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BKSC > SEC Filings for BKSC > Form 10-Q on 7-Nov-2011All Recent SEC Filings

Show all filings for BANK OF SOUTH CAROLINA CORP

Form 10-Q for BANK OF SOUTH CAROLINA CORP


7-Nov-2011

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION

Management's discussion and analysis is included to assist shareholders in understanding the Company's financial condition, results of operations, and cash flow. This discussion should be reviewed in conjunction with the consolidated financial statements (unaudited) and notes included in 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.

Management's Discussion and Analysis of Financial Condition and Results of Operations and other portions of this quarterly report contain certain "forward-looking statements" concerning the future operations of the Bank of South Carolina Corporation. Management desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1996 and is 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. The Company has used "forward-looking statements" to describe future plans and strategies including its expectations of the Company's future financial results. The following are cautionary statements. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. A variety of factors may affect the operations, performance, business strategy and results of the Company including, but not limited to 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

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.


All forward-looking statements in this report are based on information available to the Company as of the date of this report. Although Management believes that the expectations reflected in the forward-looking statements are reasonable, Management cannot guarantee that these expectations will be achieved. The Company 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 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 $373.4 million in assets as of September 30, 2011 and net income of $936,973 and $2,354,377 for the three and nine months ended September 30, 2011. 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 concept is to be a full service financial institution specializing in personal service, responsiveness, and attention to detail to foster long standing relationships.

The following is a discussion of the Company's financial condition as of September 30, 2011 as compared to December 31, 2010 and the results of operations for the three and nine months ended September 30, 2011 as compared to the three and nine months ended September 30, 2010. 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 interest and non-interest bearing deposits. One of the key measures of the Company's success is the amount of net interest income, or the difference between the income on its interest earning assets, such as loans and investments, and the expense on its interest bearing liabilities, such as deposits. Another key measure is the spread between the yield the Company earns on these interest bearing assets and the yield the Company pays on its 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. The Company established and maintains this allowance based on a methodology representing the lending environment it operates within. 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 spread for the three and nine months ended September 30, 2011 were 3.81% and 3.79%, respectively, compared to 4.17% and 4.15% for the three and nine months ended September 30, 2010.

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.

For nine months ended September 30, 2011, the Bank has paid dividends of $1,300,000 to the Company for dividend payments to shareholders.


CRITICAL ACCOUNTING POLICIES
The Company has adopted various accounting policies that govern the application principles generally accepted in the United States and with general practices within the banking industry in the preparation of its financial statements. The Company's significant accounting policies are described in the footnotes to its unaudited consolidated financial statements as of September 30, 2011 and its notes included in the consolidated financial statements in its 2010 Annual Report on Form 10-K as filed with the SEC.

Certain accounting policies involve significant judgments and assumptions by the Company that have a material impact on the carrying value of certain assets and liabilities. The Company considers these accounting policies to be critical accounting policies. The judgment and assumptions the Company uses are based on historical experience and other factors, which the Company believes to be reasonable under the circumstances. Because of the number of the judgments and assumptions the Company makes, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of its assets and liabilities and its results of operations.

The Company considers its policies regarding the allowance for loan losses to be its most subjective accounting policy due to the significant degree of Management judgment. 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."

BALANCE SHEET
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include working cash funds, due from banks, interest bearing deposits in other banks, items in process of collection and federal funds sold. In order to improve the Company's yield on daily liquidity, the Company terminated all of its Federal Funds positions and moved the money to the Federal Reserve as the Company was able to earn .25% - approximately ten basis points more than the Company was making on Federal Funds. Therefore there were no Federal Funds sold at September 30, 2011 as compared to $19,018,104 at December 31, 2010. Total Cash and cash equivalents increased 314.55% or $76,847,124 to $101,277,909 at September 30, 2011, from $24,430,785 at December 31, 2010. This increase is the result of $70 million in temporary deposits as well as core deposit growth. The temporary deposits were made by two business customers with the expectation that the funds would be used in business transactions within 30 days.

