Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

☒  Q uarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2017

 

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number: 0-27702

 

Bank of South Carolina Corporation

(Exact name of registrant issuer as specified in its charter)

 

South Carolina   57-1021355
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification Number)

 

256 Meeting Street, Charleston, SC 29401

(Address of principal executive offices)

 

(843) 724-1500

(Registrant’s telephone number)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒  No

Indicate by check mark whether the registrant has submitted electronically and posted on its Company Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒  No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer            ☐   Accelerated filer
Non-accelerated filer              ☐   Smaller reporting company
(Do not check if a smaller reporting company)   Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of November 9, 2017 there were 4,984,479 Common Shares outstanding.

 

 

 

 

 

 

Bank of South Carolina Corporation and Subsidiary

Table of Contents

 

  Page
Part I. Financial Information  
   
Item 1. Financial Statements (Unaudited)  
   
Consolidated Balance Sheets – September 30, 2017 and December 31, 2016 3
Consolidated Statements of Income - Three months ended September 30, 2017 and 2016 4
Consolidated Statements of Income - Nine months ended September 30, 2017 and 2016 5
Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2017 and 2016 6
Consolidated Statements of Shareholders’ Equity- Nine months ended September 30, 2017 and 2016 7
Consolidated Statements of Cash Flows - Nine months ended September 30, 2017 and 2016 8
Notes to Consolidated Financial Statements 9
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28
  Off-Balance Sheet Arrangements 33
  Liquidity 34
  Capital Resources 34
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
     
Item 4. Controls and Procedures 35
     
Part II. Other Information  
     
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosure 36
Item 5. Other Information 36
Item 6. Exhibits 36
     
Signatures 38
Certifications 39

 

2  

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

September 30,
2017

   

(Audited)

December 31,

2016

 
ASSETS                
Cash and due from banks   $ 8,009,824     $ 8,141,030  
Interest-bearing deposits at the Federal Reserve Bank     22,159,373       18,101,300  
Investment securities available for sale     126,496,884       119,978,944  
Mortgage loans to be sold     3,117,830       4,386,210  
Loans     269,132,631       260,576,115  
Less: Allowance for loan losses     (3,886,959 )     (3,851,617 )
Net loans     265,245,672       256,724,498  
Premises, equipment and leasehold improvements, net     2,252,832       2,296,624  
Other real estate owned     566,632       521,943  
Accrued interest receivable     1,328,542       1,614,002  
Other assets     2,296,720       2,185,085  
Total assets   $ 431,474,309     $ 413,949,636  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Liabilities                
Deposits:                
Non-interest-bearing demand   $ 124,661,171     $ 126,034,478  
Interest-bearing demand     99,066,299       96,260,589  
Money market accounts     84,417,700       77,307,662  
Time deposits over $250,000     17,695,869       17,822,136  
Other time deposits     25,993,812       26,019,121  
Other savings deposits     34,712,187       29,078,865  
Total deposits     386,547,038       372,522,851  
Accrued interest payable and other liabilities     1,217,803       813,811  
Total liabilities     387,764,841       373,336,662  
                 
Shareholders’ equity                
Common stock-no par, 12,000,000 shares authorized; 5,225,875 and 5,197,535 shares issued at September 30, 2017 and December 31, 2016, respectively; 4,984,479 and 4,956,139 shares outstanding at September 30, 2017 and December 31, 2016, respectively            
Additional paid in capital     37,172,768       36,824,022  
Retained earnings     8,558,442       6,643,476  
Treasury stock: 241,396 shares at September 30, 2017 and December 31, 2016     (2,247,415 )     (2,247,415 )
Accumulated other comprehensive income (loss), net of income taxes     225,673       (607,109 )
Total shareholders’ equity     43,709,468       40,612,974  
Total liabilities and shareholders’ equity   $ 431,474,309     $ 413,949,636  

 

See accompanying notes to consolidated financial statements.

