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| BKSC > SEC Filings for BKSC > Form 10-Q on 9-Nov-2012 | All Recent SEC Filings |
9-Nov-2012
Quarterly Report
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 weakness in the financial service industry.
These risks are exacerbated by the development over the last four years in national and international financial markets, and Management is unable to predict what effect continued uncertainty in market conditions will have on the Company. There can be no assurance that the unprecedented developments experienced over the last four years will not materially and adversely affect the Company's business, financial condition and results of operations.
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 $307.5 million in assets as of September 30, 2012 and net income of $893,662 and $2.7 million for the three and nine months ended September 30, 2012. 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.
The following is a discussion of the Company's financial condition as of September 30, 2012 as compared to December 31, 2011 and the results of operations for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011. 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. Consequently, one of the key measures of the Company's success is the amount of net interest income, or the difference between the income on 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 rate 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 environment it operates within. For a detailed discussion on the allowance for loan losses see "Provision for Loan Losses".
In addition to earning interest on loans and investments, the Company earns income through fees and other expenses charged to customers. The various components of non-interest income as well as non-interest expense are described in the following discussion.
For nine months ended September 30, 2012, the Bank has paid $1,540,000 to the Company for dividend payments.
CRITICAL ACCOUNTING POLICIES
The Company has adopted various accounting policies that govern the application of 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, 2012 and its notes included in the consolidated financial statements in its 2011 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, 2012 or December 31, 2011. Total cash and
cash equivalents decreased 60.85% or $31,680,994 to $20,382,482 at September 30,
2012, from $52,063,476 at December 31, 2011. This decrease is the result of a
decrease deposits which resulted in lower deposits with the Federal Reserve.
(See "Deposits" for further discussion on the decrease in deposits.)
Regulations set by the Federal Reserve require the Company to maintain certain average cash reserve balances. At September 30, 2012 and December 31, 2011 the daily average reserve requirement was approximately $700,000.
LOANS
The following is a discussion of the Company's total outstanding loans, which excludes mortgage loans to be sold. Mortgage loans to be sold are discussed separately in this note. The Company focuses its lending activities on small and middle market businesses, professionals and individuals in its geographic markets. At September 30, 2012, outstanding loans (plus deferred loan fees of $56,410) totaled $213,698,894 which equaled 78.29% of total deposits and 69.50% 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 of $10,000 or more.
The breakdown of total loans by type and the respective percentage of total loans (excluding mortgage loans to be sold) are as follows:
September 30, December 31,
2012 2011 2011
Commercial loans $ 53,344,845 $ 54,250,929 $ 55,565,525
Commercial real estate:
Commercial real estate construction 3,978,339 3,499,067 3,564,327
Commercial real estate other 107,681,860 106,306,693 106,408,621
Consumer
Consumer real estate 44,509,517 41,086,753 43,185,861
Consumer other 4,184,333 5,164,306 4,984,778
213,698,894 210,307,748 213,709,112
Allowance for loan losses (3,388,815 ) (2,973,615 ) (3,106,884 )
Loans, net $ 210,310,079 $ 207,334,133 $ 210,602,228
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Percentage of Loans September 30, December 31,
2012 2011 2011
Commercial loans 24.96 % 25.80 % 26.00 %
Commercial real estate constructions 1.86 % 1.66 % 1.67 %
Commercial real estate other 50.39 % 50.55 % 49.79 %
Consumer real estate 20.83 % 19.54 % 20.21 %
Consumer other 1.96 % 2.46 % 2.33 %
Total 100.00 % 100.00 % 100.00 %
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Although the Company's customers indicate that business conditions are improving, loan demand did not increase during the nine months ended September 30, 2012 from year end 2011.
Mortgage loans to be sold increased $6,514,001 or 85.95% to $14,092,588 for the nine months ended September 30, 2011 compared to $7,578,587 from year end 2011. The historically low interest rate environment has resulted in a large increase in refinancing as well as buyers taking advantage of the decrease in home prices.