Regulations set by the Federal Reserve require the Company to maintain certain average cash reserve balances. At September 30, 2011 and December 31, 2010 the daily average reserve requirement was approximately $700,000.

LOANS
The Company focuses its lending activities on small and middle market businesses, professionals and individuals in its geographic markets. At September 30, 2011 outstanding loans (plus deferred loan fees of $50,702) totaled $210,307,748 which equaled 61.78% of total deposits and 56.31% of total assets. Substantially all loans were to borrowers located in the Company's market areas in the counties of Charleston, Dorchester and Berkeley in South Carolina.

Because lending activities comprise such a significant source of revenue, the Company's main objective is to adhere to sound lending practices. The Loan Committee of the Board of Directors meets monthly to evaluate the adequacy of the Allowance for Loan Losses and to review all loans resulting in credit exposure in excess of $10,000.


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

                                     September 30,              December 31,
                                2011             2010               2010
Commercial loans            $  54,237,850     $  48,644,578     $  50,601,639
Commercial real estate        109,779,287       109,665,410       108,004,910
Residential mortgage           15,269,213        17,290,712        16,071,839
Consumer loans                  4,762,022         5,333,294         5,361,197
Personal banklines             26,008,601        28,007,273        27,734,166
Other                             200,073           265,616           234,607

Total                         210,257,046       209,206,883       208,008,358
Deferred loan fees (net)           50,702             5,123            17,306
                              210,307,748       209,212,006       208,025,664
Allowance for loan losses      (2,973,615 )      (2,683,980 )      (2,938,588 )

Loans, net                  $ 207,334,133     $ 206,528,026     $ 205,087,076




Percentage of Loans          September 30,          December 31,
                           2011         2010            2010
Commercial loans            25.80 %      23.25 %            24.33 %
Commercial real estate      52.21 %      52.42 %            51.92 %
Residential mortgage         7.26 %       8.26 %             7.73 %
Consumer loans               2.27 %       2.55 %             2.58 %
Personal banklines          12.37 %      13.39 %            13.33 %
Other                         .09 %        .13 %             0.11 %

Total                      100.00 %     100.00 %           100.00 %

As a result of recessionary economic conditions the Company experienced a decrease in loan demand in the first quarter of 2011. This trend appears to be improving with a modest increase in loan demand in the second and third quarters of 2011. As shown in the table above, loans have increased .52% or approximately $1,095,742 from September 30, 2010 to September 30, 2011.


INVESTMENT SECURITIES AVAILABLE FOR SALE
The Company uses the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income from investment of funds, to provide liquidity to meet funding requirements, and to provide collateral for pledges on public funds. Investments are classified into three categories: (1) Held to Maturity,
(2) Trading, and (3) Available for Sale. Management believes that maintaining its securities in the Available for Sale category provides greater flexibility in the management of the overall investment portfolio. The average yield on investments at September 30, 2011 was 2.53% compared to 3.90% at December 31, 2010. The amortized cost of the investments available for sale at September 30, 2011 and December 31, 2010 and percentage of each category to total investments are as follows:

                             INVESTMENT PORTFOLIO
                                    September 30, 2011       December 31, 2010
US Treasury Notes                  $          6,340,313     $         9,055,078
Government-Sponsored Enterprises             18,531,315               6,013,897
Municipal Securities                         29,847,680              23,913,091
                                   $         54,719,308     $        38,982,066

US Treasury Notes                                 11.58 %                 23.23 %
Government-Sponsored Enterprises                  33.87 %                 15.43 %
Municipal Securities                              54.55 %                 61.34 %
                                                 100.00 %                100.00 %

All investment securities were classified as Available for Sale (debt and equity securities that may be sold under certain conditions), at September 30, 2011 and December 31, 2010. The securities were 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. Gains or losses on the sale of securities are recognized on a specific identification, trade date basis.