 

3  

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

    THREE MONTHS ENDED
SEPTEMBER 30,
 
    2017     2016  
Interest and fee income                
Loans, including fees   $ 3,364,293     $ 3,360,151  
Taxable securities     409,055       379,039  
Tax-exempt securities     251,172       255,231  
Other     92,512       35,722  
Total interest and fee income     4,117,032       4,030,143  
                 
Interest expense                
Deposits     110,625       96,467  
Short-term borrowings            
Total interest expense     110,625       96,467  
                 
Net interest income     4,006,407       3,933,676  
Provision for loan losses     20,000       210,000  
Net interest income after provision for loan losses     3,986,407       3,723,676  
                 
Other income                
Service charges and fees     278,204       265,769  
Mortgage banking income     149,379       409,674  
Gains on sales of securities     45,820        
Other non-interest income     8,479       11,143  
Total other income     481,882       686,586  
                 
Other expense                
Salaries and employee benefits     1,487,207       1,485,621  
Net occupancy expense     399,534       377,075  
Other operating expenses     597,797       721,572  
Net other real estate owned expenses            
Total other expenses     2,484,538       2,584,268  
                 
Income before income tax expense     1,983,751       1,825,994  
Income tax expense     543,098       399,656  
                 
Net income   $ 1,440,653     $ 1,426,338  
                 
Weighted average shares outstanding                
Basic     4,978,515       4,931,185  
Diluted     5,067,561       5,054,723  
                 
Basic income per common share   $ 0.29     $ 0.29  
Diluted income per common share   $ 0.28     $ 0.28  

 

See accompanying notes to consolidated financial statements.

 

4  

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

    NINE MONTHS ENDED
SEPTEMBER 30,
 
    2017     2016  
Interest and fee income                
Loans, including fees   $ 9,727,886     $ 9,603,030  
Taxable securities     1,147,811       992,658  
Tax-exempt securities     778,259       734,716  
Other     187,782       102,472  
Total interest and fee income     11,841,738       11,432,876  
                 
Interest expense                
Deposits     313,929       283,588  
Short-term borrowings           7  
Total interest expense     313,929       283,595  
                 
Net interest income     11,527,809       11,149,281  
Provision for loan losses     52,500       395,000  
Net interest income after provision for loan losses     11,475,309       10,754,281  
                 
Other income                
Service charges and fees     835,643       792,036  
Mortgage banking income     825,003       1,058,438  
Gains on sales of securities     45,820       348,327  
Other non-interest income     23,769       23,385  
Total other income     1,730,235       2,222,186  
                 
Other expense                
Salaries and employee benefits     4,457,778       4,481,067  
Net occupancy expense     1,157,442       1,133,784  
Other operating expenses     1,884,928       1,928,994  
Net other real estate owned expenses     46,143       13,450  
Total other expenses     7,546,291       7,557,295  
                 
Income before income tax expense     5,659,253       5,419,172  
Income tax expense     1,606,127       1,484,989  
                 
Net income   $ 4,053,126     $ 3,934,183  
                 
Weighted average shares outstanding                
Basic     4,969,617       4,929,977  
Diluted     5,058,958       5,058,837  
                 
Basic income per common share   $ 0.82     $ 0.80  
Diluted income per common share   $ 0.80     $ 0.78  

 

See accompanying notes to consolidated financial statements.

 

5  

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

    THREE MONTHS ENDED
SEPTEMBER 30,
 
    2017     2016  
Net income   $ 1,440,653     $ 1,426,338  
Other comprehensive income:                
Unrealized gain on securities arising during the period     (339,956 )      
Reclassification adjustment for securities gains realized in net income     45,820       (387,289 )
Other comprehensive income, before tax     (294,136 )     (387,289 )
Income tax effect related to items of other comprehensive income     100,006       104,687  
Other comprehensive income, after tax     (194,130 )     (282,602 )
Total comprehensive income   $ 1,246,523     $ 1,143,736  

 

    NINE MONTHS ENDED
SEPTEMBER 30,
 
    2017     2016  
Net income   $ 4,053,126     $ 3,934,183  
Other comprehensive income:                
Unrealized gain on securities arising during the period     1,242,599        
Reclassification adjustment for securities gains realized in net income     45,820       944,314  
Other comprehensive income, before tax     1,288,419       944,314  
Income tax effect related to items of other comprehensive income     (455,637 )     (388,005 )
Other comprehensive income, after tax     832,782       556,309  
Total comprehensive income   $ 4,885,908     $ 4,490,49 2  

 

See accompanying notes to consolidated financial statements.

