CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





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



  ? Risk from changes in economic, monetary policy, and industry conditions

? Changes in interest rates, shape of the yield curve, deposit rates, the net


    interest margin and funding sources

? Market risk (including net income at risk analysis and economic value of


    equity risk analysis) and inflation

? Risk inherent in making loans including repayment risks and changes in the


    value of collateral

? Loan growth, the adequacy of the allowance for loan losses, provisions for


    loan losses, and the assessment of problem loans

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

? Deposit growth, change in the mix or type of deposit products and services

? Continued availability of senior management and ability to attract and retain


    key personnel




  ? Technological changes




  ? Ability to control expense

? Ability to compete in our industry and competitive pressures among depository


    and other financial institutions




  ? Changes in compensation

? Risks associated with income taxes including potential for adverse adjustments






  ? Changes in accounting policies and practices

? Changes in regulatory actions, including the potential for adverse adjustments






  ? Recently enacted or proposed legislation and changes in political conditions

  ? Reputational risk



                                       30

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


    policies and restrictions

  ? Impact of COVID-19 on the collectability of loans

  ? Changes in legislation as related to PPP loans

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


    loans





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



Overview

Bank of South Carolina Corporation (the "Company") is a financial institution
holding company headquartered in Charleston, South Carolina, with $691.8 million
in assets as of September 30, 2021. The Company offers a broad range of
financial services through its wholly-owned subsidiary, The Bank of South
Carolina (the "Bank"). The Bank is a state-chartered commercial bank which
operates primarily in the Charleston, Dorchester and Berkeley counties of South
Carolina. The Bank's original and current concept is to be a full-service
financial institution specializing in personal service, responsiveness, and
attention to detail to foster long standing relationships.



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



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



In addition to earning interest on loans and investments, we earn income through
fees and other expenses we charge to the customer. The various components of
non-interest income as well as non-interest expense are described in the
following discussion. The discussion and analysis also identify significant
factors that have affected our financial position and operating results as of
and for the periods ending September 30, 2021 and December 31, 2020, and should
be read in conjunction with the financial statements and the related notes
included in this report. In addition, a number of tables have been included

to
assist in the discussion.



COVID-19


On March 11, 2020, the World Health Organization ("WHO") declared COVID-19 a
pandemic. Due to orders issued by the governor of South Carolina and in an
abundance of caution for the health of our customers and employees, on March 23,
2020 the Bank closed lobbies to all 5 offices but remained fully operational.
The Bank reopened lobbies on May 3, 2021.



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



                                       31





On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,
and Venues Act ("Economic Aid Act") was enacted, which reauthorized lending
under the PPP program through March 31, 2021, with an additional $325.0 billion.
On March 31, 2021, the PPP Extension Act of 2021 was signed into law, which
formally changed the PPP application deadline from March 31, 2021 to May 31,
2021. Under the Economic Aid Act, the SBA will forgive loans, in whole or in
part, made by approved lenders to eligible borrowers for payroll and other
permitted purposes in accordance with the requirements of the program. These
loans carry a fixed rate of 1.00% and a term of five years, if not forgiven, in
whole or in part. The loans are 100% guaranteed by the SBA and as long as the
borrower submits its loan forgiveness application within ten months of
completion of the covered period, the borrower is not required to make any
payments until the forgiveness amount is remitted to the lender by the SBA. The
Bank will receive a processing fee based on the size of the loan from the SBA,
based on a tiered structure. For loans up to $50,000 in principal, the lender
processing fee will be the lesser of 50% of the principal amount or $2,500. For
loans between $50,000 and $350,000 in principal, the lender processing fee will
be 5% of the principal amount. For loans $350,000 and above, the lender
processing fee will be 3% of the principal amount. For loans of at least $2.0
million, the lender processing fee will be 1% of the principal amount. The fees
are deferred and amortized over the life of the loans in accordance with ASC
310-20.




The Bank provided $37.8 million to 266 customers in the first round of PPP and
$17.5 million to 214 customers in the second round of PPP. Because these loans
are 100% guaranteed by the SBA and did not undergo the Bank's typical
underwriting process, they are not graded and do not have an associated reserve.



