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BKSC > SEC Filings for BKSC > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for BANK OF SOUTH CAROLINA CORP

Form 10-Q for BANK OF SOUTH CAROLINA CORP


8-Aug-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 six 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 six 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 $359,078,204 in assets as of June 30, 2014 and net income of $2,065,725 for the six months ended June 30, 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 June 30, 2014 as compared to December 31, 2013 and the results of operations for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 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 earning 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 earning 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 June 30, 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 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-earning deposits, and interest-earning deposits. All amounts are readily convertible to cash and have maturities of less than 90 days. Total cash and cash equivalents increased 29.92% or $6,618,624 to $28,742,720 at June 30, 2014, from $22,124,096 at December 31, 2013. This increase was primarily due to an increase in deposits.

Regulations set by the Federal Reserve require that we maintain certain average cash reserve balances. For the six months ended June 30, 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 June 30, 2014, outstanding loans (plus deferred loan fees of $80,692) totaled $230,596,294 which equaled 71.65% of total deposits and 64.22% 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:

                                                   June 30,                 December 31,
                                            2014              2013              2013
Commercial loans                       $  52,687,696        52,933,993     $  53,303,569
Commercial real estate:
 Commercial real estate construction       1,551,147         1,725,535         1,516,545
 Commercial real estate other            111,800,212       102,514,184       104,740,578
Consumer:
 Consumer real estate                     60,260,769        52,870,365        54,669,359
 Consumer other                            4,296,470         4,294,025         4,090,253
                                         230,596,294       214,338,102       218,320,304
Allowance for loan losses                 (3,379,808 )      (3,359,915 )      (3,292,277 )
Loans, net                             $ 227,216,486       210,978,187     $ 215,028,027




Percentage of Loans                          June 30,            December 31,
                                         2014         2013           2013
Commercial loans                         22.85 %      24.70 %          24.41 %
Commercial real estate construction        .67 %        .80 %            .70 %
Commercial real estate other             48.49 %      47.83 %          47.98 %
Consumer real estate                     26.13 %      24.67 %          25.04 %
Consumer other                            1.86 %       2.00 %           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 June 30, 2014 was 2.13% compared to 2.20% at December 31, 2013. The amortized cost of the investments available for sale at June 30, 2014, June 30, 2013 and December 31, 2013 and percentage of each category to total investments are as follows:

                                         INVESTMENT PORTFOLIO

                        June 30, 2014     June 30, 2013     December 31, 2013
US Treasury Notes      $  19,142,422     $   6,159,375     $       15,832,401
Government-Sponsored
  Enterprises             40,219,602        31,300,631             43,635,038
Municipal Securities      33,803,740        34,472,958             35,180,782
                       $  93,165,764     $  71,932,964     $       94,648,221

US Treasury Notes              20.55 %            8.56 %                16.73 %
Government-Sponsored
  Enterprises                  43.17 %           43.51 %                46.10 %
Municipal Securities           36.28 %           47.93 %                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 June 30, 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 June 30, 2014 and December 31, 2013:

                                                               JUNE 30, 2014
                                                           GROSS           GROSS         ESTIMATED
                                        AMORTIZED       UNREALIZED      UNREALIZED          FAIR
                                           COST            GAINS          LOSSES           VALUE

U.S. Treasury Notes                   $ 19,258,500     $     2,559     $   118,637     $ 19,142,422
Government-Sponsored Enterprises        40,207,462         145,804         133,664       40,219,602
Municipal Securities                    31,909,356       1,933,533          39,149       33,803,740

Total                                 $ 91,375,318     $ 2,081,896     $   291,450     $ 93,165,764




                                                             DECEMBER 31, 2013
                                                           GROSS           GROSS         ESTIMATED
                                        AMORTIZED       UNREALIZED      UNREALIZED          FAIR
                                           COST            GAINS          LOSSES           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 June 30, 2014, and December 31, 2013, by contractual maturity are as follows:

                         June 30, 2014
                                                    ESTIMATED
                                   AMORTIZED           FAIR
                                      COST            VALUE

Due in one year or less          $  8,339,600     $  8,435,710
Due in one year to five years      46,234,426       46,767,692
Due in five years to ten years     29,461,922       30,390,981
Due in ten years and over           7,339,370        7,571,381

Total                            $ 91,375,318     $ 93,165,764

December 31, 2013
                                                    ESTIMATED
                                   AMORTIZED           FAIR
                                      COST            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 June 30, 2014, and December 31, 2013, are as follows:

JUNE 30, 2014
                                 Less than 12 months              12 months or longer                    Total
                                 Fair         Unrealized                      Unrealized                       Unrealized
Description of Securities       Value           Losses        Fair Value        Losses         Fair Value        Losses