 

6  

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY  

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (UNAUDITED)  

                               
   

ADDITIONAL

PAID IN

CAPITAL

   

RETAINED

EARNINGS 

   

TREASURY

STOCK

   

ACCUMULATED

OTHER

COMPREHENSIVE

INCOME (LOSS)

   

TOTAL

 
December 31, 2015   $ 36,341,744     $ 4,064,834     $ (2,247,415 )   $ 992,549     $ 39,151,712  
                                         
Net income           3,934,183                   3,934,183  
Other comprehensive income                       556,309       556,309  
Exercise of stock options     333,704                         333,704  
Stock-based compensation expense     58,112                         58,112  
Cash dividends ($0.40 per common share)           (1,974,529 )                 (1,974,529 )
September 30, 2016   $ 36,733,560     $ 6,024,488     $ (2,247,415 )   $ 1,548,858     $ 42,059,491  
                                         
December 31, 2016   $ 36,824,022     $ 6,643,476     $ (2,247,415 )   $ (607,109 )   $ 40,612,974  
                                         
Net income           4,053,126                   4,053,126  
Other comprehensive income                       832,782       832,782  
Exercise of stock options     294,342                         294,342  
Stock-based compensation expense     54,404                         54,404  
Cash dividends ($0.43 per common share)           (2,138,160 )                 (2,138,160 )
September 30, 2017   $ 37,172,768     $ 8,558,442     $ (2,247,415 )   $ 225,673     $ 43,709,468  

 

See accompanying notes to consolidated financial statements.

 

7  

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

       
    NINE MONTHS ENDED
SEPTEMBER 30,
 
    2017     2016  
Cash flows from operating activities:                
Net income   $ 4,053,126     $ 3,934,183  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation     142,859       140,276  
Gain on sale of securities     (45,820 )     (446,041 )
Loss on sale of other real estate           13,450  
Valuation and other adjustments to other real estate     46,143        
Provision for loan losses     52,500       395,000  
Stock-based compensation expense     54,404       58,112  
Deferred income taxes     (567,272 )      
Net amortization of unearned discounts on investment securities     293,080       223,272  
Origination of mortgage loans held for sale     (43,420,076 )     (57,759,783 )
Proceeds from sale of mortgage loans held for sale     44,688,456       58,617,055  
Decrease  (increase) in accrued interest receivable and other assets     285,460       (721,562 )
Increase in accrued interest payable and other liabilities     350,649       744,530  
Net cash provided by operating activities     5,933,509       5,198,492  
                 
Cash flows from investing activities:                
Proceeds from calls and maturities of investment securities available for sale     4,380,870       4,728,518  
Proceeds from sale of available for sale securities     20,231,265       26,113,400  
Purchase of investment securities available for sale     (30,088,916 )     (24,759,858 )
Proceeds from sale of other real estate           85,000  
Net increase in loans     (8,664,506 )     (23,828,667 )
Purchase of premises, equipment and leasehold improvements, net     (99,067 )     (69,303 )
Net cash used in investing activities     (14,240,354 )     (17,730,910 )
                 
Cash flows from financing activities:                
Net increase in deposit accounts     14,024,187       6,687,942  
Dividends paid     (2,084,817 )     (1,920,866 )
Stock options exercised     294,342       333,704  
Net cash provided by financing activities     12,233,712       5,100,780  
Net increase (decrease) in cash and cash equivalents     3,926,867       (7,431,638 )
Cash and cash equivalents at beginning of period     26,242,330       29,194,786  
                 
Cash and cash equivalents at end of period   $ 30,169,197     $ 21,763,148  
                 
Supplemental disclosure of cash flow data:                
Cash paid during the year for:                
Interest   $ 365,558     $ 308,857  
Income taxes   $ 2,055,063     $ 1,669,840  
Supplemental disclosure for non-cash investing and financing activity:                
Change in unrealized gain on securities available for sale, net of income taxes   $ 832,782     $ 556,309  
Change in dividends payable   $ 53,343     $ 53,663  
Transfer of loans to other real estate owned   $ 90,832     $  

 

See accompanying notes to consolidated financial statements.

 

8  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1: Nature of Business and Basis of Presentation

 

Organization

 

The Bank of South Carolina (the “Bank”) was organized on October 22, 1986 and opened for business as a state-chartered financial institution on February 26, 1987, in Charleston, South Carolina. The Bank was reorganized into a wholly-owned subsidiary of Bank of South Carolina Corporation (the “Company”), effective April 17, 1995. At the time of the reorganization, each outstanding share of the Bank was exchanged for two shares of Bank of South Carolina Corporation Stock.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. During consolidation, all significant intercompany balances and transactions have been eliminated.

