core deposits consist of non-interest bearing demand accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our reliance on 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 December 31, 2019 and 2018, our liquidity ratio was 36.18% and 34.27%, respectively.

 18

Average earning assets increased by $1.9 million from 2018 to 2019. This increase was primarily due proceeds from the sale or maturity of investment securities reinvested at the Federal Reserve as well as an increase of $4.3 million in average loans.

The following table shows the composition of average assets over the past five fiscal years.

	2019		2018		2017		2016		2015
Loans(1), net	$	277,395,432	$	273,329,677	$	260,987,352	$	261,587,734	$	240,380,985
Investment securities available for sale		106,421,507		123,347,669		130,161,937		110,762,289		110,633,399
Interest-bearing deposits at the Federal Reserve		34,713,982		20,151,823		23,558,893		26,474,258		17,549,903
Non-earning assets		22,084,219		13,666,243		13,466,177		11,757,279		10,962,817
Total average assets	$	440,615,140	$	430,495,412	$	428,174,359	$	410,581,560	$	379,527,104

⁽¹⁾ Including mortgage loans to be sold and deferred fees.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

The following table shows changes in interest income and expense based upon changes in volume and changes in rates.

	2019 vs. 2018									2018 vs. 2017							2017 vs. 2016
	Volume			Rate			Net Dollar Change(1)			Volume			Rate		Net Dollar Change(1)		Volume			Rate			Net Dollar Change(1)
Loans(2)	$	237,995		$	629,980		$	867,975		$	619,462		$	1,219,536	$	1,838,998	$	(12,868	)	$	448,286		$	435,418
Investment securities available for sale		(364,113	)		(64,792	)		(428,905	)		(133,820	)		138,800		4,980		390,667			(83,722	)		306,945
Interest-bearing deposits at the Federal Reserve		284,163			52,108			336,271			(38,839	)		162,625		123,786		(16,770	)		147,957			131,187
Interest income	$	158,045		$	617,296		$	775,341		$	466,803		$	1,520,961	$	1,967,764	$	361,029		$	512,521		$	873,550
Interest-bearing transaction accounts	$	28,048		$	137,012		$	165,060		$	(1,334	)	$	214,584	$	213,250	$	12,863		$	(2,853	)	$	10,010
Savings		(4,507	)		20,217			15,710			1,355			40,614		41,969		6,097			(340	)		5,757
Time deposits		(80,972	)		20,987			(59,985	)		(11,973	)		27,277		15,304		(14,974	)		44,330			29,356
Interest expense	$	(57,431	)	$	178,216		$	120,785		$	(11,952	)	$	282,475	$	270,523	$	3,986		$	41,137		$	45,123
Increase in net interest income							$	654,556							$	1,697,241							$	828,427

⁽¹⁾ Volume/Rate changes have been allocated to each category based on the percentage of each to the total change.

⁽²⁾ Including mortgage loans to be sold.

 19

YIELDS ON AVERAGE EARNING ASSETS AND RATES ON AVERAGE INTEREST-BEARING LIABILITIES

The following table shows the yields on average earning assets and average interest-bearing liabilities.

	2019							2018							2017
	Average Balance		Interest Paid/Earned		Average Yield/Rate(1)			Average Balance		Interest Paid/Earned		Average Yield/Rate(1)			Average Balance		Interest Paid/Earned		Average Yield/Rate(1)
Interest-earning assets
Loans(2)	$	281,508,711	$	15,994,290		5.68	%	$	277,223,600	$	15,126,316		5.46	%	$	264,881,222	$	13,287,318		5.02	%
Investment Securities Available for Sale		106,421,507		2,188,094		2.06	%		123,347,669		2,616,998		2.12	%		130,161,937		2,612,018		2.01	%
Federal Funds Sold & Interest-bearing deposits		34,713,982		729,868		2.10	%		20,151,823		393,597		1.95	%		23,558,893		269,811		1.15	%
Total earning assets	$	422,644,200	$	18,912,252		4.47	%	$	420,723,092	$	18,136,911		4.31	%	$	418,602,052	$	16,169,147		3.86	%
Interest-bearing liabilities
Interest-bearing transaction accounts	$	189,114,988	$	552,612		0.29	%	$	176,796,964	$	387,552		0.22	%	$	178,146,123	$	174,302		0.10	%
Savings		32,934,733		97,707		0.30	%		34,857,035		81,997		0.24	%		33,694,318		40,028		0.12	%
Time Deposits		26,456,064		164,852		0.62	%		41,325,783		224,837		0.54	%		44,097,537		209,533		0.48	%
Total interest-bearing liabilities	$	248,505,785	$	815,171		0.33	%	$	252,979,782	$	694,386		0.27	%	$	255,937,978	$	423,863		0.17	%
Net interest spread						4.14	%						4.04	%						3.69	%
Net interest margin						4.28	%						4.15	%						3.76	%
Net interest income			$	18,097,081						$	17,442,525						$	15,745,284

(1)	The effect of forgone interest income as a result of non-accrual loans was not considered in the above analysis.
(2)	Average loan balances include non-accrual loans and mortgage loans to be sold.

 20

INVESTMENT PORTFOLIO

The following tables summarize the carrying value of investment securities as of the indicated dates and the weighted-average yields of those securities at December 31, 2019.

	Amortized Cost
	Within One Year			After One Year through Five Years			After Five Years through Ten Years			After Ten Years			Total			Estimated Fair Value
(in thousands)
U.S. Treasury Notes	$	3,000		$	20,081		$	—		$	—		$	23,081		$	23,180
Government-Sponsored Enterprises		—			45,057			5,083			—			50,140			50,498
Municipal Securities		6,186			12,123			8,309			—			26,618			26,772
Total	$	9,186		$	77,261		$	13,392		$	—		$	99,839		$	100,450
Weighted average yields
U.S. Treasury Notes		1.75	%		1.79	%		—	%		—	%
Government-Sponsored Enterprises		—	%		2.09	%		1.87	%		—	%
Municipal Securities		2.00	%		2.27	%		2.06	%		—	%
Total		1.98	%		2.18	%		2.05	%		—	%		2.00	%

 21

The following tables present the amortized cost and estimated fair value of investment securities for the past three years.

December 31, 2019	Amortized Cost		Estimated Fair Value
(in thousands)
U.S. Treasury Notes	$	23,080	$	23,180
Government-Sponsored Enterprises		50,140		50,498
Municipal Securities		26,618		26,772
Total	$	99,838	$	100,450

December 31, 2018	Amortized Cost		Estimated Fair Value
(in thousands)
U.S. Treasury Notes	$	32,966	$	32,357
Government-Sponsored Enterprises		60,685		59,369
Municipal Securities		28,268		27,943
Total	$	121,919	$	119,669

December 31, 2017 (in thousands)	Amortized Cost		Estimated Fair Value
U.S. Treasury Notes	$	35,971	$	35,560
Government-Sponsored Enterprises		64,444		63,556
Municipal Securities		40,192		40,134
Total	$	140,607	$	139,250

As of December 31, 2019, we had no U.S. Treasury Notes with an unrealized loss compared to seven U.S. Treasury Notes with an unrealized loss of $609,059 at December 31, 2018. At December 31, 2019, we had one Government-Sponsored Enterprises with an unrealized loss of $43,100 compared to 13 Government-Sponsored Enterprises with an unrealized loss of $1.3 million at December 31, 2018. At December 31, 2019, we had 10 Municipal Securities with an unrealized loss of $16,454 compared to 33 Municipal Securities with an unrealized loss of $437,941 at December 31, 2018. The unrealized losses on these securities are related to the changes in the interest rate environment. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Therefore, these investments are not considered other-than-temporarily impaired. We have the ability to hold these investments until market price recovery or maturity.

The primary purpose of the investment portfolio is to fund loan demand, manage fluctuations in deposits and liquidity, satisfy pledging requirements and generate a favorable return on investment.  In doing these things, our main objective is to adhere to sound investment practices.  To that end, all purchases and sales of investment securities are made through reputable securities dealers that have been approved by the Board of Directors. The Board of Directors of the Bank reviews the entire investment portfolio at each regular monthly meeting, including any purchases, sales, calls, and maturities during the previous month.  Furthermore, the Credit Department conducts a financial underwriting assessment of all municipal securities and their corresponding municipalities annually and management reviews the assessments.

LOAN PORTFOLIO COMPOSITION

We focus our lending activities on small and middle market businesses, professionals and individuals in our geographic market. At December 31, 2019, outstanding loans (including deferred loan fees of $155,697) totaled $274.1 million, which equaled 72.28% of total deposits and 61.59% of total assets.

 22

The following table is a schedule of our loan portfolio, excluding both mortgage loans to be sold and deferred loan fees, as of December 31, 2019, compared to the prior four years.

	Book Value of Loans as of December 31,
(in thousands)	2019		2018		2017		2016		2015
Commercial	$	52,848	$	54,829	$	51,723	$	52,262	$	50,938
Commercial real estate construction		12,491		7,304		2,318		1,209		1,005
Commercial real estate other		143,824		143,703		140,187		122,968		115,736
Consumer real estate		59,532		63,787		70,798		77,132		69,777
Consumer other		5,378		5,040		5,155		7,005		5,166
Total	$	274,073	$	274,664	$	270,181	$	260,576	$	242,622

We had no foreign loans or loans to fund leveraged buyouts at any time during the years ended December 31, 2015 through December 31, 2019.

The following table presents the contractual terms to maturity for loans outstanding at December 31, 2019. Demand loans, loans having no stated schedule of repayment or stated maturity, and overdrafts are reported as due in one year or less. The table does not include an estimate of prepayments, which can significantly affect the average life of loans and may cause our actual principal experience to differ from that shown.

	Selected Loan Maturity as of December 31, 2019
(in thousands)	One Year or Less		Over One Year but Less Than 5 years		Over 5 Years		Total
Commercial	$	31,448	$	20,766	$	634	$	52,848
Commercial real estate construction		6,697		5,794		—		12,491
Commercial real estate other		39,974		91,656		12,194		143,824
Consumer real estate		15,169		7,298		37,065		59,532
Consumer other		1,938		3,368		72		5,378
Total	$	95,226	$	128,882	$	49,965	$	274,073
Loans maturing after one year with:
Fixed interest rates							$	93,087
Floating interest rates								—
Total							$	93,087

IMPAIRED LOANS

A loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current information and events. All loans with a principal balance over $50,000 placed on non-accrual status are classified as impaired. However, not all impaired loans are on non-accrual status nor do they all represent a loss.

Impairment loss is measured by:

a.	The present value of the future cash flow discounted at the loan’s effective interest rate, or
b.	The fair value of the collateral if the loan is collateral dependent.

The following is a schedule of our impaired loans and non-accrual loans.

	Impaired and Non-Accrual Loans as of December 31,
Loan	2019		2018		2017		2016		2015
Non-accrual loans	$	1,666,301	$	823,534	$	831,859	$	1,741,621	$	2,061,088
Impaired loans	$	4,776,928	$	4,278,347	$	3,724,262	$	5,901,784	$	6,542,707

 23

TROUBLED DEBT RESTRUCTURINGS

According to GAAP, we are required to account for certain loan modifications or restructurings as a troubled debt restructuring (“TDR”), when appropriate. In general, the modification or restructuring of a debt is considered a 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. Three factors must always be present: 

1. An existing credit must formally be renewed, extended, or modified,  

2. The borrower is experiencing financial difficulties, and  

3. We grant a concession that we would not otherwise consider.

The following is a schedule of our TDR’s including the number of loans represented.

	Troubled Debt Restructurings as of December 31,
	2019		2018		2017		2016		2015
Number of TDRs		3		—		1		2		3
Amount of TDRs	$	573,473	$	—	$	33,300	$	378,382	$	458,268

The Financial Accounting Standards Board Accounting (“FASB”) Standards Codification (“ASC”) 310-20-35-9 allows a loan to be removed from TDR status if the terms of the loan reflect current market rates and the loan has been performing under modified terms for an extended period of time or under certain other circumstances.

One TDR with a balance of $33,300 at December 31, 2017 was removed from TDR status during the year ended December 31, 2018 since, at the most recent renewal, the loan was amortized at market rate and no concessions were granted. One TDR with a balance of $345,082 at December 31, 2016 paid off during the year ended December 31, 2017. During the year ended December 31, 2016, one TDR was paid off with a balance of $72,919 at December 31, 2015. We do not know of any potential problem loans which will not meet their contractual obligations that are not otherwise discussed herein.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents our estimate of probable losses inherent in our loan portfolio. The adequacy of the allowance for loan losses (the “allowance”) is reviewed by the Loan Committee and by the Board of Directors on a quarterly basis. For purposes of this analysis, adequacy is defined as a level sufficient to absorb estimated losses in the loan portfolio as of the balance sheet date presented. To remain consistent with GAAP, the methodology employed for this analysis has been modified over the years to reflect the economic environment and new accounting pronouncements. The Credit Department reviews this calculation on a quarterly basis. In addition, the Company’s Risk Management Officer validates the allowance calculation on a periodic basis. The methodology is based on a reserve model that is comprised of the three components listed below:

1)	Specific reserve analysis for impaired loans based on FASB ASC 310-10-35, Receivables - Overall
2)	General reserve analysis applying historical loss rates based on FASB ASC 450-20, Contingencies: Loss Contingencies
3)	Qualitative or environmental factors.

Loans greater than $50,000 are reviewed for impairment on a quarterly basis if any of the following criteria are met: 

1)	The loan is on non-accrual
2)	The loan is a troubled debt restructuring
3)	The loan is over 60 days past due
4)	The loan is rated sub-standard, doubtful, or loss
5)	Excessive principal extensions are executed
6)	If we are provided information that indicates we will not collect all principal and interest as scheduled

Impairment is measured by the present value of the future cash flow discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An impaired loan may not represent an expected loss.

A general reserve analysis is performed on all loans, excluding impaired loans. This analysis includes a pool of loans that are reviewed for impairment but are not found to be impaired. Loans are segregated into similar risk groups and a historical loss ratio is determined for each group over a five-year period. The five-year average loss ratio by loan type is then used to calculate the estimated loss based on the current balance of each group.

 24

Qualitative and environmental loss factors are also applied against the portfolio, excluding impaired loans. These factors include external risk factors that we believe are representative of our overall lending environment. We believe that the following factors create a more comprehensive loss projection, which we can use to monitor the quality of the loan portfolio.

1)	Portfolio risk
		a)	Levels and trends in delinquencies and impaired loans and changes in loan rating matrix
		b)	Trends in volume and terms of loans
		c)	Over-margined real estate lending risk
2)	National and local economic trends and conditions
3)	Effects of changes in risk selection and underwriting practices
4)	Experience, ability and depth of lending management staff
5)	Industry conditions
6)	Effects of changes in credit concentrations
		a)	Loan concentration
		b)	Geographic concentration
		c)	Regulatory concentration
7)	Loan and credit administration risk
		a)	Collateral documentation
		b)	Insurance risk
		c)	Maintenance of financial information risk

The sum of each component’s analysis contributes to the total “estimated loss” within our portfolio.

Portfolio Risk  

Portfolio risk includes the levels and trends in delinquencies, impaired loans and changes in the loan rating matrix, trends in volume and terms of loans, and overmargined real estate lending. We are satisfied with the stability of the past due and non-performing loans and believe there has been no decline in the quality of our loan portfolio due to any trend in delinquent or adversely classified loans. Sizable unsecured principal balances on a non-amortizing basis are monitored. Although the vast majority of our real estate loans are underwritten on a cash flow basis, the secondary source of repayment is typically tied to our ability to realize on the collateral. Accordingly, we closely monitor loan to value ratios. The maximum collateral advance rate is 80% on all real estate transactions, with the exception of raw land at 65% and land development at 70%.

Occasionally, we extend credit beyond our normal collateral advance margins in real estate lending. We refer to these loans as overmargined real estate loans. Although infrequent, the aggregate of these loans represents a notable part of our portfolio. Accordingly, these loans are monitored and the balances reported to the Board of Directors every quarter. An excessive level of this practice (as a percentage of capital) could result in additional regulatory scrutiny, competitive disadvantages and potential losses if forced to convert the collateral. The consideration of overmargined real estate loans directly relates to the capacity of the borrower to repay. We often request additional collateral to bring the loan to value ratio within the policy objectives and require a strong secondary source of repayment.

Although significantly under our policy threshold of 100% of capital (currently approximately $51.2 million), the number of overmargined real estate loans currently totals approximately $4.8 million or approximately 1.74% of our loan portfolio at December 31, 2019 compared to $8.6 million or approximately 3.12% of the loan portfolio at December 31, 2018.

A credit rating matrix is used to rate all extensions of credit and to provide a more specified picture of the risk each loan poses to the quality of the loan portfolio. There are eight possible ratings used to determine the quality of each loan based on the following characteristics: cash flow, collateral quality, guarantor strength, financial condition, management quality, operating performance, the relevancy of the financial statements, historical loan performance, debt coverage ratio, and the borrower’s leverage position. The matrix is designed to meet our standards and expectations of loan quality. One hundred percent of our loans are graded.

National and local economic trends and conditions   

National and local economic trends and conditions are constantly changing and both positively and negatively impact borrowers. Most macroeconomic conditions are not controllable by us and are incorporated into the qualitative risk factors. Natural and environmental disasters, including the rise of sea levels, political uncertainty, international instability, as well as problems in the traditional mortgage market are a few of the trends and conditions that are currently affecting the national and local economies. These changes have impacted borrowers’ ability, in many cases, to repay loans in a timely manner. On occasion, a loan’s primary source of repayment (i.e. personal income, cash flow, or lease income) may be eroded as a result of unemployment, lack of revenues, or the inability of a tenant to make rent payments.

 25

Effects of changes in risk selection and underwriting practices  

The quality of our loan portfolio is contingent upon our risk selection and underwriting practices. All new loans (except for mortgage loans in the process of being sold to investors and loans secured by properly margined negotiable securities traded on an established market or other cash collateral) with exposure over $300,000 are reviewed by the Loan Committee on a monthly basis. The Board of Directors review credits over $750,000 monthly. Annual credit analyses are conducted on credits over $500,000 upon the receipt of updated financial information. Prior to any extension of credit, every significant commercial loan goes through sound credit underwriting. Our Credit Department conducts a detailed cash flow analysis on each proposal using the most current financial information.

Experience, ability and depth of lending management staff   

We have over 300 combined years of lending experience among our lending staff. We are aware of the many challenges currently facing the banking industry. As other banks look to increase earnings in the short term, we will continue to emphasize the need to maintain safe and sound lending practices and core deposit growth managed with a long-term perspective.

Industry conditions  

There continues to be an influx of new banks and consolidation of existing banks in our geographic area, which creates pricing competition. We believe that our borrowing base is well established and therefore unsound price competition is not necessary.

Effects of changes in credit concentrations  

The risks associated with the effects of changes in credit concentration include loan, geographic and regulatory concentrations. As of December 31, 2019, three Standard Industrial Code groups comprised more than 2% of our total outstanding loans. The groups are activities related to real estate, offices and clinics of doctors, and offices of lawyers.

We are located along the coast and on an earthquake fault line, increasing the chances that a natural disaster may impact our borrowers and us. We have a Disaster Recovery Plan in place; however, the amount of time it would take for our customers to return to normal operations is unknown. Our plan is reviewed and tested annually.

Loan and credit administration risk 

Loan and credit administration risk includes collateral documentation, insurance risk and maintaining financial information risk.

The majority of our loan portfolio is collateralized with a variety of our borrowers’ assets. The execution and monitoring of the documentation to properly secure the loan is the responsibility of our lenders and loan department. We require insurance coverage naming us as the mortgagee or loss payee. Although insurance risk is also considered collateral documentation risk, the actual coverage, amounts of coverage and increased deductibles are important to management.

Financial Information Risk includes a function of time during which the borrower’s financial condition may change; therefore, keeping financial information up to date is important to us. Our policy requires all new loans (with a credit exposure of $10,000 or more), regardless of the customer’s history with us, to have updated financial information. In addition, we monitor appraisals closely as real estate values are appreciating.

Based on our analysis of the adequacy of the allowance for loan loss model, we recorded a provision for loan loss of $180,000 for the year ended December 31, 2019 compared to $325,000 for the year ended December 31, 2018. At December 31, 2019, the five-year average loss ratios were: 0.20% Commercial, 0.00% Commercial Real Estate Construction, 0.01% Commercial Real Estate Other, -0.01% Consumer Real Estate, and 0.41% Consumer Other.

During the year ended December 31, 2019, charge-offs of $407,027 and recoveries of $16,454 were recorded to the allowance for loan losses, resulting in an allowance for loan losses of $4.0 million or 1.46% of total loans, compared to charge-offs of $115,887 and recoveries of $129,820 resulting in an allowance for loan losses of $4.2 million or 1.53% of total loans at December 31, 2018. We believe loss exposure in the portfolio is identified, reserved against, and closely monitored to ensure that economic changes are promptly addressed in the analysis of reserve adequacy.

The accrual of interest is generally discontinued on loans which become 90 days past due as to principal or interest. The accrual of interest on some loans may continue even though they are 90 days past due if the loans are well secured or in the process of collection and we deem it appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of six to nine months, they are reviewed individually to determine if they should be returned to accrual status. At December 31, 2019 and 2018, there were no loans over 90 days past due still accruing interest.

 26

The following table represents a summary of loan loss experience for the past five years.

	2019			2018			2017			2016			2015
(in thousands)
Balance of the allowance of loan losses at the beginning of the period	$	4,214		$	3,875		$	3,852		$	3,418		$	3,335
Charge-offs
Commercial		(399	)		(31	)		—			(33	)		(100	)
Commercial Real Estate Construction		—			—			—			—			—
Commercial Real Estate Other		—			—			(181	)		(78	)		(55	)
Consumer Real Estate		—			—			—			(82	)		(6	)
Consumer Other		(8	)		(85	)		(5	)		(15	)		(40	)
Total charge-offs		(407	)		(116	)		(186	)		(208	)		(201	)
Recoveries
Commercial		12			14			6			—			9
Commercial Real Estate Construction		—			—			—			—			—
Commercial Real Estate Other		—			57			87			65			54
Consumer Real Estate		—			45			60			—			6
Consumer Other		5			14			1			7			22
Total recoveries		17			130			154			72			91
Net (charge-offs) recoveries		(390	)		14			(32	)		(136	)		(110	)
Provision charged to operations		180			325			55			570			193
Balance of the allowance for loan losses at the end of the period	$	4,004		$	4,214		$	3,875		$	3,852		$	3,418

We believe the allowance for loan losses at December 31, 2019, is adequate to cover estimated losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Our judgments are based on numerous assumptions about current events that we believe to be reasonable, but may or may not be valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting our operating results.

The following table presents a breakdown of the allowance for loan losses for the past five years. 

	December 31,
	2019					2018					2017					2016					2015
	$		%(1)			$		%(1)			$		%(1)			$		%(1)			$		%(1)
(in thousands)
Commercial	$	1,430		19	%	$	1,665		20	%	$	1,404		20	%	$	1,545		20	%	$	897		21	%
Commercial Real Estate Construction		109		5	%		64		3	%		23		3	%		52		1	%		60		1	%
Commercial Real Estate Other		1,271		52	%		1,292		52	%		1,550		52	%		1,375		47	%		1,345		47	%
Consumer Real Estate		496		22	%		387		23	%		797		23	%		726		29	%		941		29	%
Consumer Other		698		2	%		806		2	%		101		2	%		154		3	%		175		2	%
Total	$	4,004		100	%	$	4,214		100	%	$	3,875		100	%	$	3,852		100	%	$	3,418		100	%

⁽¹⁾ Loan category as a percentage of total loans.

The allowance is also subject to examination testing by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

 27

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to the methodology used to determine the allowance for loan losses described above, adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio. During the year ended December 31, 2019, a provision of $3,701 was recorded compared to a provision of $4,482 during the year ended December 31, 2018. The balance for the reserve for unfunded lending commitments was $33,018 and $29,308 as of December 31, 2019 and 2018, respectively.   

OTHER REAL ESTATE OWNED

Real estate acquired because of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until it is sold. When the property is acquired, it is recorded at the lesser of the fair value of the property less estimated selling costs or the total loan balance. It is in our best interest to determine the fair market value by engaging an independent appraisal within 30 days of property being acquired into OREO. We cannot hold the property for a period of more than five years unless we have prior approval from the Commissioner of Banking of the State Board of Financial Institutions. The Bank will pay property taxes along with insurance and various other expenses until the property is sold. There were no properties classified as OREO during the year or at year ended December 31, 2019. During the year ended December 31, 2018, one property in the amount of $411,842 was sold at a loss of $33,476. There were no properties classified as OREO as of December 31, 2018. OREO as of December 31, 2017 consisted of one property in the amount of $435,479 compared to one property in the amount of $521,943 at December 31, 2016. One loan receivable valued at $98,832 transferred to OREO and subsequently sold during the year ended December 31, 2017 for a loss of $1,477. One property sold during the year ended December 31, 2016 for a loss of $13,450.

NONPERFORMING ASSETS

Nonperforming assets include OREO, nonaccrual loans and loans past due 90 days or more and still accruing interest. The following table summarizes nonperforming assets for the five years ended December 31:

Nonperforming Assets (in thousands)	2019			2018			2017			2016			2015
Nonaccrual loans	$	1,666		$	824		$	832		$	1,742		$	2,061
Loans past due 90 days or more and still accruing interest		—			—			33			123			2
Total nonperforming loans		1,666			824			865			1,865			2,063
Other real estate owned		—			—			435			522			620
Total nonperforming assets	$	1,666		$	824		$	1,300		$	2,387		$	2,683
Nonperforming loans to total loans		0.61	%		0.30	%		0.29	%		0.72	%		0.85	%
Nonperforming assets to total assets		0.37	%		0.19	%		0.32	%		0.58	%		0.67	%

 28

DEPOSITS

The following table shows the contractual maturities of time deposits in denominations of $100,000 or more at December 31, 2019.

	One Day		Less than three months		Three months to less than six months		Six months to less than one year		One year to less than five years		Five years or more		Total
(in thousands)
CD’s and other time deposits less than $100,000	$	—	$	3,108	$	1,707	$	2,158	$	1,041	$	—	$	8,014
CD’s and other time deposits $100,000 and over		—		4,684		3,816		4,655		1,014		—		14,169
Total	$	—	$	7,792	$	5,523	$	6,813	$	2,055	$	—	$	22,183

Certificates of Deposit $100,000 and over decreased $10.8 million or 43.31% to $14.2 million as of December 31, 2019 from $25.0 million as of December 31, 2018. This decrease was primarily due to the maturity of Public Funds used for construction projects.

The following table presents average deposits by category.

	2019					2018					2017
(in thousands)	Average Balance		Average Rate Paid			Average Balance		Average Rate Paid			Average Balance		Average Rate Paid
Non-interest-bearing demand	$	133,182		N/A		$	133,045		N/A		$	128,586		N/A
Interest-bearing transaction accounts		189,115		0.29	%		176,797		0.22	%		178,146		0.10	%
Savings		32,935		0.30	%		34,857		0.24	%		33,694		0.12	%
Time deposits		26,456		0.62	%		41,326		0.54	%		44,098		0.48	%
	$	381,688				$	386,025				$	384,524

Deposits decreased $3.2 million or 0.83% to $379.2 million as of December 31, 2019, from $382.4 million as of December 31, 2018. Non-interest bearing deposits decreased $5.3 million to $125.6 million as of December 31, 2019, primarily due to settlements of municipal accounts to fund projects.

We fund growth through core deposits. We do not have, nor do we rely on, Brokered Deposits or Internet Deposits.

SHORT-TERM BORROWINGS

At December 31, 2019 and 2018, we had no outstanding federal funds purchased. We have a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits the Company to retain possession of loans pledged as collateral to secure advances from the Federal Reserve Discount Window. Under this agreement, we may borrow up to $56.8 million. We established this arrangement as an additional source of liquidity. There have been no borrowings under this arrangement.

At December 31, 2019 and 2018, the Bank had unused short-term lines of credit totaling approximately $23.0 million (which are withdrawable at the lender’s option).

 29

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. We use such transactions for general corporate purposes or customer needs. General corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customer requests for funding.

Our off-balance sheet arrangements consist principally of commitments to extend credit described below. We estimate probable losses related to binding unfunded lending commitments and record a reserve for unfunded lending commitments in other liabilities on the consolidated balance sheet. At December 31, 2019 and 2018, the balance of this reserve was $33,018 and $29,308, respectively. At December 31, 2019 and 2018, we had no interests in non-consolidated special purpose entities.

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 $105.5 million and $96.1  million as of December 31, 2019 and 2018, 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. 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 December 31, 2019 and 2018 was $1.1 million and $1.2 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, totaling $5.1 million at December 31, 2019, to sell loans held for sale of $5.1 million, compared to forward sales commitments of $1.2 million at December 31, 2018, to sell loans held for sale of $1.2 million. The fair value of these commitments was not significant at December 31, 2019 or 2018. 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 $19.1 million at December 31, 2019 and $14.9  million at December 31, 2018. For the twelve months ended December 31, 2019 and December 31, 2018, there were no loans repurchased.

EFFECT OF INFLATION AND CHANGING PRICES

The consolidated financial statements have been prepared in accordance with GAAP, which require the measurement of financial position and results of operations in terms of historical dollars without consideration of changes in the relative purchasing power over time due to inflation.

Unlike most other industries, the assets and liabilities of financial institutions like the Company are primarily monetary in nature. As a result, interest rates generally have a more significant impact on our performance than the effects of general levels of inflation and changes in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. We strive to manage the relationship between interest rate sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

CAPITAL RESOURCES

Our capital needs have been met to date through the $10.6 million in capital raised in our initial offering, the retention of earnings less dividends paid and the exercise of options to purchase stock. Total shareholders’ equity at December 31, 2019 was $51.2 million. The rate of asset growth since our inception has not negatively impacted our capital base.

 30

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

Basel III became effective on January 1, 2015. The purpose is to improve the quality and increase the quantity of capital for all banking organizations. The minimum requirements for the quantity and quality of capital were increased. The rule includes a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and requires a minimum leverage ratio of 4%. In addition, the rule also implements strict eligibility criteria for regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Full compliance with all of the final rule requirements will be phased in over a multi-year schedule.

At December 31, 2019, the Bank was categorized as “well capitalized”. To be categorized as “well capitalized” the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 10.00%, 8.00%, 6.50% and 5.00%, respectively, and to be categorized as “adequately capitalized,” the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital, and Tier 1 leverage ratios of 8.00%, 6.00%, 4.50%, and 4.00%, respectively.

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. We believe, as of December 31, 2019, that the Company and the Bank meet all capital adequacy requirements to which we are subject.

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

Please see “Notes to Consolidated Financial Statements” for the Company’s and the Bank’s various capital ratios at December 31, 2019.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

See the Market Risk section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this report.

 31

Item 8. Financial Statements and Supplementary Data

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Bank of South Carolina Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Bank of South Carolina Corporation and its subsidiary (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements and schedules (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Elliott Davis, LLC

We have served as the Company's auditor since 2006.

Columbia, South Carolina

March 6, 2020

 32

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY 

CONSOLIDATED BALANCE SHEETS

	DECEMBER 31,			DECEMBER 31,
	2019			2018
ASSETS
Cash and due from banks	$	9,773,893		$	6,325,457
Interest-bearing deposits at the Federal Reserve		39,320,526			25,506,784
Investment securities available for sale (amortized cost of $99,838,799 and $121,918,501 in 2019      and 2018, respectively)		100,449,956			119,668,874
Mortgage loans to be sold		5,062,398			1,199,438
Loans		274,072,560			274,664,267
Less: Allowance for loan losses		(4,003,758	)		(4,214,331	)
Net loans		270,068,802			270,449,936
Premises, equipment and leasehold improvements, net		4,290,435			2,335,207
Right of use asset		13,209,217			—
Other real estate owned		—			—
Accrued interest receivable		1,309,772			1,561,915
Other assets		1,527,521			2,087,587
Total assets	$	445,012,520		$	429,135,198
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest bearing demand	$	125,621,031		$	130,940,138
Interest bearing demand		125,175,935			94,207,731
Money market accounts		68,964,879			87,300,433
Time deposits over $250,000		5,967,559			15,909,991
Other time deposits		16,215,228			18,558,734
Other savings deposits		37,247,023			35,461,361
Total deposits		379,191,655			382,378,388
Accrued interest payable and other liabilities		1,443,616			1,294,249
Lease liability		13,209,217			—
Total liabilities		393,844,488			383,672,637
Commitments and contingencies in Notes 7 and 12
Shareholders’ equity
Common stock - no par 12,000,000 shares authorized; Issued 5,799,637 shares at     December 31, 2019 and 5,777,474 shares at December 31, 2018. Shares outstanding     5,530,001 and 5,510,917 at December 31, 2019 and December 31, 2018, respectively.		—			—
Additional paid in capital		47,131,034			46,857,734
Retained earnings		5,879,409			2,650,296
Treasury stock: 269,636 shares as of December 31, 2019 and 266,557 shares as of       December 31, 2018		(2,325,225	)		(2,268,264	)
Accumulated other comprehensive income (loss), net of income taxes		482,814			(1,777,205	)
Total shareholders’ equity		51,168,032			45,462,561
Total liabilities and shareholders’ equity	$	445,012,520		$	429,135,198

See accompanying notes to consolidated financial statements.