The amortized cost and fair value of investment securities available for sale are summarized as follows as of September 30, 2011 and December 31, 2010:

                                                                 SEPTEMBER 30, 2011
                                                               GROSS            GROSS          ESTIMATED
                                            AMORTIZED       UNREALIZED       UNREALIZED           FAIR
                                               COST            GAINS           LOSSES            VALUE

U.S. Treasury Notes                        $  6,167,262     $   173,051     $           -     $  6,340,313
Government-Sponsored Enterprises             18,170,198         361,117                 -       18,531,315
Municipal Securities                         27,550,396       2,297,284                 -       29,847,680
Total                                      $ 51,887,856     $ 2,831,452     $           -     $ 54,719,308


                                                                  DECEMBER 31, 2010
                                                               GROSS            GROSS          ESTIMATED
                                            AMORTIZED        UNREALIZED       UNREALIZED          FAIR
                                               COST            GAINS            LOSSES           VALUE

U.S. Treasury Notes                        $  9,055,078     $      8,784     $     40,425     $  9,023,437
Government-Sponsored Enterprises              6,013,897           86,648                -        6,100,545
Municipal Securities                         23,913,091          577,462          234,922       24,255,631

Total                                      $ 38,982,066     $    672,894     $    275,347     $ 39,379,613

The amortized cost and estimated fair value of investment securities available for sale at September 30, 2011 and December 31, 2010 by contractual maturity are as follows:

                      SEPTEMBER 30, 2011
                                                   ESTIMATED
                                  AMORTIZED           FAIR
                                     COST            VALUE

Due in one year or less          $    826,294     $    834,594
Due in one year to five years      29,732,719       30,630,138
Due in five years to ten years     10,538,087       11,570,478
Due in ten years and over          10,790,756       11,684,098

Total                            $ 51,887,856     $ 54,719,308




                      DECEMBER 31, 2010
                                                   ESTIMATED
                                  AMORTIZED           FAIR
                                     COST            VALUE

Due in one year or less          $  9,619,604     $  9,719,581
Due in one year to five years       9,465,147        9,608,773
Due in five years to ten years      8,832,440        9,137,645
Due in ten years and over          11,064,875       10,913,614

Total                            $ 38,982,066     $ 39,379,613


There were no securities with an unrealized loss at September 30, 2011. The fair value of investment securities available for sale with unrealized losses December 31, 2010 are as follows:

DECEMBER 31, 2010
                                 Less than 12 months                    12 months or longer                          Total
                                Fair          Unrealized          Fair                                       Fair          Unrealized
Description of Securities      Value            Losses            Value           Unrealized Losses         Value            Losses
U.S. Treasury Notes         $  6,015,469            40,425     $         -                         -     $  6,015,469     $      40,425
Government-Sponsored
Enterprises                            -                 -               -                         -                -                 -
Municipal Securities           8,468,976           234,922               -                         -        8,468,976           234,922
Total                       $ 14,484,445           275,347     $         -                         -     $ 14,484,445     $     275,347

At September 30, 2011, there were no securities with an unrealized loss as compared to two US Treasury Notes with an unrealized loss of $40,425 and fourteen Municipal Securities with an unrealized loss of $234,922, at December 31, 2010. The investments at December 31, 2010 were not considered other-than-temporarily impaired. The Company does not intend to sell these investments and therefore it is more likely than not that the Company will not be required to sell these securities before recovery of any amortized cost. 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.

The Company realized a gain of $124,672 on the sale of investment securities during the nine months ended September 30, 2011. Proceeds from this sale were $18,140,625 and were reinvested in $17 million of Government sponsored securities with yields between 1.30% and 1.70%

DEPOSITS
Deposits remain the Company's primary source of funding for loans and investments. Average interest bearing deposits provided funding for 71.68% of average earning assets for the nine months ended September 30, 2011, and 71.30% for the twelve months ended December 31, 2010. 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,              December 31,
                                                         2011              2010              2010
Non-interest bearing demand                          $  62,031,647     $  55,482,876     $  56,884,235
Interest bearing demand                                 52,140,953        49,546,790        50,394,101
Money market accounts                                  154,806,746        59,189,446        68,007,823
Certificates of deposit $100,000 and over               40,330,289        36,233,303        45,523,280
Other time deposits                                     17,320,283        18,111,503        17,760,278
Other savings deposits                                  13,733,453        11,813,334        11,867,258