Borrowers must submit a forgiveness application within ten months of the
completion of the covered period. Once the borrower has submitted the
application, the Bank has 60 days to review, issue a lender decision, and submit
the decision and application to the SBA. Once the application is submitted, the
SBA has 90 days to review and remit the appropriate forgiveness amount to the
Bank plus any interest accrued through the date of payment. The SBA began
accepting PPP Forgiveness Applications on August 10, 2020. As of September 30,
2021, the Bank received 326 PPP forgiveness applications, in the amount of $43.6
million in principal, and submitted 306 applications and decisions to the SBA,
in the amount of $41.5 million in principal. Of the 306 submissions, 300 loans,
in the amount of $40.7 million, were forgiven as of September 30, 2021. Upon
forgiveness the Bank will recognize the deferred fee income in accordance with
ASC 310-20. The Bank received $2.4 million in processing fees related to the PPP
program. During the three months ended September 30, 2021 and 2020, the Bank
recognized $0.1 million and $0.2 million, respectively, in processing fees for
the PPP program. During the nine months ended September 30, 2021 and 2020, the
Bank recognized $1.0 million and $0.3 million, respectively, in processing

fees
for the PPP program.



Regulatory agencies, as set forth in the Interagency Statement on Loan
Modifications and Reporting for Financial Institutions Working with Customers
Affected by the Coronavirus (initially issued on March 22, 2020 and revised on
April 7, 2020), have encouraged financial institutions to work prudently with
borrowers who are or may be unable to meet their contractual payment obligations
because of the effects of COVID-19. In this statement, the regulatory agencies
expressed their view of loan modification programs as positive actions that may
mitigate adverse effects on borrowers due to COVID-19 and that the agencies will
not criticize institutions for working with borrowers in a safe and sound
manner. Moreover, the revised statement provides that eligible loan
modifications related to COVID-19 may be accounted for under section 4013 of the
CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act,
banks may elect not to categorize loan modifications as TDRs if the
modifications are related to COVID-19, executed on a loan that was not more than
30 days past due as of December 31, 2020, and executed between March 1, 2020 and
the earlier of December 31, 2020 or 60 days after the date of termination of the
National Emergency. All short-term loan modifications made on a good faith basis
in response to COVID-19 to borrowers who were current prior to any relief are
not considered TDRs. Beginning in March 2020, the Bank provided payment
accommodations to customers, consisting of 60-day principal deferral to
borrowers negatively impacted by COVID-19. The Bank processed approximately $0.7
million in principal deferments to 84 loans, with an aggregate loan balance of
$25.9 million, during year ended December 31, 2020. The principal deferments
represent 0.24% of our total loan portfolio as of December 31, 2020. In
accordance with the FDIC guidance, borrowers who were current prior to becoming
affected by COVID-19, that received payment accommodations as a result of the
pandemic, generally should not be reported as past due. There were no interest
deferments granted and all loans given payment accommodations are still paying
interest. There have been no payment accommodations granted during the nine
months ended September 30, 2021. All loans granted payment accommodations during
the year ended December 31, 2020 have commenced paying as agreed and are current
as of September 30, 2021.



                                       32





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

Critical Accounting Policies

Our critical accounting policies, which involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities, and used in the preparation of the Consolidated Financial Statements as of September 30, 2021, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2020.





Balance Sheet



Cash and Cash Equivalents

Total cash and cash equivalents increased 239.94% or $116.0 million to $164.3
million as of September 30, 2021, from $48.3 million as of December 31, 2020.
The increase in total cash and cash equivalents is primarily due to an increase
in the balances of a related group of demand deposit accounts at the end of the
quarter that are temporary in nature. Funds are placed in interest bearing
deposits at the Federal Reserve until opportunities arise for investment in
higher yielding assets.

Investment Securities Available for Sale


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




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



As of September 30, 2021, our available for sale investment portfolio included
U.S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities
with a fair market value of $193.2 million and an amortized cost of $194.4
million for a net unrealized loss of approximately $1.2 million. As of September
30, 2021 and December 31, 2020, our investment securities portfolio represented
approximately 27.93% and 25.32% of our total assets, respectively. The average
yield on our investment securities was 1.09% and 1.59% at September 30, 2021 and
December 31, 2020, respectively.

Loans



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



Net loans decreased $8.1 million, or 2.57%, to $308.5 million as of September
30, 2021 from $316.6 million as of December 31, 2020. The decrease is primarily
related to the forgiveness of PPP loans.



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



The following table is a summary of our loan portfolio composition (net of
deferred fees and costs of $713,203 at September 30, 2021 and $676,155 at
December 31, 2020, respectively) and the corresponding percentage of total loans
as of the dates indicated.