 33

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
	2019		2018		2017
Interest and fee income
Loans, including fees	$	15,994,290	$	15,126,316	$	13,287,318
Taxable securities		1,617,471		1,872,285		1,585,505
Tax-exempt securities		570,623		744,713		1,026,513
Other		729,868		393,597		269,811
Total interest and fee income		18,912,252		18,136,911		16,169,147
Interest expense
Deposits		815,171		694,386		423,863
Total interest expense		815,171		694,386		423,863
Net interest income		18,097,081		17,442,525		15,745,284
Provision for loan losses		180,000		325,000		55,000
Net interest income after provision for loan losses		17,917,081		17,117,525		15,690,284
Other income
Service charges and fees		1,175,657		1,168,808		1,135,037
Mortgage banking income		940,671		786,893		1,057,457
Gain on sales of securities, net		50,707		4,735		45,820
Other non-interest income		31,574		34,189		30,157
Total other income		2,198,609		1,994,625		2,268,471
Other expense
Salaries and employee benefits		6,809,258		6,488,229		6,060,831
Net occupancy expense		1,623,590		1,580,929		1,571,076
Other operating expenses		2,189,135		2,953,463		2,517,737
Net other real estate owned expenses		—		57,613		92,652
Total other expense		10,621,983		11,080,234		10,242,296
Income before income tax expense		9,493,707		8,031,916		7,716,459
Income tax expense		2,175,274		1,108,982		2,814,634
Net income	$	7,318,433	$	6,922,934	$	4,901,825
Weighted average shares outstanding
Basic		5,522,025		5,500,027		5,471,001
Diluted		5,588,090		5,589,012		5,568,493
Basic income per common share	$	1.33	$	1.26	$	0.90
Diluted income per common share	$	1.31	$	1.24	$	0.88

See accompanying notes to consolidated financial statements.

 34

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Years Ended December 31,
	2019			2018			2017
Net income	$	7,318,433		$	6,922,934		$	4,901,825
Other comprehensive income
Unrealized gain (loss) on securities arising during the period		2,911,491			(893,070	)		(347,066	)
Reclassification adjustment for securities gains realized in net income		(50,707	)		(4,735	)		(45,820	)
Other comprehensive income (loss) before tax		2,860,784			(897,805	)		(392,886	)
Income tax effect related to items of other comprehensive income before tax		(600,765	)		192,280			116,007
Other comprehensive income (loss) after tax		2,260,019			(705,525	)		(276,879	)
Total comprehensive income	$	9,578,452		$	6,217,409		$	4,624,946

See accompanying notes to consolidated financial statements.

 35

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY  

YEARS ENDED DECEMBER 31, 2019, 2018, 2017

	Shares Outstanding		Additional Paid in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
December 31, 2016		4,956,139	$	36,824,022	$	6,643,476		$	(2,247,415	)	$	(607,109	)	$	40,612,974
Net income		—		—		4,901,825			—			—			4,901,825
Other comprehensive loss		—		—		—			—			(276,879	)		(276,879	)
Stock option exercises, net of surrenders		33,140		340,843		—			—			—			340,843
Stock-based compensation expense		—		71,701		—			—			—			71,701
Reclassification of tax effects stranded in accumulated other comprehensive income by tax reform		—		—		187,692			—			(187,692	)		—
Cash dividends ($0.58 per common share)		—		—		(2,885,829	)		—			—			(2,885,829	)
December 31, 2017		4,989,279	$	37,236,566	$	8,847,164		$	(2,247,415	)	$	(1,071,680	)	$	42,764,635
Net income		—		—		6,922,934			—			—			6,922,934
Other comprehensive loss		—		—		—			—			(705,525	)		(705,525	)
Stock option exercises, net of surrenders		22,550		214,418		—			(20,849	)		—			193,569
Stock-based compensation expense		—		72,408		—			—			—			72,408
Cash dividends ($0.70 per common share)		—		—		(3,785,460	)		—			—			(3,785,460	)
Common stock dividend, 10%		499,088		9,334,342		(9,334,342	)		—			—			—
December 31, 2018		5,510,917	$	46,857,734	$	2,650,296		$	(2,268,264	)	$	(1,777,205	)	$	45,462,561
Net income		—		—		7,318,433			—			—			7,318,433
Other comprehensive gain		—		—		—			—			2,260,019			2,260,019
Stock option exercises, net of surrenders		19,084		195,247		—			(56,961	)		—			138,286
Stock-based compensation expense		—		78,053		—			—			—			78,053
Cash dividends ($0.74 per common share)		—		—		(4,089,320	)		—			—			(4,089,320	)
December 31, 2019		5,530,001	$	47,131,034	$	5,879,409		$	(2,325,225	)	$	482,814		$	51,168,032

See accompanying notes to consolidated financial statements.

 36

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2019			2018			2017
Cash flows from operating activities:
Net income	$	7,318,433		$	6,922,934		$	4,901,825
Adjustments to reconcile net income net cash provided by operating activities:
Depreciation		230,377			195,921			193,298
Gain on sale of investment securities		(50,707	)		(4,735	)		(45,820	)
Loss on sale of other real estate owned		—			33,476			1,477
Loss on disposal of premises, equipment, and leasehold improvements, net		—			428			—
Valuation and other adjustments to other real estate owned		—			23,637			86,464
Provision for loan losses		180,000			325,000			55,000
Stock-based compensation expense		78,053			72,408			71,701
Deferred income taxes		432,844			(217,637	)		276,362
Net amortization of unearned discounts on investment securities available for sale		247,624			303,530			381,079
Origination of mortgage loans held for sale		(67,783,219	)		(55,504,124	)		(55,791,625	)
Proceeds from sale of mortgage loans held for sale		63,920,259			56,398,409			58,084,112
Decrease (increase) in accrued interest receivable and other assets		(221,400	)		472,740			(78,328	)
Increase in accrued interest payable and other liabilities		91,204			295,071			46,412
Net cash provided by operating activities		4,443,468			9,317,058			8,181,957
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale		9,356,835			6,932,927			4,713,870
Proceeds from sale of investment securities available for sale		30,412,250			21,434,634			20,231,265
Purchase of investment securities available for sale		(17,886,300	)		(9,978,050	)		(44,944,586	)
Proceeds from sale of other real estate owned		—			378,366			89,355
Net decrease (increase) in loans		201,134			(4,469,694	)		(9,726,576	)
Purchase of premises, equipment, and leasehold improvements, net		(2,185,605	)		(287,031	)		(141,199	)
Net cash provided by (used in) investing activities		19,898,314			14,011,152			(29,777,871	)
Cash flows from financing activities:
Net (decrease) increase in deposit accounts		(3,186,733	)		(20,509,912	)		30,365,449
Dividends paid		(4,031,157	)		(3,699,845	)		(2,832,489	)
Stock options exercised, net of surrenders		138,286			193,569			340,843
Net cash (used in) provided by financing activities		(7,079,604	)		(24,016,188	)		27,873,803
Net increase (decrease) in cash and cash equivalents		17,262,178			(687,978	)		6,277,889
Cash and cash equivalents at the beginning of the period		31,832,241			32,520,219			26,242,330
Cash and cash equivalents at the end of the period	$	49,094,419		$	31,832,241		$	32,520,219
Cash paid during the period for:
Interest	$	940,299		$	626,700		$	379,302
Income taxes	$	1,761,574		$	1,169,085		$	2,496,047
Supplemental disclosures for non-cash investing and financing activity:
Change in unrealized gain on securities available for sale, net of income taxes	$	2,260,019		$	(705,525	)	$	(276,879	)
Change in dividends payable	$	58,163		$	85,615		$	53,340
Transfer of loans to other real estate owned	$	—		$	—		$	90,832
Right of use assets obtained in exchange for lease obligation	$	13,519,027		$	—		$	—
Change in right of use assets and lease liabilities	$	309,810		$	—		$	—

See accompanying notes to consolidated financial statements.

 37

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our accounting and reporting policies conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”), and to general practices within the banking industry. The following summarizes the more significant of these policies and practices.

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.

Accounting Estimates and Assumptions:  

The 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 year’s presentation. Such reclassifications have no effect on shareholders’ equity or the net income as previously reported.

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 as of 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 as of 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.

Cash and Cash Equivalents:  

Cash and cash equivalents include working cash funds, due from banks, interest-bearing deposits at the Federal Reserve, items in process of collection and federal funds sold. All cash equivalents are readily convertible to cash and have maturities of less than 90 days.

Depository institutions are required to maintain reserve and clearing balances at the Federal Reserve Bank. Vault cash satisfied our daily reserve requirement for the years ended December 31, 2019 and 2018, respectively.  

Interest-bearing Deposits at the Federal Reserve:  

Interest-bearing deposits at the Federal Reserve mature daily and are carried at cost.

Investment Securities:  

We classify investments into three categories: (1) Held to Maturity - debt securities that we have the positive intent and ability to hold to maturity, which are reported at amortized cost, adjusted for the amortization of any related premiums or the accretion of any related discounts into interest income using a methodology which approximates a level yield of interest over the estimated remaining period until maturity; (2) Trading - debt and equity securities that are bought and held principally for the purpose of selling them in the near term, which are reported at fair value, with unrealized gains and losses included in earnings; and (3) Available for Sale - debt and equity securities that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of income taxes. Unrealized losses on securities due to fluctuations in fair value are recognized when it is determined that an other than temporary decline in value has occurred.

 38

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Realized gains or losses on the sale of investments are recognized on a specific identification, trade date basis. All securities were classified as available for sale for 2019 and 2018.

Mortgage Loans to be Sold:  

We originate fixed and variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed but not yet settled with an investor are carried in our loans held for sale portfolio.   Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with our customers.  Therefore, these loans present very little market risk.  We usually deliver to, and receive funding from, the investor within 30 to 60 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. We are not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking income in the consolidated statements of income.

Loans and Allowance for Loan Losses:   

Loans are carried at principal amounts outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the weighted average life of the loan as an adjustment to yield. Interest income on all loans is recorded on an accrual basis. The accrual of interest and the amortization of net loan fees are generally discontinued on loans that 1) are maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) the payment of full principal is not expected; or 3) the principal or interest has been in default for a period of 90 days or more. We define past due loans based on contractual payment and maturity dates.

The accrual of interest is generally discontinued on loans that become 90 days past due as to principal or interest. The accrual of interest on some loans may continue even though they are 90 days past due if the loans are well secured or in the process of collection and management deems it appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of six to nine months, they are reviewed individually by management to determine if they should be returned to accrual status.

When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest income and then to principal.  

We account for impaired loans by requiring that all loans (greater than $50,000) where it is estimated that we will be unable to collect all amounts due according to the terms of the loan agreement be recorded at the loan’s fair value. Fair value may be determined based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral less cost to sell, if the loan is collateral dependent.

Additional accounting guidance allows us to use existing methods for recognizing interest income on an impaired loan. The guidance also requires additional disclosures about how we estimate interest income related to our impaired loans.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring (“TDR”). For this type of impaired loan, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting, provided they are performing in accordance with their restructured terms.

 39

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The allowance for loan losses (the “allowance”) is our estimate of credit losses inherent in the loan portfolio. The allowance is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when we believe the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is evaluated on a regular basis and is based upon our periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We believe that the allowance is adequate to absorb inherent losses in the loan portfolio; however, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances, will not require significant future additions to the allowance, thus adversely affecting our operating results.

The allowance is also subject to examination by regulatory agencies, which may consider factors such as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions and other adequacy tests. In addition, such regulatory agencies could require us to adjust our allowance based on information available at the time of the examination.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to the methodology used to determine the allowance adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

Concentration of Credit Risk:  

Our primary market consists of the counties of Berkeley, Charleston and Dorchester, South Carolina. As of December 31, 2019, the majority of the total loan portfolio, as well as a substantial portion of the commercial and real estate loan portfolios, were to borrowers within this region. No other areas of significant concentration of credit risk have been identified.

Premises, Equipment and Leasehold Improvements and Depreciation:  

Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the assets ranging from 40 years for buildings and 3 to 15 years for equipment. Leasehold improvements are amortized over the shorter of the asset’s useful life or the remaining lease term, including renewal periods when reasonably assured. The cost of maintenance and repairs is charged to operating expense as incurred.

Leases:

In accordance with ASU 2016-02, the Company determines if a contractual arrangement is a lease at inception. Operating leases are included in the operating right of use ("ROU") assets and current operating lease liabilities on the Company's Consolidated Balance Sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Currently, the Company does not have any finance leases.

Beginning January 1, 2019, operating lease ROU assets and lease liabilities are recognized at the commencement of the lease based on the present value of lease payments over the lease term. The lease payments included in the present value are fixed payments and index-based variable lease payments. The Company estimates the incremental borrowing rate, based on information available at the commencement of the lease, as most of the Company's leases do not include an implicit rate.

Income Taxes:  

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net deferred tax assets are included in other assets in the consolidated balance sheet.

Accounting standards require the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. These standards also prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. We believe that we had no uncertain tax positions for the years ended December 31, 2019 and 2018.

 40

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation:  

Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required expected term, generally defined as the average vesting period (7.5 years).

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. Earnings per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Segment Information:  

The Company operates and manages itself within one retail banking segment and therefore has not provided segment disclosures.

Interest Rate Lock Commitments and Forward Sale Contracts:  

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitments before the loan is funded. In order to hedge the change in interest rates resulting from commitments to fund the loans, we enter into forward commitments for the future delivery of mortgage loans when the interest rate is locked. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in income when they occur. As a result of the short-term nature of mortgage loans held for sale (derivative contract), our derivative instruments were considered to be immaterial as of December 31, 2019 and 2018.

We had no embedded derivative instruments requiring hedge accounting treatment at December 31, 2019. We do not currently engage in hedging activities.

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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which revises certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 – Leases. This update clarifies how to apply certain aspects of the new leases standard. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which gives entities another option for transition and to provide lessors with a practical expedient. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, providing narrow-scope improvements for lessors, that provides relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. The amendments became effective for January 1, 2019. A modified retrospective transition approach was required, applying the new standard to all leases existing at the date of initial application. The Bank has chosen to use the effective date, January 1, 2019, as its date of initial application; therefore, the financial information was not provided for dates or periods prior to January 1, 2019. The Bank considered all relevant contractual provisions, including renewal and termination options, and determined the remaining lease terms of each respective lease. The Bank considered past practices, market area, and contract terms of all leases and assumed all renewal options would be exercised. To determine the incremental borrowing rate, the Bank used the rate of interest it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Bank does not have any finance leases or material subleases or leasing arrangements in which it is the lessor of the property or equipment. The adoption of this standard did not materially affect the change in the Bank’s recognition of lease expense in future periods, but added the ROU asset and corresponding lease liability on the Company’s Consolidated Balance Sheet.

 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. The amendment will be effective for the Company for periods beginning after December 15, 2022. 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.

 41

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities, which shortens the amortization period for the premium to the earliest call date. The amendment became effective for the Company on January 1, 2019 and did not have a material effect on the financial statements. 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles and Goodwill and Other-Internal Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract),which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments became effective for the Company on January 1, 2019 and did not have a material effect on its financial statements.

In October 2018, the FASB issued ASU 2018-07, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for the reporting period beginning after December 15, 2019. The amendments related to hedging became effective January 1, 2019. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

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.

 42

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

3. INVESTMENT SECURITIES AVAILABLE FOR SALE

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

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	23,080,465	$	99,735	$	—		$	23,180,200
Government-Sponsored Enterprises		50,139,959		401,336		(43,100	)		50,498,195
Municipal Securities		26,618,375		169,640		(16,454	)		26,771,561
Total	$	99,838,799	$	670,711	$	(59,554	)	$	100,449,956

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	32,965,693	$	—	$	(609,059	)	$	32,356,634
Government-Sponsored Enterprises		60,684,878		—		(1,315,598	)		59,369,280
Municipal Securities		28,267,930		112,971		(437,941	)		27,942,960
Total	$	121,918,501	$	112,971	$	(2,362,598	)	$	119,668,874

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2019 and 2018, by contractual maturity are in the following table.

	December 31, 2019				December 31, 2018
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	9,185,615	$	9,191,226	$	4,246,325	$	4,249,570
Due in one year to five years		77,261,123		77,815,119		99,753,174		97,915,185
Due in five years to ten years		13,392,061		13,443,611		17,504,456		17,128,425
Due in ten years and over		—		—		414,546		375,694
Total	$	99,838,799	$	100,449,956	$	121,918,501	$	119,668,874

Securities pledged to secure deposits at December 31, 2019 and 2018, had a carrying amount of $37,648,687 and $41,547,205, 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 December 31, 2019 and 2018. 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.

 43

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 2019
	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		1		5,039,550		(43,100	)		—		—		—			1		5,039,550		(43,100	)
Municipal Securities		9		3,199,517		(13,335	)		1		330,880		(3,119	)		10		3,530,397		(16,454	)
Total		10	$	8,239,067	$	(56,435	)		1	$	330,880	$	(3,119	)		11	$	8,569,947	$	(59,554	)

	December 31, 2018
	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		—	$	—	$	—			7	$	32,356,634	$	(609,059	)		7	$	32,356,634	$	(609,059	)
Government-Sponsored Enterprises		2		9,967,000		(14,302	)		11		49,402,280		(1,301,296	)		13		59,369,280		(1,315,598	)
Municipal Securities		2		1,362,286		(7,547	)		31		11,840,912		(430,394	)		33		13,203,198		(437,941	)
Total		4	$	11,329,286	$	(21,849	)		49	$	93,599,826	$	(2,340,749	)		53	$	104,929,112	$	(2,362,598	)

The table below shows the proceeds received from sales of securities available for sale and gross realized gains and losses.

	For the Year Ended December 31,
	2019			2018			2017
Gross proceeds	$	30,412,250		$	21,434,634		$	20,231,265
Gross realized gains		114,888			104,634			154,692
Gross realized losses		(64,181	)		(99,899	)		(108,872	)

The tax provision related to these gains was $10,648 and $994 for the year ended December 31, 2019 and 2018, respectively.

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans (net of deferred loan fees of $155,697 at December 31, 2019, and $156,309  at December 31, 2018) are shown in the table below. 

	December 31, 2019			December 31, 2018
Commercial	$	52,848,455		$	54,829,078
Commercial real estate:
Construction		12,491,078			7,304,300
Other		143,821,990			143,703,401
Consumer:
Real estate		59,533,045			63,787,411
Other		5,377,992			5,040,077
Total loans		274,072,560			274,664,267
Allowance for loan losses		(4,003,758	)		(4,214,331	)
Loans, net	$	270,068,802		$	270,449,936

 44

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We had $85.2 million and $101.9  million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at December 31, 2019 and 2018, respectively.

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.

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

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

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

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

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

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

● Substandard (6) The borrowing entity has cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is a possibility. 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 risks by category and internally assigned grades at December 31, 2019 and December 31, 2018. “Pass” includes loans internally graded as excellent, good and satisfactory.

	December 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	48,098,936	$	12,005,834	$	137,641,011	$	56,034,247	$	4,966,615	$	258,746,643
Watch		2,303,568		485,244		3,758,220		2,096,445		315,375		8,958,852
OAEM		460,551		—		649,039		522,600		44,232		1,676,422
Substandard		1,985,400		—		1,773,720		879,753		51,770		4,690,643
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	52,848,455	$	12,491,078	$	143,821,990	$	59,533,045	$	5,377,992	$	274,072,560

 45

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 2018
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	50,663,356	$	7,304,300	$	136,804,420	$	60,480,317	$	4,726,494	$	259,978,887
Watch		1,973,675		—		4,938,711		2,077,341		226,117		9,215,844
OAEM		157,300		—		590,294		350,000		—		1,097,594
Substandard		2,034,747		—		1,369,976		879,753		87,466		4,371,942
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	54,829,078	$	7,304,300	$	143,703,401	$	63,787,411	$	5,040,077	$	274,664,267

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

	December 31, 2019
	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	$	39,329	$	—	$	178,975	$	218,304	$	52,630,151	$	52,848,455	$	—
Commercial Real Estate Construction		—		—		—		—		12,491,078		12,491,078		—
Commercial Real Estate Other		620,837		300,240		582,419		1,503,496		142,318,494		143,821,990		—
Consumer Real Estate		—		2,965		629,999		632,964		58,900,081		59,533,045		—
Consumer Other		32,842		—		—		32,842		5,345,150		5,377,992		—
Total	$	693,008	$	303,205	$	1,391,393	$	2,387,606	$	271,684,954	$	274,072,560	$	—

	December 31, 2018
	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	$	266,567	$	17,492	$	229,395	$	513,454	$	54,315,624	$	54,829,078	$	—
Commercial Real Estate Construction		—		—		—		—		7,304,300		7,304,300		—
Commercial Real Estate Other		35,000		215,049		571,292		821,341		142,882,060		143,703,401		—
Consumer Real Estate		—		—		—		—		63,787,411		63,787,411		—
Consumer Other		24,621		—		—		24,621		5,015,456		5,040,077		—
Total	$	326,188	$	232,541	$	800,687	$	1,359,416	$	273,304,851	$	274,664,267	$	—

There were no loans past due 90 days or more and still accruing interest at December 31, 2019 and 2018.

 46

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

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

	Loans Receivable on Non-Accrual
	December 31, 2019		December 31, 2018
Commercial	$	178,975	$	251,219
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		857,327		571,292
Consumer Real Estate		629,999		—
Consumer Other		—		1,023
Total	$	1,666,301	$	823,534

The following tables set forth the changes in the allowance and an allocation of the allowance by class at December 31, 2019, 2018, and 2017. The allowance 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.

	December 31, 2019
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate		Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,665,413		$	63,876	$	1,292,346		$	386,585	$	806,111		$	4,214,331
Charge-offs		(398,685	)		—		—			—		(8,342	)		(407,027	)
Recoveries		12,200			—		—			—		4,254			16,454
Provisions		150,989			45,359		(21,901	)		109,636		(104,083	)		180,000
Ending Balance	$	1,429,917		$	109,235	$	1,270,445		$	496,221	$	697,940		$	4,003,758

	December 31, 2018
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,403,588		$	23,638	$	1,549,755		$	796,918		$	101,499		$	3,875,398
Charge-offs		(31,250	)		—		—			—			(84,637	)		(115,887	)
Recoveries		14,000			—		56,827			45,412			13,581			129,820
Provisions		279,075			40,238		(314,236	)		(455,745	)		775,668			325,000
Ending Balance	$	1,665,413		$	63,876	$	1,292,346		$	386,585		$	806,111		$	4,214,331

	December 31, 2017
	Commercial			Commercial Real Estate Construction			Commercial Real Estate Other			Consumer Real Estate		Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,545,188		$	51,469		$	1,374,706		$	726,391	$	153,863		$	3,851,617
Charge-offs		—			—			(180,587	)		—		(4,862	)		(185,449	)
Recoveries		6,000			—			87,030			60,000		1,200			154,230
Provisions		(147,600	)		(27,831	)		268,606			10,527		(48,702	)		55,000
Ending Balance	$	1,403,588		$	23,638		$	1,549,755		$	796,918	$	101,499		$	3,875,398

47 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

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

	December 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	683,278	$	—	$	1,782	$	—	$	90	$	685,150
Collectively evaluated for impairment		746,639		109,235		1,268,663		496,221		697,850		3,318,608
Total Allowance for Loan Losses		1,429,917		109,235		1,270,445		496,221		697,940		4,003,758
Loans Receivable
Individually evaluated for impairment		2,065,732		—		1,679,872		879,753		51,770		4,677,127
Collectively evaluated for impairment		50,782,723		12,491,078		142,142,118		58,653,292		5,326,222		269,395,433
Total Loans Receivable	$	52,848,455	$	12,491,078	$	143,821,990	$	59,533,045	$	5,377,992	$	274,072,560

	December 31, 2018
	Commercial		Commercial Real Estate Construction		Commercial  Real Estate Other		Consumer Real Estate		Consumer  Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	1,132,805	$	—	$	37,416	$	—	$	21,324	$	1,191,545
Collectively evaluated for impairment		532,608		63,876		1,254,930		386,585		784,787		3,022,786
Total Allowance for Losses	$	1,665,413	$	63,876	$	1,292,346	$	386,585	$	806,111	$	4,214,331
Loans Receivable
Individually evaluated for impairment	$	1,996,579	$	—	$	1,280,890	$	879,753	$	21,324	$	4,178,546
Collectively evaluated for impairment		52,832,499		7,304,300		142,422,511		62,907,658		5,018,753		270,485,721
Total Loans Receivable	$	54,829,078	$	7,304,300	$	143,703,401	$	63,787,411	$	5,040,077	$	274,664,267

48 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

As of December 31, 2019 and 2018, loans individually evaluated for impairment and the corresponding allowance for loan losses are presented in the following table.

	Impaired and Restructured Loans As of
	December 31, 2019						December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	1,355,875	$	1,355,875	$	—	$	115,983	$	115,983	$	—
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,432,988		1,432,988		—		974,249		974,249		—
Consumer Real Estate		879,753		879,753		—		879,753		879,753		—
Consumer Other		—		—		—		—		—		—
Total		3,668,616		3,668,616		—		1,969,985		1,969,985		—
With an allowance recorded:
Commercial		709,857		709,857		683,278		1,880,596		1,880,596		1,132,805
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		346,685		246,884		1,782		406,442		306,641		37,416
Consumer Real Estate		—		—		—		—		—		—
Consumer Other		51,770		51,770		90		21,324		21,324		21,324
Total		1,108,312		1,008,511		685,150		2,308,362		2,208,561		1,191,545
Total
Commercial		2,065,732		2,065,732		683,278		1,996,579		1,996,579		1,132,805
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,779,673		1,679,872		1,782		1,380,691		1,280,890		37,416
Consumer Real Estate		879,753		879,753		—		879,753		879,753		—
Consumer Other		51,770		51,770		90		21,324		21,324		21,324
Total	$	4,776,928	$	4,677,127	$	685,150	$	4,278,347	$	4,178,546	$	1,191,545

49 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

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

	For the year ended December 31,
	2019				2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,483,982	$	94,779	$	133,413	$	8,637	$	173,964	$	7,416
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,533,720		76,183		982,078		40,174		1,275,402		23,084
Consumer Real Estate		879,753		30,400		879,753		51,520		451,025		16,938
Consumer Other		—		—		—		—		—		—
Total		3,897,455		201,362		1,995,244		100,331		1,900,391		47,438
With an allowance recorded:
Commercial		725,353		44,299		1,915,139		100,395		1,711,259		76,544
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		246,884		—		416,569		10,999		930,420		5,367
Consumer Real Estate		—		—		—		—		43,119		1,296
Consumer Other		59,240		3,487		26,314		1,382		36,056		1,419
Total		1,031,477		47,786		2,358,022		112,776		2,720,854		84,626
Total
Commercial		2,209,335		139,078		2,048,552		109,032		1,885,223		83,960
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,780,604		76,183		1,398,647		51,173		2,205,822		28,451
Consumer Real Estate		879,753		30,400		879,753		51,520		494,144		18,234
Consumer Other		59,240		3,487		26,314		1,382		36,056		1,419
	$	4,928,932	$	249,148	$	4,353,266	$	213,107	$	4,621,245	$	132,064

In general, the modification or restructuring of a debt is considered a troubled debt restructuring (“TDR”) if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of December 31, 2019, there were 3 TDRs with a balance of $573,473 compared to no TDRs as of December 31, 2018 and one TDR with a balance of $33,300 as of December 31, 2019. These TDRs were granted extended payment terms with no principal reduction. All TDRs were performing as agreed as of December 31, 2019. During the year ended December 31, 2019, one TDR in the amount of $2,008 was charged off and the Company recovered $439. No other TDRs that were modified within the previous twelve months defaulted during the following year for the years ended December 31, 2019, 2018, and 2017.

5. CONCENTRATIONS OF CREDIT RISK

We grant short to intermediate term commercial and consumer loans to customers throughout our primary market area of Charleston, Berkeley and Dorchester counties of South Carolina. Our primary market area is heavily dependent on tourism, medical, and legal services. Although we have a diversified loan portfolio, a substantial portion of our debtors’ ability to honor their contracts is dependent upon the stability of the economic environment in their primary market. The majority of the loan portfolio is located in our immediate market area with a concentration in real estate related activities and offices, medical offices, and attorneys’ offices.

Our loans were concentrated in the following categories.

	December 31, 2019			December 31, 2018
Commercial		19.28	%		19.96	%
Commercial Real Estate Construction		4.56	%		2.67	%
Commercial Real Estate Other		52.48	%		52.32	%
Consumer Real Estate		21.72	%		23.22	%
Consumer Other		1.96	%		1.83	%
Total		100.00	%		100.00	%

50 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

6. Premises, Equipment and Leasehold Improvements

Premises, equipment and leasehold improvements are summarized in the table below.

	December 31,
	2019			2018
Bank buildings	$	1,861,237		$	1,861,237
Land		838,075			838,075
Leasehold purchases		30,000			30,000
Leasehold improvements		2,555,376			709,520
Construction in progress		—			120,849
Equipment		3,987,002			3,526,404
		9,271,690			7,086,085
Accumulated depreciation		(4,981,255	)		(4,750,878	)
Total	$	4,290,435		$	2,335,207

Depreciation on our bank premises and equipment charged to operating expense totaled $230,377 in 2019, $195,921 in 2018, and $193,298 in 2017.

7. LEASES

As of December 31, 2019, the Company had operating right of use (“ROU”) assets of $13.2 million and operating lease liabilities of $13.2 million. 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 18.50 years. The weighted average incremental borrowing rate is 4.34%.

The exercise of renewal options is based on the sole judgement of management and what they consider to be reasonably certain. Based on the market areas, past practices, and contract terms of all leases, the Bank assumed all renewal options will be exercised. Minimum rental commitments for these leases as of December 31, 2019 are presented in the table below.

2020	$	901,896
2021		917,169
2022		930,750
2023		957,477
2024 and thereafter		11,697,343
Total undisclosed lease payments	$	15,404,635

Less: effect of discounting		(2,195,418	)
Present value of estimated lease payments	$	13,209,217

The table below shows lease expense components for the year ended December 31, 2019.

Lease Expense Components

Operating lease expense	$	577,460
Short-term lease expense		46,538
Total lease expense	$	623,998

Total rental expense was $623,998, $622,396, and $612,717 in 2019, 2018 and 2017, respectively.

As of December 31, 2019, we did not maintain any finance leases and we determined that the number and dollar amount of equipment leases was immaterial. As of December 31, 2019, we have no additional operating leases that have not yet commenced.

We rented office space at 1071 Morrison Drive, Charleston, South Carolina, from a related party, to house our Mortgage Department during the year ended December 31, 2019. Rent expense for this lease was $46,538, $60,840, and $54,720 for the years ended December 31, 2019, 2018, and 2017, respectively. This lease ended in September 2019.

51 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. OTHER REAL ESTATE OWNED

The following table summarizes the activity in other real estate owned at December 31, 2019 and 2018.

	December 31, 2019		December 31, 2018
Balance, beginning of the year	$	—	$	435,479
Additions - foreclosure		—		—
Sales		—		(411,842	)
Write-downs		—		(23,637	)
Balance, end of the year	$	—	$	—

As of December 31, 2019 and 2018, there were no properties classified as OREO. One property valued at $411,842 was sold at a loss of $33,476 during 2018.