Total Deposits                                       $ 340,363,371     $ 230,377,252     $ 250,436,975


Percentage of Deposits                          September 30,          December 31,
                                              2011         2010            2010
Non-interest bearing demand                    18.23 %      24.08 %            22.71 %
Interest bearing demand                        15.32 %      21.51 %            20.12 %
Money Market accounts                          45.48 %      25.69 %            27.16 %

Certificates of deposit $100,000 and over      11.85 %      15.73 %            18.18 %
Other time deposits                             5.09 %       7.86 %             7.09 %
Other savings deposits                          4.03 %       5.13 %             4.74 %

Total Deposits                                100.00 %     100.00 %           100.00 %

Overall deposits have increased $109,986,119 or 47.74% from September 30, 2010 to September 30, 2011 and $89,926,396 or 35.91% from December 31, 2010 to September 30, 2011. The increase in total deposits at September 30, 2011 was the result of $70 million in temporary deposits as well as core deposit growth. The temporary deposits were made by two business customers with the expectation that the funds would be used in business transactions within 30 days. Management believes this growth is due to the financial strength of the Company and the fact that it is a functioning, profitable and well-capitalized Company.

Short-Term Borrowings
The Bank has a demand note through the US Treasury, Tax and Loan system with the Federal Reserve Bank of Richmond. The Bank may borrow up to $1,000,000 at September 30, 2011 and December 31, 2010 under the arrangement at an interest rate set by the Federal Reserve. The note is secured by Government Sponsored Enterprise Securities with a market value of $1,027,905 at September 30, 2011 and $1,073,450 at December 31, 2010. The amount outstanding under the note totaled $517,520 and $767,497 at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011 and December 31, 2010, the Company had no outstanding federal funds purchased with the option to borrow up to $21,000,000 on short term lines of credit. The Company has also established 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. The Company established this arrangement as a secondary source of liquidity. As of September 30, 2011 and December 31, 2010 the Company could borrow up to $64,363,990 and $63,389,913, respectively. There have been no borrowings under this arrangement.

Comparison of Three Months Ended September 30, 2011 to Three Months Ended September 30, 2010
Net income increased $115,372 or 14.04% to $936,973, or basic and diluted earnings per share of $.21 and $.21, respectively, for the three months ended September 30, 2011, from $821,601, or basic and diluted earnings per share of $.19 and $.19, respectively, for the three months ended September 30, 2010. The increase in net income between periods is primarily due to an increase in interest and fees on loans, a decrease in the provision for loan losses, and a decrease in cost of funds. Average earning assets increased $42.8 million or 16.66%, for the three months ended September 30, 2011 as compared to the same period in 2010. Average earning assets were $299.7 million during the three months ended September 30, 2011 as compared to $256.9 million for the three months ended September 30, 2010. Average loans increased $2.8 million or 1.32% to $215.7 million for the three months ended September 30, 2011 as compared to $212.8 million for the three months ended September 30, 2010. The yield on interest bearing liabilities decreased 22 basis points from .55% for the three months ended September 30, 2010 to .33% for the three months ended September 30, 2011.


Net Interest Income
Net interest income, the major component of the Company's net income, increased $145,267 or 5.18% to $2,950,466 for the three months ended September 30, 2011, from $2,805,199 for the three months ended September 30, 2010. This increase is primarily due to an increase of $88,356 or 3.27% in interest and fees on loans as well as an increase of $15,127 in other interest income and a decrease in the cost of funds. In addition the Company recognized a gain of $66,486 on the sale of investment securities. In order to improve the Company's yield on daily liquidity, the Company terminated all of its Federal Funds positions and moved the money to the Federal Reserve as the Company was able to earn .25% - approximately ten basis points more than the Company was making on Federal Funds. Average loans increased $2,815,890 or 1.32%, average investments increased $17,217,651 or 47.21%, and average other interest bearing accounts increased $22,763,870 or 300.18%. During the three months ended September 30, 2011 the Company sold $6 million in US Treasury Notes for a gain of $66,486. The . . .

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