                                       33





                                            September 30, 2021                 December 31, 2020
                                          Amount           Percent          Amount           Percent
Commercial                            $  45,923,118           14.68 %   $  51,041,397           15.91 %

Commercial Real Estate Construction      10,802,322            3.45 %     

14,813,726            4.62 %
Commercial Real Estate Other            160,119,820           51.18 %     146,187,886           45.57 %
Consumer Real Estate                     77,530,313           24.78 %      71,836,041           22.39 %
Consumer Other                            4,576,146            1.47 %       4,480,491            1.40 %
Payroll Protection Program               13,883,076            4.44 %      32,443,132           10.11 %
Total loans                             312,834,795          100.00 %     320,802,673          100.00 %
Allowance for loan losses                (4,368,457 )                      (4,185,694 )
Total loans, net                      $ 308,466,338                     $ 316,616,979




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

Nonperforming Assets



Nonperforming Assets include real estate acquired through foreclosure or deed
taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan
is placed on nonaccrual status when it becomes 90 days past due as to principal
or interest, or when we believe, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is
such that collection of the contractual principal or interest on the loan is
doubtful. A payment of interest on a loan that is classified as nonaccrual is
recognized as a reduction in principal when received. As of September 30, 2021,
there were no loans 90 days past due still accruing interest.

The following table is a summary of our Nonperforming Assets:





                                September 30,       December 31,
                                    2021                2020
Commercial                     $       178,975     $      178,975
Commercial Real Estate Other           926,808            923,828
Consumer Real Estate                        -              40,893
Consumer Other                          10,337             12,234
Total nonaccruing loans              1,116,120          1,155,930
Other real estate owned                     -                  -
Total nonperforming assets     $     1,116,120     $    1,155,930




On March 18, 2020, in recognition of the difficulties of COVID-19, the Chief
Justice of South Carolina declared a statewide moratorium on evictions and
foreclosures until directed by subsequent order of the Chief Justice. The South
Carolina Supreme Court lifted its moratorium effective May 15, 2020. On August
8, 2020, the President of the United States of America issued an executive order
that allows the Secretary of Housing and Urban Development to take action, as
appropriate and consistent with applicable law, to promote the ability of
renters and homeowners to avoid foreclosure and eviction resulting from
financial hardships related to COVID-19. On August 27, 2020, the Federal Housing
Finance Authority and Department of Housing and Urban Development announced it
would extend its foreclosure and eviction moratorium through the end of 2020,
benefiting homeowners who have mortgages guaranteed by Fannie Mae and Freddie
Mac. On March 29, 2021, the federal eviction moratorium was extended again
through September 30, 2021. On June 24, 2021, the federal eviction moratorium
was extended again through July 31, 2021. On August 3, 2021, the CDC issued an
eviction moratorium order in areas of substantial and high transmission that was
subsequently lifted by the Supreme Court on August 26, 2021.



Allowance for Loan Losses




The allowance for loan losses was $4.4 million as of September 30, 2021 and $4.2
million as of December 31, 2020, or 1.46% and 1.45%, respectively, of
outstanding loans, net of PPP loans. Because PPP loans are 100% guaranteed by
the SBA and did not undergo the Bank's typical underwriting process, they are
not graded and do not have an associated reserve. At September 30, 2021 and
December 31, 2020, the allowance for loan losses represented 391.40% and 362.11%
of the total amount of nonperforming loans, respectively. Based on the level of
coverage on nonperforming loans and analysis of our loan portfolio, we believe
the allowance for loan losses at September 30, 2021 is adequate.



                                       34






At September 30, 2021, impaired loans totaled $3.7 million, for which $0.2
million of these loans had a reserve of approximately $0.2 million allocated in
the allowance for loan losses. Comparatively, impaired loans totaled $7.8
million as of December 31, 2020, and $1.0 million of these loans had a reserve
of approximately $0.4 million allocated in the allowance for loan losses.



During the three months ended September 30, 2021, we recorded $903 in
charge-offs and $63,057 of recoveries on loans previously charged-off, for net
recoveries of $62,154. During the nine months ended September 30, 2021, we
recorded $20,318 in charge-offs and $83,081 of recoveries on loans previously
charged-off, for net recoveries of $62,763.

Deposits



Deposits remain our primary source of funding for loans and investments. Average
interest-bearing deposits provided funding for 56.67% of average earning assets
for the nine months ended September 30, 2021, and 56.62% for the nine months
ended September 30, 2020. The Company encounters strong competition from other
financial institutions as well as consumer and commercial finance companies,
insurance companies and brokerage firms located in the primary service area of
the Bank. However, the percentage of funding provided by deposits has remained
stable.



