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BKSC > SEC Filings for BKSC > Form 10-Q on 13-May-2013All Recent SEC Filings

Show all filings for BANK OF SOUTH CAROLINA CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BANK OF SOUTH CAROLINA CORP


13-May-2013

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 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 $328.6 million in assets as of March 31, 2013 and net income of $998,805 for the three months ended March 31, 2013. 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 March 31, 2013 as compared to December 31, 2012 and the results of operations for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. 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 three months ended March 31, 2013, the Bank has paid $545,000 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 March 31, 2013 and its notes included in the consolidated financial statements in its 2012 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 March 31, 2013 or December 31, 2012. Total Cash and cash equivalents increased 13.35% or $11,953,599 to $101,509,663 at March 31, 2013, from $89,556,064 at December 31, 2012. This increase was primarily due to the growth of the Company's core deposits.

Regulations set by the Federal Reserve require the Company to maintain certain average cash reserve balances. For the year ended December 31, 2012 the average reserve requirement was $700,000. For the three months ended March 31, 2013 the reserve requirement was satisfied by vault cash resulting in a zero reserve requirement at the Federal Reserve.


LOANS
The Company focuses its lending activities on small and middle market businesses, professionals and individuals in its geographic markets. At March 31, 2013, outstanding loans (plus deferred loan fees of $56,124) totaled $216,193,030 which equaled 73.79% of total deposits and 65.78% 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 are as follows:

                                                 March 31,                December 31,
                                          2013              2012              2012
Commercial loans                      $  55,724,957     $  53,042,238     $  54,664,286
Commercial real estate:
Commercial real estate construction       1,730,252         3,250,384         2,276,532
Commercial real estate other            105,451,553       106,764,460       108,575,415
Consumer:
Consumer real estate                     49,241,306        44,980,357        46,703,454
Consumer other                            4,044,962         4,403,143         4,908,937
                                        216,193,030       212,440,582       217,128,624
Allowance for loan losses                (3,418,953 )      (3,234,514 )      (3,432,844 )

Loans, net                            $ 212,774,077     $ 209,206,068     $ 213,695,780



Percentage of Loans                         March 31,            December 31,
                                        2013         2012            2012
Commercial loans                         25.77 %      24.97 %            25.18 %
Commercial real estate construction        .80 %       1.53 %             1.05 %
Commercial real estate other             48.78 %      50.26 %            50.00 %
Consumer real estate                     22.78 %      21.17 %            21.51 %
Consumer other                            1.87 %       2.07 %             2.26 %

Total                                   100.00 %     100.00 %           100.00 %

The Company's customers indicate that business conditions are improving; however, loan demand continues to remain low.


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 March 31, 2013 was 2.46% compared to 2.45% at December 31, 2012. The amortized cost of the investments available for sale at March 31, 2013, March 31, 2012 and December 31, 2012 and percentage of each category to total investments are as follows:

                                                         INVESTMENT PORTFOLIO
                                     March 31, 2013        March 31, 2012        December 31, 2012
US Treasury Notes                   $      6,188,438      $      6,261,562      $         6,213,750
Government-Sponsored Enterprises          18,250,090            18,377,605               18,344,032
Municipal Securities                      33,977,335            34,107,436               33,956,434
                                    $     58,415,863      $     58,746,603      $        58,514,216

US Treasury Notes                              10.59 %               10.66 %                  10.62 %
Government-Sponsored Enterprises               31.24 %               31.28 %                  31.35 %
Municipal Securities                           58.17 %               58.06 %                  58.03 %
                                              100.00 %              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 March 31, 2013 and December 31, 2012. 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 March 31, 2013 and December 31, 2012:

                                                      MARCH 31, 2013
                                                GROSS                GROSS             ESTIMATED
                          AMORTIZED           UNREALIZED          UNREALIZED              FAIR
                             COST               GAINS               LOSSES               VALUE

