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BKSC > SEC Filings for BKSC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for BANK OF SOUTH CAROLINA CORP

Form 10-Q for BANK OF SOUTH CAROLINA CORP


9-May-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS

OR PLAN OF OPERATION

Management's discussion and analysis is included to assist shareholders in understanding our financial condition, results of operations, and cash flow. This discussion should be reviewed in conjunction with the consolidated financial statements (unaudited) and notes presented 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. We desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1996 and are 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. Forward looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of the Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Actual results may differ materially from those anticipated in any forward-looking statements. The words "may", "would", "could", "should", "will", "expect", "anticipate", "predict", "project", "potential", "continue", "assume", "believe", "intend", "plan", "forecast", "goal", and "estimate", as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitations, those described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission (the SEC) and 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 uncertainty in the financial service industry

These risks are exacerbated by the development over the last five years in national and international financial markets, and we are unable to predict what effect continued uncertainty in market conditions will have on us. There can be no assurance that the unprecedented developments experienced over the last five years will not materially and adversely affect our business, financial condition and results of operations.

All forward-looking statements in this report are based on information available to us as of the date of this report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved. We 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 our future filings with the SEC, in our press releases, and in our oral and written statements, 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 $336.6 million in assets as of March 31, 2014 and net income of $955,798 for the three months ended March 31, 2014. 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 our financial condition as of March 31, 2014 as compared to December 31, 2013 and the results of operations for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The discussion and analysis identifies significant factors that have affected our financial position and operating results and should be read in conjunction with the financial statements and the related notes included in this report.

We derive most of our income from interest on loans and investments (interest bearing assets). The primary source of funding for making these loans and investments is our interest and non-interest bearing deposits. Consequently, one of the key measures of our success is the amount of net interest income, or the difference between the income on our interest earning assets, such as loans and investments, and the expense on our interest bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest bearing assets and the rate we pay on our interest bearing liabilities.

A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The reserve for credit losses consists of the allowance for loan and lease losses (the "Allowance") and a reserve for unfunded commitments (the "Unfunded Reserve"). The Allowance provides for probable and estimable losses inherent in our loan and lease portfolio. The Allowance is increased or decreased through the provisioning process. For a detailed discussion on the allowance for loan losses see "Allowance for Loan Losses".

In addition to earning interest on loans and investments, we earn income through fees and other expenses we charge to the customer. The various components of non-interest income as well as non-interest expense are described in the following discussion.

CRITICAL ACCOUNTING POLICIES

We have 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 our financial statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of March 31, 2014 and our notes included in the consolidated financial statements in our 2013 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. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the number of the judgments and assumptions that we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

We consider our policies regarding the allowance for loan losses to be our most subjective accounting policy due to the significant degree of management judgment. We have developed what we believe 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 our loan portfolio. Our 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 at the time of the issuance of the consolidated financial statements. For additional discussion concerning our allowance for loan losses and related matters, see "Allowance for Loan Losses."

BALANCE SHEET

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and noninterest-bearing deposits, and interest-bearing deposits. All amounts are readily convertible to cash and have maturities of less than 90 days. Total cash and cash equivalents decreased 49.15% or $10,874,738 to $11,249,358 at March 31, 2014, from $22,124,096 at December 31, 2013. This decrease was primarily due to a decrease in deposits in other banks and an increase in loans.

Regulations set by the Federal Reserve require that we maintain certain average cash reserve balances. For the three months ended March 31, 2014 and 2013 our cash reserve requirement with the Federal Reserve was satisfied by vault cash.

LOANS

We focus our lending activities on small and middle market businesses, professionals and individuals in our geographic markets. At March 31, 2014, outstanding loans (plus deferred loan fees of $79,198) totaled $227,240,465 which equaled 75.78% of total deposits and 67.51% of total assets. Substantially all loans were to borrowers located in our market area of Charleston, Dorchester and Berkeley counties of South Carolina.

The quality of our loan portfolio is contingent upon our risk selection and underwriting practices. Every credit with over $100,000 in exposure is summarized by our Credit Department and reviewed by the Loan Committee on a monthly basis. The Board of Directors review credits over $500,000 monthly with annual credit analyses conducted on these borrowers upon the receipt of updated financial information. Prior to any extension of credit, every loan request goes through sound credit underwriting. The Credit Department conducts detailed cash flow analysis on each proposal using the most current financial information. Relevant trends and ratios are evaluated.

