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BKSC > SEC Filings for BKSC > Form 10-Q on 8-Nov-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


8-Nov-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 five 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 five 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 $334.2 million in assets as of September 30, 2013 and net income of $1,064,177 and $3,107,056 for the three and nine months ended September 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 September 30, 2013 as compared to December 31, 2012 and the results of operations for the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 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 "Allowance 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, 2013, the Bank has paid $1,615,000 to the Company for dividend payments compared to $1,540,000 paid for the nine months ended September 30, 2012.

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, 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 and items in process of collection. Total cash and cash equivalents increased 2.68% or $832,694 to $31,874,542 at September 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 nine months ended September 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 September 30, 2013, outstanding loans (plus deferred loan fees of $63,472) totaled $224,611,082 which equaled 75.25% of total deposits and 67.21% 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 safe and 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:

                                               September 30,              December 31,
                                          2013              2012              2012
Commercial loans                      $  58,079,200     $  53,344,845     $  54,664,286
Commercial real estate:
Commercial real estate construction       1,534,898         3,978,339         2,276,532
Commercial real estate other            106,043,842       107,681,860       108,575,415
Consumer:
Consumer real estate                     54,578,304        44,509,517        46,703,454
Consumer other                            4,374,838         4,184,333         4,908,937
                                        224,611,082       213,698,894       217,128,624
Allowance for loan losses                (3,386,647 )      (3,388,815 )      (3,432,844 )

Loans, net                            $ 221,224,435     $ 210,310,079     $ 213,695,780




Percentage of Loans                       September 30,          December 31,
                                        2013         2012            2012
Commercial loans                         25.86 %      24.96 %            25.18 %
Commercial real estate construction       0.68 %       1.86 %             1.05 %
Commercial real estate other             47.21 %      50.39 %            50.00 %
Consumer real estate                     24.30 %      20.83 %            21.51 %
Consumer other                            1.95 %       1.96 %             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 September 30, 2013 was 2.23% compared to 2.34% at September 30, 2012, and 2.46% at December 31, 2012. The fair value of the investments available for sale at September 30, 2013, September 30, 2012 and December 31, 2012 and percentage of each category to total investments are as follows:

                                                  INVESTMENT PORTFOLIO

                                September 30,        September 30,         December 31,
                                     2013                 2012                 2012
US Treasury Notes              $      6,133,594     $      6,240,938     $      6,213,750
Government-Sponsored
Enterprises                          31,073,567           18,446,092           18,344,032
Municipal Securities                 33,583,014           34,275,641           33,956,434
                               $     70,790,175     $     58,962,671     $     58,514,216

US Treasury Notes                          8.66 %              10.59 %              10.62 %
Government-Sponsored
Enterprises                               43.90 %              31.28 %              31.35 %
Municipal Securities                      47.44 %              58.13 %              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 September 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 September 30, 2013 and December 31, 2012:

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

U.S. Treasury Notes                 $  6,056,316      $     77,278      $          -      $  6,133,594
Government-Sponsored Enterprises      30,868,129           373,743           168,305        31,073,567
Municipal Securities                  32,121,652         1,622,715           161,353        33,583,014

Total                               $ 69,046,097      $  2,073,736      $    329,658      $ 70,790,175

                                                              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 September 30, 2013, and December 31, 2012, by contractual maturity are as follows:

                                  September 30, 2013
                                              AMORTIZED        ESTIMATED
                                                 COST          FAIR VALUE

            Due in one year or less          $  4,958,664     $  5,004,027
            Due in one year to five years      42,493,578       43,175,390
            Due in five years to ten years     12,336,324       13,133,612
            Due in ten years and over           9,257,531        9,477,146

            Total                            $ 69,046,097     $ 70,790,175

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

SEPTEMBER 30, 2013
                                  Less than 12 months                    12 months or longer                           Total
                                               Unrealized                                                                    Unrealized
Description of Securities     Fair Value         Losses          Fair Value         Unrealized Losses       Fair Value         Losses

Government-Sponsored
Enterprises                  $  7,341,246           168,305                 -                        -        7,341,246           168,305
Municipal Securities            5,290,152           160,965           403,928                      388        5,694,080           161,353
Total                        $ 12,631,398     $     329,270     $     403,928      $               388     $ 13,035,326     $     329,658

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 September 30, 2013, there were thirteen Municipal Securities and two Government-Sponsored Enterprises with an unrealized loss of $161,353 and $168,305, 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. One Municipal Security with an unrealized loss of $388 has been impaired for more than twelve months and is therefore considered to be other-than-temporarily impaired. However, 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 has the ability to hold these investments until a market price recovery or maturity.

