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| BKSC > SEC Filings for BKSC > Form 10-K on 9-Mar-2009 | All Recent SEC Filings |
9-Mar-2009
Annual Report
• 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;
• Technological changes;
• 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;
• Current disarray in the financial service industry.
Such forward looking statements speak only as of the date on which such statements are made and shall be deemed to be updated by any future filings made by the Company with the SEC. The Company will undertake no obligation to update any forward looking statement after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings by the Company with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company, 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 $243.7 million
in assets as of December 31, 2008 and net income of $783,862 and $2,939,297,
respectively, for the three and twelve months ended December 31, 2008. 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 principally in the Charleston,
Dorchester and Berkeley counties of South Carolina. The Bank's original and
current business plan is to be a full service financial institution specializing
in personal service, responsiveness, attention to detail, and long standing
relationships.
The following is a discussion of the Company's financial condition and the
results of operations as of December 31, 2008 as compared to December 31, 2007
and December 31, 2007 as compared to December 31, 2006. The discussion and
analysis identifies significant factors that have affected the Company's
financial position and operating results and should be read in conjunction with
the financial statements and the related notes included in this report.
The Company derives most of its income from interest on loans and investments
(interest bearing assets). The primary source of funding for making these loans
and investments is the Company's deposits (interest bearing liabilities). One of
the key measures of the Company's success is the net interest spread which
depends upon the volume and rates associated with interest earning assets and
interest bearing liabilities.
There are risks inherent in all loans; therefore, the Company maintains an
allowance for loan losses to absorb estimated losses on existing loans that may
become uncollectible. For a detailed discussion on the allowance for loan losses
see "Provision for Loan Losses".
The Company's results of operations depend not only on the level of its net
interest income from loans and investments, but also on its non-interest income
and its operating expenses. Net interest income depends upon the volumes, rates
and mix associated with interest earning assets and interest bearing liabilities
which result in the net interest spread. The Company's net interest margin for
the twelve months ended December 31, 2008 was 4.71% compared to 5.13% for the
twelve months ended December 31, 2007. Non-interest income includes fees and
other expenses charged to customers. A more detailed discussion of interest
income, non-interest income and operating expenses follows.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are set forth in Note One of the
consolidated financial statements. Of these policies, the Company considers its
policy regarding the allowance for loan losses to be its most subjective
accounting policy due to the significant degree of management judgement. The
Company has developed what it believes 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 its
loan portfolio. The Company's 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 by
management at the time of the issuance of the consolidated financial statements.
For additional discussion concerning the Company's allowance for loan losses and
related matters, see "Allowance for Loan Losses".
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2008 TO DECEMBER 31, 2007
Net income decreased $891,947 from $3,831,244 for the year ended December 31,
2007, to $2,939,297 for the year ended December 31, 2008, a decrease of 23.28%.
Basic and diluted earnings per share decreased from $.97 and $.96, respectively
in 2007 to $.74 and $.74, respectively for the year ended December 31, 2008. The
decrease in net income is primarily due to a decrease in interest and fees on
loans and a decrease in interest on federal funds sold.
Net interest income, the major component of the Company's net income, decreased
10.39% to $10,268,042 for the year ended December 31, 2008, from $11,459,092 for
the year ended December 31, 2007. Total interest and fee income decreased 26.30%
or $4,335,358, to $12,146,820 for the year ended December 31, 2008, from
$16,482,178 for the year ended December 31, 2007. This decrease is due to a
decrease in interest and fees on loans and a decrease in interest on federal
funds sold. Recent decreases in the Federal Reserve short-term rates and the
resulting decrease in the yields generated on earning assets (from variable rate
loan repricing and new loans at lower rates) contributed to this decrease. Total
interest and fees on loans decreased $3,350,564 or 24.69% to $10,219,052 for the
year ended December 31, 2008, from $13,569,616 for the year ended December 31,
2007. Interest on federal funds sold decreased $800,790 or 71.53% to $318,695
for the year ended December 31, 2008. As of December 31, 2008, the federal funds
target rate, the rate at which banks lend balances at the Federal Reserve to
other depository institutions (federal funds sold), was .25%. The federal funds
target rate at December 31, 2007 was 4.25%. Net interest income depends upon the
volume of and rates associated with interest earning assets and interest bearing
liabilities, which result in net interest spread. The average net interest
spread increased from 4.12% at December 31, 2007 to 4.30% for the year ended
December 31, 2008.