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



                                  September 30, 2021             December 31, 2020
                                 Amount         Percent         Amount         Percent
Deposits

Non-interest bearing demand $ 286,499,136 46.00 % $ 169,170,751

      36.60 %
Interest bearing demand         170,175,580        27.32 %     140,602,723        30.42 %
Money market accounts            88,730,966        14.25 %      84,681,783        18.32 %

Time deposits over $250,000       7,462,857         1.20 %       4,493,189 

       0.97 %
Other time deposits              14,296,961         2.30 %      16,205,942         3.51 %
Other savings deposits           55,625,779         8.93 %      47,043,243        10.18 %
Total deposits                $ 622,791,279       100.00 %   $ 462,197,631       100.00 %

Deposits increased 34.75% or $160.6 million from December 31, 2020 to September 30, 2021 primarily due to an increase in the balances of a related group of demand deposit accounts at the end of the quarter that are in temporary in nature.

At September 30, 2021 and December 31, 2020, deposits with an aggregate deficit balance of $143,416 and $100,304, respectively, were re-classified as other loans.

Comparison of Three Months Ended September 30, 2021 to Three Months Ended September 30, 2020



Net income increased $0.02 million or 1.39% to $1.7 million, or basic and
diluted earnings per share of $0.31 and $0.30, respectively, for the three
months ended September 30, 2021, from $1.7 million, or basic and diluted
earnings per share of $0.31 and $0.30, respectively, for the three months ended
September 30, 2020. Our annualized returns on average assets and average equity
for the three months ended September 30, 2021 were 1.15% and 12.32%,
respectively, compared with 1.28% and 12.34%, respectively, for the three months
ended September 30, 2020.



Net Interest Income

Net interest income is affected by the size and mix of our balance sheet
components as well as the spread between interest earned on assets and interest
paid on liabilities. Net interest margin is a measure of the difference between
interest income on earning assets and interest paid on interest bearing
liabilities relative to the amount of interest-bearing assets. Net interest
income remained consistent with the three months ended September 30, 2020, at
$4.2 million for the three months ended September 30, 2021. Average loans
decreased $7.8 million or 2.37% to $319.1 million for the three months ended
September 30, 2021, compared to $326.9 million for the three months ended
September 30, 2020. The yield on average loans (including fees) was 5.02% and
5.09% for the three months ended September 30, 2021 and September 30, 2020,
respectively. Interest income on loans decreased $0.2 million for the three
months ended September 30, 2021 to $3.6 million from $3.8 million for the three
months ended September 30, 2020.



                                       35





The average balance of interest bearing deposits at the Federal Reserve
increased $18.1 million or 30.17% to $77.9 million for the three months ended
September 30, 2021, with a yield of 0.16% as compared to $59.8 million for the
three months ended September 30, 2020, with a yield of 0.11%.

Provision for Loan Losses



We have established an allowance for loan losses through a provision for loan
losses charged as an expense on our consolidated statements of income. We review
our loan portfolio periodically to evaluate our outstanding loans and to measure
both the performance of the portfolio and the adequacy of our allowance for loan
losses. For the three months ended September 30, 2021, we had no provision of
loan losses compared to a provision of $40,000 for the same period in the prior
year. The decrease in the provision for loan losses was based on our analysis of
the adequacy of the allowance for loan losses.

Non-Interest Income


Other income increased $0.1 million or 16.40% to $1.1 million for the three
months ended September 30, 2021, from $1.0 million for the three months ended
September 30, 2020. This increase was primarily due to gain on sales of
investment securities. Three investment securities were sold during the quarter
ended September 30, 2021, resulting in a gain on sale of $0.3 million.

Non-Interest Expense



Non-interest expense increased $0.1 million or 3.83% to $3.0 million for the
three months ended September 30, 2021 from $2.9 million for the three months
ended September 30, 2020. This increase is related to increases in salaries and
wages and net occupancy expenses during the three months ended September 30,
2021.



Income Tax Expense

We incurred income tax expense of $0.5 million for the three months ended September 30, 2021 as compared to $0.5 million during the same period in 2020. Our effective tax rate was 23.34% and 23.39% for the three months ended September 30, 2021 and 2020, respectively.