DEPOSITS

Deposits remain the Company's primary source of funding for loans and investments. Average interest bearing deposits provided funding for 64.46% of average earning assets for the nine months ended September 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:

                                   Deposits by Type
                                             September 30,                December 31,
                                        2013               2012                2012
Non-interest bearing demand         $  84,183,274      $  78,713,939      $  83,447,675
Interest bearing demand                80,272,644         61,627,515         77,441,588
Money market accounts                  52,805,022         57,298,746         54,450,828
Certificates of deposit $100,000
and over                               46,304,844         41,507,596         40,903,886
Other time deposits                    15,514,359         16,069,951         15,909,164
Other savings deposits                 19,420,454         17,727,362         18,920,702

Total Deposits                      $ 298,500,597      $ 272,945,109      $ 291,073,843




                               Deposits by Percentage
Percentage of Deposits                          September 30,          December 31,
                                              2013         2012            2012
Non-interest bearing demand                    28.20 %      28.84 %            28.67 %
Interest bearing demand                        26.89 %      22.58 %            26.60 %
Money Market accounts                          17.69 %      20.99 %            18.71 %
Certificates of deposit $100,000 and over      15.51 %      15.21 %            14.05 %
Other time deposits                             5.20 %       5.89 %             5.47 %
Other savings deposits                          6.51 %       6.49 %             6.50 %

Total Deposits                                100.00 %     100.00 %           100.00 %

Deposits increased 9.36% from September 30, 2012 to September 30, 2013 and increased 2.55% from December 31, 2012 to September 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 September 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 September 30, 2013 and December 31, 2012 the Company could borrow up to $65.3 million and $62.6 million, respectively. There have been no borrowings under this arrangement.

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

Net income increased $170,515 or 19.08% to $1,064,177, or basic and diluted earnings per share of $.24 and $.24, respectively, for the three months ended September 30, 2013, from $893,662, or basic and diluted earnings per share of $.20 and $.20, respectively, for the three months ended September 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 cost of funds and other operating expenses.

Net Interest Income

Net interest income increased $119,453 or 3.99% to $3,111,018 for the three months ended September 30, 2013 from $2,991,565 for the three months ended September 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 an increase of $10.9 million or 5.11% in outstanding loans from $213,698,894 for the three months ended September 30, 2012, to $224,611,082 for the three months ended September 30, 2013. Average loans increased $8.9 million or 4.10% to $227,805,996 for the three months ended September 30, 2013, from $218,840,840 for the three months ended September 30, 2012. Meanwhile, the yield on average loans decreased 9 basis points from 4.99% for the three months ended September 30, 2012 to 4.90% for the three months ended September 30, 2013. Loan demand is increasing as the economy in the Company's market continues to improve.

The Company also experienced an increase of $52,173 on interest and dividends earned on investment securities. Average investments increased $14.4 million or 25.37% to $71,153,786 for the three months ended September 30, 2013, from $56,754,071 for the three months ended September 30, 2012. The yield on the average investments decreased 19 basis points from 2.33% at September 30, 2012 to 2.14% at September 30, 2013. Average interest bearing assets increased $14.5 million for the three months ended September 30, 2013 to $321,726,483 from $307,271,547 for the three months ended September 30, 2012. Average interest bearing deposits decreased $8.9 million or 28.13%, to $22,766,701 for the three months ended September 30, 2013, from $31,676,636 for the three months ended September 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 reviewed on a monthly basis by Credit Personnel (who has no lending authority nor complete the allowance). In addition, the allowance is validated on a periodic basis by the Company's Risk Manager. 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, "Accounting by Creditors for Impairment of a Loan."

2) General reserve analysis applying historical loss rates based on FASB ASC 450-20, "Loss Contingencies."

. . .

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