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

Show all filings for BANK OF SOUTH CAROLINA CORP

Form 10-Q for BANK OF SOUTH CAROLINA CORP


13-Aug-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 $340.5 million in assets as of June 30, 2013 and net income of $1,044,074 and $2,042,879 for the three and six months ended June 30, 2013, respectively. 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 June 30, 2013 as compared to December 31, 2012 and the results of operations for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 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 six months ended June 30, 2013, the Bank has paid $1,075,000 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 June 30, 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 June 30, 2013 or December 31, 2012. Total cash and cash equivalents increased 39.00% or $12,106,022 to $43,147,870 at June 30, 2013, from $31,041,848 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 six months ended June 30, 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 June 30, 2013, outstanding loans (plus deferred loan fees of $62,691) totaled $214,338,102 which equaled 70.28% of total deposits and 62.95% 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:

                                                 June 30,                 December 31,
                                          2013              2012              2012
Commercial loans                      $  52,933,993     $  53,021,600     $  54,664,286
Commercial real estate:
Commercial real estate construction       1,725,535         3,685,093         2,276,532
Commercial real estate other            102,514,184       105,840,164       108,575,415
Consumer:
Consumer real estate                     52,870,365        43,427,930        46,703,454
Consumer other                            4,294,025         4,775,408         4,908,937
                                        214,338,102       210,750,195       217,128,624
Allowance for loan losses                (3,359,915 )      (3,341,579 )      (3,432,844 )

Loans, net                            $ 210,978,187     $ 207,408,616     $ 213,695,780




Percentage of Loans                         June 30,             December 31,
                                        2013         2012            2012
Commercial loans                         24.70 %      25.16 %            25.18 %
Commercial real estate construction       0.80 %       1.75 %             1.05 %
Commercial real estate other             47.83 %      50.22 %            50.00 %
Consumer real estate                     24.67 %      20.61 %            21.51 %
Consumer other                            2.00 %       2.26 %             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 June 30, 2013 was 2.23% compared to 2.54% at June 30, 2012, and 2.46% at December 31, 2012. The fair value of the investments available for sale at June 30, 2013, June 30, 2012 and December 31, 2012 and percentage of each category to total investments are as follows:

                                                         INVESTMENT PORTFOLIO

                                                                                  December 31,
                                         June 30, 2013        June 30, 2012           2012
US Treasury Notes                       $     6,159,375      $     6,260,625      $   6,213,750
Government-Sponsored Enterprises             31,300,631           18,440,831         18,344,032
Municipal Securities                         34,472,958           31,483,188         33,956,434
                                        $    71,932,964      $    56,184,644      $  58,514,216

US Treasury Notes                                  8.56 %              11.14 %            10.62 %
Government-Sponsored Enterprises                  43.51 %              32.82 %            31.35 %
Municipal Securities                              47.93 %              56.04 %            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 June 30, 2013 and 2012, and at 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 June 30, 2013 and December 31, 2012:

                                                                  JUNE 30, 2013
                                                              GROSS              GROSS
                                                           UNREALIZED         UNREALIZED          ESTIMATED
                                     AMORTIZED COST           GAINS             LOSSES           FAIR VALUE

U.S. Treasury Notes                 $      6,070,279      $      89,096      $           -      $   6,159,375
Government-Sponsored Enterprises          30,981,127            399,779             80,275         31,300,631
Municipal Securities                      32,306,342          2,208,566             41,950         34,472,958

Total                               $     69,357,748      $   2,697,441      $     122,225      $  71,932,964

                                                                DECEMBER 31, 2012
                                                              GROSS              GROSS
                                                           UNREALIZED          UNREALIZED          ESTIMATED
                                     AMORTIZED COST           GAINS              LOSSES           FAIR 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 June 30, 2013, and December 31, 2012, by contractual maturity are as follows:

                                 June 30, 2013

                                       AMORTIZED COST       ESTIMATED FAIR VALUE

     Due in one year or less          $      1,928,831     $            1,941,784
     Due in one year to five years          43,156,732                 44,087,609
     Due in five years to ten years         14,936,988                 16,038,302
     Due in ten years and over               9,335,197                  9,865,269

     Total                            $     69,357,748     $           71,932,964




                               December 31, 2012

                                       AMORTIZED COST       ESTIMATED FAIR 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 June 30, 2013, and December 31, 2012, are as follows:

JUNE 30, 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

Government-Sponsored
Enterprises                 $  7,427,738            80,275                 -                       -        7,427,738            80,275
Municipal Securities           3,159,603            41,950                 -                       -        3,159,603            41,950

Total $ 10,587,341 $ 122,225 $ - $ - $ 10,587,341 $ 122,225

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

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

At June 30, 2013, there were five Municipal Securities and two Government-Sponsored Enterprises with an unrealized loss of $41,950 and $80,275, respectively, 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 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 64.64% of average earning assets for the six months ended June 30, 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:

                                                         June 30,                  December 31,
                                                 2013               2012               2012
Non-interest bearing demand                  $  86,445,804      $  79,672,270      $  83,447,675
Interest bearing demand                         84,876,741         63,505,499         77,441,588
Money market accounts                           53,911,655         57,934,606         54,450,828
Certificates of deposit $100,000 and over       45,171,414         39,784,530         40,903,886
Other time deposits                             15,499,830         16,369,208         15,909,164
Other savings deposits                          19,082,903         20,163,983         18,920,702

Total Deposits                               $ 304,988,347      $ 277,430,096      $ 291,073,843




Percentage of Deposits                            June 30,             December 31,
                                              2013         2012            2012
Non-interest bearing demand                    28.34 %      28.72 %            28.67 %
Interest bearing demand                        27.83 %      22.89 %            26.60 %
Money Market accounts                          17.68 %      20.88 %            18.71 %
Certificates of deposit $100,000 and over      14.81 %      14.34 %            14.05 %
Other time deposits                             5.08 %       5.90 %             5.47 %
Other savings deposits                          6.26 %       7.27 %             6.50 %

Total Deposits                                100.00 %     100.00 %           100.00 %

Deposits increased 9.93% from June 30, 2012 to June 30, 2013 and increased 4.78% from December 31, 2012 to June 30, 2013.

Deposits increased as the result of business development efforts and not as a result of the Company offering special rates. The Company does not have any internet or brokered deposits.

SHORT-TERM BORROWINGS

At June 30, 2013 and December 31, 2012, the Company had no outstanding federal funds purchased with the option to borrow up to $19,000,000on 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 June 30, 2013 and December 31, 2012 the Company could borrow up to $67.5 million and $62.6 million, respectively. There have been no borrowings under this arrangement.

Comparison of Three Months Ended June 30, 2013 to Three Months Ended June 30, 2012

Net income increased $153,807 or 17.28% to $1,044,074, or basic and diluted earnings per share of $.23 and $.23, respectively, for the three months ended June 30, 2013, from $890,267, or basic and diluted earnings per share of $.20 and $.20, respectively, for the three months ended June 30, 2012. The increase was primarily due to an increase in interest and fees on loans, an increase in interest and dividends on investment securities, an increase in mortgage banking income, coupled with a decrease in both the provision for loan losses and non-interest bearing expenses.

Net Interest Income

Net interest income increased $181,715 or 6.12% to $3,151,079 for the three months ended June 30, 2013 from $2,969,364 for the three months ended June 30, 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 increase in net interest income was primarily due to an increase in interest and fees on loans and an increase in interest and dividends from investment securities. Interest and fees on loans increased primarily due to the payoff of three impaired loans totaling $4.05 million. The payoff resulted in the collection of $79,623 in non-accrual interest and fees and $36,994 in interest and fees. Average loans increased $27.75 million or 12.79% to $244,704,708 for the three months ended June 30, 2013, from $216,954,693 for the three months ended June 30, 2012. The yield on average loans decreased 33 basis points from 5.06% for the three months ended June 30, 2012 to 4.73% for the three months ended June 30, 2013.

The Company also experienced an increase of $11,443 on interest and dividends earned on investment securities. Average investments increased $4.24 million or 7.51% to $60,730,098 for the three months ended June 30, 2013, from $56,488,683 for the three months ended June 30, 2012. The yield on the average investments decreased 10 basis points from 2.38% at June 30, 2012 to 2.28% at June 30, 2013. During the three months ended June 30, 2013, the Company purchased $12.54 million in Government Agency Enterprises with yielding between 1.17% and 1.41%, and $1.00 million in Municipal securities yielding between 2.00% and 2.30%. Average interest bearing assets increased $38.72 million for the three months ended June 30, 2013 to $344,204,915. Average interest bearing deposits increased $10.80 million or 5.42%, to $209,840,218 for the three months ended June 30, 2013, from $199,044,224 for the three months ended June 30, 2012. This increase allowed the Company to not only purchase additional investments but also to increase its interest bearing deposits in other banks, including the Federal Reserve. Average interest bearing deposits in other banks increased $6.73 million or 21.02% to $38,770,109 for the three months ended June 30, 2013, from $32,037,313 at June 30, 2012.

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable losses inherent in the loan portfolio. The adequacy of the allowance for loan losses (the "allowance") is reviewed monthly by the Loan Committee and on a quarterly basis by the Board of Directors. For purposes of this analysis, adequacy is defined as a level sufficient to absorb estimated losses in the loan portfolio as of the balance sheet date presented. The methodology employed for this analysis has had various modifications since 2007 to better reflect the economic environment and to implement regulatory guidance. This allowance is validated on a monthly basis by Credit Personnel (who have no lending authority nor complete the allowance). The revised methodology is based on a Reserve Model that is comprised of the three components listed below:

1) Specific Reserve analysis for impaired loans based on Financial Accounting Standards Board (FASB) ASC 310-10-35.

. . .

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