9. DEPOSITS

As of December 31, 2019 and 2018, certificates of deposit of $250,000 or more totaled approximately $5,967,559 and $15,909,991, respectively.

The scheduled maturities of certificates of deposit as of December 31, 2019 are presented in the table below:

2020	$	20,127,684
2021		1,072,986
2022		340,257
2023		368,391
2024 and thereafter		273,469
	$	22,182,787

As of December 31, 2019, deposits with a deficit balance of $25,319 were re-classified as other loans.

10. Short-Term Borrowings

At December 31, 2019 and 2018, we had no outstanding federal funds purchased. We have a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits the Company to retain possession of loans pledged as collateral to secure advances from the Federal Reserve Discount Window. Under this agreement, we may borrow up to $56.8 million. We established this arrangement as an additional source of liquidity. There have been no borrowings under this arrangement.

At December 31, 2019 and 2018, the Bank had unused short-term lines of credit totaling approximately $23.0 million (which are withdrawable at the lender’s option).

11. Income Taxes

On December 22, 2017, the President of the United States signed into law the 2017 Tax Act. The 2017 Tax Act included a number of changes to the existing U.S. tax laws that impact the Company, most notably a reduction in the U.S. corporate income tax rate from 34 percent to 21 percent for tax years beginning after December 31, 2017.

The Company recognized the income tax effects of the 2017 Tax Act in its 2017 consolidated financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined.

 52

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total income taxes for the years ended December 31, 2019, 2018 and 2017 are presented in the table below.

	For the year ended December 31,
	2019			2018			2017
Income tax expense	$	2,175,274		$	1,108,982		$	2,814,634
Unrealized gains (losses) on securities available for sale presented in accumulated other comprehensive income (loss)		(600,765	)		(192,280	)		(116,007	)
Total	$	1,574,509		$	916,702		$	2,698,627

Income tax expense was as follows:

	For the year ended December 31,
	2019		2018			2017
Current income taxes
Federal	$	1,742,430	$	1,326,619		$	2,538,272
State		—		—			—
Total current tax expense		1,742,430		1,326,619			2,538,272
Deferred income tax (benefit) expense		432,844		(217,637	)		276,362
Total income tax expense	$	2,175,274	$	1,108,982		$	2,814,634

The differences between actual income tax expense and the amounts computed by applying the U.S. federal income tax rate of 21% to pretax income from continuing operations for the periods indicated are reconciled in the table below.

	For the year ended December 31,
	2019			2018			2017
Computed “expected” tax expense	$	1,993,679		$	1,686,702		$	2,623,595
Increase (reduction) in income taxes resulting from:
Tax rate change impact		—			—			666,674
Amortization of credit and gain		1,685			196,477			163,411
Stock based compensation		16,391			15,205			24,378
Valuation allowance		7,123			7,538			16,952
Other		6,233			38,938			(4,768	)
State income tax, net of federal benefit		268,000			(226,578	)		(329,412	)
Federal credits		—			(454,985	)		—
Tax exempt interest income		(117,837	)		(154,315	)		(346,196	)
	$	2,175,274		$	1,108,982		$	2,814,634

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented below.

	December 31, 2019			December 31, 2018
Deferred tax assets:
Allowance for loan losses	$	806,982		$	850,964
State credit carryforward		307,950			647,190
Unrealized gain (loss) on securities available for sale		—			472,421
Pass-through income		68,438			68,438
State net operating loss carryforward		81,914			74,791
Nonaccrual interest		41,453			27,956
Other		6,934			6,155
Total gross deferred tax assets	$	1,313,671			2,147,915
Valuation allowance		(81,914	)		(74,791	)
Total gross deferred tax assets, net of valuation allowance	$	1,231,757			2,073,124
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation		(109,169	)		(39,294	)
Unrealized gain (loss) on securities available for sale		(128,344	)		—
Deferred loan fees		(32,696	)		(32,825	)
Other		(57,741	)		(56,481	)
Prepaid expenses		(225	)		(210	)
Total deferred tax liabilities		(328,175	)		(128,810	)
Net deferred tax assets	$	903,582		$	1,944,314

 53

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2018, the Company invested in a Federal Rehabilitation Credit. The tax credit was used during the year ended December 31, 2018. Amortization expense recognized for the years ended December 31, 2019 and 2018 was $8,022 and $354,888, respectively. In 2016, the Company invested in a South Carolina Rehabilitation Credit. The tax credit was included in deferred tax assets and is being amortized. Amortization expense recognized for the years ended December 31, 2018 and 2017 was $306,105, and was included in other operating expense on the statement of operations.

There was a $81,914 valuation allowance for deferred tax assets at December 31, 2019 associated with the Company’s state net operating loss. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and prior to their expiration governed by the income tax code. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred income tax assets are expected to be deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2019. The amount of the deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a $666,674 increase in income tax expense for the year ended December 31, 2017 and a corresponding $666,674 decrease in net deferred tax assets as of December 31, 2017.

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with applicable regulations.

Tax returns for 2016 and subsequent years are subject to examination by taxing authorities.

12. Commitments and Contingencies

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is essentially the same as that involved in extending loan facilities to customers. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

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. If deemed necessary, the amount of collateral obtained 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 $105,481,545 and $96,115,504 at December 31, 2019 and 2018, respectively.

 54

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Standby letters of credit represent our obligation to a third party contingent upon the failure by 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. Commitments under standby letters of credit are usually for one year or less. At December 31, 2019 and 2018, we have recorded no liability for the current carrying amount of the obligation to perform as a guarantor; as such amounts are not considered material. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2019 and 2018 was $1,042,966 and $1,169,644, respectively.

13. RELATED PARTY TRANSACTIONS

In the opinion of management, loans to our Executive Officers and Directors are made on substantially the same terms, including interest rates and collateral, as those terms prevailing at the time for comparable loans with persons not related to the lender that do not involve more than the normal risk of collectability. There were no past due loans to our Executive Officers as of December 31, 2019 and 2018.

The table below summarizes related party loans.

	December 31, 2019			December 31, 2018
Balance at beginning of the year	$	4,401,710		$	4,569,780
New loans or advances		370,275			1,428,098
Repayments		(2,120,078	)		(1,596,169	)
Balance at the end of the year	$	2,651,907		$	4,401,710

At December 31, 2019 and 2018, total deposits held by related parties were $4,343,903 and $8,914,967, respectively.

The Company also leased office space from a related party during the year ended December 31, 2019 as discussed in the Leases footnote.

14. Other Expense

The table below summarizes the components of other operating expense.

	For the year ended December 31,
	2019		2018		2017
Data processing services	$	607,467	$	579,666	$	585,497
Professional fees		324,628		459,348		451,882
Telephone and postage		182,801		175,520		207,526
State and FDIC insurance and fees		113,117		183,867		165,280
Supplies		103,796		85,984		75,965
Courier service		49,200		54,044		82,907
Insurance		43,097		43,866		44,613
Advertising and business development		16,059		12,217		10,844
Amortization of federal tax credit		8,022		354,888		—
Amortization of state tax credit		—		306,106		306,105
Other		740,948		697,957		587,118
Total other operating expenses	$	2,189,135	$	2,953,463	$	2,517,737

 55

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Stock Incentive Plan

We have a Stock Incentive Plan which was approved in 1998 with 180,000 (329,422 adjusted for five 10% stock dividends and a 25% stock dividend) shares reserved and a Stock Incentive Plan which was approved in 2010 with 300,000 (363,000 adjusted for two 10% stock dividends) shares reserved. Under both plans, options are periodically granted to employees at a price not less than the fair market value of the shares at the date of grant. Employees become 20% vested after five years and then vest 20% each year until fully vested. The right to exercise each such 20% of the options is cumulative and will not expire until the tenth anniversary of the date of the grant. All employees are eligible to participate in this plan if the Executive/Long-Range Committee, in its sole discretion, determines that such person has contributed or can be expected to contribute to our profits or growth. The Stock Incentive Plan for Executive Officers is administered by the Compensation Committee of the Board of Directors.

Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of our common stock. The expected term of the options granted shall not exceed ten years from the date of grant (the amount of time options granted are expected to be outstanding). The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted was determined using the following weighted-average assumptions as of grant date:

	2019			2018			2017
Risk free interest rate		2.01	%		2.88	%		2.43	%
Expected life (in years)		7.5			7.5			7.5
Expected stock price volatility		33.13	%		33.69	%		34.20	%
Dividend yield		4.28	%		3.61	%		4.00	%

There are currently no options to purchase or shares exercisable under the 1998 Omnibus Stock Incentive Plan as of December 31, 2019.

The following table presents a summary of the activity under the 1998 and 2010 Omnibus Stock Incentive Plans for the years ended December 31.

	2019					2018					2017
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, January 1		102,760		$	11.89		117,191		$	10.79		154,085		$	10.19
Granted		6,250			18.92		11,275			18.23		10,175			20.72
Expired		—					—			—		—			—
Exercised		(22,163	)		8.81		(24,056	)		8.96		(36,454	)		9.57
Forfeited		(750	)		18.92		(1,650	)		20.02		(10,615	)		15.83
Outstanding, December 31		86,097		$	12.92		102,760		$	11.89		117,191		$	10.79
Exercisable at year end		27,459		$	9.03		32,219		$	8.81		31,694		$	8.77

Information has been retroactively adjusted for the 2018 10% stock dividend as applicable.

The following table presents information pertaining to options outstanding at December 31, 2019.

December 31, 2019
Exercise Price		Number of Options Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price of Options Outstanding		Intrinsic Value of Options Outstanding		Number of Options Exercisable		Weighted Average Exercise Price of Options Exercisable		Intrinsic Value of Options Exercisable
$	8.61		24,236		5.33	$	8.61	$	208,672		19,389	$	8.61	$	194,683
$	8.90		1,210		0.75	$	8.90	$	10,769		1,210	$	8.90	$	11,799
$	9.18		5,263		2.50	$	9.18	$	48,314		3,158	$	9.18	$	29,907
$	9.65		1,210		1.25	$	9.65	$	11,677		968	$	9.65	$	8,713
$	9.92		1,210		2.75	$	9.92	$	12,003		726	$	9.92	$	6,339
$	12.26		5,202		4.59	$	12.26	$	63,777		1,040	$	12.26	$	6,649
$	12.40		2,419		4.00	$	12.40	$	29,996		968	$	12.40	$	6,048
$	13.05		14,217		5.33	$	13.05	$	185,532		—	$	13.05	$	—
$	13.62		3,630		5.50	$	13.62	$	49,441		—	$	13.62	$	—
$	14.54		5,500		6.25	$	14.54	$	79,970		—	$	14.54	$	—
$	18.23		10,450		8.25	$	18.23	$	190,504		—	$	18.23	$	—
$	18.92		5,500		9.50	$	18.92	$	104,060		—	$	18.92	$	—
$	19.00		2,750		7.17	$	19.00	$	52,250		—	$	19.00	$	—
$	19.82		3,300		7.09	$	19.82	$	65,406		—	$	19.82	$	—
			86,097		5.73	$	12.92	$	1,112,371		27,459	$	9.03	$	264,138

 56

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The total intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017, was $218,116, $262,415, and $311,836, respectively.

We recognized compensation cost for the years ended December 31, 2019, 2018 and 2017 in the amount of $78,053, $72,408, and $71,701, respectively, related to the granted options.

As of December 31, 2019, there was a total of $189,103 in unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted average period of 3.86 years.

16. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

We established an Employee Stock Ownership Plan (“ESOP”) effective January 1, 1989. Any employee of the Bank is eligible to become a participant in the ESOP upon reaching 21 years of age and credited with one-year of service (1,000 hours of service). The employee may enter the Plan on the January 1^st that occurs nearest the date on which the employee first satisfies the age and service requirements described above. No contributions by employees are permitted. The amount and time of contributions are at the sole discretion of the Board of Directors of the Bank. The contribution for all participants is based solely on each participant’s respective regular or base salary and wages paid by the Bank including commissions, bonuses and overtime, if any.

The Company recognizes expense when the contribution is approved by the Board of Directors. The total expenses amounted to $510,000, $420,000, and $375,000, during the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, the plan owned 313,703 shares of common stock of Bank of South Carolina Corporation.

A participant vests in the ESOP based upon the participant’s credited years of service. The vesting schedule is as follows:

●	1 Year of Service	0% Vested
●	2 Years of Service	25% Vested
●	3 Years of Service	50% Vested
●	4 Years of Service	75% Vested
●	5 Years of Service	100% Vested

Periodically, the Internal Revenue Service “IRS” requires a restatement of a qualified retirement plan to ensure that the plan document includes provisions required by legislative and regulatory changes made since the last restatement. There have been no substantive changes to the plan. The Board of Directors approved a restated plan, on January 26, 2012 (incorporated as Exhibit 10.5 in the 2011 10-K). The Plan was submitted to the IRS for approval and a determination letter was issued September 26, 2013, stating that the plan satisfies the requirements of Code Section 4975(e)(7). On January 26, 2017, the Board of Directors approved a restated plan (incorporated as Exhibit 10.6 in the 2016 10-K). The Plan was submitted to the IRS for approval and a determination letter was issued November 17, 2017, stating that the plan satisfies the requirements of Code Section 4975(e)(7).

 57

BANK OF SOUTH CAROLINA CORPORATION  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. DIVIDENDS

The Bank’s ability to pay dividends to the Company is restricted by the laws and regulations of the State of South Carolina. Generally, these restrictions allow the Bank to pay dividends from current earnings without the prior written consent of the South Carolina Commissioner of Banking, if it received a satisfactory rating at its most recent examination. Cash dividends when declared, are paid by the Bank to the Company for distribution to shareholders of the Company. The Bank paid dividends of $4.1 million, $3.8 million, and $2.9 million, to the Company during the years ended December 31, 2019, 2018 and 2017, respectively.

On April 10, 2018, the Company’s Board of Directors declared a ten percent stock dividend to our shareholders. The record date was April 30, 2018 and the distribution date was May 31, 2018. Earnings per share and average shares outstanding have been adjusted for all periods presented to retroactively reflect the stock dividend in our consolidated financial statements. Total shares outstanding increased by 499,088 shares.

18. Income Per Common Share

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted-average number of common shares and potential common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock. Earnings per share and average shares outstanding have been adjusted for all periods presented to retroactively reflect the ten percent stock dividend declared on April 10, 2018.

The following table is a summary of the reconciliation of average shares outstanding for the years ended December 31.

	2019		2018		2017
Net income	$	7,318,433	$	6,922,934	$	4,901,825
Weighted average shares outstanding		5,522,025		5,500,027		5,471,001
Effect of dilutive shares		66,065		88,985		97,492
Weighted average shares outstanding - diluted		5,588,090		5,589,012		5,568,493
Earnings per share - basic	$	1.33	$	1.26	$	0.90
Earnings per share - diluted	$	1.31	$	1.24	$	0.88

19. Regulatory Capital Requirements

The Company and the Bank are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.

Current quantitative measures established by regulation to ensure capital adequacy require that we maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and to average assets. We believe that the Company and the Bank meet all capital adequacy requirements to which they were subject at December 31, 2019 and 2018.

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

58 

BANK OF SOUTH CAROLINA CORPORATION  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basel III became effective on January 1, 2015. The purpose is to improve the quality and increase the quantity of capital for all banking organizations. The minimum requirements for the quantity and quality of capital were increased. The rule includes a new common equity Tier 1 capital to risk-weighted assets ratio of 4.50% and a common equity Tier 1 capital conservation buffer of 2.50% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00% to 6.00% and requires a minimum leverage ratio of 4.00%. In addition, the rule also implements strict eligibility criteria for regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. All final rule requirements will be phased in over a multi-year schedule. The capital conservation buffer in effect for the year ended December 31, 2019 was 8.46%.

At December 31, 2019, the Bank was categorized as “well capitalized” under Basel III. To be categorized as “well capitalized” the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 10.00%, 8.00%, 6.50%, and 5.00%, respectively, and to be categorized as “adequately capitalized,” the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital, and Tier 1 leverage ratios of 8.00%, 6.00%, 4.50%, and 4.00%, respectively.

The following tables present the actual and required capital amounts and ratios for the Company and Bank at December 31, 2019 and 2018: 

	December 31, 2019
	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Company	$	54,690		16.69	%	$	26,221		8.00	%		N/A		N/A
Bank	$	53,897		16.46	%	$	26,199		8.00	%	$	32,748		10.00	%
Tier 1 capital to risk-weighted assets:
Company	$	50,686		15.46	%	$	19,666		6.00	%		N/A		N/A
Bank	$	49,860		15.23	%	$	19,649		6.00	%	$	26,199		8.00	%
Tier 1 capital to average assets:
Company	$	50,686		11.32	%	$	17,907		4.00	%		N/A		N/A
Bank	$	49,860		11.14	%	$	17,895		4.00	%	$	22,369		5.00	%
Common equity Tier 1 capital:
Company	$	50,686		15.46	%	$	14,749		4.50	%		N/A		N/A
Bank	$	49,860		15.23	%	$	14,737		4.50	%	$	14,737		4.50	%

	December 31, 2018
	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Company	$	50,657		16.69	%	$	24,280		8.00	%		N/A		N/A
Bank	$	49,695		16.39	%	$	24,262		8.00	%	$	30,328		10.00	%
Tier 1 capital to risk-weighted assets:
Company	$	46,864		15.44	%	$	18,210		6.00	%		N/A		N/A
Bank	$	45,898		15.13	%	$	18,197		6.00	%	$	24,262		8.00	%
Tier 1 capital to average assets:
Company	$	46,864		10.76	%	$	17,428		4.00	%		N/A		N/A
Bank	$	45,898		10.54	%	$	17,419		4.00	%	$	21,773		5.00	%
Common equity Tier 1 capital:
Company	$	46,864		15.44	%	$	13,658		4.50	%		N/A		N/A
Bank	$	45,898		15.13	%	$	13,647		4.50	%	$	13,647		4.50	%

59 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. Disclosures 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. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would use in pricing an asset or liability.

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

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

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

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

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

60 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

Derivative Instruments

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

We had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments with interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on the short-term fair value of mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of December 31, 2019 and 2018. 

Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and 2018 are in the following table.

	Balance as of December 31, 2019
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	23,180,200	$	—	$	—	$	23,180,200
Government-Sponsored Enterprises		—		50,498,195		—		50,498,195
Municipal Securities		—		14,817,110		11,954,451		26,771,561
Total	$	23,180,200	$	65,315,305	$	11,954,451	$	100,449,956

	Balance as of December 31, 2018
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	32,356,634	$	—	$	—	$	32,356,634
Government-Sponsored Enterprises		—		59,369,280		—		59,369,280
Municipal Securities		—		21,701,005		6,241,955		27,942,960
Total	$	32,356,634	$	81,070,285	$	6,241,955	$	119,668,874

There were no liabilities recorded at fair value on a recurring basis as of December 31, 2019 or 2018. 

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2019 and 2018. 

	December 31, 2019			December 31, 2018
Beginning balance	$	6,241,955		$	11,458,889
Total realized/unrealized gains (losses)
Included in earnings		—			—
Included in other comprehensive income		7,924,331			150,993
Purchases, issuances, and settlements, net of maturities		(2,211,835	)		(5,367,927	)
Transfers in and/or out of Level 3		—			—
Ending balance	$	11,954,451		$	6,241,955

There were no transfers between fair value levels in 2019 or 2018.

61 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 an ongoing 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). The following tables present information about certain assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2019 and 2018.

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	2,657,644	$	2,657,644
Mortgage loans to be sold		—		5,062,398		—		5,062,398
Total	$	—	$	5,062,398	$	2,657,644	$	7,720,042

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	2,223,028	$	2,223,028
Mortgage loans to be sold		—		1,199,438		—		1,199,438
Total	$	—	$	1,199,438	$	2,223,028	$	3,422,466

62 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2019 or 2018.

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2019:

	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
Other Real Estate Owned	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 Bank

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

b. Investment securities available for sale   

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

c. Loans 

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

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

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).

63 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 on the counterparties.

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of December 31, 2019 and 2018, respectively.

	Fair Value Measurements at December 31, 2019
		Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks		$	9,773,893	$	9,773,893	$	9,773,893	$	—	$	—
Interest-bearing deposits at the Federal Reserve			39,320,526		39,320,526		39,320,526		—		—
Investment securities available for sale			100,449,956		100,449,956		23,180,200		65,315,305		11,954,451
Mortgage loans to be sold			5,062,398		5,062,398		—		5,062,398		—
Loans, net			270,068,802		271,736,572		—		—		271,736,572
Accrued interest receivable			1,309,772		1,309,772		—		1,309,772		—
Financial Liabilities:
Demand deposits			357,008,868		357,008,868		—		357,008,868		—
Time deposits			22,182,787		21,962,039		—		21,962,039		—
Accrued interest payable			38,748		38,748		—		38,748		—

	Fair Value Measurements at December 31, 2018
	Carrying   Amount		Estimated  Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	6,325,457	$	6,325,457	$	6,325,457	$	—	$	—
Interest-bearing deposits at the Federal Reserve		25,506,784		25,506,784		25,506,784		—		—
Investment securities available for sale		119,668,874		119,668,874		32,356,634		81,070,285		6,241,955
Mortgage loans to be sold		1,199,438		1,199,438		—		1,199,438		—
Net loans		270,449,936		263,780,751		—				263,780,751
Accrued interest receivable		1,561,915		1,561,915		—		1,561,915		—
Financial Liabilities:
Demand deposits		347,909,663		347,909,663		—		347,909,663		—
Time deposits		34,468,725		38,747,898		—		38,747,898		—
Accrued interest payable		163,876		163,876		—		163,876		—

21.

Bank of South Carolina Corporation - Parent Company

The Company’s principal source of income is dividends from the Bank. Certain regulatory requirements restrict the amount of dividends which the Bank can pay to the Company. The Company’s principal asset is its investment in its Bank subsidiary. The Company’s condensed statements of financial condition as of December 31, 2019 and 2018, and the related condensed statements of income and cash flows for the years ended December 31, 2019, 2018 and 2017, are as follows:

64 

BANK OF SOUTH CAROLINA CORPORATION  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Statements of Financial Condition  

	December 31, 2019		December 31, 2018
Assets
Cash	$	1,096,474	$	1,007,501
Investment in wholly-owned bank subsidiary		50,731,750		45,103,068
Other assets		224,608		178,629
Total assets	$	52,032,832	$	46,289,198
Liabilities and shareholders’ equity
Other liabilities	$	884,800	$	826,637
Shareholders’ equity		51,168,032		45,462,561
Total liabilities and shareholders’ equity	$	52,052,832	$	46,289,198

Condensed Statements of Income

	For the year ended December 31,
	2019			2018			2017
Interest income	$	1,280		$	1,157		$	484
Net operating expenses		(221,510	)		(224,316	)		(189,872	)
Dividends received from bank		4,170,000			3,775,000			2,685,000
Equity in undistributed earnings of subsidiary		3,368,663			3,371,093			2,406,213
Net income	$	7,318,433		$	6,922,934		$	4,901,825

Condensed Statements of Cash Flows

	For the year ended December 31,
	2019			2018			2017
Cash flows from operating activities:
Net income	$	7,318,433		$	6,922,934		$	4,901,825
Stock-based compensation expense		78,053			72,408			71,701
Equity in undistributed earnings of subsidiary		(3,368,663	)		(3,371,093	)		(2,406,213	)
(Increase) decrease in other assets		(45,979	)		(51,355	)		(51,197	)
(Decrease) increase in other liabilities		—			(6,333	)		151
Net cash provided by operating activities		3,981,844			3,566,561			2,516,267
Cash flows from financing activities:
Dividends paid		(4,031,157	)		(3,699,845	)		(2,832,489	)
Stock options exercised, net of surrenders		138,286			193,569			340,843
Net cash used by financing activities		(3,892,871	)		(3,506,276	)		(2,491,646	)
Net increase in cash		88,973			60,285			24,621
Cash at the beginning of the year		1,007,501			947,216			922,595
Cash at the end of the year	$	1,096,474		$	1,007,501		$	947,216
Supplemental disclosure for non-cash investing and financing activity
Change in dividends payable	$	58,163		$	85,615		$	53,340

65 

BANK OF SOUTH CAROLINA CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

22. Quarterly Results of Operations (unaudited)

The tables below represent the quarterly results of operations for the years ended December 31, 2019 and 2018, respectively: 

	2019
	Fourth		Third		Second		First
Total interest and fee income	$	4,578,390	$	4,827,684	$	4,813,345	$	4,692,833
Total interest expense		112,311		213,876		245,226		243,758
Net interest income		4,466,079		4,613,808		4,568,119		4,449,075
Provision for loan losses		25,000		10,000		135,000		10,000
Net interest income after provision for loan losses		4,441,079		4,603,808		4,433,119		4,439,075
Total other income		601,017		596,070		592,739		408,783
Total other expense		2,746,019		2,581,823		2,634,782		2,659,361
Income before income tax expense		2,296,077		2,618,055		2,391,076		2,188,497
Income tax expense		522,548		603,264		550,229		499,233
Net income	$	1,773,529	$	2,014,791	$	1,840,847	$	1,689,264
Basic income per common share	$	0.33	$	0.36	$	0.33	$	0.31
Diluted income per common share	$	0.32	$	0.36	$	0.33	$	0.30

	2018
	Fourth		Third		Second		First
Total interest and fee income	$	4,727,449	$	4,665,586	$	4,423,867	$	4,320,009
Total interest expense		249,425		195,434		139,697		109,830
Net interest income		4,478,024		4,470,152		4,284,170		4,210,179
Provision for loan losses		95,000		100,000		75,000		55,000
Net interest income after provision for loan losses		4,383,024		4,370,152		4,209,170		4,155,179
Other income		532,891		458,693		555,096		447,945
Other expense		2,970,411		2,816,474		2,651,515		2,641,834
Income before income tax expense		1,945,504		2,012,371		2,112,751		1,961,290
Income tax expense		139,310		234,218		386,394		349,060
Net income	$	1,806,194	$	1,778,153	$	1,726,357	$	1,612,230
Basic income per common share	$	0.33	$	0.32	$	0.31	$	0.29
Diluted income per common share	$	0.32	$	0.32	$	0.31	$	0.29

66

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934 as amended (the “Act”) was carried out as of December 31, 2019 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 December 31, 2019, 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.

Management’s Report on Internal Control Over Financial Reporting

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 December 31, 2019, 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 December 31, 2019. Based on this assessment, management believes that as of December 31, 2019, 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 year ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to the final ruling by the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report.

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

Item 9B. Other Information

There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2019 that was not reported.

67

PART III

Item 10. Directors, Executive Officers, Promoters and Corporate Governance

The information required by this item contained under the sections captioned “Proposal 1: To elect nineteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2020 Annual Meeting of Shareholders” and “Meetings and Committees of the Board of Directors and Corporate Governance Matters” included in the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 14, 2020, a copy of which has been filed with the SEC, the “Proxy Statement”, is incorporated in this document by reference.

Executive Officers The information concerning the Company’s executive officers is contained under the section captioned “Proposal 1: To elect nineteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2021 Annual Meeting of Shareholders,” included in the Company’s Proxy Statement, and is incorporated in this document by reference.

Audit and Compliance Committee Financial Expert The Audit and Compliance Committee of the Company is composed of Directors Linda J. Bradley McKee, PhD, CPA, David W. Bunch, William L. Hiott, Jr., Karen J. Phillips, and Steve D. Swanson (Chairman). The Board has selected the Audit and Compliance Committee members based on its determination that they are qualified to oversee the accounting and financial reporting processes of the Company and audits of the Company’s financial statements. Each member of the Audit and Compliance Committee is “independent” as defined in the NASDAQ Stock Market listing standards for audit committee members.

The Board of Directors has determined that Linda J. Bradley McKee, PhD, CPA, qualifies as a financial expert within the meaning of SEC rules and regulations and has designated Dr. Bradley McKee as the Audit and Compliance Committee financial expert. Director Bradley McKee is independent as that term is used in Schedule 14A promulgated under the Exchange Act.

Code of Ethics The Company has adopted a “Code of Ethics”, applicable to the Chairman of the Board of Directors, the President/Chief Executive Officer, the Chief Financial Officer/Executive Vice President, the Chief Operating Officer/Executive Vice President and the Senior Lender/Executive Vice President and a “Code of Conduct” for Directors, officers and employees. A copy of these policies may be obtained at the Company’s website: http://www.banksc.com.

Compliance with Insider Reporting The information contained under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” is included in the Company’s Proxy Statement and is incorporated in this document by reference.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the Section captioned “Directors Compensation” and “Executive Compensation-Compensation Discussion and Analysis” included in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership and Certain Beneficial Owners

Information required by this item is incorporated in this document by reference to the Section captioned “Security Ownership of Certain Beneficial Owners and Management” included in the Proxy Statement.

Security Ownership of Management

Information required by this item is incorporated in this document by reference to the Section captioned “Security Ownership of Certain Beneficial Owners and Management” included in the Proxy Statement.

Changes in Control

Management is not aware of any arrangements, including any pledge by any shareholder of the Company, the operation of which may at a subsequent date result in a change of control of the Company.

68

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated in this document by reference to the Sections captioned “Proposal 1: To elect nineteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2021 Annual Meeting of Shareholders” and “Meetings and Committees of the Board of Directors and Corporate Governance Matters”, included in the Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required by this item is incorporated in this document by reference to “Proposal 3: to ratify the appointment of Elliott Davis, LLC as the Company’s independent registered public accounting firm for the year ended December 31, 2020” and “Auditing and Related Fees”, included in the Proxy Statement.

69

PART IV

Item 15. Exhibits and Financial Statement Schedules

1. The Consolidated Financial Statements and Report of Independent Auditors are included in this Form 10-K and listed on pages as indicated.

		Page
(1)	Report of Independent Registered Public Accounting Firm		32
(2)	Consolidated Balance Sheets		33
(3)	Consolidated Statements of Income		34
(4)	Consolidated Statements of Comprehensive Income		35
(5)	Consolidated Statements of Shareholders’ Equity		36
(6)	Consolidated Statements of Cash Flows		37
(7)	Notes to Consolidated Financial Statements		38 - 66

2. Exhibits

2.0	Plan of Reorganization (Filed with 1995 10-KSB)
3.0	Articles of Incorporation of the Registrant (Filed with 1995 10-KSB)
3.1	By-laws of the Registrant (Filed with 1995 10-KSB)
3.2	Amendments to the Articles of Incorporation of the Registrant (Filed with Form S-3 on June 23, 2011)
4.0	2019 Proxy Statement (Filed with 2018 10-K)
10.0	Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB)
10.1	Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB)
10.2	Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB)
10.3	Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB)
10.4	Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with 2010 10-K)
	Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with March 31, 2013 10-Q)
10.5	1998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A)
10.6	Employee Stock Ownership Plan (Filed with 2008 10-K/A)
	Employee Stock Ownership Plan, Restated (Filed with 2011 Proxy Statement)
	Employee Stock Ownership Plan, Restated (Incorporated herein)
10.7	2010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement)
10.8	Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K)
10.9	Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
10.10	First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
10.11	Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
10.12	Extension to Lease Agreement for 256 Meeting Street (Filed with September 30, 2017 10-Q)
10.13	North Charleston Lease Agreement (Filed with June 30, 2017 10-Q)
10.14	Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed with September 30, 2017 10-Q)
13.0	2018 10-K (Incorporated herein)
14.0	Code of Ethics (Filed with 2004 10-KSB)
21.0	List 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)
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a) by the Principal Executive Officer
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a) by the Principal Financial Officer
32.1	Certification pursuant to Section 1350
32.2	Certification pursuant to Section 1350
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

70

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: March 6, 2020	BANK OF SOUTH CAROLINA CORPORATION
	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

71

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

March 6, 2020	/s/ David W. Bunch
	David W. Bunch, Director
March 6, 2020	/s/ Graham M. Eubank, Jr.
	Graham M. Eubank, Jr., Director
March 6, 2020	/s/ Elizabeth M. Hagood
	Elizabeth M. Hagood, Director
March 6, 2020	/s/ Fleetwood S. Hassell
	Fleetwood S. Hassell, President/ Chief Executive Officer, Director
March 6, 2020	/s/ Glen B. Haynes, DVM
	Glen B. Haynes, DVM, Director
March 6, 2020	/s/ William L. Hiott, Jr.
	William L. Hiott, Jr., Director
March 6, 2020	/s/ Richard W. Hutson, Jr.
	Richard W. Hutson, Jr., Director
March 6, 2020	/s/ Charles G. Lane
	Charles G. Lane, Director
March 6, 2020	/s/ Hugh C. Lane, Jr.
	Hugh C. Lane, Jr., Chairman of the Board, Director
March 6, 2020	/s/ Linda. J. Bradley McKee, PHD, CPA
	Linda J. Bradley McKee, PHD, CPA, Director
March 6, 2020	/s/ Alan I. Nussbaum
	Alan I. Nussbaum, MD, Director
March 6, 2020	/s/ Karen J. Phillips
	Karen J. Phillips, Director
March 6, 2020	/s/ Malcolm M. Rhodes
	Malcolm M. Rhodes, MD, Director
March 6, 2020	/s/ Douglas H. Sass
	Douglas H. Sass, Executive Vice President, Director
March 6, 2020	/s/ Sheryl G. Sharry
	Sheryl G. Sharry, Director
March 6, 2020	/s/ Steve D. Swanson
	Steve D. Swanson, Director
March 6, 2020	/s/ Susanne K. Boyd
	Chief Operating Officer/Executive Vice President, Director
March 6, 2020	/s/ Eugene H. Walpole, IV
	Chief Financial Officer/Executive Vice President, Director

72

EX-31.1

BANK OF SOUTH CAROLINA CORPORATION 10-K

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) UNDER
THE SECURITIES EXCHANGE ACT OF 1934

CERTIFICATION

I, Fleetwood S. Hassell, certify that:

1. I have reviewed this Annual Report on Form 10-K of the Bank of South Carolina Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report.