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, 2012 was 2.34% compared to 2.45% at December 31, 2011. The estimated fair value of the investments available for sale at September 30, 2012 and December 31, 2011 and percentage of each category to total investments are as follows:
INVESTMENT PORTFOLIO
September 30, December 31,
2012 2011
US Treasury Notes $ 6,240,938 $ 6,310,782
Government-Sponsored Enterprises 18,446,092 18,434,117
Municipal Securities 34,275,641 34,807,261
$ 58,962,671 $ 59,552,160
US Treasury Note 10.59 % 10.60 %
Government-Sponsored Enterprises 31.28 % 30.95 %
Municipal Securities 58.13 % 58.45 %
100.00 % 100.00 %
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All investment securities were classified as Available for Sale (debt and equity securities that may be sold under certain conditions), at September 30, 2012 and December 31, 2011. 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, 2012 and December 31, 2011:
SEPTEMBER 30, 2012
GROSS
UNREALIZED GROSS UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES FAIR VALUE
U.S. Treasury Note $ 6,111,713 $ 129,225 $ - $ 6,240,938
Government-Sponsored Enterprises 17,892,326 553,766 - 18,446,092
Municipal Securities 31,121,890 3,153,751 - 34,275,641
Total $ 55,125,929 $ 3,836,742 $ - $ 58,962,671
DECEMBER 31, 2011
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES FAIR VALUE
U.S. Treasury Notes $ 6,153,299 $ 157,483 $ - $ 6,310,782
Government-Sponsored Enterprises 18,100,730 333,387 - 18,434,117
Municipal Securities 32,101,781 2,706,597 1,117 34,807,261
Total $ 56,355,810 $ 3,197,467 $ 1,117 $ 59,552,160
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The amortized cost and fair value of investment securities available for sale at September 30, 2012, and December 31, 2011, by contractual maturity are as follows:
September 30, 2012
AMORTIZED COST ESTIMATED FAIR VALUE
Due in one year or less $ 2,340,269 $ 2,352,215
Due in one year to five years 31,622,713 32,791,947
Due in five years to ten years 11,415,887 12,785,179
Due in ten years and over 9,747,060 11,033,330
Total $ 55,125,929 $ 58,962,671
December 31, 2011
AMORTIZED COST ESTIMATED FAIR VALUE
Due in one year or less $ 3,745,464 $ 3,752,060
Due in one year to five years 30,306,215 31,159,444
Due in five years to ten years 11,110,227 12,350,591
Due in ten years and over 11,193,904 12,290,065
Total $ 56,355,810 $ 59,552,160
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At September 30, 2012, there were no securities with an unrealized loss as compared to three Municipal Securities with an unrealized loss of $1,117 at December 31, 2011. The fair values of investment securities available for sale with unrealized losses at December 31, 2011, are as follows:
Less than 12 months 12 months or longer Total
Fair Unrealized Unrealized Unrealized
Description of Securities Value Losses Fair Value Losses Fair Value Losses
U.S. Treasury Notes $ - $ - $ - $ - $ - $ -
Government-Sponsored Enterprises - - - - - -
Municipal Securities 243,884 1,117 - - 243,884 1,117
$ 243,884 $ 1,117 $ - $ - $ 243,884 $ 1,117
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The unrealized losses on investments at December 31, 2011, were caused by interest rate increases. The contractual terms of these investments did not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company had the ability to hold these investments until a market price recovery or maturity, these investments were not considered other-than-temporarily impaired.
DEPOSITS
Deposits remain the Company's primary source of funding for loans and investments. Average interest bearing deposits provided funding for 66.46% of average earning assets for the nine months ended September 30, 2012, and 71.68% for the twelve months ended December 31, 2011. 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,
2012 2011 2011
Non-interest bearing demand 78,713,939 62,031,647 70,217,614
Interest bearing demand 61,627,515 52,140,953 64,350,891
Money market accounts 57,298,746 154,806,746 96,292,414
Certificates of deposit $100,000
and over 41,507,596 40,330,289 38,638,528
Other time deposits 16,069,951 17,320,283 17,416,840
Other savings deposits 17,727,362 13,733,453 14,211,228
Total Deposits 272,945,109 340,363,371 301,127,515
Percentage of Deposits September 30, December 31,
2012 2011 2011
Non-interest bearing demand 28.84 % 18.23 % 23.32 %
Interest bearing demand 22.58 % 15.32 % 21.37 %
Money Market accounts 20.99 % 45.48 % 31.98 %
Certificates of deposit $100,000 and over 15.21 % 11.85 % 12.83 %
Other time deposits 5.89 % 5.09 % 5.78 %
Other savings deposits 6.49 % 4.03 % 4.72 %
Total Deposits 100.00 % 100.00 % 100.00 %
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Deposits have decreased 19.81% from September 30, 2011 to September 30, 2012 and decreased 9.36% from December 31, 2011 to September 30, 2012.