Comparison of Nine Months Ended September 30, 2021 to Nine Months Ended September 30, 2020



Net income increased $0.5 million or 10.16% to $5.2 million, or basic and
diluted earnings per share of $0.94 and $0.92, respectively, for the nine months
ended September 30, 2021, from $4.7 million, or basic and diluted earnings per
share of $0.85 and $0.83, respectively, for the nine months ended September 30,
2020. Our annualized returns on average assets and average equity for the nine
months ended September 30, 2021 were 1.23% and 12.64%, respectively, compared
with 1.28% and 11.77%, respectively, for the nine months ended September 30,
2020.



Net Interest Income

Net interest income is affected by the size and mix of our balance sheet
components as well as the spread between interest earned on assets and interest
paid on liabilities. Net interest margin is a measure of the difference between
interest income on earning assets and interest paid on interest bearing
liabilities relative to the amount of interest-bearing assets. Net interest
income increased $0.5 million or 4.10% to $13.1 million for the nine months
ended September 30, 2021 from $12.6 million for the nine months ended September
30, 2020. This increase was primarily due to the recognition of PPP processing
fees. During the nine months ended September 30, 2021 and 2020, the Bank
recognized $1.0 million and $0.3 million, respectively, in processing fees

from
the PPP program.



The average balance of interest bearing deposits at the Federal Reserve
increased $2.3 million or 103.75% to $62.2 million for the nine months ended
September 30, 2021, with a yield of 0.12% as compared to $60.0 million for the
nine months ended September 30, 2020, with a yield of 0.39%.

Provision for Loan Losses



We have established an allowance for loan losses through a provision for loan
losses charged as an expense on our consolidated statements of income. We review
our loan portfolio periodically to evaluate our outstanding loans and to measure
both the performance of the portfolio and the adequacy of our allowance for loan
losses. For the nine months ended September 30, 2021, we had a provision of loan
losses of $120,000 compared to a provision of $40,000 for the same period in the
prior year. The increase in the provision for loan losses was based on our
analysis of the adequacy of the allowance for loan losses.



                                       36





Non-Interest Income


Other income increased $0.7 million or 31.00% to $3.0 million for the nine
months ended September 30, 2021, from $2.3 million for the nine months ended
September 30, 2020. This increase was primarily due to gain on sales of
investment securities as well as income from mortgage banking activity. Three
investment securities were sold during the nine months ended September 30, 2021,
resulting in a gain on sale of $0.3 million. The Bank sold mortgage loans held
for sale in the amount of $141.6 million during the nine months ended September
30, 2021 compared to $114.1 million during the nine months ended September

30,
2020.



Non-Interest Expense

Non-interest expense increased $0.5 million or 5.79% to $9.2 million for the
nine months ended September 30, 2021 from $8.7 million for the nine months ended
September 30, 2020. This increase was primarily due to an increase in FDIC
assessments as a result of the depletion of the FDIC Small Bank Assessment
Credits used in 2020. Additionally, there was an increase in occupancy expenses
resulting from contractual lease obligations.

Income Tax Expense



We incurred income tax expense of $1.6 million for the nine months ended
September 30, 2021 as compared to $1.4 million during the same period in 2020.
Our effective tax rate was 23.58% and 23.32% for the nine months ended September
30, 2021 and 2020, respectively.

Off-Balance Sheet Arrangements



Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on our credit
evaluation of the borrower. Collateral held varies but may include accounts
receivable, negotiable instruments, inventory, property, plant and equipment,
and real estate. Commitments to extend credit, including unused lines of credit,
amounted to $118.4 million and $122.8 million at September 30, 2021 and December
31, 2020, respectively.



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



Commitments under standby letters of credit are usually for one year or less.
The maximum potential amount of undiscounted future payments related to standby
letters of credit at September 30, 2021 and December 31, 2020 was $0.8 million
and $0.8 million, respectively.



We originate certain fixed rate residential loans and commit these loans for
sale. The commitments to originate fixed rate residential loans and the sales
commitments are freestanding derivative instruments. We had forward sales
commitments on mortgage loans held for sale totaling $5.8 million and $13.0
million at September 30, 2021 and December 31, 2020, respectively. The fair
value of these commitments was not significant at September 30, 2021 or December
31, 2020. We had no embedded derivative instruments requiring separate
accounting treatment.