4. The registrant’s other certifying officer (s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within the entity, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of registrant’s disclosure controls and procedures within 90 days prior to the filing date of the report and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any changes in registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer (s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit and Compliance Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 6, 2020

/s/ Fleetwood S. Hassell

Fleetwood S. Hassell

President/Chief Executive Officer

73

EX-31.2

BANK OF SOUTH CAROLINA CORPORATION 10-K

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) UNDER
THE SECURITIES EXCHANGE ACT OF 1934

CERTIFICATION

I, Eugene H. Walpole, IV, certify that:

1. I have reviewed this Annual Report on Form 10-K of the Bank of South Carolina Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report.

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within the entity, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures within 90 days prior to the filing date of the report and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer (s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit and Compliance Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in registrant’s internal control over financial reporting.

Date: March 6, 2020

/s/ Eugene H. Walpole, IV

Eugene H. Walpole, IV

Chief Financial Officer/Executive Vice President

74

EX-32.1

BANK OF SOUTH CAROLINA CORPORATION 10-K

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Fleetwood S. Hassell, President/Chief Executive Officer of Bank of South Carolina Corporation (the “Company”), certify, that to the best of my knowledge, based upon a review of the annual report on Form 10-K for the period ended December 31, 2019 of the Company (the “Report”):

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (U.S.C. 78m or 78o(d)); and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 6, 2020

By:	/s/ Fleetwood S. Hassell
	Fleetwood S. Hassell
	President/Chief Executive Officer

75

EX-32.2

BANK OF SOUTH CAROLINA CORPORATION 10-K

EXHIBIT 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Eugene H. Walpole, IV, Chief Financial Officer/Executive Vice President of Bank of South Carolina Corporation (the “Company”), certify that to the best of my knowledge, based upon a review of the annual report on Form 10-K for the period ended December 31, 2019 of the Company (the “Report”):

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (U.S.C. 78m or 78o(d)); and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 6, 2020

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

76

XML

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Quarterly Financial Information Disclosure [Abstract]
Total interest and fee income	$ 4,578,390	$ 4,827,684	$ 4,813,345	$ 4,692,833	$ 4,727,449	$ 4,665,586	$ 4,423,867	$ 4,320,009	$ 18,912,252	$ 18,136,911	$ 16,169,147
Total interest expense	112,311	213,876	245,226	243,758	249,425	195,434	139,697	109,830	815,171	694,386	423,863
Net interest income	4,466,079	4,613,808	4,568,119	4,449,075	4,478,024	4,470,152	4,284,170	4,210,179	18,097,081	17,442,525	15,745,284
Provision for loan losses	25,000	10,000	135,000	10,000	95,000	100,000	75,000	55,000	180,000	325,000	55,000
Net interest income after provision for loan losses	4,441,079	4,603,808	4,433,119	4,439,075	4,383,024	4,370,152	4,209,170	4,155,179	17,917,081	17,117,525	15,690,284
Total other income	601,017	596,070	592,739	408,783	532,891	458,693	555,096	447,945	2,198,609	1,994,625	2,268,471
Total other expense	2,746,019	2,581,823	2,634,782	2,659,361	2,970,411	2,816,474	2,651,515	2,641,834	10,621,983	11,080,234	10,242,296
Income before income tax expense	2,296,077	2,618,055	2,391,076	2,188,497	1,945,504	2,012,371	2,112,751	1,961,290
Income tax expense	522,548	603,264	550,229	499,233	139,310	234,218	386,394	349,060	2,175,274	1,108,982	2,814,634
Net income	$ 1,773,529	$ 2,014,791	$ 1,840,847	$ 1,689,264	$ 1,806,194	$ 1,778,153	$ 1,726,357	$ 1,612,230	$ 7,318,433	$ 6,922,934	$ 4,901,825
Basic income per common share (in dollars per share)	$ 0.33	$ 0.36	$ 0.33	$ 0.31	$ 0.33	$ 0.32	$ 0.31	$ 0.29	$ 1.33	$ 1.26	$ 0.90
Diluted income per common share (in dollars per share)	$ 0.32	$ 0.36	$ 0.33	$ 0.30	$ 0.32	$ 0.32	$ 0.31	$ 0.29	$ 1.31	$ 1.24	$ 0.88

XML

STOCK INCENTIVE PLAN (Tables)

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Schedule of fair value weighted-average assumptions as of options

The fair value of options granted was determined using the following weighted-average assumptions as of grant date:

	2019			2018			2017
Risk free interest rate		2.01	%		2.88	%		2.43	%
Expected life (in years)		7.5			7.5			7.5
Expected stock price volatility		33.13	%		33.69	%		34.20	%
Dividend yield		4.28	%		3.61	%		4.00	%

Schedule of activity under stock incentive plan

The following table presents a summary of the activity under the 1998 and 2010 Omnibus Stock Incentive Plans for the years ended December 31. 

	2019					2018					2017
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, January 1		102,760		$	11.89		117,191		$	10.79		154,085		$	10.19
Granted		6,250			18.92		11,275			18.23		10,175			20.72
Expired		—					—			—		—			—
Exercised		(22,163	)		8.81		(24,056	)		8.96		(36,454	)		9.57
Forfeited		(750	)		18.92		(1,650	)		20.02		(10,615	)		15.83
Outstanding, December 31		86,097		$	12.92		102,760		$	11.89		117,191		$	10.79
Exercisable at year end		27,459		$	9.03		32,219		$	8.81		31,694		$	8.77

Schedule of information pertaining to options outstanding

The following table presents information pertaining to options outstanding at December 31, 2019.

December 31, 2019
Exercise Price		Number of Options Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price of Options Outstanding		Intrinsic Value of Options Outstanding		Number of Options Exercisable		Weighted Average Exercise Price of Options Exercisable		Intrinsic Value of Options Exercisable
$	8.61		24,236		5.33	$	8.61	$	208,672		19,389	$	8.61	$	194,683
$	8.90		1,210		0.75	$	8.90	$	10,769		1,210	$	8.90	$	11,799
$	9.18		5,263		2.50	$	9.18	$	48,314		3,158	$	9.18	$	29,907
$	9.65		1,210		1.25	$	9.65	$	11,677		968	$	9.65	$	8,713
$	9.92		1,210		2.75	$	9.92	$	12,003		726	$	9.92	$	6,339
$	12.26		5,202		4.59	$	12.26	$	63,777		1,040	$	12.26	$	6,649
$	12.40		2,419		4.00	$	12.40	$	29,996		968	$	12.40	$	6,048
$	13.05		14,217		5.33	$	13.05	$	185,532		—	$	13.05	$	—
$	13.62		3,630		5.50	$	13.62	$	49,441		—	$	13.62	$	—
$	14.54		5,500		6.25	$	14.54	$	79,970		—	$	14.54	$	—
$	18.23		10,450		8.25	$	18.23	$	190,504		—	$	18.23	$	—
$	18.92		5,500		9.50	$	18.92	$	104,060		—	$	18.92	$	—
$	19.00		2,750		7.17	$	19.00	$	52,250		—	$	19.00	$	—
$	19.82		3,300		7.09	$	19.82	$	65,406		—	$	19.82	$	—
			86,097		5.73	$	12.92	$	1,112,371		27,459	$	9.03	$	264,138

XML

BANK OF SOUTH CAROLINA CORPORATION - PARENT COMPANY (Tables)

12 Months Ended

Dec. 31, 2019

Condensed Financial Information Disclosure [Abstract]

Schedule of condensed financial statements of parent company

The Company’s condensed statements of financial condition as of December 31, 2019 and 2018, and the related condensed statements of income and cash flows for the years ended December 31, 2019, 2018 and 2017, are as follows:

Condensed Statements of Financial Condition   

	December 31, 2019		December 31, 2018
Assets
Cash	$	1,096,474	$	1,007,501
Investment in wholly-owned bank subsidiary		50,731,750		45,103,068
Other assets		224,608		178,629
Total assets	$	52,032,832	$	46,289,198
Liabilities and shareholders’ equity
Other liabilities	$	884,800	$	826,637
Shareholders’ equity		51,168,032		45,462,561
Total liabilities and shareholders’ equity	$	52,052,832	$	46,289,198

Condensed Statements of Income

	For the year ended December 31,
	2019			2018			2017
Interest income	$	1,280		$	1,157		$	484
Net operating expenses		(221,510	)		(224,316	)		(189,872	)
Dividends received from bank		4,170,000			3,775,000			2,685,000
Equity in undistributed earnings of subsidiary		3,368,663			3,371,093			2,406,213
Net income	$	7,318,433		$	6,922,934		$	4,901,825

Condensed Statements of Cash Flows

	For the year ended December 31,
	2019			2018			2017
Cash flows from operating activities:
Net income	$	7,318,433		$	6,922,934		$	4,901,825
Stock-based compensation expense		78,053			72,408			71,701
Equity in undistributed earnings of subsidiary		(3,368,663	)		(3,371,093	)		(2,406,213	)
(Increase) decrease in other assets		(45,979	)		(51,355	)		(51,197	)
(Decrease) increase in other liabilities		—			(6,333	)		151
Net cash provided by operating activities		3,981,844			3,566,561			2,516,267
Cash flows from financing activities:
Dividends paid		(4,031,157	)		(3,699,845	)		(2,832,489	)
Stock options exercised, net of surrenders		138,286			193,569			340,843
Net cash used by financing activities		(3,892,871	)		(3,506,276	)		(2,491,646	)
Net increase in cash		88,973			60,285			24,621
Cash at the beginning of the year		1,007,501			947,216			922,595
Cash at the end of the year	$	1,096,474		$	1,007,501		$	947,216
Supplemental disclosure for non-cash investing and financing activity
Change in dividends payable	$	58,163		$	85,615		$	53,340

XML

BANK OF SOUTH CAROLINA CORPORATION - PARENT COMPANY (Details 2) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Cash flows from operating activities:
Net income	$ 1,773,529	$ 2,014,791	$ 1,840,847	$ 1,689,264	$ 1,806,194	$ 1,778,153	$ 1,726,357	$ 1,612,230	$ 7,318,433	$ 6,922,934	$ 4,901,825
Stock-based compensation expense									78,053	72,408	71,701
Net cash provided by operating activities									4,443,468	9,317,058	8,181,957
Cash flows from financing activities:
Stock options exercised, net of surrenders									138,286	193,569	340,843
Net cash used by financing activities									(7,079,604)	(24,016,188)	27,873,803
Supplemental disclosure for non-cash investing and financing activity:
Change in dividends payable									58,163	85,615	53,340
Bank of South Carolina Corporation - Parent [Member]
Cash flows from operating activities:
Net income									7,318,433	6,922,934	4,901,825
Stock-based compensation expense									78,053	72,408	71,701
Equity in undistributed earnings of subsidiary									(3,368,663)	(3,371,093)	(2,406,213)
(Increase) decrease in other assets									(45,979)	(51,355)	(51,197)
(Decrease) increase in other liabilities										(6,333)	151
Net cash provided by operating activities									3,981,844	3,566,561	2,516,267
Cash flows from financing activities:
Dividends paid									(4,031,157)	(3,699,845)	(2,832,489)
Stock options exercised, net of surrenders									138,286	193,569	340,843
Net cash used by financing activities									(3,892,871)	(3,506,276)	(2,491,646)
Net increase in cash									88,973	60,285	24,621
Cash at the beginning of the year				$ 1,007,501				$ 947,216	1,007,501	947,216	922,595
Cash at the end of the year	$ 1,096,474				$ 1,007,501				1,096,474	1,007,501	947,216
Supplemental disclosure for non-cash investing and financing activity:
Change in dividends payable									$ 58,163	$ 85,615	$ 53,340

XML

OTHER REAL ESTATE OWNED (Details)	12 Months Ended
	Dec. 31, 2018 USD ($)
Summary of activity in other real estate owned:
Balance, beginning of the year	$ 435,479
Sales	(411,842)
Write-downs	$ (23,637)

XML

PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Property, Plant and Equipment [Abstract]
Depreciation	$ 230,377	$ 195,921	$ 193,298

XML

DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 3) - Appraisals and/or Sales [Member] - Discount Rate [Member]	Dec. 31, 2019
Minimum [Member]
Impaired loans	0.10
Other real estate owned	0.10
Maximum [Member]
Impaired loans	0.20
Other real estate owned	0.20

XML

REGULATORY CAPITAL REQUIREMENTS (Details Narrative)	Dec. 31, 2019
Broker-Dealer, Net Capital Requirement, SEC Regulation [Abstract]
Common equity tier 1 capital conservation buffer (risk-weighted assets)	8.46%

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 7) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Average Impaired Loans with no related allowance recorded
Average Recorded Investment with no related allowance recorded	$ 3,897,455	$ 1,995,244	$ 1,900,391
Interest Income Recognized with no related allowance recorded	201,362	100,331	47,438
Average Impaired Loans with an allowance recorded
Average Recorded Investment with an allowance recorded	1,031,477	2,358,022	2,720,854
Interest Income Recognized with an allowance recorded	47,786	112,776	84,626
Total Average Impaired Loans
Average Recorded Investment	4,928,932	4,353,266	4,621,245
Interest Income Recognized	249,148	213,107	132,064
Commercial [Member]
Average Impaired Loans with no related allowance recorded
Average Recorded Investment with no related allowance recorded	1,483,982	133,413	173,964
Interest Income Recognized with no related allowance recorded	94,779	8,637	7,416
Average Impaired Loans with an allowance recorded
Average Recorded Investment with an allowance recorded	725,353	1,915,139	1,711,259
Interest Income Recognized with an allowance recorded	44,299	100,395	76,544
Total Average Impaired Loans
Average Recorded Investment	2,209,335	2,048,552	1,885,223
Interest Income Recognized	139,078	109,032	83,960
Commercial Real Estate Other [Member]
Average Impaired Loans with no related allowance recorded
Average Recorded Investment with no related allowance recorded	1,533,720	982,078	1,275,402
Interest Income Recognized with no related allowance recorded	76,183	40,174	23,084
Average Impaired Loans with an allowance recorded
Average Recorded Investment with an allowance recorded	246,884	416,569	930,420
Interest Income Recognized with an allowance recorded		10,999	5,367
Total Average Impaired Loans
Average Recorded Investment	1,780,604	1,398,647	2,205,822
Interest Income Recognized	76,183	51,173	28,451
Consumer Real Estate [Member]
Average Impaired Loans with no related allowance recorded
Average Recorded Investment with no related allowance recorded	879,753	879,753	451,025
Interest Income Recognized with no related allowance recorded	30,400	51,520	16,938
Average Impaired Loans with an allowance recorded
Average Recorded Investment with an allowance recorded			43,119
Interest Income Recognized with an allowance recorded			1,296
Total Average Impaired Loans
Average Recorded Investment	879,753	879,753	494,144
Interest Income Recognized	30,400	51,520	18,234
Consumer Other [Member]
Average Impaired Loans with an allowance recorded
Average Recorded Investment with an allowance recorded	59,240	26,314	36,056
Interest Income Recognized with an allowance recorded	3,487	1,382	1,419
Total Average Impaired Loans
Average Recorded Investment	59,240	26,314	36,056
Interest Income Recognized	$ 3,487	$ 1,382	$ 1,419

XML

REGULATORY CAPITAL REQUIREMENTS

12 Months Ended

Dec. 31, 2019

Broker-Dealer, Net Capital Requirement, SEC Regulation [Abstract]

REGULATORY CAPITAL REQUIREMENTS

19. Regulatory Capital Requirements

The Company and the Bank are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.

Current quantitative measures established by regulation to ensure capital adequacy require that we maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and to average assets. We believe that the Company and the Bank meet all capital adequacy requirements to which they were subject at December 31, 2019 and 2018.

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

Basel III became effective on January 1, 2015. The purpose is to improve the quality and increase the quantity of capital for all banking organizations. The minimum requirements for the quantity and quality of capital were increased. The rule includes a new common equity Tier 1 capital to risk-weighted assets ratio of 4.50% and a common equity Tier 1 capital conservation buffer of 2.50% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00% to 6.00% and requires a minimum leverage ratio of 4.00%. In addition, the rule also implements strict eligibility criteria for regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. All final rule requirements will be phased in over a multi-year schedule. The capital conservation buffer in effect for the year ended December 31, 2019 was 8.46%.

At December 31, 2019, the Bank was categorized as “well capitalized” under Basel III. To be categorized as “well capitalized” the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 10.00%, 8.00%, 6.50%, and 5.00%, respectively, and to be categorized as “adequately capitalized,” the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital, and Tier 1 leverage ratios of 8.00%, 6.00%, 4.50%, and 4.00%, respectively.

The following tables present the actual and required capital amounts and ratios for the Company and Bank at December 31, 2019 and 2018:  

	December 31, 2019
	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Company	$	54,690		16.69	%	$	26,221		8.00	%		N/A		N/A
Bank	$	53,897		16.46	%	$	26,199		8.00	%	$	32,748		10.00	%
Tier 1 capital to risk-weighted assets:
Company	$	50,686		15.46	%	$	19,666		6.00	%		N/A		N/A
Bank	$	49,860		15.23	%	$	19,649		6.00	%	$	26,199		8.00	%
Tier 1 capital to average assets:
Company	$	50,686		11.32	%	$	17,907		4.00	%		N/A		N/A
Bank	$	49,860		11.14	%	$	17,895		4.00	%	$	22,369		5.00	%
Common equity Tier 1 capital:
Company	$	50,686		15.46	%	$	14,749		4.50	%		N/A		N/A
Bank	$	49,860		15.23	%	$	14,737		4.50	%	$	14,737		4.50	%

	December 31, 2018
	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Company	$	50,657		16.69	%	$	24,280		8.00	%		N/A		N/A
Bank	$	49,695		16.39	%	$	24,262		8.00	%	$	30,328		10.00	%
Tier 1 capital to risk-weighted assets:
Company	$	46,864		15.44	%	$	18,210		6.00	%		N/A		N/A
Bank	$	45,898		15.13	%	$	18,197		6.00	%	$	24,262		8.00	%
Tier 1 capital to average assets:
Company	$	46,864		10.76	%	$	17,428		4.00	%		N/A		N/A
Bank	$	45,898		10.54	%	$	17,419		4.00	%	$	21,773		5.00	%
Common equity Tier 1 capital:
Company	$	46,864		15.44	%	$	13,658		4.50	%		N/A		N/A
Bank	$	45,898		15.13	%	$	13,647		4.50	%	$	13,647		4.50	%

XML

STOCK INCENTIVE PLAN

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

STOCK INCENTIVE PLAN

15. Stock Incentive Plan

We have a Stock Incentive Plan which was approved in 1998 with 180,000 (329,422 adjusted for five 10% stock dividends and a 25% stock dividend) shares reserved and a Stock Incentive Plan which was approved in 2010 with 300,000 (363,000 adjusted for two 10% stock dividends) shares reserved. Under both plans, options are periodically granted to employees at a price not less than the fair market value of the shares at the date of grant. Employees become 20% vested after five years and then vest 20% each year until fully vested. The right to exercise each such 20% of the options is cumulative and will not expire until the tenth anniversary of the date of the grant. All employees are eligible to participate in this plan if the Executive/Long-Range Committee, in its sole discretion, determines that such person has contributed or can be expected to contribute to our profits or growth. The Stock Incentive Plan for Executive Officers is administered by the Compensation Committee of the Board of Directors.

Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of our common stock. The expected term of the options granted shall not exceed ten years from the date of grant (the amount of time options granted are expected to be outstanding). The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted was determined using the following weighted-average assumptions as of grant date:

	2019			2018			2017
Risk free interest rate		2.01	%		2.88	%		2.43	%
Expected life (in years)		7.5			7.5			7.5
Expected stock price volatility		33.13	%		33.69	%		34.20	%
Dividend yield		4.28	%		3.61	%		4.00	%

There are currently no options to purchase or shares exercisable under the 1998 Omnibus Stock Incentive Plan as of December 31, 2019.

The following table presents a summary of the activity under the 1998 and 2010 Omnibus Stock Incentive Plans for the years ended December 31.

	2019					2018					2017
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, January 1		102,760		$	11.89		117,191		$	10.79		154,085		$	10.19
Granted		6,250			18.92		11,275			18.23		10,175			20.72
Expired		—					—			—		—			—
Exercised		(22,163	)		8.81		(24,056	)		8.96		(36,454	)		9.57
Forfeited		(750	)		18.92		(1,650	)		20.02		(10,615	)		15.83
Outstanding, December 31		86,097		$	12.92		102,760		$	11.89		117,191		$	10.79
Exercisable at year end		27,459		$	9.03		32,219		$	8.81		31,694		$	8.77

Information has been retroactively adjusted for the 2018 10% stock dividend as applicable.

The following table presents information pertaining to options outstanding at December 31, 2019.

December 31, 2019
Exercise Price		Number of Options Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price of Options Outstanding		Intrinsic Value of Options Outstanding		Number of Options Exercisable		Weighted Average Exercise Price of Options Exercisable		Intrinsic Value of Options Exercisable
$	8.61		24,236		5.33	$	8.61	$	208,672		19,389	$	8.61	$	194,683
$	8.90		1,210		0.75	$	8.90	$	10,769		1,210	$	8.90	$	11,799
$	9.18		5,263		2.50	$	9.18	$	48,314		3,158	$	9.18	$	29,907
$	9.65		1,210		1.25	$	9.65	$	11,677		968	$	9.65	$	8,713
$	9.92		1,210		2.75	$	9.92	$	12,003		726	$	9.92	$	6,339
$	12.26		5,202		4.59	$	12.26	$	63,777		1,040	$	12.26	$	6,649
$	12.40		2,419		4.00	$	12.40	$	29,996		968	$	12.40	$	6,048
$	13.05		14,217		5.33	$	13.05	$	185,532		—	$	13.05	$	—
$	13.62		3,630		5.50	$	13.62	$	49,441		—	$	13.62	$	—
$	14.54		5,500		6.25	$	14.54	$	79,970		—	$	14.54	$	—
$	18.23		10,450		8.25	$	18.23	$	190,504		—	$	18.23	$	—
$	18.92		5,500		9.50	$	18.92	$	104,060		—	$	18.92	$	—
$	19.00		2,750		7.17	$	19.00	$	52,250		—	$	19.00	$	—
$	19.82		3,300		7.09	$	19.82	$	65,406		—	$	19.82	$	—
			86,097		5.73	$	12.92	$	1,112,371		27,459	$	9.03	$	264,138

The total intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017, was $218,116, $262,415, and $311,836, respectively.

We recognized compensation cost for the years ended December 31, 2019, 2018 and 2017 in the amount of $78,053, $72,408, and $71,701, respectively, related to the granted options.

As of December 31, 2019, there was a total of $189,103 in unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted average period of 3.86 years.

XML

INCOME TAXES

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

INCOME TAXES

11. Income Taxes

On December 22, 2017, the President of the United States signed into law the 2017 Tax Act. The 2017 Tax Act included a number of changes to the existing U.S. tax laws that impact the Company, most notably a reduction in the U.S. corporate income tax rate from 34 percent to 21 percent for tax years beginning after December 31, 2017.

The Company recognized the income tax effects of the 2017 Tax Act in its 2017 consolidated financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined.

Total income taxes for the years ended December 31, 2019, 2018 and 2017 are presented in the table below.

	For the year ended December 31,
	2019			2018			2017
Income tax expense	$	2,175,274		$	1,108,982		$	2,814,634
Unrealized gains (losses) on securities available for sale presented in accumulated other comprehensive income (loss)		(600,765	)		(192,280	)		(116,007	)
Total	$	1,574,509		$	916,702		$	2,698,627

Income tax expense was as follows:

	For the year ended December 31,
	2019		2018			2017
Current income taxes
Federal	$	1,742,430	$	1,326,619		$	2,538,272
State		—		—			—
Total current tax expense		1,742,430		1,326,619			2,538,272
Deferred income tax (benefit) expense		432,844		(217,637	)		276,362
Total income tax expense	$	2,175,274	$	1,108,982		$	2,814,634

The differences between actual income tax expense and the amounts computed by applying the U.S. federal income tax rate of 21% to pretax income from continuing operations for the periods indicated are reconciled in the table below.

	For the year ended December 31,
	2019			2018			2017
Computed “expected” tax expense	$	1,993,679		$	1,686,702		$	2,623,595
Increase (reduction) in income taxes resulting from:
Tax rate change impact		—			—			666,674
Amortization of credit and gain		1,685			196,477			163,411
Stock based compensation		16,391			15,205			24,378
Valuation allowance		7,123			7,538			16,952
Other		6,233			38,938			(4,768	)
State income tax, net of federal benefit		268,000			(226,578	)		(329,412	)
Federal credits		—			(454,985	)		—
Tax exempt interest income		(117,837	)		(154,315	)		(346,196	)
	$	2,175,274		$	1,108,982		$	2,814,634

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented below.

	December 31, 2019			December 31, 2018
Deferred tax assets:
Allowance for loan losses	$	806,982		$	850,964
State credit carryforward		307,950			647,190
Unrealized gain (loss) on securities available for sale		—			472,421
Pass-through income		68,438			68,438
State net operating loss carryforward		81,914			74,791
Nonaccrual interest		41,453			27,956
Other		6,934			6,155
Total gross deferred tax assets	$	1,313,671			2,147,915
Valuation allowance		(81,914	)		(74,791	)
Total gross deferred tax assets, net of valuation allowance	$	1,231,757			2,073,124
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation		(109,169	)		(39,294	)
Unrealized gain (loss) on securities available for sale		(128,344	)		—
Deferred loan fees		(32,696	)		(32,825	)
Other		(57,741	)		(56,481	)
Prepaid expenses		(225	)		(210	)
		(328,175	)		(128,810	)
Net deferred tax assets	$	903,582		$	1,944,314

In 2018, the Company invested in a Federal Rehabilitation Credit. The tax credit was used during the year ended December 31, 2018. Amortization expense recognized for the years ended December 31, 2019 and 2018 was $8,022 and $354,888, respectively. In 2016, the Company invested in a South Carolina Rehabilitation Credit. The tax credit was included in deferred tax assets and is being amortized. Amortization expense recognized for the years ended December 31, 2018 and 2017 was $306,105, and was included in other operating expense on the statement of operations.

There was a $81,914 valuation allowance for deferred tax assets at December 31, 2019 associated with the Company’s state net operating loss. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and prior to their expiration governed by the income tax code. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred income tax assets are expected to be deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2019. The amount of the deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a $666,674 increase in income tax expense for the year ended December 31, 2017 and a corresponding $666,674 decrease in net deferred tax assets as of December 31, 2017.

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with applicable regulations.

Tax returns for 2016 and subsequent years are subject to examination by taxing authorities.

XML

LEASES

12 Months Ended

Dec. 31, 2019

Leases [Abstract]

LEASES

7. LEASES

As of December 31, 2019, the Company had operating right of use (“ROU”) assets of $13.2 million and operating lease liabilities of $13.2 million. 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 18.50 years. The weighted average incremental borrowing rate is 4.34%.

The exercise of renewal options is based on the sole judgement of management and what they consider to be reasonably certain. Based on the market areas, past practices, and contract terms of all leases, the Bank assumed all renewal options will be exercised. Minimum rental commitments for these leases as of December 31, 2019 are presented in the table below.

2020	$	901,896
2021		917,169
2022		930,750
2023		957,477
2024 and thereafter		11,697,343
Total undisclosed lease payments	$	15,404,635

Less: effect of discounting		(2,195,418	)
Present value of estimated lease payments	$	13,209,217

The table below shows lease expense components for the year ended December 31, 2019.

Lease Expense Components

Operating lease expense	$	577,460
Short-term lease expense		46,538
Total lease expense	$	623,998

Total rental expense was $623,998, $622,396, and $612,717 in 2019, 2018 and 2017, respectively.

As of December 31, 2019, we did not maintain any finance leases and we determined that the number and dollar amount of equipment leases was immaterial. As of December 31, 2019, we have no additional operating leases that have not yet commenced.

We rented office space at 1071 Morrison Drive, Charleston, South Carolina, from a related party, to house our Mortgage Department during the year ended December 31, 2019. Rent expense for this lease was $46,538, $60,840, and $54,720 for the years ended December 31, 2019, 2018, and 2017, respectively. This lease ended in September 2019.

XML

INVESTMENT SECURITIES AVAILABLE FOR SALE

12 Months Ended

Dec. 31, 2019

Investments, Debt and Equity Securities [Abstract]

INVESTMENT SECURITIES AVAILABLE FOR SALE

3. INVESTMENT SECURITIES AVAILABLE FOR SALE

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

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	23,080,465	$	99,735	$	—		$	23,180,200
Government-Sponsored Enterprises		50,139,959		401,336		(43,100	)		50,498,195
Municipal Securities		26,618,375		169,640		(16,454	)		26,771,561
Total	$	99,838,799	$	670,711	$	(59,554	)	$	100,449,956

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	32,965,693	$	—	$	(609,059	)	$	32,356,634
Government-Sponsored Enterprises		60,684,878		—		(1,315,598	)		59,369,280
Municipal Securities		28,267,930		112,971		(437,941	)		27,942,960
Total	$	121,918,501	$	112,971	$	(2,362,598	)	$	119,668,874

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2019 and 2018, by contractual maturity are in the following table.

	December 31, 2019				December 31, 2018
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	9,185,615	$	9,191,226	$	4,246,325	$	4,249,570
Due in one year to five years		77,261,123		77,815,119		99,753,174		97,915,185
Due in five years to ten years		13,392,061		13,443,611		17,504,456		17,128,425
Due in ten years and over		—		—		414,546		375,694
Total	$	99,838,799	$	100,449,956	$	121,918,501	$	119,668,874

Securities pledged to secure deposits at December 31, 2019 and 2018, had a carrying amount of $37,648,687 and $41,547,205, 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 December 31, 2019 and 2018. 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.

	December 31, 2019
	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		1		5,039,550		(43,100	)		—		—		—			1		5,039,550		(43,100	)
Municipal Securities		9		3,199,517		(13,335	)		1		330,880		(3,119	)		10		3,530,397		(16,454	)
Total		10	$	8,239,067	$	(56,435	)		1	$	330,880	$	(3,119	)		11	$	8,569,947	$	(59,554	)

	December 31, 2018
	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		—	$	—	$	—			7	$	32,356,634	$	(609,059	)		7	$	32,356,634	$	(609,059	)
Government-Sponsored Enterprises		2		9,967,000		(14,302	)		11		49,402,280		(1,301,296	)		13		59,369,280		(1,315,598	)
Municipal Securities		2		1,362,286		(7,547	)		31		11,840,912		(430,394	)		33		13,203,198		(437,941	)
Total		4	$	11,329,286	$	(21,849	)		49	$	93,599,826	$	(2,340,749	)		53	$	104,929,112	$	(2,362,598	)

The table below shows the proceeds received from sales of securities available for sale and gross realized gains and losses.