On February 7, 2012, the Company was notified by a large depositor, that its funds would be withdrawn by the end of that month. This company was started in Charleston, SC and was purchased by an out-of-state company in 2007. The deposits remained with The Bank of South Carolina with the understanding these deposits would eventually be moved. The balances of the deposits were $71,797,267 at September 30, 2011, $32,462,427 at December 31, 2011, and $1,876,056 at September 30, 2012.
SHORT-TERM BORROWINGS
The Bank had a demand note through the US Treasury, Tax and Loan system with the Federal Reserve Bank of Richmond. The Bank had the ability to borrow up to $1,000,000 at September 30, 2011 under the arrangement at an interest rate set by the Federal Reserve. The note was secured by Government Sponsored Enterprise Securities with a market value of $1,027,905 at September 30, 2011. The amount outstanding under the note totaled $517,520 at September 30, 2011. The Federal Reserve discontinued this program on December 30, 2011. Electronic tax deposits will no longer be deposited into the Company's TT&L main account balance. At September 30, 2012 and December 31, 2011, the Company had no outstanding federal funds purchased with the option to borrow up to $21,000,000 on short term lines of credit. In March 2012, the Company established a $6 million REPO Line with Raymond James (formally Morgan Keegan). There have been no borrowings under this agreement. 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 an additional source of liquidity. As of September 30, 2012 and December 31, 2011 the Company could borrow up to $64,042,833 and $61,527,194, respectively. There have been no borrowings under this arrangement.
Comparison of Three Months Ended September 30, 2012 to Three Months Ended September 30, 2011
Net Income
Net income decreased $43,311 or 4.62% to $893,662, or basic and diluted earnings per share of $.20 and $.20, respectively, for the three months ended September 30, 2012, from $936,973, or basic and diluted earnings per share of $.21 and $.21, respectively, for the three months ended September 30, 2011. During the three months ended September 30, 2011, the Company sold $6 million in US Treasury Notes for a gain of $66,486, compared to no gains or losses on the sale of securities recognized during the three months ended September 30, 2012. This decrease was primarily offset by an increase in mortgage banking income of $149,492 or 82.49%. (See "net interest income" and "other income" for further discussion) Average earning assets increased $6.3 million to $307.3 million for the three months ended September 30, 2012 as compared to the $301.0 million for the same period in 2011. Average loans increased $3.2 million to $218.8 million and average investment securities increased $3.1 million to $56.8 million for the three months ended September 30, 2012 compared to the same period in 2011. The yield on average loans decreased 14 basis points to 4.99%, and average investments decreased 5 basis points to 2.33% for the three months ended September 30, 2012. Historically low interest rates have encouraged refinancing activity, resulting in an increase in average mortgage loans to be sold by $4.13 million for the three months ended September 30, 2012. Net interest margin decreased from 3.89% for the three months ended September 30, 2011 to 3.87% for the three months ended September 30, 2012.
Yields on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
Three Months ended Three Months Ended
September 30, 2012 September 30, 2011
Interest Interest
Average Balance Earned/Paid Yield/Rate % Average Balance Earned/Paid Yield/Rate %
Loans $ 218,840,840 $ 2,745,764 4.99 $ 215,663,371 $ 2,787,415 5.13
Investments 56,754,071 332,344 2.33 53,690,651 321,716 2.38
Other 31,676,636 20,332 0.26 31,670,013 18,623 0.23
Total Earning Assets 307,271,547 3,098,440 4.01 301,024,035 3,127,754 4.12
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