 

References to “we”, “us”, “our”, “the Bank”, or “the Company” refer to the parent and its subsidiary that are consolidated for financial purposes.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for the interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 3, 2017. In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

 

Accounting Estimates and Assumptions

 

The preparation of the consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ significantly from these estimates and assumptions. Material estimates generally susceptible to significant change are related to the determination of the allowance for loan losses, impaired loans, other real estate owned, deferred tax assets, the fair value of financial instruments and other-than-temporary impairment of investment securities.

 

Reclassification

 

Certain amounts in the prior years’ financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications had no effect on shareholders’ equity or the net income as previously reported.

 

Income per share

 

Basic income per share represents income available to shareholders divided by the weighted-average number of common shares outstanding during the period. Dilutive income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. The only potential common share equivalents are those related to stock options. Stock options that are anti-dilutive are excluded from the calculation of diluted net income per share. The dilutive effect of options outstanding under our stock compensation plan is reflected in diluted earnings per share by the application of the treasury stock method. Retroactive recognition has been given for the effects of all stock dividends.

 

9  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

Subsequent Events

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. We have reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.

 

Recent Accounting Pronouncements

 

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure of financial information by the Company.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, Topic 606. The core principle of the new standard is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. This guidance also includes expanded disclosure requirements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. In August 2015, the FASB deferred the effective date of the amendments. As a result of the deferral, the guidance will be effective for the Company for reporting periods beginning after December 15, 2017. We will apply this guidance using a modified retrospective approach. Because the amendment does not apply to revenue associated with financial instruments, such as loans and investment securities available for sale, we do not expect this amendment to have a material effect on our consolidated financial statements. We are still evaluating the effects of the amendment regarding its applicability and related impact on credit card fees and deposit service charges.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10); Recognition and Measurement of Financial Instruments and Financial Liabilities. This update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect this amendment to have a material effect on its financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which revises certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the effect that implementation of the new standard will have on our results of operations and cash flows but expect the effect on the financial position to be considerable due to the fact that substantially all operating lease commitments will be recognized as right of use assets and lease liabilities based on the present value of unpaid lease payments as of the date of adoption.

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017 . The Company does not expect this amendment to have a material effect on its financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share – Based Payment Accounting, to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments became effective for the Company on January 1, 2017 and this amendment did not have a material effect on its financial statements.

 

10  

 

 

BANK OF SOUTH CAROLINA CORPORATION  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow- Scope Improvements and Practical Expedients , to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers . These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will continue to evaluate the impact of this ASU and does not expect these amendments to have a material effect on its financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business , which provided guidance to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective date. The Company does not expect this amendment to have a material effect on its financial statements.

 

In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets , to clarify the scope of established guidance on nonfinancial asset derecognition, issued as part of ASU 2014-09, Revenue from Contracts with Customers , as well as accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. This amendment is effective for annual periods beginning after December 15, 2017. The Company does not expect this amendment to have a material effect on its financial statements.

 

11  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities, which shortens the amortization period for the premium to the earliest call date. The amendment will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect this amendment to have a material effect on its financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on our financial position, results of operations or cash flows.

 

Note 2: Investment Securities

 

The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale are summarized as follows:

 

    SEPTEMBER 30, 2017  
   

AMORTIZED

COST

   

GROSS

UNREALIZED

GAINS

   

GROSS

UNREALIZED

LOSSES

   

FAIR  

VALUE 

 
                         
U.S. Treasury Notes   $ 26,112,531     $ 24,169     $ (39,199 )   $ 26,097,501  
Government-Sponsored Enterprises     59,497,890       179,426       (307,911 )     59,369,405  
Municipal Securities     40,561,715       765,902       (297,639 )     41,029,978  
                                 
Total   $ 126,172,136     $ 969,497     $ (644,749 )   $ 126,496,884  

    DECEMBER 31, 2016  
   

AMORTIZED

COST

   

GROSS

UNREALIZED  

GAINS  

   

GROSS

UNREALIZED

LOSSES  

   