Average interest earning assets decreased $5,271,359, from $223,374,085 for the
year ended December 31, 2007 to $218,102,726 for the year ended December 31,
2008. This decrease was primarily due to a decrease in the average balances of
federal funds sold of $8,072,909 and investment securities available for sale of
$1,600,180. Average loans including mortgage loans held for sale increased
$3,898,885, offsetting the decrease in average federal funds sold. The yield on
interest earning assets decreased 181 basis points between periods to 5.57% for
the year ended December 31, 2008, from 7.38 for the year ended December 31,
2007. This decrease is primarily due to the decrease in the yield on average
loans of 222 basis points and the decrease of 291 basis points on federal funds
sold to 6.16% and 2.05%, respectively. Average interest bearing liabilities
decreased $6,185,251 to $147,787,052 for the year ended December 31, 2008, from
$153,972,303 for the year ended December 31, 2007. This decrease is primarily
due to a decrease in average transaction accounts and average savings accounts.
Average interest-bearing transaction accounts decreased $2,866,890 and average
savings accounts decreased $2,130,883 for the year ended December 31, 2008. The
yield on average transaction accounts and average savings accounts at
December 31, 2008 was .57% and .61%, respectively, compared to 2.82% and 2.59%,
respectively, for the year ended December 31, 2007. The yield on average
interest bearing liabilities of 1.27% at December 31, 2008 is a decrease of 199
basis points from 3.26% at December 31, 2007.
Total interest expense decreased $3,144,308 or 62.60% to $1,878,778 for the year
ended December 31, 2008 from $5,023,086 for the year ended December 31, 2007.
The decrease in interest expense is primarily due to the decrease in the average
cost of deposits. As noted above average interest bearing liabilities decreased
$6,185,251 for the year ended December 31, 2008. Interest expense on deposit
accounts decreased $3,113,269 or 62.48% to $1,869,655 for the year ended
December 31, 2008, from $4,982,924 for the year ended December 31, 2007.
Total provision for loan losses for the year ended December 31, 2008 was
$192,000 compared to $40,000 for the year ended December 31, 2007. Management
believes the allowance for loan losses at December 31, 2008, is adequate to
cover estimated losses in the loan portfolio; however, assessing the adequacy of
the allowance is a process that requires considerable judgment. Management's
judgments are based on numerous assumptions about current events which it
believes to be reasonable, but which 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 management's 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 the operating results of the Company.
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 the Company
to adjust its Allowance based on information available to them at the time of
their examination. For further discussion, see "Non Accrual and Past Due Loans"
and "Allowance for Loan Losses".
The methodology used to determine the reserve for unfunded lending commitments,
which is included in other liabilities, is inherently similar to that 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 third quarter of the year ended December 31,
2007, Management determined that $20,796 of the allowance for loan loss
represented the reserve for unfunded lending commitments and as such this amount
was moved from the allowance for loan loss to the allowance for unfunded loans
and commitments. In addition $1,507 was added to the provision of unfunded loans
and commitments, for the year ending December 31, 2007, based on the methodology
referred to above. During the year ended December 31, 2008, the provision for
unfunded commitments was decreased by $1,478 bringing the balance to $20,825 at
December 31, 2008.
Total non interest income decreased $71,015 or 4.60% to $1,472,854 for the year
ended December 31, 2008 from $1,543,869 for the year ended December 31, 2007.
This decrease was primarily due to a decrease of $82,628 or 14.89% in mortgage
banking income. The decrease in mortgage banking income is the result of the
slowdown in the real estate market locally and nationally. Mortgage loan
origination fees and discount fees earned decreased from $534,395 for the year
ended December 31, 2007 to $311,130 for the year ended December 31, 2008, a
decrease of 41.78%.
During the year ended December 31, 2007, a security was sold at a gain of
$69,792, whereas during the year ended December 31, 2008 a municipal bond was
sold at a loss of $238, resulting in a decrease of $70,030 or 100.34% in other
income.
Service charges, fees and commissions increased $95,145 or 10.85% from $877,155
for the year ended December 31, 2007 to $972,300. This increase resulted
primarily from an increase in service charges on business accounts of $65,821
and an increase of $25,133 in overdraft fees. The increase in service charges on
business accounts is due to a decrease in the earnings credit and the decrease
in average balances maintained.