	For the Year Ended December 31,
	2019			2018			2017
Gross proceeds	$	30,412,250		$	21,434,634		$	20,231,265
Gross realized gains		114,888			104,634			154,692
Gross realized losses		(64,181	)		(99,899	)		(108,872	)

The tax provision related to these gains was $10,648 and $994 for the year ended December 31, 2019 and 2018, respectively.

XML

INVESTMENT SECURITIES AVAILABLE FOR SALE (Tables)

12 Months Ended

Dec. 31, 2019

Investments, Debt and Equity Securities [Abstract]

Schedule of amortized cost fair value of investment securities available for sale

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

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	23,080,465	$	99,735	$	—		$	23,180,200
Government-Sponsored Enterprises		50,139,959		401,336		(43,100	)		50,498,195
Municipal Securities		26,618,375		169,640		(16,454	)		26,771,561
Total	$	99,838,799	$	670,711	$	(59,554	)	$	100,449,956

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury Notes	$	32,965,693	$	—	$	(609,059	)	$	32,356,634
Government-Sponsored Enterprises		60,684,878		—		(1,315,598	)		59,369,280
Municipal Securities		28,267,930		112,971		(437,941	)		27,942,960
Total	$	121,918,501	$	112,971	$	(2,362,598	)	$	119,668,874

Schedule of amortized cost and estimated fair value of investment securities available for sale by contractual maturity

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2019 and 2018, by contractual maturity are in the following table.

	December 31, 2019				December 31, 2018
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	9,185,615	$	9,191,226	$	4,246,325	$	4,249,570
Due in one year to five years		77,261,123		77,815,119		99,753,174		97,915,185
Due in five years to ten years		13,392,061		13,443,611		17,504,456		17,128,425
Due in ten years and over		—		—		414,546		375,694
Total	$	99,838,799	$	100,449,956	$	121,918,501	$	119,668,874

Schedule of investment securities gross unrealized losses on investment securities and the fair market value of the related securities

	December 31, 2019
	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		1		5,039,550		(43,100	)		—		—		—			1		5,039,550		(43,100	)
Municipal Securities		9		3,199,517		(13,335	)		1		330,880		(3,119	)		10		3,530,397		(16,454	)
Total		10	$	8,239,067	$	(56,435	)		1	$	330,880	$	(3,119	)		11	$	8,569,947	$	(59,554	)

	December 31, 2018
	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		—	$	—	$	—			7	$	32,356,634	$	(609,059	)		7	$	32,356,634	$	(609,059	)
Government-Sponsored Enterprises		2		9,967,000		(14,302	)		11		49,402,280		(1,301,296	)		13		59,369,280		(1,315,598	)
Municipal Securities		2		1,362,286		(7,547	)		31		11,840,912		(430,394	)		33		13,203,198		(437,941	)
Total		4	$	11,329,286	$	(21,849	)		49	$	93,599,826	$	(2,340,749	)		53	$	104,929,112	$	(2,362,598	)

Schedule of proceeds from sales of securities available for sale and gross realized gains and losses

The table below shows the proceeds received from sales of securities available for sale and gross realized gains and losses.

	For the Year Ended December 31,
	2019			2018			2017
Gross proceeds	$	30,412,250		$	21,434,634		$	20,231,265
Gross realized gains		114,888			104,634			154,692
Gross realized losses		(64,181	)		(99,899	)		(108,872	)

XML

LEASES (Tables)

12 Months Ended

Dec. 31, 2019

Leases Tables Abstract

Schedule of minimum rental commitments for leases

Minimum rental commitments for these leases as of December 31, 2019 are presented in the table below.

2020	$	901,896
2021		917,169
2022		930,750
2023		957,477
2024 and thereafter		11,697,343
Total undisclosed lease payments	$	15,404,635

Less: effect of discounting		(2,195,418	)
Present value of estimated lease payments	$	13,209,217

Schedule of lease expense components

The table below shows lease expense components for the year ended December 31, 2019.

Lease Expense Components

Operating lease expense	$	577,460
Short-term lease expense		46,538
Total lease expense	$	623,998

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 3) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Financing Receivable, Past Due [Line Items]
Non-accrual loans receivable	$ 1,666,301	$ 823,534
Commercial [Member]
Financing Receivable, Past Due [Line Items]
Non-accrual loans receivable	178,975	251,219
Commercial Real Estate Other [Member]
Financing Receivable, Past Due [Line Items]
Non-accrual loans receivable	857,327	571,292
Consumer Other [Member]
Financing Receivable, Past Due [Line Items]
Non-accrual loans receivable		$ 1,023
Consumer Real Estate [Member]
Financing Receivable, Past Due [Line Items]
Non-accrual loans receivable	$ 629,999

XML

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Parenthetical) - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Statement of Stockholders' Equity [Abstract]
Dividends (per common share)	$ 0.74	$ 0.70	$ 0.58
Common stock dividend (percent)		10.00%

XML

INVESTMENT SECURITIES AVAILABLE FOR SALE (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Investments, Debt and Equity Securities [Abstract]
Investment securities pledged to secure deposits, fair value	$ 37,648,687	$ 41,547,205
Gross realized gains (losses) on sale of investments, tax	$ 10,648	$ 994

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Statement of Financial Position [Abstract]
Amortized cost for Investment securities available for sale	$ 99,838,799	$ 121,918,501
Common stock, no par value (in dollars per share)	$ 0	$ 0
Common stock, authorized	12,000,000	12,000,000
Common stock, issued	5,799,637	5,777,474
Common stock, outstanding	5,530,001	5,510,917
Treasury stock, shares	269,636	266,557

XML

OTHER REAL ESTATE OWNED (Details Narrative)	12 Months Ended
	Dec. 31, 2018 USD ($) Number	Dec. 31, 2017 USD ($)
Real Estate Owned, Disclosure of Detailed Components [Abstract]
Carrying value of other real estate sold	$ 411,842
Loss on sale of other real estate	$ (33,476)	$ (1,477)
Number of OREO properties sold | Number	1

XML

RELATED PARTY TRANSACTIONS (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Related Party Transactions [Abstract]
Balance at beginning of the year	$ 4,401,710	$ 4,569,780
New loans or advances	370,275	1,428,098
Repayments	(2,120,078)	(1,596,169)
Balance at the end of the year	$ 2,651,907	$ 4,401,710

XML

STOCK INCENTIVE PLAN (Details 1) - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Shares
Outstanding, beginning	102,760	117,191	154,085
Granted	6,250	11,275	10,175
Exercised	(22,163)	(24,056)	(36,454)
Forfeited	(750)	(1,650)	(10,615)
Outstanding, ending	86,097	102,760	117,191
Exercisable at year end	27,459	32,219	31,694
Weighted Average Exercise Price
Outstanding, beginning	$ 11.89	$ 10.79	$ 10.19
Granted	18.92	18.23	20.72
Exercised	8.81	8.96	9.57
Forfeited	18.92	20.02	15.83
Outstanding, ending	12.92	11.89	10.79
Exercisable at year end	$ 9.03	$ 8.81	$ 8.77

XML

INCOME TAXES (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Income Tax Disclosure [Abstract]
Income tax expense	$ 522,548	$ 603,264	$ 550,229	$ 499,233	$ 139,310	$ 234,218	$ 386,394	$ 349,060	$ 2,175,274	$ 1,108,982	$ 2,814,634
Unrealized gains (losses) on securities available for sale presented in accumulated other comprehensive income (loss)									600,765	(192,280)	(116,007)
Total									$ 1,574,509	$ 916,702	$ 2,698,627

XML

INCOME TAXES (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
U.S. Federal statutory rate		21.00%	34.00%
Amortization of tax credits	$ 8,022	$ 354,888
Decrease in deferred tax assets for change in tax rates			$ 666,674
Increase in income tax expense for change in tax rates			666,674
Deferred tax asset, valuation allowance	$ 81,914	74,791
South Carolina Rehabilitation Credit [Member]
Amortization of tax credits		$ 306,105	$ 306,105

XML

DIVIDENDS (Details Narrative) - USD ($)		12 Months Ended
	Apr. 10, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Dividends [Abstract]
Dividends paid to parent by subsidiaries		$ 4,100,000	$ 3,800,000	$ 2,900,000
Common stock dividend (percent)	10.00%		10.00%
Increase in shares outstanding due to stock dividends	499,088

XML

PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

12 Months Ended

Dec. 31, 2019

Property, Plant and Equipment [Abstract]

PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

6. Premises, Equipment and Leasehold Improvements

Premises, equipment and leasehold improvements are summarized in the table below.

	December 31,
	2019			2018
Bank buildings	$	1,861,237		$	1,861,237
Land		838,075			838,075
Leasehold purchases		30,000			30,000
Leasehold improvements		2,555,376			709,520
Construction in progress		—			120,849
Equipment		3,987,002			3,526,404
		9,271,690			7,086,085
Accumulated depreciation		(4,981,255	)		(4,750,878	)
Total	$	4,290,435		$	2,335,207

Depreciation on our bank premises and equipment charged to operating expense totaled $230,377 in 2019, $195,921 in 2018, and $193,298 in 2017.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our accounting and reporting policies conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”), and to general practices within the banking industry. The following summarizes the more significant of these policies and practices.

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.

Accounting Estimates and Assumptions:  

The 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 year’s presentation. Such reclassifications have no effect on shareholders’ equity or the net income as previously reported.

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 as of 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 as of 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.

Cash and Cash Equivalents:  

Cash and cash equivalents include working cash funds, due from banks, interest-bearing deposits at the Federal Reserve, items in process of collection and federal funds sold. All cash equivalents are readily convertible to cash and have maturities of less than 90 days.

Depository institutions are required to maintain reserve and clearing balances at the Federal Reserve Bank. Vault cash satisfied our daily reserve requirement for the years ended December 31, 2019 and 2018, respectively.  

Interest-bearing Deposits at the Federal Reserve:  

Interest-bearing deposits at the Federal Reserve mature daily and are carried at cost.

Investment Securities:  

We classify investments into three categories: (1) Held to Maturity - debt securities that we have the positive intent and ability to hold to maturity, which are reported at amortized cost, adjusted for the amortization of any related premiums or the accretion of any related discounts into interest income using a methodology which approximates a level yield of interest over the estimated remaining period until maturity; (2) Trading - debt and equity securities that are bought and held principally for the purpose of selling them in the near term, which are reported at fair value, with unrealized gains and losses included in earnings; and (3) Available for Sale - debt and equity securities that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of income taxes. Unrealized losses on securities due to fluctuations in fair value are recognized when it is determined that an other than temporary decline in value has occurred.

Realized gains or losses on the sale of investments are recognized on a specific identification, trade date basis. All securities were classified as available for sale for 2019 and 2018.

Mortgage Loans to be Sold:  

We originate fixed and variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed but not yet settled with an investor are carried in our loans held for sale portfolio.   Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with our customers.  Therefore, these loans present very little market risk.  We usually deliver to, and receive funding from, the investor within 30 to 60 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. We are not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking income in the consolidated statements of income.

Loans and Allowance for Loan Losses:   

Loans are carried at principal amounts outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the weighted average life of the loan as an adjustment to yield. Interest income on all loans is recorded on an accrual basis. The accrual of interest and the amortization of net loan fees are generally discontinued on loans that 1) are maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) the payment of full principal is not expected; or 3) the principal or interest has been in default for a period of 90 days or more. We define past due loans based on contractual payment and maturity dates.

The accrual of interest is generally discontinued on loans that become 90 days past due as to principal or interest. The accrual of interest on some loans may continue even though they are 90 days past due if the loans are well secured or in the process of collection and management deems it appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of six to nine months, they are reviewed individually by management to determine if they should be returned to accrual status.

When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest income and then to principal.  

We account for impaired loans by requiring that all loans (greater than $50,000) where it is estimated that we will be unable to collect all amounts due according to the terms of the loan agreement be recorded at the loan’s fair value. Fair value may be determined based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral less cost to sell, if the loan is collateral dependent.

Additional accounting guidance allows us to use existing methods for recognizing interest income on an impaired loan. The guidance also requires additional disclosures about how we estimate interest income related to our impaired loans.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring (“TDR”). For this type of impaired loan, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting, provided they are performing in accordance with their restructured terms.

The allowance for loan losses (the “allowance”) is our estimate of credit losses inherent in the loan portfolio. The allowance is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when we believe the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is evaluated on a regular basis and is based upon our periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We believe that the allowance is adequate to absorb inherent losses in the loan portfolio; however, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances, will not require significant future additions to the allowance, thus adversely affecting our operating results.

The allowance is also subject to examination by regulatory agencies, which may consider factors such as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions and other adequacy tests. In addition, such regulatory agencies could require us to adjust our allowance based on information available at the time of the examination.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to the methodology used to determine the allowance adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

Concentration of Credit Risk:  

Our primary market consists of the counties of Berkeley, Charleston and Dorchester, South Carolina. As of December 31, 2019, the majority of the total loan portfolio, as well as a substantial portion of the commercial and real estate loan portfolios, were to borrowers within this region. No other areas of significant concentration of credit risk have been identified.

Premises, Equipment and Leasehold Improvements and Depreciation:  

Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the assets ranging from 40 years for buildings and 3 to 15 years for equipment. Leasehold improvements are amortized over the shorter of the asset’s useful life or the remaining lease term, including renewal periods when reasonably assured. The cost of maintenance and repairs is charged to operating expense as incurred.

Leases:

In accordance with ASU 2016-02, the Company determines if a contractual arrangement is a lease at inception. Operating leases are included in the operating right of use ("ROU") assets and current operating lease liabilities on the Company's Consolidated Balance Sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Currently, the Company does not have any finance leases.

Beginning January 1, 2019, operating lease ROU assets and lease liabilities are recognized at the commencement of the lease based on the present value of lease payments over the lease term. The lease payments included in the present value are fixed payments and index-based variable lease payments. The Company estimates the incremental borrowing rate, based on information available at the commencement of the lease, as most of the Company's leases do not include an implicit rate.

Income Taxes:  

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net deferred tax assets are included in other assets in the consolidated balance sheet.

Accounting standards require the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. These standards also prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. We believe that we had no uncertain tax positions for the years ended December 31, 2019 and 2018.

Stock-Based Compensation:  

Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required expected term, generally defined as the average vesting period (7.5 years).

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. Earnings per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Segment Information:  

The Company operates and manages itself within one retail banking segment and therefore has not provided segment disclosures.

Interest Rate Lock Commitments and Forward Sale Contracts:  

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitments before the loan is funded. In order to hedge the change in interest rates resulting from commitments to fund the loans, we enter into forward commitments for the future delivery of mortgage loans when the interest rate is locked. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in income when they occur. As a result of the short-term nature of mortgage loans held for sale (derivative contract), our derivative instruments were considered to be immaterial as of December 31, 2019 and 2018.

We had no embedded derivative instruments requiring hedge accounting treatment at December 31, 2019. We do not currently engage in hedging activities.

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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which revises certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 – Leases. This update clarifies how to apply certain aspects of the new leases standard. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which gives entities another option for transition and to provide lessors with a practical expedient. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, providing narrow-scope improvements for lessors, that provides relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. The amendments became effective for January 1, 2019. A modified retrospective transition approach was required, applying the new standard to all leases existing at the date of initial application. The Bank has chosen to use the effective date, January 1, 2019, as its date of initial application; therefore, the financial information was not provided for dates or periods prior to January 1, 2019. The Bank considered all relevant contractual provisions, including renewal and termination options, and determined the remaining lease terms of each respective lease. The Bank considered past practices, market area, and contract terms of all leases and assumed all renewal options would be exercised. To determine the incremental borrowing rate, the Bank used the rate of interest it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Bank does not have any finance leases or material subleases or leasing arrangements in which it is the lessor of the property or equipment. The adoption of this standard did not materially affect the change in the Bank’s recognition of lease expense in future periods, but added the ROU asset and corresponding lease liability on the Company’s Consolidated Balance Sheet.

 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. The amendment will be effective for the Company for periods beginning after December 15, 2022. 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 March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities, which shortens the amortization period for the premium to the earliest call date. The amendment became effective for the Company on January 1, 2019 and did not have a material effect on the financial statements. 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles and Goodwill and Other-Internal Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract),which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments became effective for the Company on January 1, 2019 and did not have a material effect on its financial statements.

In October 2018, the FASB issued ASU 2018-07, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for the reporting period beginning after December 15, 2019. The amendments related to hedging became effective January 1, 2019. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

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.

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.

XML

SHORT-TERM BORROWINGS

12 Months Ended

Dec. 31, 2019

Short-term Debt [Abstract]

SHORT-TERM BORROWINGS

10. Short-Term Borrowings

At December 31, 2019 and 2018, we had no outstanding federal funds purchased. We have a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits the Company to retain possession of loans pledged as collateral to secure advances from the Federal Reserve Discount Window. Under this agreement, we may borrow up to $56.8 million. We established this arrangement as an additional source of liquidity. There have been no borrowings under this arrangement.

At December 31, 2019 and 2018, the Bank had unused short-term lines of credit totaling approximately $23.0 million (which are withdrawable at the lender’s option).

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables)

12 Months Ended

Dec. 31, 2019

Receivables [Abstract]

Schedule of major classifications of loans

Major classifications of loans (net of deferred loan fees of $155,697 at December 31, 2019, and $156,309  at December 31, 2018) are shown in the table below.  

	December 31, 2019			December 31, 2018
Commercial	$	52,848,455		$	54,829,078
Commercial real estate:
Construction		12,491,078			7,304,300
Other		143,821,990			143,703,401
Consumer:
Real estate		59,533,045			63,787,411
Other		5,377,992			5,040,077
Total loans		274,072,560			274,664,267
Allowance for loan losses		(4,003,758	)		(4,214,331	)
Loans, net	$	270,068,802		$	270,449,936

Schedule of credit risks by category and internally assigned grades

The following tables illustrate credit risks by category and internally assigned grades at December 31, 2019 and December 31, 2018. “Pass” includes loans internally graded as excellent, good and satisfactory.

	December 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	48,098,936	$	12,005,834	$	137,641,011	$	56,034,247	$	4,966,615	$	258,746,643
Watch		2,303,568		485,244		3,758,220		2,096,445		315,375		8,958,852
OAEM		460,551		—		649,039		522,600		44,232		1,676,422
Substandard		1,985,400		—		1,773,720		879,753		51,770		4,690,643
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	52,848,455	$	12,491,078	$	143,821,990	$	59,533,045	$	5,377,992	$	274,072,560

	December 31, 2018
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	50,663,356	$	7,304,300	$	136,804,420	$	60,480,317	$	4,726,494	$	259,978,887
Watch		1,973,675		—		4,938,711		2,077,341		226,117		9,215,844
OAEM		157,300		—		590,294		350,000		—		1,097,594
Substandard		2,034,747		—		1,369,976		879,753		87,466		4,371,942
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	54,829,078	$	7,304,300	$	143,703,401	$	63,787,411	$	5,040,077	$	274,664,267

Schedule of aging analysis of the recorded investment in loans segregated by class

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

	December 31, 2019
	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	$	39,329	$	—	$	178,975	$	218,304	$	52,630,151	$	52,848,455	$	—
Commercial Real Estate Construction		—		—		—		—		12,491,078		12,491,078		—
Commercial Real Estate Other		620,837		300,240		582,419		1,503,496		142,318,494		143,821,990		—
Consumer Real Estate		—		2,965		629,999		632,964		58,900,081		59,533,045		—
Consumer Other		32,842		—		—		32,842		5,345,150		5,377,992		—
Total	$	693,008	$	303,205	$	1,391,393	$	2,387,606	$	271,684,954	$	274,072,560	$	—

	December 31, 2018
	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	$	266,567	$	17,492	$	229,395	$	513,454	$	54,315,624	$	54,829,078	$	—
Commercial Real Estate Construction		—		—		—		—		7,304,300		7,304,300		—
Commercial Real Estate Other		35,000		215,049		571,292		821,341		142,882,060		143,703,401		—
Consumer Real Estate		—		—		—		—		63,787,411		63,787,411		—
Consumer Other		24,621		—		—		24,621		5,015,456		5,040,077		—
Total	$	326,188	$	232,541	$	800,687	$	1,359,416	$	273,304,851	$	274,664,267	$	—

Schedule of non-accrual loans

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

	Loans Receivable on Non-Accrual
	December 31, 2019		December 31, 2018
Commercial	$	178,975	$	251,219
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		857,327		571,292
Consumer Real Estate		629,999		—
Consumer Other		—		1,023
Total	$	1,666,301	$	823,534

Schedule of change in allowance and an allocation of the allowance by loan category

The following tables set forth the changes in the allowance and an allocation of the allowance by class at December 31, 2019, 2018, and 2017. The allowance 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.

	December 31, 2019
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate		Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,665,413		$	63,876	$	1,292,346		$	386,585	$	806,111		$	4,214,331
Charge-offs		(398,685	)		—		—			—		(8,342	)		(407,027	)
Recoveries		12,200			—		—			—		4,254			16,454
Provisions		150,989			45,359		(21,901	)		109,636		(104,083	)		180,000
Ending Balance	$	1,429,917		$	109,235	$	1,270,445		$	496,221	$	697,940		$	4,003,758

	December 31, 2018
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,403,588		$	23,638	$	1,549,755		$	796,918		$	101,499		$	3,875,398
Charge-offs		(31,250	)		—		—			—			(84,637	)		(115,887	)
Recoveries		14,000			—		56,827			45,412			13,581			129,820
Provisions		279,075			40,238		(314,236	)		(455,745	)		775,668			325,000
Ending Balance	$	1,665,413		$	63,876	$	1,292,346		$	386,585		$	806,111		$	4,214,331

	December 31, 2017
	Commercial			Commercial Real Estate Construction			Commercial Real Estate Other			Consumer Real Estate		Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,545,188		$	51,469		$	1,374,706		$	726,391	$	153,863		$	3,851,617
Charge-offs		—			—			(180,587	)		—		(4,862	)		(185,449	)
Recoveries		6,000			—			87,030			60,000		1,200			154,230
Provisions		(147,600	)		(27,831	)		268,606			10,527		(48,702	)		55,000
Ending Balance	$	1,403,588		$	23,638		$	1,549,755		$	796,918	$	101,499		$	3,875,398

Schedule of allocation of the allowance for loan losses and the gross investment in loans by class and reserving methodology

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

	December 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	683,278	$	—	$	1,782	$	—	$	90	$	685,150
Collectively evaluated for impairment		746,639		109,235		1,268,663		496,221		697,850		3,318,608
Total Allowance for Loan Losses		1,429,917		109,235		1,270,445		496,221		697,940		4,003,758
Loans Receivable
Individually evaluated for impairment		2,065,732		—		1,679,872		879,753		51,770		4,677,127
Collectively evaluated for impairment		50,782,723		12,491,078		142,142,118		58,653,292		5,326,222		269,395,433
Total Loans Receivable	$	52,848,455	$	12,491,078	$	143,821,990	$	59,533,045	$	5,377,992	$	274,072,560

	December 31, 2018
	Commercial		Commercial Real Estate Construction		Commercial  Real Estate Other		Consumer Real Estate		Consumer  Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	1,132,805	$	—	$	37,416	$	—	$	21,324	$	1,191,545
Collectively evaluated for impairment		532,608		63,876		1,254,930		386,585		784,787		3,022,786
Total Allowance for Losses	$	1,665,413	$	63,876	$	1,292,346	$	386,585	$	806,111	$	4,214,331
Loans Receivable
Individually evaluated for impairment	$	1,996,579	$	—	$	1,280,890	$	879,753	$	21,324	$	4,178,546
Collectively evaluated for impairment		52,832,499		7,304,300		142,422,511		62,907,658		5,018,753		270,485,721
Total Loans Receivable	$	54,829,078	$	7,304,300	$	143,703,401	$	63,787,411	$	5,040,077	$	274,664,267

Schedule of loans individually evaluated for impairment and the corresponding allowance for loan losses

As of December 31, 2019 and 2018, loans individually evaluated for impairment and the corresponding allowance for loan losses are presented in the following table.

	Impaired and Restructured Loans As of
	December 31, 2019						December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	1,355,875	$	1,355,875	$	—	$	115,983	$	115,983	$	—
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,432,988		1,432,988		—		974,249		974,249		—
Consumer Real Estate		879,753		879,753		—		879,753		879,753		—
Consumer Other		—		—		—		—		—		—
Total		3,668,616		3,668,616		—		1,969,985		1,969,985		—
With an allowance recorded:
Commercial		709,857		709,857		683,278		1,880,596		1,880,596		1,132,805
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		346,685		246,884		1,782		406,442		306,641		37,416
Consumer Real Estate		—		—		—		—		—		—
Consumer Other		51,770		51,770		90		21,324		21,324		21,324
Total		1,108,312		1,008,511		685,150		2,308,362		2,208,561		1,191,545
Total
Commercial		2,065,732		2,065,732		683,278		1,996,579		1,996,579		1,132,805
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,779,673		1,679,872		1,782		1,380,691		1,280,890		37,416
Consumer Real Estate		879,753		879,753		—		879,753		879,753		—
Consumer Other		51,770		51,770		90		21,324		21,324		21,324
Total	$	4,776,928	$	4,677,127	$	685,150	$	4,278,347	$	4,178,546	$	1,191,545

Schedule of average impaired loans and interest income recognized on those impaired loans by class

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

	For the year ended December 31,
	2019				2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,483,982	$	94,779	$	133,413	$	8,637	$	173,964	$	7,416
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,533,720		76,183		982,078		40,174		1,275,402		23,084
Consumer Real Estate		879,753		30,400		879,753		51,520		451,025		16,938
Consumer Other		—		—		—		—		—		—
Total		3,897,455		201,362		1,995,244		100,331		1,900,391		47,438
With an allowance recorded:
Commercial		725,353		44,299		1,915,139		100,395		1,711,259		76,544
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		246,884		—		416,569		10,999		930,420		5,367
Consumer Real Estate		—		—		—		—		43,119		1,296
Consumer Other		59,240		3,487		26,314		1,382		36,056		1,419
Total		1,031,477		47,786		2,358,022		112,776		2,720,854		84,626
Total
Commercial		2,209,335		139,078		2,048,552		109,032		1,885,223		83,960
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,780,604		76,183		1,398,647		51,173		2,205,822		28,451
Consumer Real Estate		879,753		30,400		879,753		51,520		494,144		18,234
Consumer Other		59,240		3,487		26,314		1,382		36,056		1,419
	$	4,928,932	$	249,148	$	4,353,266	$	213,107	$	4,621,245	$	132,064

XML

OTHER REAL ESTATE OWNED (Tables)

12 Months Ended

Dec. 31, 2019

Real Estate Owned, Disclosure of Detailed Components [Abstract]

Schedule of activity in other real estate owned

The following table summarizes the activity in other real estate owned at December 31, 2019 and December 31, 2018. 

	December 31, 2019		December 31, 2018
Balance, beginning of the year	$	—	$	435,479
Additions - foreclosure		—		—
Sales		—		(411,842	)
Write-downs		—		(23,637	)
Balance, end of the year	$	—	$	—

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 2) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Financing Receivable, Past Due [Line Items]
Total Past Due	$ 2,387,606	$ 1,359,416
Current	271,684,954	273,304,851
Total Loans Receivable	274,072,560	274,664,267
30-59 Days Past Due [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	693,008	326,188
60-89 Days Past Due [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	303,205	232,541
Greater Than 90 Days [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	1,391,393	800,687
Commercial [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	218,304	513,454
Current	52,630,151	54,315,624
Total Loans Receivable	52,848,455	54,829,078
Commercial [Member] | 30-59 Days Past Due [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	39,329	266,567
Commercial [Member] | 60-89 Days Past Due [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due		17,492
Commercial [Member] | Greater Than 90 Days [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	178,975	229,395
Commercial Real Estate Construction [Member]
Financing Receivable, Past Due [Line Items]
Current	12,491,078	7,304,300
Total Loans Receivable	12,491,078	7,304,300
Commercial Real Estate Other [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	1,503,496	821,341
Current	142,318,494	142,882,060
Total Loans Receivable	143,821,990	143,703,401
Commercial Real Estate Other [Member] | 30-59 Days Past Due [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	620,837	35,000
Commercial Real Estate Other [Member] | 60-89 Days Past Due [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	300,240	215,049
Commercial Real Estate Other [Member] | Greater Than 90 Days [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	582,419	571,292
Consumer Real Estate [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	632,964
Current	58,900,081	63,787,411
Total Loans Receivable	59,533,045	63,787,411
Consumer Real Estate [Member] | 60-89 Days Past Due [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	2,965
Consumer Real Estate [Member] | Greater Than 90 Days [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	629,999
Consumer Other [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	32,842	24,621
Current	5,345,150	5,015,456
Total Loans Receivable	5,377,992	5,040,077
Consumer Other [Member] | 30-59 Days Past Due [Member]
Financing Receivable, Past Due [Line Items]
Total Past Due	$ 32,842	$ 24,621

XML

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($)	Shares Outstanding [Member]	Additional Paid in Capital [Member]	Retained Earnings [Member]	Treasury Stock [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance at beginning at Dec. 31, 2016		$ 36,824,022	$ 6,643,476	$ (2,247,415)	$ (607,109)	$ 40,612,974
Balance at beginning (in shares) at Dec. 31, 2016	4,956,139
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income			4,901,825			4,901,825
Other comprehensive gain (loss)					(276,879)	(276,879)
Stock option exercises, net of surrenders		340,843				$ 340,843
Stock option exercises, net of surrenders (in shares)	33,140					36,454
Stock-based compensation expense		71,701				$ 71,701
Reclassification of tax effects stranded in accumulated other comprehensive income by tax reform			187,692		(187,692)
Cash dividends			(2,885,829)			(2,885,829)
Balance at ending at Dec. 31, 2017		37,236,566	8,847,164	(2,247,415)	(1,071,680)	42,764,635
Balance at ending (in shares) at Dec. 31, 2017	4,989,279
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income			6,922,934			6,922,934
Other comprehensive gain (loss)					(705,525)	(705,525)
Stock option exercises, net of surrenders		214,418		(20,849)		$ 193,569
Stock option exercises, net of surrenders (in shares)	22,550					24,056
Stock-based compensation expense		72,408				$ 72,408
Cash dividends			(3,785,460)			(3,785,460)
Common stock dividend, 10%		9,334,342	(9,334,342)
Common stock dividend, 10% (in shares)	499,088
Balance at ending at Dec. 31, 2018		46,857,734	2,650,296	(2,268,264)	(1,777,205)	$ 45,462,561
Balance at ending (in shares) at Dec. 31, 2018	5,510,917					5,510,917
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income			7,318,433			$ 7,318,433
Other comprehensive gain (loss)					2,260,019	2,260,019
Stock option exercises, net of surrenders		195,247		(56,961)		$ 138,286
Stock option exercises, net of surrenders (in shares)	19,084					22,163
Stock-based compensation expense		78,053				$ 78,053
Cash dividends			(4,089,320)			(4,089,320)
Balance at ending at Dec. 31, 2019		$ 47,131,034	$ 5,879,409	$ (2,325,225)	$ 482,814	$ 51,168,032
Balance at ending (in shares) at Dec. 31, 2019	5,530,001					5,530,001

XML

INVESTMENT SECURITIES AVAILABLE FOR SALE (Details 3) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Investments, Debt and Equity Securities [Abstract]
Gross proceeds	$ 30,412,250	$ 21,434,634	$ 20,231,265
Gross realized gains	114,888	104,634	154,692
Gross realized losses	$ (64,181)	$ (99,899)	$ (108,872)