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

                                                 March 31,                December 31,
                                          2014              2013              2013
Commercial loans                      $  53,233,240        55,724,957     $  53,303,569
Commercial real estate:
Commercial real estate construction       1,496,366         1,730,252         1,516,545
Commercial real estate other            107,489,145       105,451,553       104,740,578
Consumer:
Consumer real estate                     60,682,506        49,241,306        54,669,359
Consumer other                            4,339,208         4,044,962         4,090,253
                                        227,240,465       216,193,030       218,320,304
Allowance for loan losses                (3,323,565 )      (3,418,953 )      (3,292,277 )

Loans, net                            $ 223,916,900     $ 212,774,077     $ 215,028,027




Percentage of Loans                         March 31,            December 31,
                                        2014         2013            2013
Commercial loans                         23.43 %      25.77 %            24.41 %
Commercial real estate construction        .66 %        .80 %              .70 %
Commercial real estate other             47.30 %      48.78 %            47.98 %
Consumer real estate                     26.70 %      22.78 %            25.04 %
Consumer other                            1.91 %       1.87 %             1.87 %

Total                                   100.00 %     100.00 %           100.00 %

INVESTMENT SECURITIES AVAILABLE FOR SALE

We use 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. We believe that maintaining our 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, 2014 was 2.20% compared to 2.46% at December 31, 2013. The amortized cost of the investments available for sale at March 31, 2014, March 31, 2013 and December 31, 2013 and percentage of each category to total investments are as follows:

                                                          INVESTMENT PORTFOLIO
                                                                                    December 31,
                                         March 31, 2014        March 31, 2013           2013
US Treasury Notes                       $     10,747,414      $      6,188,438      $  15,832,401
Government-Sponsored Enterprises              45,639,243            18,250,090         43,635,038
Municipal Securities                          33,842,675            33,977,335         35,180,782
                                        $     90,229,332      $     58,415,863      $  94,648,221

US Treasury Notes                                  11.91 %               10.59 %            16.73 %
Government-Sponsored Enterprises                   50.58 %               31.24 %            46.10 %
Municipal Securities                               37.51 %               58.17 %            37.17 %
                                                  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, 2014 and December 31, 2013. 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. (See "non-interest income" for discussion on the sale of investment securities.)

The amortized cost and fair value of investment securities available for sale are summarized as follows as of March 31, 2014 and December 31, 2013:

                                                                 MARCH 31, 2014
                                                              GROSS              GROSS
                                                           UNREALIZED         UNREALIZED          ESTIMATED
                                     AMORTIZED COST           GAINS             LOSSES           FAIR VALUE

U.S. Treasury Notes                 $     10,814,112      $           -      $      66,698      $  10,747,414
Government-Sponsored Enterprises          45,649,870            275,417            286,044         45,639,243
Municipal Securities                      32,058,959          1,851,462             67,746         33,842,675

Total                               $     88,522,941      $   2,126,879      $     420,488      $  90,229,332




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

U.S. Treasury Notes                 $     15,841,901      $      58,429      $      67,929      $  15,832,401
Government-Sponsored Enterprises          43,582,119            363,981            311,062         43,635,038
Municipal Securities                      33,706,898          1,599,638            125,754         35,180,782

Total                               $     93,130,918      $   2,022,048      $     504,745      $  94,648,221

The amortized cost and fair value of investment securities available for sale at March 31, 2014, and December 31, 2013, by contractual maturity are as follows:

                               March 31, 2014
                                  AMORTIZED COST       ESTIMATED FAIR VALUE

Due in one year or less          $      4,721,793     $            4,775,047
Due in one year to five years          49,580,835                 50,153,864
Due in five years to ten years         25,422,397                 26,214,686
Due in ten years and over               8,797,916                  9,085,735

Total                            $     88,522,541     $           90,229,332




                             December 31, 2013
                                  AMORTIZED COST       ESTIMATED FAIR VALUE

Due in one year or less          $     11,048,145     $           11,147,251
Due in one year to five years          39,310,800                 39,914,350
Due in five years to ten years         31,907,109                 32,503,090
Due in ten years and over              10,864,864                 11,083,530

Total                            $     93,130,918     $           94,648,221

The fair value of investment securities available for sale with unrealized losses at March 31, 2014, and December 31, 2013, are as follows:

MARCH 31, 2014
                                        Less than 12 months                   12 months or longer                         Total
                                                     Unrealized                               Unrealized                        Unrealized
   Description of Securities        Fair Value         Losses          Fair Value               Losses        Fair Value          Losses

U.S. Treasury Notes                $10,747,414      $      66,698     $          -           $          -     $10,747,414      $      66,698
Government-Sponsored Enterprises     25,293,461           286,044                -                      -       25,293,461           286,044
Municipal Securities                  1,924,577            67,746                -                      -        1,924,577            67,746
Total                              $ 37,965,452     $     420,488     $          -           $          -     $ 37,965,452     $     420,488

DECEMBER 31, 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

U.S. Treasury Notes                $  9,713,619     $      67,929     $           -      $                 -     $  9,713,619     $      67,929
Government-Sponsored Enterprises     20,027,016           311,062                 -                        -       20,027,016           311,062
Municipal Securities                  2,496,742           125,652           401,624                      102        2,898,366           125,754
Total                              $ 32,237,377     $     504,643     $     401,624      $               102     $ 32,639,001     $     504,745

At March 31, 2014, we had four US Treasury Notes with an unrealized loss of $66,698, six Agency Notes with an unrealized loss of $286,044 and three Municipal Securities with an unrealized loss of $67,746. At December 31, 2013 we had three US Treasury Notes with an unrealized loss of $67,929, five Agency Notes with an unrealized loss of $311,062 and six Municipal Securities with an unrealized loss of $125,754. The unrealized losses on investments were caused by interest rate increase. 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. Therefore, these investments are not considered other-than-temporarily impaired. We have the ability to hold these investments until market price recovery or maturity.