Banking overhead increased $96,240 or 1.36% to $7,181,641 for the year ended
December 31, 2008 from $7,085,401 for the year ended December 31, 2007. Other
operating expenses increased $103,679 or 6.65% to $1,663,891 for the year ended
December 31, 2008 from $1,560,212 for the year ended December 31, 2007. This
increase is primarily due to the increase in professional fees and insurance
paid to the FDIC which increased $58,727 and $63,304, respectively, for the year
ended December 31, 2008. Professional audit and legal fees increased $36,603 due
to compliance with Sarbanes Oxley. The increase in insurance paid to the FDIC is
due to the FDIC Insurance Reform Legislation. This Legislation allows the FDIC
to price deposit insurance according to risk for all insured institutions
regardless of the level of the reserve ratio. In 2007 the Company had a credit
with the FDIC that was used toward payment of this assessment. These increases
were offset by a decrease in salaries and employee benefits of $13,441 due to
non replacement of employees who terminated with the Bank during 2008.
Income tax expense decreased $618,358 or 30.22% to $1,427,958 for the year ended
December 31, 2008 from $2,046,316 for the year ended December 31, 2007. The
company's effective tax rate was approximately 32.70% for the year ended
December 31, 2008 compared to 34.82% for the year ended December 31, 2007.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2007 TO DECEMBER 31, 2006
Net income decreased $97,019 from $3,928,263 for the year ended December 31,
2006, to $3,831,244 for the year ended December 31, 2007, a decrease of 2.47%.
Basic and diluted earnings per share decreased from $1.01 and $1.00,
respectively, for 2006 to $.97 and $.96, respectively for the year ended
December 31, 2007. The decrease in net income is primarily due to an increase in
other operating expenses. Sundry losses increased $15,586. During 2007, the
Company suffered a loss due to a robbery at its Summerville Branch. Additional
operating expenses that increased were check and ACH clearing fees by $10,838,
data processing fees by $9,682, contributions by $16,234 and professional audit
and legal fees increased $10,982 and $19,041, respectively.
Net interest and fee income decreased .13% to $11,459,092 in 2007 from
$11,473,466 in 2006. Net interest income depends upon the volume of and rates
associated with interest earning assets and interest bearing liabilities, which
result in the net interest spread. The average net interest spread decreased
from 4.26% for the year ended December 31, 2006, to 4.12% for the year ended
December 31, 2007. Average interest bearing assets increased $4,483,769 to
$223,374,085 for the year ended December 31, 2007, from $218,890,316 in 2006.
This increase was primarily due to an increase in average loans, including
mortgage loans held for sale, and an increase in average federal funds sold.
Average loans including mortgage loans held for sale increased $2,347,751 to
$162,006,962 for the year ended December 31, 2007, from $159,659,211 in 2006.
Average federal funds sold increased $2,655,684 to $22,548,768 for the year
ended December 31, 2007, compared to $19,893,084 for the year ended December 31,
2006. The yield on average loans of 8.38% for the year ended December 31, 2007,
remained the same as the yield for the year ended December 31, 2006. Average
interest bearing liabilities increased $3,934,744 to $153,972,303 for the year
ended December 31, 2007 compared to $150,037,559 in 2006. This increase is
primarily due to an increase in average transaction accounts and time deposits
offset by a decrease in average savings accounts. Average interest-bearing
transaction accounts and average time deposits increased $1,243,331 and
$4,950,835, respectively. Average savings accounts decreased $2,384,977 for the
year ended December 31, 2007. The yield on average interest bearing liabilities
increased from 3.13% for the year ended December 31, 2006, to 3.26% for the year
ended December 31, 2007. The net interest margin decreased from 5.24% for the
year ended December 31, 2006, to 5.13% for the year ended December 31, 2007.
Total interest and fee income earned on interest bearing assets increased
$312,220 to $16,482,178 for the year ended December 31, 2007, from $16,169,958
for the year ended December 31, 2006. As noted above average loans increased
$2,347,751. As a result interest and fees earned on loans increased $199,672 or
1.49% to $13,569,616 for the year ended December 31, 2007 form $13,369,944 in
2006. The increase on average federal funds sold led to an increase of $132,313
in interest earned to $1,119,485 for the year ended December 31, 2007, from
$987,172 for the year ended December 31, 2006. Interest and dividends on
investment securities decreased $19,765 to $1,793,077 for the year ended
December 31, 2007, from $1,812,842 in 2006. The decrease in interest and
dividends on investment securities is primarily due to a decline in average
investments which resulted from the sale of investment securities, decreasing
the average investment securities by $519,784. A gain of $69,792 was recognized
on the sale of the investment securities compared to a loss on sale of
securities of $22,950 in 2006.