XML

CONSOLIDATED BALANCE SHEETS - USD ($)	Dec. 31, 2019	Dec. 31, 2018
ASSETS
Cash and due from banks	$ 9,773,893	$ 6,325,457
Interest-bearing deposits at the Federal Reserve	39,320,526	25,506,784
Investment securities available for sale (amortized cost of $99,838,799 and $121,918,501 in 2019 and 2018, respectively)	100,449,956	119,668,874
Mortgage loans to be sold	5,062,398	1,199,438
Loans	274,072,560	274,664,267
Less: Allowance for loan losses	(4,003,758)	(4,214,331)
Net loans	270,068,802	270,449,936
Premises, equipment and leasehold improvements, net	4,290,435	2,335,207
Right of use asset	13,209,217
Other real estate owned
Accrued interest receivable	1,309,772	1,561,915
Other assets	1,527,521	2,087,587
Total assets	445,012,520	429,135,198
Deposits:
Non-interest bearing demand	125,621,031	130,940,138
Interest bearing demand	125,175,935	94,207,731
Money market accounts	68,964,879	87,300,433
Time deposits over $250,000	5,967,559	15,909,991
Other time deposits	16,215,228	18,558,734
Other savings deposits	37,247,023	35,461,361
Total deposits	379,191,655	382,378,388
Accrued interest payable and other liabilities	1,443,616	1,294,249
Lease liability	13,209,217
Total liabilities	393,844,488	383,672,637
Commitments and contingencies in Notes 7 and 11
Shareholders' equity
Common stock - no par 12,000,000 shares authorized; Issued 5,799,637 shares at December 31, 2019 and 5,777,474 shares at December 31, 2018. Shares outstanding 5,530,001 and 5,510,917 at December 31, 2019 and December 31, 2018, respectively.
Additional paid in capital	47,131,034	46,857,734
Retained earnings	5,879,409	2,650,296
Treasury stock: 269,636 shares as of December 31, 2019 and 266,557 shares as of December 31, 2018	(2,325,225)	(2,268,264)
Accumulated other comprehensive income (loss), net of income taxes	482,814	(1,777,205)
Total shareholders' equity	51,168,032	45,462,561
Total liabilities and shareholders' equity	$ 445,012,520	$ 429,135,198

XML

COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Standby Letters of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Undiscounted future payments related to standby letters of credit	$ 1,042,966	$ 1,169,644
Commitments to Extend Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments to extend credit	$ 105,481,545	$ 96,115,504

XML

INCOME PER COMMON SHARE (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Earnings Per Share [Abstract]
Net income	$ 1,773,529	$ 2,014,791	$ 1,840,847	$ 1,689,264	$ 1,806,194	$ 1,778,153	$ 1,726,357	$ 1,612,230	$ 7,318,433	$ 6,922,934	$ 4,901,825
Weighted average shares outstanding									5,522,025	5,500,027	5,471,001
Effect of dilutive shares									66,065	88,985	97,492
Weighted average shares outstanding - diluted									5,588,090	5,589,012	5,568,493
Earnings per share - basic (in dollars per share)	$ 0.33	$ 0.36	$ 0.33	$ 0.31	$ 0.33	$ 0.32	$ 0.31	$ 0.29	$ 1.33	$ 1.26	$ 0.90
Earnings per share - diluted (in dollars per share)	$ 0.32	$ 0.36	$ 0.33	$ 0.30	$ 0.32	$ 0.32	$ 0.31	$ 0.29	$ 1.31	$ 1.24	$ 0.88

XML

DEPOSITS (Details)	Dec. 31, 2019 USD ($)
Maturities of certificates of deposits
2020	$ 20,127,684
2021	1,072,986
2022	340,257
2023	368,391
2024 and thereafter	273,469
Certificates of deposit	$ 22,182,787

XML

RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Related Party Transactions [Abstract]
Deposits held by related parties	$ 4,343,903	$ 8,914,967

XML

STOCK INCENTIVE PLAN (Details 2) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 12.92	$ 11.89	$ 10.79	$ 10.19
Number of Options Outstanding	86,097	102,760	117,191	154,085
Weighted Average Remaining Contractual Life	5 years 8 months 23 days
Weighted Average Exercise Price	$ 9.03	$ 8.81	$ 8.77
Intrinsic Value of Options Outstanding	$ 1,112,371
Number of Options Exercisable	27,459	32,219	31,694
Intrinsic Value of Options Exercisable	$ 264,138
Exercise Price 1 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 8.61
Number of Options Outstanding	24,236
Weighted Average Remaining Contractual Life	5 years 3 months 29 days
Weighted Average Exercise Price	$ 8.61
Intrinsic Value of Options Outstanding	$ 208,672
Number of Options Exercisable	19,389
Intrinsic Value of Options Exercisable	$ 194,683
Exercise Price 2 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 8.90
Number of Options Outstanding	1,210
Weighted Average Remaining Contractual Life	9 months
Weighted Average Exercise Price	$ 8.90
Intrinsic Value of Options Outstanding	$ 10,769
Number of Options Exercisable	1,210
Intrinsic Value of Options Exercisable	$ 11,799
Exercise Price 3 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 9.18
Number of Options Outstanding	5,263
Weighted Average Remaining Contractual Life	2 years 6 months
Weighted Average Exercise Price	$ 9.18
Intrinsic Value of Options Outstanding	$ 48,314
Number of Options Exercisable	3,158
Intrinsic Value of Options Exercisable	$ 29,907
Exercise Price 4 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 9.65
Number of Options Outstanding	1,210
Weighted Average Remaining Contractual Life	1 year 3 months
Weighted Average Exercise Price	$ 9.65
Intrinsic Value of Options Outstanding	$ 11,677
Number of Options Exercisable	968
Intrinsic Value of Options Exercisable	$ 8,713
Exercise Price 5 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 9.92
Number of Options Outstanding	1,210
Weighted Average Remaining Contractual Life	2 years 9 months
Weighted Average Exercise Price	$ 9.92
Intrinsic Value of Options Outstanding	$ 12,003
Number of Options Exercisable	726
Intrinsic Value of Options Exercisable	$ 6,339
Exercise Price 6 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 12.26
Number of Options Outstanding	5,202
Weighted Average Remaining Contractual Life	4 years 7 months 2 days
Weighted Average Exercise Price	$ 12.26
Intrinsic Value of Options Outstanding	$ 63,777
Number of Options Exercisable	1,040
Intrinsic Value of Options Exercisable	$ 6,649
Exercise Price 7 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 12.40
Number of Options Outstanding	2,419
Weighted Average Remaining Contractual Life	4 years
Weighted Average Exercise Price	$ 12.40
Intrinsic Value of Options Outstanding	$ 29,996
Number of Options Exercisable	968
Intrinsic Value of Options Exercisable	$ 6,048
Exercise Price 8 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 13.05
Number of Options Outstanding	14,217
Weighted Average Remaining Contractual Life	5 years 3 months 29 days
Weighted Average Exercise Price	$ 13.05
Intrinsic Value of Options Outstanding	$ 185,532
Exercise Price 9 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 13.62
Number of Options Outstanding	3,630
Weighted Average Remaining Contractual Life	5 years 6 months
Weighted Average Exercise Price	$ 13.62
Intrinsic Value of Options Outstanding	$ 49,441
Exercise Price 10 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 14.54
Number of Options Outstanding	5,500
Weighted Average Remaining Contractual Life	6 years 3 months
Weighted Average Exercise Price	$ 14.54
Intrinsic Value of Options Outstanding	$ 79,970
Exercise Price 11 Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 18.23
Number of Options Outstanding	10,450
Weighted Average Remaining Contractual Life	8 years 3 months
Weighted Average Exercise Price	$ 18.23
Intrinsic Value of Options Outstanding	$ 190,504
Exercise Price 12 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 18.92
Number of Options Outstanding	5,500
Weighted Average Remaining Contractual Life	9 years 6 months
Weighted Average Exercise Price	$ 18.92
Intrinsic Value of Options Outstanding	$ 104,060
Exercise Price 13 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 19.00
Number of Options Outstanding	2,750
Weighted Average Remaining Contractual Life	7 years 2 months 1 day
Weighted Average Exercise Price	$ 19.00
Intrinsic Value of Options Outstanding	$ 52,250
Exercise Price 14 [Member]
Share-based Payment Arrangement, Option, Exercise Price Range [Line Items]
Exercise Price	$ 19.82
Number of Options Outstanding	3,300
Weighted Average Remaining Contractual Life	7 years 1 month 2 days
Weighted Average Exercise Price	$ 19.82
Intrinsic Value of Options Outstanding	$ 65,406

XML

INCOME TAXES (Details 1) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Current income tax
Federal									$ 1,742,430	$ 1,326,619	$ 2,538,272
Total current tax expense									1,742,430	1,326,619	2,538,272
Deferred income tax (benefit) expense									432,844	(217,637)	276,362
Income tax expense	$ 522,548	$ 603,264	$ 550,229	$ 499,233	$ 139,310	$ 234,218	$ 386,394	$ 349,060	$ 2,175,274	$ 1,108,982	$ 2,814,634

XML

INCOME PER COMMON SHARE (Tables)

12 Months Ended

Dec. 31, 2019

Earnings Per Share [Abstract]

Schedule of reconciliation of average shares outstanding

The following table is a summary of the reconciliation of average shares outstanding for the years ended December 31.

	2019		2018		2017
Net income	$	7,318,433	$	6,922,934	$	4,901,825
Weighted average shares outstanding		5,522,025		5,500,027		5,471,001
Effect of dilutive shares		66,065		88,985		97,492
Weighted average shares outstanding - diluted		5,588,090		5,589,012		5,568,493
Earnings per share - basic	$	1.33	$	1.26	$	0.90
Earnings per share - diluted	$	1.31	$	1.24	$	0.88

XML

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Tables)

12 Months Ended

Dec. 31, 2019

Quarterly Financial Information Disclosure [Abstract]

Schedule of quarterly operating results

The tables below represent the quarterly results of operations for the years ended December 31, 2019 and 2018, respectively: 

	2019
	Fourth		Third		Second		First
Total interest and fee income	$	4,578,390	$	4,827,684	$	4,813,345	$	4,692,833
Total interest expense		112,311		213,876		245,226		243,758
Net interest income		4,466,079		4,613,808		4,568,119		4,449,075
Provision for loan losses		25,000		10,000		135,000		10,000
Net interest income after provision for loan losses		4,441,079		4,603,808		4,433,119		4,439,075
Total other income		601,017		596,070		592,739		408,783
Total other expense		2,746,019		2,581,823		2,634,782		2,659,361
Income before income tax expense		2,296,077		2,618,055		2,391,076		2,188,497
Income tax expense		522,548		603,264		550,229		499,233
Net income	$	1,773,529	$	2,014,791	$	1,840,847	$	1,689,264
Basic income per common share	$	0.33	$	0.36	$	0.33	$	0.31
Diluted income per common share	$	0.32	$	0.36	$	0.33	$	0.30

	2018
	Fourth		Third		Second		First
Total interest and fee income	$	4,727,449	$	4,665,586	$	4,423,867	$	4,320,009
Total interest expense		249,425		195,434		139,697		109,830
Net interest income		4,478,024		4,470,152		4,284,170		4,210,179
Provision for loan losses		95,000		100,000		75,000		55,000
Net interest income after provision for loan losses		4,383,024		4,370,152		4,209,170		4,155,179
Other income		532,891		458,693		555,096		447,945
Other expense		2,970,411		2,816,474		2,651,515		2,641,834
Income before income tax expense		1,945,504		2,012,371		2,112,751		1,961,290
Income tax expense		139,310		234,218		386,394		349,060
Net income	$	1,806,194	$	1,778,153	$	1,726,357	$	1,612,230
Basic income per common share	$	0.33	$	0.32	$	0.31	$	0.29
Diluted income per common share	$	0.32	$	0.32	$	0.31	$	0.29

XML

PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Property, Plant and Equipment [Line Items]
Premises, equipment and leasehold improvements, gross	$ 9,271,690	$ 7,086,085
Accumulated depreciation	(4,981,255)	(4,750,878)
Total	4,290,435	2,335,207
Bank Buildings [Member]
Property, Plant and Equipment [Line Items]
Premises, equipment and leasehold improvements, gross	1,861,237	1,861,237
Land [Member]
Property, Plant and Equipment [Line Items]
Premises, equipment and leasehold improvements, gross	838,075	838,075
Leasehold Purchases [Member]
Property, Plant and Equipment [Line Items]
Premises, equipment and leasehold improvements, gross	30,000	30,000
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Premises, equipment and leasehold improvements, gross	2,555,376	709,520
Construction in Progress [Member]
Property, Plant and Equipment [Line Items]
Premises, equipment and leasehold improvements, gross		120,849
Equipment [Member]
Property, Plant and Equipment [Line Items]
Premises, equipment and leasehold improvements, gross	$ 3,987,002	$ 3,526,404

XML

DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 2) - Nonrecurring Basis [Member] - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Impaired loans	$ 2,657,644	$ 2,223,028
Mortgage loans to be sold	5,062,398	1,199,438
Total	7,720,042	3,422,466
Level 2 [Member]
Mortgage loans to be sold	5,062,398	1,199,438
Total	5,062,398	1,199,438
Level 3 [Member]
Impaired loans	2,657,644	2,223,028
Total	$ 2,657,644	$ 2,223,028

XML

REGULATORY CAPITAL REQUIREMENTS (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Total Capital to risk-weighted assets:
Total Capital	$ 54,690	$ 50,657
Total Capital (to risk-weighted assets) ratio	16.69%	16.69%
Minimum amount of capital for adequacy purposes	$ 26,221	$ 24,280
Minimum amount of capital for adequacy purposes, ratio	8.00%	8.00%
Tier 1 capital to risk-weighted assets:
Tier 1 Capital	$ 50,686	$ 46,864
Tier 1 Capital (to risk-weighted assets) ratio	15.46%	15.44%
Minimum amount of Tier 1 Capital for adequacy purposes	$ 19,666	$ 18,210
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	6.00%	6.00%
Tier 1 capital to average assets:
Tier 1 Capital	$ 50,686	$ 46,864
Tier 1 Capital (to average assets) ratio	11.32%	10.76%
Minimum amount of Tier 1 Capital for adequacy purposes	$ 17,907	$ 17,428
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	4.00%	4.00%
Common equity Tier 1 capital:
Tier 1 Capital	$ 50,686	$ 46,864
Tier 1 Capital (to tangible assets) ratio	15.46%	15.44%
Tier 1 Capital for adequacy purposes	$ 14,749	$ 13,658
Tier 1 Capital for adequacy purposes, ratio	4.50%	4.50%
Bank [Member]
Total Capital to risk-weighted assets:
Total Capital	$ 53,897	$ 49,695
Total Capital (to risk-weighted assets) ratio	16.46%	16.39%
Minimum amount of capital for adequacy purposes	$ 26,199	$ 24,262
Minimum amount of capital for adequacy purposes, ratio	8.00%	8.00%
Minimum Capital required to be well-capitalized	$ 32,748	$ 30,328
Minimum Capital required to be well-capitalized, ratio	10.00%	10.00%
Tier 1 capital to risk-weighted assets:
Tier 1 Capital	$ 49,860	$ 45,898
Tier 1 Capital (to risk-weighted assets) ratio	15.23%	15.13%
Minimum amount of Tier 1 Capital for adequacy purposes	$ 19,649	$ 18,197
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	6.00%	6.00%
Minimum Tier 1 Capital required to be well-capitalized	$ 26,199	$ 24,262
Minimum Tier 1 Capital required to be well-capitalized, ratio	8.00%	8.00%
Tier 1 capital to average assets:
Tier 1 Capital	$ 49,860	$ 45,898
Tier 1 Capital (to average assets) ratio	11.14%	10.54%
Minimum amount of Tier 1 Capital for adequacy purposes	$ 17,895	$ 17,419
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	4.00%	4.00%
Minimum Tier 1 Capital required to be well-capitalized	$ 22,369	$ 21,773
Minimum Tier 1 Capital required to be well-capitalized, ratio	5.00%	5.00%
Common equity Tier 1 capital:
Tier 1 Capital	$ 49,860	$ 45,898
Tier 1 Capital (to tangible assets) ratio	15.23%	15.13%
Tier 1 Capital for adequacy purposes	$ 14,737	$ 13,647
Tier 1 Capital for adequacy purposes, ratio	4.50%	4.50%
Tier 1 Capital required to be well-capitalized	$ 14,737	$ 13,647
Tier 1 Capital required to be well-capitalized, ratio	4.50%	4.50%

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 6) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Impaired and Restructured Loans with no related allowance recorded
Unpaid Principal Balance with no related allowance recorded	$ 3,668,616	$ 1,969,985
Recorded Investment with no related allowance recorded	3,668,616	1,969,985
Impaired and Restructured Loans with an allowance recorded
Unpaid Principal Balance with an allowance recorded	1,108,312	2,308,362
Recorded Investment with an allowance recorded	1,008,511	2,208,561
Related allowance with an allowance recorded	685,150	1,191,545
Total of Impaired and Restructured Loans
Unpaid Principal balance	4,776,928	4,278,347
Recorded Investment	4,677,127	4,178,546
Related Allowance	685,150	1,191,545
Commercial [Member]
Impaired and Restructured Loans with no related allowance recorded
Unpaid Principal Balance with no related allowance recorded	1,355,875	115,983
Recorded Investment with no related allowance recorded	1,355,875	115,983
Impaired and Restructured Loans with an allowance recorded
Unpaid Principal Balance with an allowance recorded	709,857	1,880,596
Recorded Investment with an allowance recorded	709,857	1,880,596
Related allowance with an allowance recorded	683,278	1,132,805
Total of Impaired and Restructured Loans
Unpaid Principal balance	2,065,732	1,996,579
Recorded Investment	2,065,732	1,996,579
Related Allowance	683,278	1,132,805
Commercial Real Estate Other [Member]
Impaired and Restructured Loans with no related allowance recorded
Unpaid Principal Balance with no related allowance recorded	1,432,988	974,249
Recorded Investment with no related allowance recorded	1,432,988	974,249
Impaired and Restructured Loans with an allowance recorded
Unpaid Principal Balance with an allowance recorded	346,685	406,442
Recorded Investment with an allowance recorded	246,884	306,641
Related allowance with an allowance recorded	1,782	37,416
Total of Impaired and Restructured Loans
Unpaid Principal balance	1,779,673	1,380,691
Recorded Investment	1,679,872	1,280,890
Related Allowance	1,782	37,416
Consumer Real Estate [Member]
Impaired and Restructured Loans with no related allowance recorded
Unpaid Principal Balance with no related allowance recorded	879,753	879,753
Recorded Investment with no related allowance recorded	879,753	879,753
Total of Impaired and Restructured Loans
Unpaid Principal balance	879,753	879,753
Recorded Investment	879,753	879,753
Consumer Other [Member]
Impaired and Restructured Loans with an allowance recorded
Unpaid Principal Balance with an allowance recorded	51,770	21,324
Recorded Investment with an allowance recorded	51,770	21,324
Related allowance with an allowance recorded	90	21,324
Total of Impaired and Restructured Loans
Unpaid Principal balance	51,770	21,324
Recorded Investment	51,770	21,324
Related Allowance	$ 90	$ 21,324

XML

BANK OF SOUTH CAROLINA CORPORATION - PARENT COMPANY (Details 1) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Condensed Income Statements, Captions [Line Items]
Interest income	$ 4,466,079	$ 4,613,808	$ 4,568,119	$ 4,449,075	$ 4,478,024	$ 4,470,152	$ 4,284,170	$ 4,210,179	$ 18,097,081	$ 17,442,525	$ 15,745,284
Net income	$ 1,773,529	$ 2,014,791	$ 1,840,847	$ 1,689,264	$ 1,806,194	$ 1,778,153	$ 1,726,357	$ 1,612,230	7,318,433	6,922,934	4,901,825
Bank of South Carolina Corporation - Parent [Member]
Condensed Income Statements, Captions [Line Items]
Interest income									1,280	1,157	484
Net operating expenses									(221,510)	(224,316)	(189,872)
Dividends received from bank									4,170,000	3,775,000	2,685,000
Equity in undistributed earnings of subsidiary									3,368,663	3,371,093	2,406,213
Net income									$ 7,318,433	$ 6,922,934	$ 4,901,825

XML

LEASES (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Operating Lease, Right-of-Use Asset	$ 13,209,217
Operating Lease, Liability	$ 13,209,217
Weighted average remaining lease term	18 years 6 months
Weighted average rate	4.34%
Rent expense	$ 623,998	$ 622,396	$ 612,717
Renewal terms	20 years
Related Party [Member]
Rent expense	$ 46,538	$ 60,840	$ 54,720

XML

INCOME PER COMMON SHARE

12 Months Ended

Dec. 31, 2019

Earnings Per Share [Abstract]

INCOME PER COMMON SHARE

18. Income Per Common Share

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted-average number of common shares and potential common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock. Earnings per share and average shares outstanding have been adjusted for all periods presented to retroactively reflect the ten percent stock dividend declared on April 10, 2018.

The following table is a summary of the reconciliation of average shares outstanding for the years ended December 31.

	2019		2018		2017
Net income	$	7,318,433	$	6,922,934	$	4,901,825
Weighted average shares outstanding		5,522,025		5,500,027		5,471,001
Effect of dilutive shares		66,065		88,985		97,492
Weighted average shares outstanding - diluted		5,588,090		5,589,012		5,568,493
Earnings per share - basic	$	1.33	$	1.26	$	0.90
Earnings per share - diluted	$	1.31	$	1.24	$	0.88

XML

OTHER EXPENSE

12 Months Ended

Dec. 31, 2019

Other Income and Expenses [Abstract]

OTHER EXPENSE

14. Other Expense

The table below summarizes the components of other operating expense.

	For the year ended December 31,
	2019		2018		2017
Data processing services	$	607,467	$	579,666	$	585,497
Professional fees		324,628		459,348		451,882
Telephone and postage		182,801		175,520		207,526
State and FDIC insurance and fees		113,117		183,867		165,280
Supplies		103,796		85,984		75,965
Courier service		49,200		54,044		82,907
Insurance		43,097		43,866		44,613
Advertising and business development		16,059		12,217		10,844
Amortization of federal tax credit		8,022		354,888		—
Amortization of state tax credit		—		306,106		306,105
Other		740,948		697,957		587,118
Total other operating expenses	$	2,189,135	$	2,953,463	$	2,517,737

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Principles of Consolidation

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.

Accounting Estimates and Assumptions

Accounting Estimates and Assumptions:  

The 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

Reclassification:  

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

Subsequent Events

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 as of 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 as of 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.

Cash and Cash Equivalents

Cash and Cash Equivalents:  

Cash and cash equivalents include working cash funds, due from banks, interest-bearing deposits at the Federal Reserve, items in process of collection and federal funds sold. All cash equivalents are readily convertible to cash and have maturities of less than 90 days.

Depository institutions are required to maintain reserve and clearing balances at the Federal Reserve Bank. Vault cash satisfied our daily reserve requirement for the years ended December 31, 2019 and 2018, respectively.  

Interest-bearing Deposits at the Federal Reserve

Interest-bearing Deposits at the Federal Reserve:  

Interest-bearing deposits at the Federal Reserve mature daily and are carried at cost.

Investment Securities

Investment Securities:  

We classify investments into three categories: (1) Held to Maturity - debt securities that we have the positive intent and ability to hold to maturity, which are reported at amortized cost, adjusted for the amortization of any related premiums or the accretion of any related discounts into interest income using a methodology which approximates a level yield of interest over the estimated remaining period until maturity; (2) Trading - debt and equity securities that are bought and held principally for the purpose of selling them in the near term, which are reported at fair value, with unrealized gains and losses included in earnings; and (3) Available for Sale - debt and equity securities that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of income taxes. Unrealized losses on securities due to fluctuations in fair value are recognized when it is determined that an other than temporary decline in value has occurred.

Realized gains or losses on the sale of investments are recognized on a specific identification, trade date basis. All securities were classified as available for sale for 2019 and 2018.

Mortgage Loans to be Sold

Mortgage Loans to be Sold:  

We originate fixed and variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed but not yet settled with an investor are carried in our loans held for sale portfolio.   Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with our customers.  Therefore, these loans present very little market risk.  We usually deliver to, and receive funding from, the investor within 30 to 60 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. We are not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking income in the consolidated statements of income.

Loans and Allowance for Loan Losses

Loans and Allowance for Loan Losses:   

Loans are carried at principal amounts outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the weighted average life of the loan as an adjustment to yield. Interest income on all loans is recorded on an accrual basis. The accrual of interest and the amortization of net loan fees are generally discontinued on loans that 1) are maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) the payment of full principal is not expected; or 3) the principal or interest has been in default for a period of 90 days or more. We define past due loans based on contractual payment and maturity dates.

The accrual of interest is generally discontinued on loans that become 90 days past due as to principal or interest. The accrual of interest on some loans may continue even though they are 90 days past due if the loans are well secured or in the process of collection and management deems it appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of six to nine months, they are reviewed individually by management to determine if they should be returned to accrual status.

When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest income and then to principal.  

We account for impaired loans by requiring that all loans (greater than $50,000) where it is estimated that we will be unable to collect all amounts due according to the terms of the loan agreement be recorded at the loan’s fair value. Fair value may be determined based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral less cost to sell, if the loan is collateral dependent.

Additional accounting guidance allows us to use existing methods for recognizing interest income on an impaired loan. The guidance also requires additional disclosures about how we estimate interest income related to our impaired loans.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring (“TDR”). For this type of impaired loan, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting, provided they are performing in accordance with their restructured terms.

The allowance for loan losses (the “allowance”) is our estimate of credit losses inherent in the loan portfolio. The allowance is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is evaluated on a regular basis and is based upon our periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We believe that the allowance is adequate to absorb inherent losses in the loan portfolio; however, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances, will not require significant future additions to the allowance, thus adversely affecting our operating results.

The allowance is also subject to examination by regulatory agencies, which may consider factors such as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions and other adequacy tests. In addition, such regulatory agencies could require us to adjust our allowance based on information available at the time of the examination.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to the methodology used to determine the allowance adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

Concentration of Credit Risk

Concentration of Credit Risk:  

Our primary market consists of the counties of Berkeley, Charleston and Dorchester, South Carolina. As of December 31, 2019, the majority of the total loan portfolio, as well as a substantial portion of the commercial and real estate loan portfolios, were to borrowers within this region. No other areas of significant concentration of credit risk have been identified.

Premises, Equipment and Leasehold Improvements and Depreciation

Premises, Equipment and Leasehold Improvements and Depreciation:  

Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the assets ranging from 40 years for buildings and 3 to 15 years for equipment. Leasehold improvements are amortized over the shorter of the asset’s useful life or the remaining lease term, including renewal periods when reasonably assured. The cost of maintenance and repairs is charged to operating expense as incurred.

Leases

Leases:

In accordance with ASU 2016-02, the Company determines if a contractual arrangement is a lease at inception. Operating leases are included in the operating right of use ("ROU") assets and current operating lease liabilities on the Company's Consolidated Balance Sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Currently, the Company does not have any finance leases.

Beginning January 1, 2019, operating lease ROU assets and lease liabilities are recognized at the commencement of the lease based on the present value of lease payments over the lease term. The lease payments included in the present value are fixed payments and index-based variable lease payments. The Company estimates the incremental borrowing rate, based on information available at the commencement of the lease, as most of the Company's leases do not include an implicit rate.

Income Taxes

Income Taxes:  

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net deferred tax assets are included in other assets in the consolidated balance sheet.

Accounting standards require the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. These standards also prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. We believe that we had no uncertain tax positions for the years ended December 31, 2019 and 2018.

Stock-Based Compensation

Stock-Based Compensation:  

Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required expected term, generally defined as the average vesting period (7.5 years).

Income Per Common Share

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. Earnings per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Segment Information

Segment Information:  

The Company operates and manages itself within one retail banking segment and therefore has not provided segment disclosures.

Interest Rate Lock Commitments and Forward Sale Contracts

Interest Rate Lock Commitments and Forward Sale Contracts:  

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitments before the loan is funded. In order to hedge the change in interest rates resulting from commitments to fund the loans, we enter into forward commitments for the future delivery of mortgage loans when the interest rate is locked. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in income when they occur. As a result of the short-term nature of mortgage loans held for sale (derivative contract), our derivative instruments were considered to be immaterial as of December 31, 2019 and 2018.

We had no embedded derivative instruments requiring hedge accounting treatment at December 31, 2019. We do not currently engage in hedging activities.

Recent Accounting Pronouncements

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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which revises certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 – Leases. This update clarifies how to apply certain aspects of the new leases standard. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which gives entities another option for transition and to provide lessors with a practical expedient. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, providing narrow-scope improvements for lessors, that provides relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. The amendments became effective for January 1, 2019. A modified retrospective transition approach was required, applying the new standard to all leases existing at the date of initial application. The Bank has chosen to use the effective date, January 1, 2019, as its date of initial application; therefore, the financial information was not provided for dates or periods prior to January 1, 2019. The Bank considered all relevant contractual provisions, including renewal and termination options, and determined the remaining lease terms of each respective lease. The Bank considered past practices, market area, and contract terms of all leases and assumed all renewal options would be exercised. To determine the incremental borrowing rate, the Bank used the rate of interest it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Bank does not have any finance leases or material subleases or leasing arrangements in which it is the lessor of the property or equipment. The adoption of this standard did not materially affect the change in the Bank’s recognition of lease expense in future periods, but added the ROU asset and corresponding lease liability on the Company’s Consolidated Balance Sheet.

 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. The amendment will be effective for the Company for periods beginning after December 15, 2022. 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 March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities, which shortens the amortization period for the premium to the earliest call date. The amendment became effective for the Company on January 1, 2019 and did not have a material effect on the financial statements. 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles and Goodwill and Other-Internal Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract),which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments became effective for the Company on January 1, 2019 and did not have a material effect on its financial statements.

In October 2018, the FASB issued ASU 2018-07, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for the reporting period beginning after December 15, 2019. The amendments related to hedging became effective January 1, 2019. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

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.

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.

XML

PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Tables)

12 Months Ended

Dec. 31, 2019

Property, Plant and Equipment [Abstract]

Schedule of premises, equipment and leasehold improvements

Premises, equipment and leasehold improvements are summarized in the table below. 

	December 31,
	2019			2018
Bank buildings	$	1,861,237		$	1,861,237
Land		838,075			838,075
Leasehold purchases		30,000			30,000
Leasehold improvements		2,555,376			709,520
Construction in progress		—			120,849
Equipment		3,987,002			3,526,404
		9,271,690			7,086,085
Accumulated depreciation		(4,981,255	)		(4,750,878	)
Total	$	4,290,435		$	2,335,207

XML

INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Schedule of components of income tax expense

Total income taxes for the years ended December 31, 2019, 2018 and 2017 are presented in the table below.

	For the year ended December 31,
	2019			2018			2017
Income tax expense	$	2,175,274		$	1,108,982		$	2,814,634
Unrealized gains (losses) on securities available for sale presented in accumulated other comprehensive income (loss)		(600,765	)		(192,280	)		(116,007	)
Total	$	1,574,509		$	916,702		$	2,698,627

Income tax expense was as follows:

	For the year ended December 31,
	2019		2018			2017
Current income taxes
Federal	$	1,742,430	$	1,326,619		$	2,538,272
State		—		—			—
Total current tax expense		1,742,430		1,326,619			2,538,272
Deferred income tax (benefit) expense		432,844		(217,637	)		276,362
Total income tax expense	$	2,175,274	$	1,108,982		$	2,814,634

Schedule of income tax reconciliation

The differences between actual income tax expense and the amounts computed by applying the U.S. federal income tax rate of 21% to pretax income from continuing operations for the periods indicated are reconciled in the table below.

	For the year ended December 31,
	2019			2018			2017
Computed “expected” tax expense	$	1,993,679		$	1,686,702		$	2,623,595
Increase (reduction) in income taxes resulting from:
Tax rate change impact		—			—			666,674
Amortization of credit and gain		1,685			196,477			163,411
Stock based compensation		16,391			15,205			24,378
Valuation allowance		7,123			7,538			16,952
Other		6,233			38,938			(4,768	)
State income tax, net of federal benefit		268,000			(226,578	)		(329,412	)
Federal credits		—			(454,985	)		—
Tax exempt interest income		(117,837	)		(154,315	)		(346,196	)
	$	2,175,274		$	1,108,982		$	2,814,634

Schedule of deferred tax assets and liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented below.