U.S. Treasury Notes     $    6,084,091      $      104,347      $             -      $    6,188,438
Government-Sponsored
Enterprises                 17,753,389             496,701                    -          18,250,090
Municipal Securities        31,344,735           2,641,606                9,006          33,977,335

Total                   $   55,182,215      $    3,242,654      $         9,006      $   58,415,863


                                                     DECEMBER 31, 2012
                                                GROSS                GROSS             ESTIMATED
                          AMORTIZED           UNREALIZED          UNREALIZED              FAIR
                             COST               GAINS               LOSSES               VALUE

U.S. Treasury Notes     $    6,097,750      $      116,000      $             -      $    6,213,750
Government-Sponsored
Enterprises                 17,822,858             521,174                    -          18,344,032
Municipal Securities        31,101,401           2,858,625                3,592          33,956,434

Total                   $   55,022,009      $    3,495,799      $         3,592      $   58,514,216

The amortized cost and fair value of investment securities available for sale at March 31, 2013, and December 31, 2012, by contractual maturity are as follows:

                                    March 31, 2013
                                                               ESTIMATED
                                              AMORTIZED           FAIR
                                                 COST            VALUE

            Due in one year or less          $  1,928,509     $  1,941,867
            Due in one year to five years      31,699,870       32,791,903
            Due in five years to ten years     13,327,268       14,771,812
            Due in ten years and over           8,226,568        8,910,281

            Total                            $ 55,182,215     $ 58,415,863




                                  December 31, 2012
                                                               ESTIMATED
                                              AMORTIZED           FAIR
                                                 COST            VALUE

            Due in one year or less          $  2,331,067     $  2,336,933
            Due in one year to five years      32,183,058       33,321,740
            Due in five years to ten years     11,407,945       12,718,115
            Due in ten years and over           9,099,939       10,137,428

            Total                            $ 55,022,009     $ 58,514,216

The fair value of investment securities available for sale with unrealized losses at March 31, 2013, and December 31, 2012, are as follows:

MARCH 31, 2013
                                   Less than 12 months                   12 months or longer                         Total
                                                Unrealized                              Unrealized                         Unrealized
Description of Securities     Fair Value          Losses          Fair Value              Losses         Fair Value          Losses

Municipal Securities         $  1,429,942      $       9,006      $         -           $         -      $ 1,429,942      $       9,006


DECEMBER 31, 2012
                                   Less than 12 months                   12 months or longer                         Total
                                                Unrealized                              Unrealized                         Unrealized
Description of Securities     Fair Value          Losses          Fair Value              Losses         Fair Value          Losses

  Municipal Securities       $  1,973,303      $       3,592      $         -           $         -      $ 1,973,303      $       3,592

At March 31, 2013, there were two Municipal Securities with an unrealized loss of $9,006 as compared to one Municipal Security with an unrealized loss of $3,592, at December 31, 2012. The unrealized losses on investments were caused by interest rate increase. 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 64.55% of average earning assets for the three months ended March 31, 2013, and 66.07% for the twelve months ended December 31, 2012. 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:

                                                        March 31,                  December 31,
                                                 2013               2012               2012
Non-interest bearing demand                  $  86,883,466      $  77,565,884      $  83,447,675
Interest bearing demand                         76,682,220         61,161,565         77,441,588
Money market accounts                           52,807,591         99,169,593         54,450,828
Certificates of deposit $100,000 and over       42,410,373         40,178,883         40,903,886
Other time deposits                             15,815,284         17,022,278         15,909,164
Other savings deposits                          18,379,803         15,173,063         18,920,702

Total Deposits                               $ 292,978,737      $ 310,271,266      $ 291,073,843



Percentage of Deposits                            March 31,            December 31,
                                              2013         2012            2012
Non-interest bearing demand                    29.66 %      25.00 %            28.67 %
Interest bearing demand                        26.17 %      19.71 %            26.60 %
Money Market accounts                          18.02 %      31.96 %            18.71 %
Certificates of deposit $100,000 and over      14.48 %      12.95 %            14.05 %
Other time deposits                             5.40 %       5.49 %             5.47 %
Other savings deposits                          6.27 %       4.89 %             6.50 %

Total Deposits                                100.00 %     100.00 %           100.00 %

Deposits decreased 5.57% from March 31, 2012 to March 31, 2013 and increased .65% from December 31, 2012 to March 31, 2013.