Total interest expense increased $326,594 or 6.95% to $5,023,086 from
$4,696,492. As noted above average time deposits increased $4,950,835 to
$40,580,931 for the year ended December 31, 2007, from $35,630,096 for the year
ended December 31, 2006. This resulted in an increase of $378,480 in the cost
paid on time deposits. The cost on average interest bearing liabilities
increased from 3.13% for the year ended December 31, 2006, to 3.26% for the year
ended December 31, 2007.
During the third quarter of 2007, the methodology used by management in the
analysis of the allowance for loan losses (the "Allowance") was modified to
conform to regulatory guidance. The new methodology is discussed more fully in
"Allowance for Loan Losses". Total provision for loan losses for the year ended
December 31, 2007 was $40,000 compared to $240,000 for the year ended
December 31, 2006. Management believes the allowance for loan losses at
December 31, 2007, is adequate to cover estimated losses in the loan portfolio;
however, assessing the adequacy of the allowance is a process that requires
considerable judgment. Management's judgments are based on numerous assumptions
about current events which it believes to be reasonable, but which 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 management's 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 the operating results of the Company.
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 the Company
to adjust its Allowance based on information available to them at the time of
their examination. For further discussion, see "Non Accrual and Past Due Loans"
and "Allowance for Loan Losses".
The methodology used to determine the reserve for unfunded lending commitments,
which is included in other liabilities, is inherently similar to that 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 third quarter of the year ended December 31,
2007, Management determined that $20,796 of the allowance for loan loss
represented the reserve for unfunded lending commitments. This amount was moved
from the allowance for loan loss to the allowance for unfunded loans and
commitments. In addition $1,507 was added to the provision of unfunded loans and
commitments, for the year ending December 31, 2007, based on the methodology
referred to above.
Total non interest income increased $76,476 or 5.21% to $1,543,869 for the year
ended December 31, 2007, from $1,467,393 at December 31, 2006. This increase was
primarily due to a gain of $69,792 on the sale of securities. During 2006 there
was a loss of $22,950 on the sale of securities which makes the total increase
due to the gain in 2007, $92,742 or 404.10%. This increase was offset by a
decrease in mortgage banking income of $35,378 or 5.99%. This decrease is
primarily due to the slow down in the real estate market.
Banking overhead increased $381,685 or 5.69% to $7,085,401 for the year ended
December 31, 2007 from $6,703,716 for the year ended December 31, 2006. This
increase was primarily due to an increase in salaries and employee benefits and
net occupancy expense as well as other operating expenses. Salaries and employee
benefits increased $173,829 or 4.34% to $4,181,712 for the year ended
December 31, 2007 from $4,007,883 for the year ended December 31, 2006. Salaries
increased $182,071 or 5.60% due to annual merit increases and the hiring of a
loan officer. Insurance increased $25,572 and payroll taxes increased $17,384.
These increases were offset by a $60,000 decrease in the ESOP contribution.
Total occupancy expense increased $114,074 or 9.29% to $1,341,970 for the year
ended December 31, 2007 from $1,227,896 for the year ended December 31, 2006.
Insurance on the properties increased $52,198 or 109.79% to $99,740 for the year
ended December 31, 2007 from $47,542 for the year ended December 31, 2006. In
addition, rent on the buildings increased $15,188 or 3.95%, property taxes
increased $13,049 or 15.18% and depreciation on furniture fixtures and equipment
increased $19,281 or 11.82%. Other operating expenses increased $92,275 or 6.29%
to $1,560,212 for the year ended December 31, 2007 from $1,467,937 in 2006. This
increase included $19,041 in legal fees and $10,982 in audit fees, which
included an increase due to compliance with Sarbanes Oxley. Data processing fees
increased $9,682, check and ACH clearing fees increased $10,838, contributions
increased $16,234 and sundry losses increased $15,586.
Income tax expense decreased $22,564 or 1.09% to $2,046,316 for the year ended
December 31, 2007 from $2,068,880 for the year ended December 31, 2006. The
Company's effective tax rate was approximately 34.82% for the year ended
December 31, 2007 compared to 34.50% for the year ended December 31, 2006.
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