	December 31, 2019			December 31, 2018
Deferred tax assets:
Allowance for loan losses	$	806,982		$	850,964
State credit carryforward		307,950			647,190
Unrealized gain (loss) on securities available for sale		—			472,421
Pass-through income		68,438			68,438
State net operating loss carryforward		81,914			74,791
Nonaccrual interest		41,453			27,956
Other		6,934			6,155
Total gross deferred tax assets	$	1,313,671			2,147,915
Valuation allowance		(81,914	)		(74,791	)
Total gross deferred tax assets, net of valuation allowance	$	1,231,757			2,073,124
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation		(109,169	)		(39,294	)
Unrealized gain (loss) on securities available for sale		(128,344	)		—
Deferred loan fees		(32,696	)		(32,825	)
Other		(57,741	)		(56,481	)
Prepaid expenses		(225	)		(210	)
Total deferred tax liabilities		(328,175	)		(128,810	)
Net deferred tax assets	$	903,582		$	1,944,314

XML

OTHER REAL ESTATE OWNED

12 Months Ended

Dec. 31, 2019

Real Estate Owned, Disclosure of Detailed Components [Abstract]

OTHER REAL ESTATE OWNED

8. OTHER REAL ESTATE OWNED

The following table summarizes the activity in other real estate owned at December 31, 2019 and 2018. 

	December 31, 2019		December 31, 2018
Balance, beginning of the year	$	—	$	435,479
Additions - foreclosure		—		—
Sales		—		(411,842	)
Write-downs		—		(23,637	)
Balance, end of the year	$	—	$	—

As of December 31, 2019 and 2018, there were no properties classified as OREO. One property valued at $411,842 was sold at a loss of $33,476 during 2018.

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2019

Receivables [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans (net of deferred loan fees of $155,697 at December 31, 2019, and $156,309  at December 31, 2018) are shown in the table below. 

	December 31, 2019			December 31, 2018
Commercial	$	52,848,455		$	54,829,078
Commercial real estate:
Construction		12,491,078			7,304,300
Other		143,821,990			143,703,401
Consumer:
Real estate		59,533,045			63,787,411
Other		5,377,992			5,040,077
Total loans		274,072,560			274,664,267
Allowance for loan losses		(4,003,758	)		(4,214,331	)
Loans, net	$	270,068,802		$	270,449,936

We had $85.2 million and $101.9  million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at December 31, 2019 and 2018, respectively.

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.

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

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

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

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

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

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

● Substandard (6) The borrowing entity has cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is a possibility. 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 risks by category and internally assigned grades at December 31, 2019 and December 31, 2018. “Pass” includes loans internally graded as excellent, good and satisfactory.

	December 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	48,098,936	$	12,005,834	$	137,641,011	$	56,034,247	$	4,966,615	$	258,746,643
Watch		2,303,568		485,244		3,758,220		2,096,445		315,375		8,958,852
OAEM		460,551		—		649,039		522,600		44,232		1,676,422
Substandard		1,985,400		—		1,773,720		879,753		51,770		4,690,643
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	52,848,455	$	12,491,078	$	143,821,990	$	59,533,045	$	5,377,992	$	274,072,560

	December 31, 2018
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	50,663,356	$	7,304,300	$	136,804,420	$	60,480,317	$	4,726,494	$	259,978,887
Watch		1,973,675		—		4,938,711		2,077,341		226,117		9,215,844
OAEM		157,300		—		590,294		350,000		—		1,097,594
Substandard		2,034,747		—		1,369,976		879,753		87,466		4,371,942
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	54,829,078	$	7,304,300	$	143,703,401	$	63,787,411	$	5,040,077	$	274,664,267

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

	December 31, 2019
	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	$	39,329	$	—	$	178,975	$	218,304	$	52,630,151	$	52,848,455	$	—
Commercial Real Estate Construction		—		—		—		—		12,491,078		12,491,078		—
Commercial Real Estate Other		620,837		300,240		582,419		1,503,496		142,318,494		143,821,990		—
Consumer Real Estate		—		2,965		629,999		632,964		58,900,081		59,533,045		—
Consumer Other		32,842		—		—		32,842		5,345,150		5,377,992		—
Total	$	693,008	$	303,205	$	1,391,393	$	2,387,606	$	271,684,954	$	274,072,560	$	—

	December 31, 2018
	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	$	266,567	$	17,492	$	229,395	$	513,454	$	54,315,624	$	54,829,078	$	—
Commercial Real Estate Construction		—		—		—		—		7,304,300		7,304,300		—
Commercial Real Estate Other		35,000		215,049		571,292		821,341		142,882,060		143,703,401		—
Consumer Real Estate		—		—		—		—		63,787,411		63,787,411		—
Consumer Other		24,621		—		—		24,621		5,015,456		5,040,077		—
Total	$	326,188	$	232,541	$	800,687	$	1,359,416	$	273,304,851	$	274,664,267	$	—

There were no loans past due 90 days or more and still accruing interest at December 31, 2019 and 2018.

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

	Loans Receivable on Non-Accrual
	December 31, 2019		December 31, 2018
Commercial	$	178,975	$	251,219
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		857,327		571,292
Consumer Real Estate		629,999		—
Consumer Other		—		1,023
Total	$	1,666,301	$	823,534

The following tables set forth the changes in the allowance and an allocation of the allowance by class at December 31, 2019, 2018, and 2017. The allowance 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.

	December 31, 2019
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate		Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,665,413		$	63,876	$	1,292,346		$	386,585	$	806,111		$	4,214,331
Charge-offs		(398,685	)		—		—			—		(8,342	)		(407,027	)
Recoveries		12,200			—		—			—		4,254			16,454
Provisions		150,989			45,359		(21,901	)		109,636		(104,083	)		180,000
Ending Balance	$	1,429,917		$	109,235	$	1,270,445		$	496,221	$	697,940		$	4,003,758

	December 31, 2018
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,403,588		$	23,638	$	1,549,755		$	796,918		$	101,499		$	3,875,398
Charge-offs		(31,250	)		—		—			—			(84,637	)		(115,887	)
Recoveries		14,000			—		56,827			45,412			13,581			129,820
Provisions		279,075			40,238		(314,236	)		(455,745	)		775,668			325,000
Ending Balance	$	1,665,413		$	63,876	$	1,292,346		$	386,585		$	806,111		$	4,214,331

	December 31, 2017
	Commercial			Commercial Real Estate Construction			Commercial Real Estate Other			Consumer Real Estate		Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,545,188		$	51,469		$	1,374,706		$	726,391	$	153,863		$	3,851,617
Charge-offs		—			—			(180,587	)		—		(4,862	)		(185,449	)
Recoveries		6,000			—			87,030			60,000		1,200			154,230
Provisions		(147,600	)		(27,831	)		268,606			10,527		(48,702	)		55,000
Ending Balance	$	1,403,588		$	23,638		$	1,549,755		$	796,918	$	101,499		$	3,875,398

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

	December 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	683,278	$	—	$	1,782	$	—	$	90	$	685,150
Collectively evaluated for impairment		746,639		109,235		1,268,663		496,221		697,850		3,318,608
Total Allowance for Loan Losses		1,429,917		109,235		1,270,445		496,221		697,940		4,003,758
Loans Receivable
Individually evaluated for impairment		2,065,732		—		1,679,872		879,753		51,770		4,677,127
Collectively evaluated for impairment		50,782,723		12,491,078		142,142,118		58,653,292		5,326,222		269,395,433
Total Loans Receivable	$	52,848,455	$	12,491,078	$	143,821,990	$	59,533,045	$	5,377,992	$	274,072,560

	December 31, 2018
	Commercial		Commercial Real Estate Construction		Commercial  Real Estate Other		Consumer Real Estate		Consumer  Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	1,132,805	$	—	$	37,416	$	—	$	21,324	$	1,191,545
Collectively evaluated for impairment		532,608		63,876		1,254,930		386,585		784,787		3,022,786
Total Allowance for Losses	$	1,665,413	$	63,876	$	1,292,346	$	386,585	$	806,111	$	4,214,331
Loans Receivable
Individually evaluated for impairment	$	1,996,579	$	—	$	1,280,890	$	879,753	$	21,324	$	4,178,546
Collectively evaluated for impairment		52,832,499		7,304,300		142,422,511		62,907,658		5,018,753		270,485,721
Total Loans Receivable	$	54,829,078	$	7,304,300	$	143,703,401	$	63,787,411	$	5,040,077	$	274,664,267

As of December 31, 2019 and 2018, loans individually evaluated for impairment and the corresponding allowance for loan losses are presented in the following table.

	Impaired and Restructured Loans As of
	December 31, 2019						December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	1,355,875	$	1,355,875	$	—	$	115,983	$	115,983	$	—
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,432,988		1,432,988		—		974,249		974,249		—
Consumer Real Estate		879,753		879,753		—		879,753		879,753		—
Consumer Other		—		—		—		—		—		—
Total		3,668,616		3,668,616		—		1,969,985		1,969,985		—
With an allowance recorded:
Commercial		709,857		709,857		683,278		1,880,596		1,880,596		1,132,805
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		346,685		246,884		1,782		406,442		306,641		37,416
Consumer Real Estate		—		—		—		—		—		—
Consumer Other		51,770		51,770		90		21,324		21,324		21,324
Total		1,108,312		1,008,511		685,150		2,308,362		2,208,561		1,191,545
Total
Commercial		2,065,732		2,065,732		683,278		1,996,579		1,996,579		1,132,805
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,779,673		1,679,872		1,782		1,380,691		1,280,890		37,416
Consumer Real Estate		879,753		879,753		—		879,753		879,753		—
Consumer Other		51,770		51,770		90		21,324		21,324		21,324
Total	$	4,776,928	$	4,677,127	$	685,150	$	4,278,347	$	4,178,546	$	1,191,545

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

	For the year ended December 31,
	2019				2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,483,982	$	94,779	$	133,413	$	8,637	$	173,964	$	7,416
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,533,720		76,183		982,078		40,174		1,275,402		23,084
Consumer Real Estate		879,753		30,400		879,753		51,520		451,025		16,938
Consumer Other		—		—		—		—		—		—
Total		3,897,455		201,362		1,995,244		100,331		1,900,391		47,438
With an allowance recorded:
Commercial		725,353		44,299		1,915,139		100,395		1,711,259		76,544
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		246,884		—		416,569		10,999		930,420		5,367
Consumer Real Estate		—		—		—		—		43,119		1,296
Consumer Other		59,240		3,487		26,314		1,382		36,056		1,419
Total		1,031,477		47,786		2,358,022		112,776		2,720,854		84,626
Total
Commercial		2,209,335		139,078		2,048,552		109,032		1,885,223		83,960
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,780,604		76,183		1,398,647		51,173		2,205,822		28,451
Consumer Real Estate		879,753		30,400		879,753		51,520		494,144		18,234
Consumer Other		59,240		3,487		26,314		1,382		36,056		1,419
	$	4,928,932	$	249,148	$	4,353,266	$	213,107	$	4,621,245	$	132,064

In general, the modification or restructuring of a debt is considered a troubled debt restructuring (“TDR”) if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of December 31, 2019, there were 3 TDRs with a balance of $573,473 compared to no TDRs as of December 31, 2018 and one TDR with a balance of $33,300 as of December 31, 2019. These TDRs were granted extended payment terms with no principal reduction. All TDRs were performing as agreed as of December 31, 2019. During the year ended December 31, 2019, one TDR in the amount of $2,008 was charged off and the Company recovered $439. No other TDRs that were modified within the previous twelve months defaulted during the following year for the years ended December 31, 2019, 2018, and 2017.

XML

SHORT-TERM BORROWINGS (Details Narrative) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Line of Credit Facility [Line Items]
Unused balance of line of credit	$ 23,000,000	$ 23,000,000
Federal Reserve Bank Advances [Member]
Line of Credit Facility [Line Items]
Line of credit maximum borrowing capacity	$ 56,800,000

XML

STOCK INCENTIVE PLAN (Details)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Share-based Payment Arrangement [Abstract]
Risk free interest rate	2.01%	2.88%	2.43%
Expected life	7 years 6 months	7 years 6 months	7 years 6 months
Expected stock price volatility	33.13%	33.69%	34.20%
Dividend yield	4.28%	3.61%	4.00%

XML

EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (Details Narrative)	12 Months Ended
	Dec. 31, 2019 USD ($) Number shares	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)
ESOP Award, Tranche One [Member]
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Vesting rights by percent	0.00%
ESOP Award, Tranche Two [Member]
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Vesting rights by percent	25.00%
ESOP Award, Tranche Three [Member]
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Vesting rights by percent	50.00%
ESOP Award, Tranche Four [Member]
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Vesting rights by percent	75.00%
ESOP Award, Tranche Five [Member]
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Vesting rights by percent	100.00%
Employee Stock Ownership Plan (ESOP) [Member]
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Stock-based compensation expense | $	$ 510,000	$ 420,000	$ 375,000
Number of common shares the plan currently owns | shares	313,703
Minimum age requirement	21
Hours of service	1,000

XML

INCOME TAXES (Details 3) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Deferred tax assets:
Allowance for loan losses	$ 806,982	$ 850,964
State credit carryforward	307,950	647,190
Unrealized gain (loss) on securities available for sale		472,421
Pass-through income	68,438	68,438
State net operating loss carryforward	81,914	74,791
Nonaccrual interest	41,453	27,956
Other	6,934	6,155
Total gross deferred tax assets	1,313,671	2,147,915
Valuation allowance	(81,914)	(74,791)
Total gross deferred tax assets, net of valuation allowance	1,231,757	2,073,124
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation	(109,169)	(39,294)
Unrealized gain (loss) on securities available for sale	(128,344)
Deferred loan fees	(32,696)	(32,825)
Other	(57,741)	(56,481)
Prepaid expenses	(225)	(210)
Total deferred tax liabilities	(328,175)	(128,810)
Net deferred tax assets	$ 903,582	$ 1,944,314

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 4) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Activity in the allowance for loan losses by portfolio segment
Beginning Balance				$ 4,214,331				$ 3,875,398	$ 4,214,331	$ 3,875,398	$ 3,851,617
Charge-offs									(407,027)	(115,887)	(185,449)
Recoveries									16,454	129,820	154,230
Provisions	$ 25,000	$ 10,000	$ 135,000	10,000	$ 95,000	$ 100,000	$ 75,000	55,000	180,000	325,000	55,000
Ending Balance	4,003,758				4,214,331				4,003,758	4,214,331	3,875,398
Commercial [Member]
Activity in the allowance for loan losses by portfolio segment
Beginning Balance				1,665,413				1,403,588	1,665,413	1,403,588	1,545,188
Charge-offs									(398,685)	(31,250)
Recoveries									12,200	14,000	6,000
Provisions									150,989	279,075	(147,600)
Ending Balance	1,429,917				1,665,413				1,429,917	1,665,413	1,403,588
Commercial Real Estate Construction [Member]
Activity in the allowance for loan losses by portfolio segment
Beginning Balance				63,876				23,638	63,876	23,638	51,469
Provisions									45,359	40,238	(27,831)
Ending Balance	109,235				63,876				109,235	63,876	23,638
Commercial Real Estate Other [Member]
Activity in the allowance for loan losses by portfolio segment
Beginning Balance				1,292,346				1,549,755	1,292,346	1,549,755	1,374,706
Charge-offs											(180,587)
Recoveries										56,827	87,030
Provisions									(21,901)	(314,236)	268,606
Ending Balance	1,270,445				1,292,346				1,270,445	1,292,346	1,549,755
Consumer Real Estate [Member]
Activity in the allowance for loan losses by portfolio segment
Beginning Balance				386,585				796,918	386,585	796,918	726,391
Recoveries										45,412	60,000
Provisions									109,636	(455,745)	10,527
Ending Balance	496,221				386,585				496,221	386,585	796,918
Consumer Other [Member]
Activity in the allowance for loan losses by portfolio segment
Beginning Balance				$ 806,111				$ 101,499	806,111	101,499	153,863
Charge-offs									(8,342)	(84,637)	(4,862)
Recoveries									4,254	13,581	1,200
Provisions									(104,083)	775,668	(48,702)
Ending Balance	$ 697,940				$ 806,111				$ 697,940	$ 806,111	$ 101,499

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Cash flows from operating activities:
Net income	$ 7,318,433	$ 6,922,934	$ 4,901,825
Adjustments to reconcile net income net cash provided by operating activities:
Depreciation	230,377	195,921	193,298
Gain on sale of investment securities	(50,707)	(4,735)	(45,820)
Loss on sale of other real estate owned		33,476	1,477
Loss on disposal of premises, equipment, and leasehold improvements, net		428
Valuation and other adjustments to other real estate owned		23,637	86,464
Provision for loan losses	180,000	325,000	55,000
Stock-based compensation expense	78,053	72,408	71,701
Deferred income taxes	432,844	(217,637)	276,362
Net amortization of unearned discounts on investment securities available for sale	247,624	303,530	381,079
Origination of mortgage loans held for sale	(67,783,219)	(55,504,124)	(55,791,625)
Proceeds from sale of mortgage loans held for sale	63,920,259	56,398,409	58,084,112
Decrease (increase) in accrued interest receivable and other assets	(221,400)	472,740	(78,328)
Increase in accrued interest payable and other liabilities	91,204	295,071	46,412
Net cash provided by operating activities	4,443,468	9,317,058	8,181,957
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale	9,356,835	6,932,927	4,713,870
Proceeds from sale of investment securities available for sale	30,412,250	21,434,634	20,231,265
Purchase of investment securities available for sale	(17,886,300)	(9,978,050)	(44,944,586)
Proceeds from sale of other real estate owned		378,366	89,355
Net decrease (increase) in loans	201,134	(4,469,694)	(9,726,576)
Purchase of premises, equipment, and leasehold improvements, net	(2,185,605)	(287,031)	(141,199)
Net cash provided by (used in) investing activities	19,898,314	14,011,152	(29,777,871)
Cash flows from financing activities:
Net (decrease) increase in deposit accounts	(3,186,733)	(20,509,912)	30,365,449
Dividends paid	(4,031,157)	(3,699,845)	(2,832,489)
Stock options exercised, net of surrenders	138,286	193,569	340,843
Net cash (used in) provided by financing activities	(7,079,604)	(24,016,188)	27,873,803
Net increase (decrease) in cash and cash equivalents	17,262,178	(687,978)	6,277,889
Cash and cash equivalents at the beginning of the period	31,832,241	32,520,219	26,242,330
Cash and cash equivalents at the end of the period	49,094,419	31,832,241	32,520,219
Cash paid during the period for:
Interest	940,299	626,700	379,302
Income taxes	1,761,574	1,169,085	2,496,047
Supplemental disclosures for non-cash investing and financing activity:
Change in unrealized gain on securities available for sale, net of income taxes	2,260,019	(705,525)	(276,879)
Change in dividends payable	58,163	$ 85,615	53,340
Transfer of loans to other real estate owned			$ 90,832
Right of use assets obtained in exchange for lease obligation	13,519,027
Change in right of use assets and lease liabilities	$ 309,810

XML

CONSOLIDATED STATEMENTS OF INCOME - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Interest and fee income
Loans, including fees	$ 15,994,290	$ 15,126,316	$ 13,287,318
Taxable securities	1,617,471	1,872,285	1,585,505
Tax-exempt securities	570,623	744,713	1,026,513
Other	729,868	393,597	269,811
Total interest and fee income	18,912,252	18,136,911	16,169,147
Interest expense
Deposits	815,171	694,386	423,863
Total interest expense	815,171	694,386	423,863
Net interest income	18,097,081	17,442,525	15,745,284
Provision for loan losses	180,000	325,000	55,000
Net interest income after provision for loan losses	17,917,081	17,117,525	15,690,284
Other income
Service charges and fees	1,175,657	1,168,808	1,135,037
Mortgage banking income	940,671	786,893	1,057,457
Gain on sales of securities, net	50,707	4,735	45,820
Other non-interest income	31,574	34,189	30,157
Total other income	2,198,609	1,994,625	2,268,471
Other expense
Salaries and employee benefits	6,809,258	6,488,229	6,060,831
Net occupancy expense	1,623,590	1,580,929	1,571,076
Other operating expenses	2,189,135	2,953,463	2,517,737
Net other real estate owned expenses		57,613	92,652
Total other expense	10,621,983	11,080,234	10,242,296
Income before income tax expense	9,493,707	8,031,916	7,716,459
Income tax expense	2,175,274	1,108,982	2,814,634
Net income	$ 7,318,433	$ 6,922,934	$ 4,901,825
Weighted average shares outstanding
Basic (in shares)	5,522,025	5,500,027	5,471,001
Diluted (in shares)	5,588,090	5,589,012	5,568,493
Basic income per common share (in dollars per share)	$ 1.33	$ 1.26	$ 0.90
Diluted income per common share (in dollars per share)	$ 1.31	$ 1.24	$ 0.88

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Total loans	$ 274,072,560	$ 274,664,267
Allowance for loan losses	(4,003,758)	(4,214,331)
Loans, net	270,068,802	270,449,936
Commercial [Member]
Total loans	52,848,455	54,829,078
Commercial Real Estate Construction [Member]
Total loans	12,491,078	7,304,300
Commercial Real Estate Other [Member]
Total loans	143,821,990	143,703,401
Consumer Real Estate [Member]
Total loans	59,533,045	63,787,411
Consumer Other [Member]
Total loans	$ 5,377,992	$ 5,040,077

XML

INVESTMENT SECURITIES AVAILABLE FOR SALE (Details 1) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Amortized Cost
Due in one year or less	$ 9,185,615	$ 4,246,325
Due in one year to five years	77,261,123	99,753,174
Due in five years to ten years	13,392,061	17,504,456
Due in ten years and over		414,546
Total	99,838,799	121,918,501
Estimated Fair Value
Due in one year or less	9,191,226	4,249,570
Due in one year to five years	77,815,119	97,915,185
Due in five years to ten years	13,443,611	17,128,425
Due in ten years and over		375,694
Total	$ 100,449,956	$ 119,668,874

XML

LEASES (Details)	Dec. 31, 2019 USD ($)
Leases [Abstract]
2020	$ 901,896
2021	917,169
2022	930,750
2023	957,577
2024 and thereafter	11,697,343
Total undisclosed lease payments	15,404,635
Less: effect of discounting	(2,195,418)
Present value of estimated lease payments	$ 13,209,217

XML

DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 4) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Financial Assets:
Investment securities available for sale	$ 100,449,956	$ 119,668,874
Level 1 [Member]
Financial Assets:
Cash and due from banks	9,773,893	6,325,457
Interest-bearing deposits at the Federal Reserve	39,320,526	25,506,784
Investment securities available for sale	23,180,200	32,356,634
Level 2 [Member]
Financial Assets:
Investment securities available for sale	65,315,305	81,070,285
Mortgage loans to be sold	5,062,398	1,199,438
Accrued interest receivable	1,309,772	1,561,915
Financial Liabilities:
Demand deposits	357,008,868	347,909,663
Time deposits	21,962,039	38,747,898
Accrued interest payable	38,748	163,876
Level 3 [Member]
Financial Assets:
Investment securities available for sale	11,954,451	6,241,955
Loans, net	271,736,572	263,780,751
Carrying Amount [Member]
Financial Assets:
Cash and due from banks	9,773,893	6,325,457
Interest-bearing deposits at the Federal Reserve	39,320,526	25,506,784
Investment securities available for sale	100,449,956	119,668,874
Mortgage loans to be sold	5,062,398	1,199,438
Loans, net	270,068,802	270,449,936
Accrued interest receivable	1,309,772	1,561,915
Financial Liabilities:
Demand deposits	357,008,868	347,909,663
Time deposits	22,182,787	34,468,725
Accrued interest payable	38,748	163,876
Estimated Fair Value [Member]
Financial Assets:
Cash and due from banks	9,773,893	6,325,457
Interest-bearing deposits at the Federal Reserve	39,320,526	25,506,784
Investment securities available for sale	100,449,956	119,668,874
Mortgage loans to be sold	5,062,398	1,199,438
Loans, net	271,736,572	263,780,751
Accrued interest receivable	1,309,772	1,561,915
Financial Liabilities:
Demand deposits	357,008,868	347,909,663
Time deposits	21,962,039	38,747,898
Accrued interest payable	$ 38,748	$ 163,876

XML

DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Investment securities available for sale	$ 100,449,956	$ 119,668,874
Level 1 [Member]
Investment securities available for sale	23,180,200	32,356,634
Level 2 [Member]
Investment securities available for sale	65,315,305	81,070,285
Level 3 [Member]
Investment securities available for sale	11,954,451	6,241,955
U.S. Treasury Notes [Member]
Investment securities available for sale	23,180,200	32,356,634
Government-Sponsored Enterprises [Member]
Investment securities available for sale	50,498,195	59,369,280
Municipal Securities [Member]
Investment securities available for sale	26,771,561	27,942,960
Recurring Basis [Member]
Investment securities available for sale	100,449,956	119,668,874
Recurring Basis [Member] | Level 1 [Member]
Investment securities available for sale	23,180,200	32,356,634
Recurring Basis [Member] | Level 2 [Member]
Investment securities available for sale	65,315,305	81,070,285
Recurring Basis [Member] | Level 3 [Member]
Investment securities available for sale	11,954,451	6,241,955
Recurring Basis [Member] | U.S. Treasury Notes [Member]
Investment securities available for sale	23,180,200	32,356,634
Recurring Basis [Member] | U.S. Treasury Notes [Member] | Level 1 [Member]
Investment securities available for sale	23,180,200	32,356,634
Recurring Basis [Member] | Government-Sponsored Enterprises [Member]
Investment securities available for sale	50,498,195	59,369,280
Recurring Basis [Member] | Government-Sponsored Enterprises [Member] | Level 2 [Member]
Investment securities available for sale	50,498,195	59,369,280
Recurring Basis [Member] | Municipal Securities [Member]
Investment securities available for sale	26,771,561	27,942,960
Recurring Basis [Member] | Municipal Securities [Member] | Level 2 [Member]
Investment securities available for sale	14,817,110	21,701,005
Recurring Basis [Member] | Municipal Securities [Member] | Level 3 [Member]
Investment securities available for sale	$ 11,954,451	$ 6,241,955

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Receivables [Abstract]
Deferred loan fees	$ 155,697	$ 156,309
Loans pledged as collateral to secure funding with the Federal Reserve Bank	85,200,000	$ 101,900,000
Restructured loan	573,473		$ 33,300
Loan charged-off	2,008
Recovery loan	$ 439

XML

OTHER EXPENSE (Tables)

12 Months Ended

Dec. 31, 2019

Other Income and Expenses [Abstract]

Schedule of other operating expenses

The table below summarizes the components of other operating expense.

	For the year ended December 31,
	2019		2018		2017
Data processing services	$	607,467	$	579,666	$	585,497
Professional fees		324,628		459,348		451,882
Telephone and postage		182,801		175,520		207,526
State and FDIC insurance and fees		113,117		183,867		165,280
Supplies		103,796		85,984		75,965
Courier service		49,200		54,044		82,907
Insurance		43,097		43,866		44,613
Advertising and business development		16,059		12,217		10,844
Amortization of federal tax credit		8,022		354,888		—
Amortization of state tax credit		—		306,106		306,105
Other		740,948		697,957		587,118
Total other operating expenses	$	2,189,135	$	2,953,463	$	2,517,737

XML

DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Schedule of assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and 2018 are in the following table.

	Balance as of December 31, 2019
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	23,180,200	$	—	$	—	$	23,180,200
Government-Sponsored Enterprises		—		50,498,195		—		50,498,195
Municipal Securities		—		14,817,110		11,954,451		26,771,561
Total	$	23,180,200	$	65,315,305	$	11,954,451	$	100,449,956

	Balance as of December 31, 2018
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	32,356,634	$	—	$	—	$	32,356,634
Government-Sponsored Enterprises		—		59,369,280		—		59,369,280
Municipal Securities		—		21,701,005		6,241,955		27,942,960
Total	$	32,356,634	$	81,070,285	$	6,241,955	$	119,668,874

Table of the reconciliation of changes in assets measured at fair value on a recurring basis using significant unobservable inputs

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2019 and 2018. 

	December 31, 2019			December 31, 2018
Beginning balance	$	6,241,955		$	11,458,889
Total realized/unrealized gains (losses)
Included in earnings		—			—
Included in other comprehensive income		7,924,331			150,993
Purchases, issuances, and settlements net or maturities		(2,211,835	)		(5,367,927	)
Transfers in and/or out of Level 3		—			—
Ending balance	$	11,954,451		$	6,241,955

Schedule of certain assets and liabilities measured at fair value on a nonrecurring basis

The following tables present information about certain assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2019 and 2018.

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	2,657,644	$	2,657,644
Mortgage loans to be sold		—		5,062,398		—		5,062,398
Total	$	—	$	5,062,398	$	2,657,644	$	7,720,042

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	2,223,028	$	2,223,028
Mortgage loans to be sold		—		1,199,438		—		1,199,438
Total	$	—	$	1,199,438	$	2,223,028	$	3,422,466

Schedule of unobservable inputs used in Level 3 fair value measurement

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2019:

	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
Other Real Estate Owned	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

Schedule of carrying amount, fair value, and placement in the fair value hierarchy of financial instruments

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of December 31, 2019 and 2018, respectively.

	Fair Value Measurements at December 31, 2019
		Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks		$	9,773,893	$	9,773,893	$	9,773,893	$	—	$	—
Interest-bearing deposits at the Federal Reserve			39,320,526		39,320,526		39,320,526		—		—
Investment securities available for sale			100,449,956		100,449,956		23,180,200		65,315,305		11,954,451
Mortgage loans to be sold			5,062,398		5,062,398		—		5,062,398		—
Loans, net			270,068,802		271,736,572		—		—		271,736,572
Accrued interest receivable			1,309,772		1,309,772		—		1,309,772		—
Financial Liabilities:
Demand deposits			357,008,868		357,008,868		—		357,008,868		—
Time deposits			22,182,787		21,962,039		—		21,962,039		—
Accrued interest payable			38,748		38,748		—		38,748		—

	Fair Value Measurements at December 31, 2018
	Carrying   Amount		Estimated  Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	6,325,457	$	6,325,457	$	6,325,457	$	—	$	—
Interest-bearing deposits at the Federal Reserve		25,506,784		25,506,784		25,506,784		—		—
Investment securities available for sale		119,668,874		119,668,874		32,356,634		81,070,285		6,241,955
Mortgage loans to be sold		1,199,438		1,199,438		—		1,199,438		—
Net loans		270,449,936		263,780,751		—				263,780,751
Accrued interest receivable		1,561,915		1,561,915		—		1,561,915		—
Financial Liabilities:
Demand deposits		347,909,663		347,909,663		—		347,909,663		—
Time deposits		34,468,725		38,747,898		—		38,747,898		—
Accrued interest payable		163,876		163,876		—		163,876		—

XML

INVESTMENT SECURITIES AVAILABLE FOR SALE (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Amortized Cost	$ 99,838,799	$ 121,918,501
Gross Unrealized Gains	670,711	112,971
Gross Unrealized Losses	(59,554)	(2,362,598)
Estimated Fair Value	100,449,956	119,668,874
U.S. Treasury Notes [Member]
Amortized Cost	23,080,465	32,965,693
Gross Unrealized Gains	99,735
Gross Unrealized Losses		(609,059)
Estimated Fair Value	23,180,200	32,356,634
Government-Sponsored Enterprises [Member]
Amortized Cost	50,139,959	60,684,878
Gross Unrealized Gains	401,336
Gross Unrealized Losses	(43,100)	(1,315,598)
Estimated Fair Value	50,498,195	59,369,280
Municipal Securities [Member]
Amortized Cost	26,618,375	28,267,930
Gross Unrealized Gains	169,640	112,971
Gross Unrealized Losses	(16,454)	(437,941)
Estimated Fair Value	$ 26,771,561	$ 27,942,960

XML

DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS

20. Disclosures 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. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would use in pricing an asset or liability.

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

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

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

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

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

Derivative Instruments

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

We had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments with interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on the short-term fair value of mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of December 31, 2019 and 2018. 

Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and 2018 are in the following table.

	Balance as of December 31, 2019
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	23,180,200	$	—	$	—	$	23,180,200
Government-Sponsored Enterprises		—		50,498,195		—		50,498,195
Municipal Securities		—		14,817,110		11,954,451		26,771,561
Total	$	23,180,200	$	65,315,305	$	11,954,451	$	100,449,956

	Balance as of December 31, 2018
	Level 1		Level 2		Level 3		Total
U.S. Treasury Notes	$	32,356,634	$	—	$	—	$	32,356,634
Government-Sponsored Enterprises		—		59,369,280		—		59,369,280
Municipal Securities		—		21,701,005		6,241,955		27,942,960
Total	$	32,356,634	$	81,070,285	$	6,241,955	$	119,668,874

There were no liabilities recorded at fair value on a recurring basis as of December 31, 2019 or 2018. 