DEPOSITS

Deposits remain our primary source of funding for loans and investments. Average interest bearing deposits provided funding for 64.40% of average earning assets for the three months ended March 31, 2014, and 66.07% for the twelve months ended December 31, 2013. 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,
                                                 2014               2013               2013
Non-interest bearing demand                  $  85,613,981      $  86,883,466      $  90,574,330
Interest bearing demand                         75,233,813         76,682,220         78,576,851
Money market accounts                           50,885,257         52,807,591         47,190,365
Certificates of deposit $100,000 and over       50,291,095         42,410,373         52,516,487
Other time deposits                             15,485,341         15,815,284         15,730,187
Other savings deposits                          22,368,706         18,379,803         20,654,435

Total Deposits                               $ 299,878,193      $ 292,978,737      $ 305,242,655




Percentage of Deposits                            March 31,            December 31,
                                              2014         2013            2013
Non-interest bearing demand                    28.55 %      29.66 %            29.67 %
Interest bearing demand                        25.09 %      26.17 %            25.74 %
Money market accounts                          16.97 %      18.02 %            15.46 %
Certificates of deposit $100,000 and over      16.77 %      14.48 %            17.21 %
Other time deposits                             5.16 %       5.40 %             5.51 %
Other savings deposits                          7.46 %       6.27 %             6.77 %

Total Deposits                                100.00 %     100.00 %           100.00 %

Deposits increased 2.35% or $6,899,456 from March 31, 2013 to March 31, 2014 and declined 1.76% or $5,364,462 from December 31, 2013 to March 31, 2014.

SHORT-TERM BORROWINGS

At March 31, 2014 and December 31, 2013, we had no outstanding federal funds purchased with the option to borrow up to $19,000,000on short term lines of credit. In March 2012, we established a $6 million REPO Line with Raymond James. There have been no borrowings under this agreement. We also established a Borrower-In-Custody arrangement with the Federal Reserve as a secondary source of liquidity. This arrangement permits us to retain possession of loans pledged as collateral to secure advances from the Federal Reserve Discount Window. Under this agreement we could borrow up to $65.5 million and $69 million at March 31, 2014 and December 31, 2013, respectively. There have been no borrowings under this arrangement.

Comparison of Three Months Ended March 31, 2014 to Three Months Ended March 31, 2013

Net income decreased $43,007 or 4.31% to $955,798, or basic and diluted earnings per share of $.21 and $.21, respectively, for the three months ended March 31, 2014, from $998,805, or basic and diluted earnings per share of $.22 and $.22, respectively, for the three months ended March 31, 2013. Our return on average assets and average equity for the three months ended March 31, 2014 were 1.15% and 10.92%, respectively, compared with 1.26% and 11.72%, respectively, for the three months ended March 31, 2013.

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is a measure of the difference between interest income on earning assets and interest paid on interest bearing liabilities relative to the amount of interest bearing assets. Net interest income increased $144,703 or 4.89% to $3,105,362 for the three months ended March 31, 2014 from $2,960,659 for the three months ended March 31, 2013. The increase in net interest income was primarily due to an increase in interest and dividends from investment securities. We made a decision to invest some of our excess cash in securities rather than leaving it at the Federal Reserve where it was earning .25%. Average investments increased $36,060,067 or 61.90% for the three months ended March 31, 2014 from the three months ended March 31, 2013, with a yield of 2.11%. We had a modest increase in average loans of $713,864 to $226,323,287 for the three months ended March 31, 2014 from $225,609,423 for the three months ended March 31, 2013. The yield on average loans remained relatively stable at 4.86% for the three months ended March 31, 2013 from 4.87% for the three months ended March 31, 2013. Total average interest bearing assets increased $14,328,096 or 4.54% to $330,194,832 for the three months ended March 31, 2014. Our average interest bearing deposits increased $8,767,971 or 4.30% to $212,653,464 for the three months ended March 31, 2014 from $203,885,493 for the three months ended March 31, 2013. The yield on these deposits remained relatively unchanged from .20% for the three months ended March 31, 2013 to .19% for the three months ended March 31, 2014.

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 over the years to better reflect the economic environment and to implement regulatory guidance. This allowance is reviewed on a monthly basis by Credit Personnel (who have 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 310-10-35.
2) General reserve analysis applying historical loss rates based on FASB ASC 450-20.
3) Qualitative or environmental factors.

. . .

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