Once we sell certain fixed rate residential loans, the loans are no longer
reportable on our balance sheet. With most of these sales, we have an obligation
to repurchase the loan in the event of a default of principal or interest on the
loan. This recourse period ranges from three to nine months. Misrepresentation
or fraud carries unlimited time for recourse. The unpaid principal balance of
loans sold with recourse was $141.6 million at September 30, 2021 and $57.2
million at December 31, 2020. For the three and nine months ended September 30,
2021, there was one loan repurchased with a principal balance of $0.2 million.
There were no loans repurchased during the three and nine months ended September
30, 2020.



Liquidity

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



                                       37





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



Proper liquidity management is crucial to ensure that we are able to take
advantage of new business opportunities as well as meet the credit needs of our
existing customers. Investment securities are an important tool in our liquidity
management. Our primary liquid assets are cash and due from banks,
interest-bearing deposits in other banks, federal funds sold, investments
available for sale, other short-term investments and mortgage loans held for
sale. Our primary liquid assets accounted for 52.51% and 36.83% of total assets
at September 30, 2021 and December 31, 2020, respectively. Securities classified
as available for sale, which are not pledged, may be sold in response to changes
in interest rates and liquidity needs. All of the securities presently owned are
classified as available for sale. Net cash provided by operations and deposits
from customers have been the primary sources of liquidity. At September 30,
2021, we had unused short-term lines of credit totaling approximately $41.0
million (which can be withdrawn at the lender's option). Additional sources of
funds available to us for additional liquidity needs include borrowing on a
short-term basis from the Federal Reserve System, increasing deposits by raising
interest rates paid and sale of mortgage loans held for sale. We established a
Borrower-In-Custody arrangement with the Federal Reserve. This arrangement
permits us to retain possession of assets pledged as collateral to secure
advances from the Federal Reserve Discount Window. At September 30, 2021, we
could borrow up to $67.0 million. There have been no borrowings under this
arrangement.



Our core deposits consist of non-interest-bearing accounts, NOW accounts, money
market accounts, time deposits and savings accounts. We closely monitor our
level of certificates of deposit greater than $250,000 and other large deposits.
We maintain a Contingency Funding Plan ("CFP') that identifies liquidity needs
and weighs alternate courses of action designed to address these needs in
emergency situations. We perform a quarterly cash flow analysis and stress test
the CFP to evaluate the expected funding needs and funding capacity during a
liquidity stress event. We believe our liquidity sources are adequate to meet
our operating needs and do not know of any trends, events or uncertainties that
may result in a significant adverse effect on our liquidity position. At
September 30, 2021 and December 31, 2020, our liquidity ratio was 56.53% and
38.63%, respectively.



Capital Resources

Our capital needs have been met to date through the $10.6 million in capital
raised in our initial offering, the retention of earnings less dividends paid
and the exercise of stock options to purchase stock. Total shareholders' equity
as of September 30, 2021 was $54.4 million. The rate of asset growth since our
inception has not negatively impacted this capital base.



On March 26, 2020, the Board of Directors of the Company approved a stock
repurchase of up to $1.0 million through March 2021. The Company repurchased
25,067 shares for $0.4 million as a part of this plan, which expired in March
2021.



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



On November 4, 2019, the federal banking agencies jointly issued a final rule on
an optional, simplified measure of capital adequacy for qualifying community
banking organizations called the community bank leverage ratio ("CBLR")
framework effective on January 1, 2020. The Bank adopted this rule as of March
31, 2020 and will no longer be subject to other capital and leverage
requirements. A qualifying community banking organization is defined as having
less than $10 billion in total consolidated assets, a leverage ratio greater
than 9%, off-balance sheet exposures of 25% or less of total consolidated
assets, and trading assets and liabilities of 5% or less of total consolidated
assets. On October 9, 2020, the federal banking agencies jointly issued a final
rule on the CBLR framework effective November 9, 2020. Under the final rule, the
CBLR is 8.0% for the year ended December 31, 2020, 8.5% for the year ended
December 31, 2021, and 9.0% thereafter to be considered well capitalized.
Additionally, the qualifying community banking institution must be a
non-advanced approaches FDIC supervised institution. The final rule adopts Tier
1 capital and existing leverage ratio into the CBLR framework. A bank meeting
CBLR qualifying criteria is deemed to have met the "well capitalized" ratio
requirements and be in compliance with the generally applicable capital rule.
The Bank's CBLR as of September 30, 2021 and December 31, 2020, was 9.40% and
10.19%, respectively. As of September 30, 2021, the Company and the Bank were
categorized as "well capitalized."



                                       38





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

© Edgar Online, source Glimpses