U.S. Treasury Notes         $ 16,154,141     $   118,637     $        -      $        -      $ 16,154,141     $   118,637
Government-Sponsored
Enterprises                   13,185,687          45,593       7,426,096          88,071       20,611,783         133,664
Municipal Securities             410,364           4,635       1,538,672          34,514        1,949,036          39,149
Total                       $ 29,750,192     $   168,865     $ 8,964,768     $   122,585     $ 38,714,960     $   291,450

DECEMBER 31, 2013
                                Less than 12 months               12 months or longer                      Total
     Description of             Fair         Unrealized                         Unrealized                       Unrealized
       Securities              Value           Losses         Fair Value          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 June 30, 2014, we had five US Treasury Notes with an unrealized loss of $118,637, five Agency Notes with an unrealized loss of $133,664 and three Municipal Securities with an unrealized loss of $39,149. 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 63.54% of average earning assets for the six months ended June 30, 2014, and 66.07% for the twelve months ended December 31, 2013. There is strong competition from other financial institutions as well as consumer and commercial finance companies, insurance companies and brokerage firms located in our primary service area. 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,
                                                    2014              2013              2013
Non-interest bearing demand                    $ 101,024,740     $  86,445,804     $  90,574,330
Interest bearing demand                           79,982,199        84,876,741        78,576,851
Money market accounts                             51,489,810        53,911,655        47,190,365
Certificates of deposit $100,000 and over         49,830,228        45,171,414        52,516,487
Other time deposits                               15,805,539        15,499,830        15,730,187
Other savings deposits                            23,720,158        19,082,903        20,654,435

Total Deposits                                 $ 321,852,674     $ 304,988,347     $ 305,242,655




Percentage of Deposits                             June 30,            December 31,
                                               2014         2013           2013
Non-interest bearing demand                    31.39 %      28.34 %          29.67 %
Interest bearing demand                        24.85 %      27.83 %          25.74 %
Money market accounts                          16.00 %      17.68 %          15.46 %
Certificates of deposit $100,000 and over      15.48 %      14.81 %          17.21 %
Other time deposits                             4.91 %       5.08 %           5.15 %
Other savings deposits                          7.37 %       6.26 %           6.77 %

Total Deposits                                100.00 %     100.00 %         100.00 %

Deposits increased 5.53% or $16,864,327 from June 30, 2013 to June 30, 2014 and increased 5.44% or $16,610,019 from December 31, 2013 to June 30, 2014.

SHORT-TERM BORROWINGS

At June 30, 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 $70 million and $69 million at June 30, 2014 and December 31, 2013, respectively. There have been no borrowings under this arrangement.

Comparison of Three Months Ended June 30, 2014 to Three Months Ended June 30, 2013

Net income increased $65,853 or 6.31% to $1,109,927, or basic and diluted earnings per share of $.25 and $.24, respectively, for the three months ended June 30, 2014, from $1,044,074, or basic and diluted earnings per share of $.23 and $.23, respectively, for the three months ended June 30, 2013. Our return on average assets and average equity for the three months ended June 30, 2014 were 1.27% and 12.33%, respectively, compared with 1.27% and 11.98%, respectively, for the three months ended June 30, 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 $61,653 or 1.96% to $3,212,732 for the three months ended June 30, 2014 from $3,151,079 for the three months ended June 30, 2013. The increase in net interest income was primarily due to an increase in interest and dividends from investment securities. A portion of our excess cash was reinvested to improve on the existing Federal Reserve yield of .25%. Average investments increased $30,339,025 or 49.96% for the three months ended June 30, 2014 from the three months ended June 30, 2013, with a yield of 2.15%. We saw a small improvement in loan demand demonstrated by the increase in average loans by $8,044,928 to $232,749,636 for the three months ended June 30, 2014 from $224,704,708 for the three months ended June 30, 2013. The yield on average loans increased from 4.73% for the three months ended June 30, 2013 to 4.85% for the three months ended June 30, 2014. The increase in average investment securities and average loans, contributed to the increase in total average interest bearing assets of $19,945,513 or 6.15% to $344,150,428 for the three months ended June 30, 2014. Our average interest bearing deposits increased $6,012,357 or 2.87% to $215,852,575 for the three months ended June 30, 2014 from $209,840,218 for the three months ended June 30, 2013. This increase was primarily due to larger balances in existing customer accounts as well as the opening of new accounts. The yield on these deposits remained relatively unchanged from .20% for the three months ended June 30, 2013 to .19% for the three months ended June 30, 2014.

Allowance for Loan Losses

The allowance for loan losses represents our estimate of probable losses inherent in our 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. To remain GAAP compliant the methodology employed for this analysis has been modified over the years to reflect the economic environment. 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.

Loans are reviewed for impairment on a quarterly basis if any of the following criteria are met:

1) Any loan on non-accrual

2) Any loan that is a troubled debt restructuring

3) Any loan over 60 days past due

4) Any loan rated sub-standard, doubtful, or loss

5) Excessive principal extensions are executed

. . .

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