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 depositor was a company that 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 after the purchase, with the understanding that these deposits would eventually be moved. At March 31, 2012, the balance of the deposits was $47.6 million, with $1.1 million remaining at March 31, 2013.

SHORT-TERM BORROWINGS
At March 31, 2013 and December 31, 2012, the Company had no outstanding federal funds purchased with the option to borrow up to $19,000,000 on short term lines of credit. In March 2012, the Company established a $6 million REPO Line with Raymond James. 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 March 31, 2013 and December 31, 2012 the Company could borrow up to $62.7 million and $62.6 million, respectively. There have been no borrowings under this arrangement.

Comparison of Three Months Ended March 31, 2013 to Three Months Ended March 31, 2012
Net income increased $108,079 or 12.13% to $998,805, or basic and diluted earnings per share of $.22 and $.22, respectively, for the three months ended March 31, 2013, from $890,726, or basic and diluted earnings per share of $.20 and $.20, respectively, for the three months ended March 31, 2012. The increase was primarily due to an increase in mortgage banking income, a decrease in the cost of funds and a decrease in the provision for loan losses. At December 31, 2012, the Company had $18.5 million in mortgage loans to be sold, approximately $10.9 million more than at December 31, 2011. The majority of these loans closed during the three months ended March 31 2013, resulting in mortgage banking income of $494,012 an increase of $179,140 or 56.89% over the three months ended March 31, 2012.

The cost of funds decreased as a result of lower rates paid on interest bearing deposits coupled with a decrease in interest bearing deposits. Interest bearing deposits decreased $1,530,897 or 0.74% to $206,095,271 for the three months ended March 31, 2013 from $291,073,843 for the three months ended March 31, 2012. The cost associated with these deposits decreased $30,632 or 23.20% to $101,427 for the three months ended March 31, 2013. On February 7, 2012, the Company was notified by a large depositor that it would begin to withdraw its deposits by the end of that month. This depositor was a company that was started in Charleston, SC and purchased by an out-of-state company in 2007. The company's deposits remained at the Bank with the understanding that these deposits would eventually be moved. The balance of the deposits, all of which were interest bearing, at March 31, 2012 was $47.6 million with $1.1 million remaining at March 31, 2013. Although the Company saw a decrease in interest bearing deposits during the period, the Company's non-interest bearing accounts increased $9,317,582 or 12.01% to $86,883,466 for the three months ended March 31, 2013 from $77,565,884 for the three months ended March 31, 2012. The Company had a strong increase in the number of small business accounts due to its business development efforts.

Net Interest Income
Net interest income decreased $34,935 or 1.17% to $2,960,659 for the three months ended March 31, 2013 from $2,995,594 for the three months ended March 31, 2012. Net interest income is a primary source of revenue. Net interest income is the difference between income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on interest earning assets and the rates paid on interest bearing liabilities, the relative amounts of interest earning assets and interest bearing liabilities, and the degree of mismatch and maturity and repricing characteristics of its interest earning assets and interest bearing liabilities. The decrease in net interest income was primarily due to a decrease in interest and fees on loans and a decrease in interest and dividends from investment securities. The decrease in interest and fees on loans was primarily due to decreased interest margins. Average loans increased $6.0 million or 2.72% to $225,609,423 for the three months ended March 31, 2013, from $219,640,583 for the three months ended March 31, 2012. The yield on average loans decreased 18 . . .

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