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2019 and 2018. 

	December 31, 2019			December 31, 2018
Beginning balance	$	6,241,955		$	11,458,889
Total realized/unrealized gains (losses)
Included in earnings		—			—
Included in other comprehensive income		7,924,331			150,993
Purchases, issuances, and settlements, net of maturities		(2,211,835	)		(5,367,927	)
Transfers in and/or out of Level 3		—			—
Ending balance	$	11,954,451		$	6,241,955

There were no transfers between fair value levels in 2019 or 2018.

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 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 an ongoing 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). The following tables present information about certain assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2019 and 2018.

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	2,657,644	$	2,657,644
Mortgage loans to be sold		—		5,062,398		—		5,062,398
Total	$	—	$	5,062,398	$	2,657,644	$	7,720,042

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Impaired loans	$	—	$	—	$	2,223,028	$	2,223,028
Mortgage loans to be sold		—		1,199,438		—		1,199,438
Total	$	—	$	1,199,438	$	2,223,028	$	3,422,466

There were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2019 or 2018.

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2019:

	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
Other Real Estate Owned	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 Bank

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

b. Investment securities available for sale   

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

c. Loans 

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

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

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 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 on the counterparties.

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of December 31, 2019 and 2018, respectively.

	Fair Value Measurements at December 31, 2019
		Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks		$	9,773,893	$	9,773,893	$	9,773,893	$	—	$	—
Interest-bearing deposits at the Federal Reserve			39,320,526		39,320,526		39,320,526		—		—
Investment securities available for sale			100,449,956		100,449,956		23,180,200		65,315,305		11,954,451
Mortgage loans to be sold			5,062,398		5,062,398		—		5,062,398		—
Loans, net			270,068,802		271,736,572		—		—		271,736,572
Accrued interest receivable			1,309,772		1,309,772		—		1,309,772		—
Financial Liabilities:
Demand deposits			357,008,868		357,008,868		—		357,008,868		—
Time deposits			22,182,787		21,962,039		—		21,962,039		—
Accrued interest payable			38,748		38,748		—		38,748		—

	Fair Value Measurements at December 31, 2018
	Carrying   Amount		Estimated  Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	6,325,457	$	6,325,457	$	6,325,457	$	—	$	—
Interest-bearing deposits at the Federal Reserve		25,506,784		25,506,784		25,506,784		—		—
Investment securities available for sale		119,668,874		119,668,874		32,356,634		81,070,285		6,241,955
Mortgage loans to be sold		1,199,438		1,199,438		—		1,199,438		—
Net loans		270,449,936		263,780,751		—				263,780,751
Accrued interest receivable		1,561,915		1,561,915		—		1,561,915		—
Financial Liabilities:
Demand deposits		347,909,663		347,909,663		—		347,909,663		—
Time deposits		34,468,725		38,747,898		—		38,747,898		—
Accrued interest payable		163,876		163,876		—		163,876		—

XML

EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

12 Months Ended

Dec. 31, 2019

Employee Stock Ownership Plan And Trust

EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

16. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

We established an Employee Stock Ownership Plan (“ESOP”) effective January 1, 1989. Any employee of the Bank is eligible to become a participant in the ESOP upon reaching 21 years of age and credited with one-year of service (1,000 hours of service). The employee may enter the Plan on the January 1^st that occurs nearest the date on which the employee first satisfies the age and service requirements described above. No contributions by employees are permitted. The amount and time of contributions are at the sole discretion of the Board of Directors of the Bank. The contribution for all participants is based solely on each participant’s respective regular or base salary and wages paid by the Bank including commissions, bonuses and overtime, if any.

The Company recognizes expense when the contribution is approved by the Board of Directors. The total expenses amounted to $510,000, $420,000, and $375,000, during the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, the plan owned 313,703 shares of common stock of Bank of South Carolina Corporation.

A participant vests in the ESOP based upon the participant’s credited years of service. The vesting schedule is as follows:

●	1 Year of Service	0% Vested
●	2 Years of Service	25% Vested
●	3 Years of Service	50% Vested
●	4 Years of Service	75% Vested
●	5 Years of Service	100% Vested

Periodically, the Internal Revenue Service “IRS” requires a restatement of a qualified retirement plan to ensure that the plan document includes provisions required by legislative and regulatory changes made since the last restatement. There have been no substantive changes to the plan. The Board of Directors approved a restated plan, on January 26, 2012 (incorporated as Exhibit 10.5 in the 2011 10-K). The Plan was submitted to the IRS for approval and a determination letter was issued September 26, 2013, stating that the plan satisfies the requirements of Code Section 4975(e)(7). On January 26, 2017, the Board of Directors approved a restated plan (incorporated as Exhibit 10.6 in the 2016 10-K). The Plan was submitted to the IRS for approval and a determination letter was issued November 17, 2017, stating that the plan satisfies the requirements of Code Section 4975(e)(7).

XML

COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

12. Commitments and Contingencies

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is essentially the same as that involved in extending loan facilities to customers. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

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. If deemed necessary, the amount of collateral obtained 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 $105,481,545 and $96,115,504 at December 31, 2019 and 2018, respectively.

Standby letters of credit represent our obligation to a third party contingent upon the failure by 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. Commitments under standby letters of credit are usually for one year or less. At December 31, 2019 and 2018, we have recorded no liability for the current carrying amount of the obligation to perform as a guarantor; as such amounts are not considered material. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2019 and 2018 was $1,042,966 and $1,169,644, respectively.

XML

LEASES (Details 1)	12 Months Ended
	Dec. 31, 2019 USD ($)
Lease Expense Components:
Operating lease expense	$ 577,460
Short-term lease expense	46,538
Total lease expense	$ 623,998

XML

BANK OF SOUTH CAROLINA CORPORATION - PARENT COMPANY (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Assets
Other assets	$ 1,527,521	$ 2,087,587
Total assets	445,012,520	429,135,198
Liabilities and shareholders' equity
Shareholders' equity	51,168,032	45,462,561	$ 42,764,635	$ 40,612,974
Total liabilities and shareholders' equity	445,012,520	429,135,198
Bank of South Carolina Corporation - Parent [Member]
Assets
Cash	1,096,474	1,007,501	$ 947,216	$ 922,595
Investment in wholly-owned bank subsidiary	50,731,750	45,103,068
Other assets	224,608	178,629
Total assets	52,052,832	46,289,198
Liabilities and shareholders' equity
Other liabilities	884,800	826,637
Shareholders' equity	51,168,032	45,462,561
Total liabilities and shareholders' equity	$ 52,052,832	$ 46,289,198

XML

DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 1) - Level 3 [Member] - Municipal Securities [Member] - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Beginning Balance	$ 6,241,955	$ 11,458,889
Total gains or (losses) (realized/unrealized)
Included in other comprehensive income	7,924,331	150,993
Purchases, issuances, and settlements net of maturities	(2,211,835)	(5,367,927)
Ending balance	$ 11,954,451	$ 6,241,955

XML

CONCENTRATIONS OF CREDIT RISK (Details) - Credit Concentration Risk [Member]	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Concentration Risk [Line Items]
Concentration of credit risk	100.00%	100.00%
Commercial [Member]
Concentration Risk [Line Items]
Concentration of credit risk	19.28%	19.96%
Commercial Real Estate Construction [Member]
Concentration Risk [Line Items]
Concentration of credit risk	4.56%	2.67%
Commercial Real Estate Other [Member]
Concentration Risk [Line Items]
Concentration of credit risk	52.48%	52.32%
Consumer Real Estate [Member]
Concentration Risk [Line Items]
Concentration of credit risk	21.72%	23.22%
Consumer Other [Member]
Concentration Risk [Line Items]
Concentration of credit risk	1.96%	1.83%

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative)	12 Months Ended
	Dec. 31, 2019 Number
Property, Plant and Equipment [Line Items]
Average vesting period	7 years 6 months
Number of segment	1
Bank Buildings [Member]
Property, Plant and Equipment [Line Items]
Useful life (in years)	40 years
Minimum [Member] | Equipment [Member]
Property, Plant and Equipment [Line Items]
Useful life (in years)	3 years
Maximum [Member] | Equipment [Member]
Property, Plant and Equipment [Line Items]
Useful life (in years)	5 years

XML

RELATED PARTY TRANSACTIONS (Tables)

12 Months Ended

Dec. 31, 2019

Related Party Transactions [Abstract]

Schedule of related party loans

The table below summarizes related party loans.

	December 31, 2019			December 31, 2018
Balance at beginning of the year	$	4,401,710		$	4,569,780
New loans or advances		370,275			1,428,098
Repayments		(2,120,078	)		(1,596,169	)
Balance at the end of the year	$	2,651,907		$	4,401,710

XML

REGULATORY CAPITAL REQUIREMENTS (Tables)

12 Months Ended

Dec. 31, 2019

Broker-Dealer, Net Capital Requirement, SEC Regulation [Abstract]

Schedule of Regulatory Capital Requirements

The following tables present the actual and required capital amounts and ratios for the Company and Bank at December 31, 2019 and 2018:  

	December 31, 2019
	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Company	$	54,690		16.69	%	$	26,221		8.00	%		N/A		N/A
Bank	$	53,897		16.46	%	$	26,199		8.00	%	$	32,748		10.00	%
Tier 1 capital to risk-weighted assets:
Company	$	50,686		15.46	%	$	19,666		6.00	%		N/A		N/A
Bank	$	49,860		15.23	%	$	19,649		6.00	%	$	26,199		8.00	%
Tier 1 capital to average assets:
Company	$	50,686		11.32	%	$	17,907		4.00	%		N/A		N/A
Bank	$	49,860		11.14	%	$	17,895		4.00	%	$	22,369		5.00	%
Common equity Tier 1 capital:
Company	$	50,686		15.46	%	$	14,749		4.50	%		N/A		N/A
Bank	$	49,860		15.23	%	$	14,737		4.50	%	$	14,737		4.50	%

	December 31, 2018
	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Company	$	50,657		16.69	%	$	24,280		8.00	%		N/A		N/A
Bank	$	49,695		16.39	%	$	24,262		8.00	%	$	30,328		10.00	%
Tier 1 capital to risk-weighted assets:
Company	$	46,864		15.44	%	$	18,210		6.00	%		N/A		N/A
Bank	$	45,898		15.13	%	$	18,197		6.00	%	$	24,262		8.00	%
Tier 1 capital to average assets:
Company	$	46,864		10.76	%	$	17,428		4.00	%		N/A		N/A
Bank	$	45,898		10.54	%	$	17,419		4.00	%	$	21,773		5.00	%
Common equity Tier 1 capital:
Company	$	46,864		15.44	%	$	13,658		4.50	%		N/A		N/A
Bank	$	45,898		15.13	%	$	13,647		4.50	%	$	13,647		4.50	%

XML

DIVIDENDS

12 Months Ended

Dec. 31, 2019

Dividends [Abstract]

DIVIDENDS

17. DIVIDENDS

The Bank’s ability to pay dividends to the Company is restricted by the laws and regulations of the State of South Carolina. Generally, these restrictions allow the Bank to pay dividends from current earnings without the prior written consent of the South Carolina Commissioner of Banking, if it received a satisfactory rating at its most recent examination. Cash dividends when declared, are paid by the Bank to the Company for distribution to shareholders of the Company. The Bank paid dividends of$4.1 million, $3.8 million, and $2.9 million, to the Company during the years ended December 31, 2019, 2018 and 2017, respectively.

On April 10, 2018, the Company’s Board of Directors declared a ten percent stock dividend to our shareholders. The record date was April 30, 2018 and the distribution date was May 31, 2018. Earnings per share and average shares outstanding have been adjusted for all periods presented to retroactively reflect the stock dividend in our consolidated financial statements. Total shares outstanding increased by 499,088 shares.

XML

RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2019

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

13. RELATED PARTY TRANSACTIONS

In the opinion of management, loans to our Executive Officers and Directors are made on substantially the same terms, including interest rates and collateral, as those terms prevailing at the time for comparable loans with persons not related to the lender that do not involve more than the normal risk of collectability. There were no past due loans to our Executive Officers as of December 31, 2019 and 2018.

The table below summarizes related party loans.

	December 31, 2019			December 31, 2018
Balance at beginning of the year	$	4,401,710		$	4,569,780
New loans or advances		370,275			1,428,098
Repayments		(2,120,078	)		(1,596,169	)
Balance at the end of the year	$	2,651,907		$	4,401,710

At December 31, 2019 and 2018, total deposits held by related parties were $4,343,903 and $8,914,967, respectively.

The Company also leased office space from a related party during the year ended December 31, 2019 as discussed in the Leases footnote.

XML

BANK OF SOUTH CAROLINA CORPORATION - PARENT COMPANY

12 Months Ended

Dec. 31, 2019

Condensed Financial Information Disclosure [Abstract]

BANK OF SOUTH CAROLINA CORPORATION - PARENT COMPANY

21.

Bank of South Carolina Corporation - Parent Company

The Company’s principal source of income is dividends from the Bank. Certain regulatory requirements restrict the amount of dividends which the Bank can pay to the Company. The Company’s principal asset is its investment in its Bank subsidiary. The Company’s condensed statements of financial condition as of December 31, 2019 and 2018, and the related condensed statements of income and cash flows for the years ended December 31, 2019, 2018 and 2017, are as follows:

Condensed Statements of Financial Condition 

	December 31, 2019		December 31, 2018
Assets
Cash	$	1,096,474	$	1,007,501
Investment in wholly-owned bank subsidiary		50,731,750		45,103,068
Other assets		224,608		178,629
Total assets	$	52,032,832	$	46,289,198
Liabilities and shareholders’ equity
Other liabilities	$	884,800	$	826,637
Shareholders’ equity		51,168,032		45,462,561
Total liabilities and shareholders’ equity	$	52,052,832	$	46,289,198

Condensed Statements of Income

	For the year ended December 31,
	2019			2018			2017
Interest income	$	1,280		$	1,157		$	484
Net operating expenses		(221,510	)		(224,316	)		(189,872	)
Dividends received from bank		4,170,000			3,775,000			2,685,000
Equity in undistributed earnings of subsidiary		3,368,663			3,371,093			2,406,213
Net income	$	7,318,433		$	6,922,934		$	4,901,825

Condensed Statements of Cash Flows

	For the year ended December 31,
	2019			2018			2017
Cash flows from operating activities:
Net income	$	7,318,433		$	6,922,934		$	4,901,825
Stock-based compensation expense		78,053			72,408			71,701
Equity in undistributed earnings of subsidiary		(3,368,663	)		(3,371,093	)		(2,406,213	)
(Increase) decrease in other assets		(45,979	)		(51,355	)		(51,197	)
(Decrease) increase in other liabilities		—			(6,333	)		151
Net cash provided by operating activities		3,981,844			3,566,561			2,516,267
Cash flows from financing activities:
Dividends paid		(4,031,157	)		(3,699,845	)		(2,832,489	)
Stock options exercised, net of surrenders		138,286			193,569			340,843
Net cash used by financing activities		(3,892,871	)		(3,506,276	)		(2,491,646	)
Net increase in cash		88,973			60,285			24,621
Cash at the beginning of the year		1,007,501			947,216			922,595
Cash at the end of the year	$	1,096,474		$	1,007,501		$	947,216
Supplemental disclosure for non-cash investing and financing activity
Change in dividends payable	$	58,163		$	85,615		$	53,340

XML

DEPOSITS (Tables)

12 Months Ended

Dec. 31, 2019

Deposits:

Schedule of maturities of certificates of deposits

The scheduled maturities of certificates of deposit as of December 31, 2019 are presented in the table below:

2020	$	20,127,684
2021		1,072,986
2022		340,257
2023		368,391
2024 and thereafter		273,469
	$	22,182,787

XML

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

12 Months Ended

Dec. 31, 2019

Quarterly Financial Information Disclosure [Abstract]

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

22. Quarterly Results of Operations (unaudited)

The tables below represent the quarterly results of operations for the years ended December 31, 2019 and 2018, respectively: 

	2019
	Fourth		Third		Second		First
Total interest and fee income	$	4,578,390	$	4,827,684	$	4,813,345	$	4,692,833
Total interest expense		112,311		213,876		245,226		243,758
Net interest income		4,466,079		4,613,808		4,568,119		4,449,075
Provision for loan losses		25,000		10,000		135,000		10,000
Net interest income after provision for loan losses		4,441,079		4,603,808		4,433,119		4,439,075
Total other income		601,017		596,070		592,739		408,783
Total other expense		2,746,019		2,581,823		2,634,782		2,659,361
Income before income tax expense		2,296,077		2,618,055		2,391,076		2,188,497
Income tax expense		522,548		603,264		550,229		499,233
Net income	$	1,773,529	$	2,014,791	$	1,840,847	$	1,689,264
Basic income per common share	$	0.33	$	0.36	$	0.33	$	0.31
Diluted income per common share	$	0.32	$	0.36	$	0.33	$	0.30

	2018
	Fourth		Third		Second		First
Total interest and fee income	$	4,727,449	$	4,665,586	$	4,423,867	$	4,320,009
Total interest expense		249,425		195,434		139,697		109,830
Net interest income		4,478,024		4,470,152		4,284,170		4,210,179
Provision for loan losses		95,000		100,000		75,000		55,000
Net interest income after provision for loan losses		4,383,024		4,370,152		4,209,170		4,155,179
Other income		532,891		458,693		555,096		447,945
Other expense		2,970,411		2,816,474		2,651,515		2,641,834
Income before income tax expense		1,945,504		2,012,371		2,112,751		1,961,290
Income tax expense		139,310		234,218		386,394		349,060
Net income	$	1,806,194	$	1,778,153	$	1,726,357	$	1,612,230
Basic income per common share	$	0.33	$	0.32	$	0.31	$	0.29
Diluted income per common share	$	0.32	$	0.32	$	0.31	$	0.29

XML

CONCENTRATIONS OF CREDIT RISK (Tables)

12 Months Ended

Dec. 31, 2019

Risks and Uncertainties [Abstract]

Schedule of loan concentration

Our loans were concentrated in the following categories. 

	December 31, 2019			December 31, 2018
Commercial		19.28	%		19.96	%
Commercial Real Estate Construction		4.56	%		2.67	%
Commercial Real Estate Other		52.48	%		52.32	%
Consumer Real Estate		21.72	%		23.22	%
Consumer Other		1.96	%		1.83	%
Total		100.00	%		100.00	%

XML

DEPOSITS

12 Months Ended

Dec. 31, 2019

Deposits:

DEPOSITS

9. DEPOSITS

As of December 31, 2019 and 2018, certificates of deposit of $250,000 or more totaled approximately $5,967,559 and $15,909,991, respectively.

The scheduled maturities of certificates of deposit as of December 31, 2019 are presented in the table below:

2020	$	20,127,684
2021		1,072,986
2022		340,257
2023		368,391
2024 and thereafter		273,469
	$	22,182,787

As of December 31, 2019, deposits with a deficit balance of $25,319 were re-classified as other loans.

XML

CONCENTRATIONS OF CREDIT RISK

12 Months Ended

Dec. 31, 2019

Risks and Uncertainties [Abstract]

CONCENTRATIONS OF CREDIT RISK

5. CONCENTRATIONS OF CREDIT RISK

We grant short to intermediate term commercial and consumer loans to customers throughout our primary market area of Charleston, Berkeley and Dorchester counties of South Carolina. Our primary market area is heavily dependent on tourism, medical, and legal services. Although we have a diversified loan portfolio, a substantial portion of our debtors’ ability to honor their contracts is dependent upon the stability of the economic environment in their primary market. The majority of the loan portfolio is located in our immediate market area with a concentration in real estate related activities and offices, medical offices, and attorneys’ offices.

Our loans were concentrated in the following categories.

	December 31, 2019			December 31, 2018
Commercial		19.28	%		19.96	%
Commercial Real Estate Construction		4.56	%		2.67	%
Commercial Real Estate Other		52.48	%		52.32	%
Consumer Real Estate		21.72	%		23.22	%
Consumer Other		1.96	%		1.83	%
Total		100.00	%		100.00	%

XML

DEPOSITS (Details Narrative) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Deposits:
Deposits with deficit balance reclassified as other loans	$ 25,319
Time deposits over $250,000	$ 5,967,559	$ 15,909,991

XML

OTHER EXPENSE (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Other Income and Expenses [Abstract]
Data processing services	$ 607,467	$ 579,666	$ 585,497
Professional fees	324,628	459,348	451,882
Telephone and postage	182,801	175,520	207,526
State and FDIC insurance and fees	113,117	183,867	165,280
Supplies	103,796	85,984	75,965
Courier service	49,200	54,044	82,907
Insurance	43,097	43,866	44,613
Advertising and business development	16,059	12,217	10,844
Amortization of federal tax credit	8,022	354,888
Amortization of state tax credit		306,106	306,105
Other	740,948	697,957	587,118
Total other operating expenses	$ 2,189,135	$ 2,953,463	$ 2,517,737

XML

STOCK INCENTIVE PLAN (Details Narrative)	12 Months Ended
	Dec. 31, 2019 USD ($) Number shares	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)
Intrinsic value of options exercised | $	$ 218,093	$ 262,415	$ 311,836
Stock-based compensation expense | $	78,053	$ 72,408	$ 71,701
Unrecognized compensation cost | $	$ 189,103
Period for unrecognized compensation cost to be recognized	3 years 10 months 10 days
Vesting After Five Years [Member]
Percentage of options vesting	20.00%
Vesting Each Year Thereafter [Member]
Percentage of options vesting	20.00%
1998 Stock Incentive Plan [Member]
Number of share authorized under stock incentive plan	180,000
1998 Stock Incentive Plan [Member] | Adjusted For Stock Dividends [Member]
Number of share authorized under stock incentive plan	329,422
Number of stock dividends effecting stock plans | Number	5
Stock dividends for share adjustment of plans (percent)	10.00%
1998 Stock Incentive Plan [Member] | Adjusted For Stock Dividends 2 [Member]
Stock dividends for share adjustment of plans (percent)	25.00%
2010 Stock Incentive Plan [Member]
Number of share authorized under stock incentive plan	300,000
2010 Stock Incentive Plan [Member] | Adjusted For Stock Dividends [Member]
Number of share authorized under stock incentive plan	363,000
Number of stock dividends effecting stock plans | Number	2
Stock dividends for share adjustment of plans (percent)	10.00%

XML

INCOME TAXES (Details 2) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Income Tax Disclosure [Abstract]
Computed "expected" tax expense									$ 1,993,679	$ 1,686,702	$ 2,623,595
Increase (reduction) in income taxes resulting from:
Tax rate change impact											666,674
Amortization of credit and gain									1,685	196,477	163,411
Stock based compensation									16,391	15,205	24,378
Valuation Allowance									7,123	7,538	16,952
Other									6,233	38,938	(4,768)
State income tax, net of federal benefit									268,000	(226,578)	(329,412)
Federal credits										(454,985)
Tax exempt interest income									(117,837)	(154,315)	(346,196)
Income tax expense	$ 522,548	$ 603,264	$ 550,229	$ 499,233	$ 139,310	$ 234,218	$ 386,394	$ 349,060	$ 2,175,274	$ 1,108,982	$ 2,814,634

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Statement of Comprehensive Income [Abstract]
Net income	$ 7,318,433	$ 6,922,934	$ 4,901,825
Other comprehensive income
Unrealized gain (loss) on securities arising during the period	2,911,491	(893,070)	(347,066)
Reclassification adjustment for securities gains realized in net income	(50,707)	(4,735)	(45,820)
Other comprehensive income (loss) before tax	2,860,784	(897,805)	(392,886)
Income tax effect related to items of other comprehensive income before tax	(600,765)	192,280	116,007
Other comprehensive income (loss) after tax	2,260,019	(705,525)	(276,879)
Total comprehensive income	$ 9,578,452	$ 6,217,409	$ 4,624,946

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 1) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Credit risks by category and internally assigned grades
Loans	$ 274,072,560	$ 274,664,267
Pass [Member]
Credit risks by category and internally assigned grades
Loans	258,746,643	259,978,887
Watch [Member]
Credit risks by category and internally assigned grades
Loans	8,958,852	9,215,844
OAEM [Member]
Credit risks by category and internally assigned grades
Loans	1,676,422	1,097,594
SubStandard [Member]
Credit risks by category and internally assigned grades
Loans	4,690,643	4,371,942
Commercial [Member]
Credit risks by category and internally assigned grades
Loans	52,848,455	54,829,078
Commercial [Member] | Pass [Member]
Credit risks by category and internally assigned grades
Loans	48,098,936	50,663,356
Commercial [Member] | Watch [Member]
Credit risks by category and internally assigned grades
Loans	2,303,568	1,973,675
Commercial [Member] | OAEM [Member]
Credit risks by category and internally assigned grades
Loans	460,551	157,300
Commercial [Member] | SubStandard [Member]
Credit risks by category and internally assigned grades
Loans	1,985,400	2,034,747
Commercial Real Estate Construction [Member]
Credit risks by category and internally assigned grades
Loans	12,491,078	7,304,300
Commercial Real Estate Construction [Member] | Pass [Member]
Credit risks by category and internally assigned grades
Loans	12,005,834	7,304,300
Commercial Real Estate Construction [Member] | Watch [Member]
Credit risks by category and internally assigned grades
Loans	485,244
Commercial Real Estate Other [Member]
Credit risks by category and internally assigned grades
Loans	143,821,990	143,703,401
Commercial Real Estate Other [Member] | Pass [Member]
Credit risks by category and internally assigned grades
Loans	137,641,011	136,804,420
Commercial Real Estate Other [Member] | Watch [Member]
Credit risks by category and internally assigned grades
Loans	3,758,220	4,938,711
Commercial Real Estate Other [Member] | OAEM [Member]
Credit risks by category and internally assigned grades
Loans	649,039	590,294
Commercial Real Estate Other [Member] | SubStandard [Member]
Credit risks by category and internally assigned grades
Loans	1,773,720	1,369,976
Consumer Real Estate [Member]
Credit risks by category and internally assigned grades
Loans	59,533,045	63,787,411
Consumer Real Estate [Member] | Pass [Member]
Credit risks by category and internally assigned grades
Loans	56,034,247	60,480,317
Consumer Real Estate [Member] | Watch [Member]
Credit risks by category and internally assigned grades
Loans	2,096,445	2,077,341
Consumer Real Estate [Member] | OAEM [Member]
Credit risks by category and internally assigned grades
Loans	522,600	350,000
Consumer Real Estate [Member] | SubStandard [Member]
Credit risks by category and internally assigned grades
Loans	879,753	879,753
Consumer Other [Member]
Credit risks by category and internally assigned grades
Loans	5,377,992	5,040,077
Consumer Other [Member] | Pass [Member]
Credit risks by category and internally assigned grades
Loans	4,966,615	4,726,494
Consumer Other [Member] | Watch [Member]
Credit risks by category and internally assigned grades
Loans	315,375	226,117
Consumer Other [Member] | OAEM [Member]
Credit risks by category and internally assigned grades
Loans	44,232
Consumer Other [Member] | SubStandard [Member]
Credit risks by category and internally assigned grades
Loans	$ 51,770	$ 87,466

XML

Document and Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2019	Feb. 14, 2020	Jun. 30, 2019
Cover [Abstract]
Entity Registrant Name	BANK OF SOUTH CAROLINA CORP
Entity Central Index Key	0001007273
Document Type	10-K
Entity File Number	0-27702
Entity State Incorporation	SC
Document Period End Date	Dec. 31, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well Known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		5,530,363
Entity Public Float			$ 68,725,103
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2019

XML

INVESTMENT SECURITIES AVAILABLE FOR SALE (Details 2)	Dec. 31, 2019 USD ($) Number	Dec. 31, 2018 USD ($) Number
Number of positions | Number	10	4
Fair Value	$ 8,239,067	$ 11,329,286
Gross Unrealized Losses	$ (56,435)	$ (21,849)
Number of positions | Number	1	49
Fair value	$ 330,880	$ 93,599,826
Gross Unrealized Losses	$ (3,119)	$ (2,340,749)
Total
Number of positions | Number	11	53
Fair value	$ 8,569,947	$ 104,929,112
Gross Unrealized Losses	$ (59,554)	$ (2,362,598)
U.S. Treasury Notes [Member]
Number of positions | Number		7
Fair value		$ 32,356,634
Gross Unrealized Losses		$ (609,059)
Total
Number of positions | Number		7
Fair value		$ 32,356,634
Gross Unrealized Losses		$ (609,059)
Government-Sponsored Enterprises [Member]
Number of positions | Number	1	2
Fair Value	$ 5,039,550	$ 9,967,000
Gross Unrealized Losses	$ (43,100)	$ (14,302)
Number of positions | Number		11
Fair value		$ 49,402,280
Gross Unrealized Losses		$ (1,301,296)
Total
Number of positions | Number	1	13
Fair value	$ 5,039,550	$ 59,369,280
Gross Unrealized Losses	$ (43,100)	$ (1,315,598)
Municipal Securities [Member]
Number of positions | Number	9	2
Fair Value	$ 3,199,517	$ 1,362,286
Gross Unrealized Losses	$ (13,335)	$ (7,547)
Number of positions | Number	1	31
Fair value	$ 330,880	$ 11,840,912
Gross Unrealized Losses	$ (3,119)	$ (430,394)
Total
Number of positions | Number	10	33
Fair value	$ 3,530,397	$ 13,203,198
Gross Unrealized Losses	$ (16,454)	$ (437,941)

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 5) - USD ($)	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Allowance for Loan Losses
Individually evaluated for impairment	$ 685,150	$ 1,191,545
Collectively evaluated for impairment	3,318,608	3,022,786
Total Allowance for Loan Losses	4,003,758	4,214,331	$ 3,875,398	$ 3,851,617
Loans Receivable
Individually evaluated for impairment	4,677,127	4,178,546
Collectively evaluated for impairment	269,395,433	270,485,721
Total Loans Receivable	274,072,560	274,664,267
Commercial [Member]
Allowance for Loan Losses
Individually evaluated for impairment	683,278	1,132,805
Collectively evaluated for impairment	746,639	532,608
Total Allowance for Loan Losses	1,429,917	1,665,413	1,403,588	1,545,188
Loans Receivable
Individually evaluated for impairment	2,065,732	1,996,579
Collectively evaluated for impairment	50,782,723	52,832,499
Total Loans Receivable	52,848,455	54,829,078
Commercial Real Estate Construction [Member]
Allowance for Loan Losses
Collectively evaluated for impairment	109,235	63,876
Total Allowance for Loan Losses	109,235	63,876	23,638	51,469
Loans Receivable
Collectively evaluated for impairment	12,491,078	7,304,300
Total Loans Receivable	12,491,078	7,304,300
Commercial Real Estate Other [Member]
Allowance for Loan Losses
Individually evaluated for impairment	1,782	37,416
Collectively evaluated for impairment	1,268,663	1,254,930
Total Allowance for Loan Losses	1,270,445	1,292,346	1,549,755	1,374,706
Loans Receivable
Individually evaluated for impairment	1,679,872	1,280,890
Collectively evaluated for impairment	142,142,118	142,422,511
Total Loans Receivable	143,821,990	143,703,401
Consumer Real Estate [Member]
Allowance for Loan Losses
Collectively evaluated for impairment	496,221	386,585
Total Allowance for Loan Losses	496,221	386,585	796,918	726,391
Loans Receivable
Individually evaluated for impairment	879,753	879,753
Collectively evaluated for impairment	58,653,292	62,907,658
Total Loans Receivable	59,533,045	63,787,411
Consumer Other [Member]
Allowance for Loan Losses
Individually evaluated for impairment	90	21,324
Collectively evaluated for impairment	697,850	784,787
Total Allowance for Loan Losses	697,940	806,111	$ 101,499	$ 153,863
Loans Receivable
Individually evaluated for impairment	51,770	21,324
Collectively evaluated for impairment	5,326,222	5,018,753
Total Loans Receivable	$ 5,377,992	$ 5,040,077

XML

ORGANIZATION

12 Months Ended

Dec. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

ORGANIZATION

1. 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.