FAIR

VALUE

 
                         
U.S. Treasury Notes   $ 24,148,295     $ 41,153     $ (250,385 )   $ 23,939,063  
Government-Sponsored Enterprises     51,737,930       129,482       (833,321 )     51,034,091  
Municipal Securities     45,056,390       765,813       (816,413 )     45,005,790  
                                 
Total   $ 120,942,615     $ 936,448     $ (1,900,119 )   $ 119,978,944  

 

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2017 and December 31, 2016, by contractual maturity are as follows:

 

    SEPTEMBER 30, 2017     DECEMBER 31, 2016  
 

AMORTIZED
COST

   

FAIR
VALUE

   

AMORTIZED
COST

   

FAIR
VALUE

 
                         
Due in one year or less   $ 8,561,255     $ 8,586,020     $ 3,343,347     $ 3,350,205  
Due in one year to five years     70,669,406       71,024,994       82,848,411       82,682,901  
Due in five years to ten years     43,799,734       43,853,008       29,662,030       29,169,228  
Due in ten years and over     3,141,741       3,032,862       5,088,827       4,776,610  
                                 
Total   $ 126,172,136     $ 126,496,884     $ 120,942,615     $ 119,978,944  

 

Investment securities pledged to secure public deposits and for other purposes required or permitted by law at September 30, 2017 and December 31, 2016, had a fair value of $54.2 million and $47.6 million, respectively.

 

12  

 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2017 and December 31, 2016. We believe that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and not as a result of credit deterioration. We do not intend to sell, and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

 

Less Than 12 Months     12 Months or Longer     Total  
                Gross                 Gross                 Gross  
                Unrealized                 Unrealized                 Unrealized  
    #     Fair Value     Loss     #     Fair Value     Loss     #     Fair Value     Loss  

September 30, 2017

Available for sale

                                                                       
U.S. Treasury notes     3     $ 15,146,094     $ (39,199 )         $     $       3     $ 15,146,094     $ (39,199 )
Government-sponsored enterprises     4       17,620,585       (129,779 )     2       5,347,950       (178,132 )     6       22,968,535       (307,911 )
Municipal securities     11       3,541,927       (50,316 )     20       8,246,598       (247,323 )     31       11,788,525       (297,639 )
Total     18     $ 36,308,606     $ (219,294 )     22     $ 13,594,548     $ (425,455 )     40     $ 49,903,154     $ (644,749 )
                                                                         

December 31, 2016

Available for sale

                                                                       
U.S. Treasury notes     4     $ 17,968,594     $ (250,385 )         $     $       4     $ 17,968,594     $ (250,385 )
Government-sponsored enterprises     8       30,136,720       (833,321 )                       8       30,136,720       (833,321 )
Municipal securities     54       22,606,430       (816,413 )                       54       22,606,430       (816,413 )
Total     66     $ 70,711,744     $ (1,900,119 )         $     $       66     $ 70,711,744     $ (1,900,119 )

 

We received proceeds and gross realized gains and losses from sales of securities available for sale as follows:

 

    For the Three Months Ended
September 30,
 
    2017     2016  
Gross proceeds   $ 20,231,265     $ 4,902,286  
Gross realized gains     154,692       97,714  
Gross realized losses     108,872        

 

    For the Nine Months Ended
September 30,
 
    2017     2016  
Gross proceeds   $ 20,231,265     $ 25,667,359  
Gross realized gains     154,692       446,041  
Gross realized losses     108,872        

 

For the three months ended September 30, 2017 and 2016, the tax provision related to these gains was $15,578 and $36,154, respectively. For the nine months ended September 30, 2017 and 2016, the tax provision related to these gains was $15,578 and $165,035, respectively.

 

13  

 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3: Loans and Allowance for Loan Losses

 

Major classifications of loans (net of deferred loan fees of $149,640 at September 30, 2017 and $136,446 at December 31, 2016) are as follows:

 

    September 30,     December 31,  
    2017     2016  
Commercial loans   $ 53,348,364     $ 52,262,209  
Commercial real estate:                
Construction     1,842,668       1,208,901  
Other     134,779,206       122,968,126  
Consumer:                
Real Estate     74,254,387       77,131,816  
Other     4,908,006       7,005,063  
      269,132,631       260,576,115  
Allowance for loan losses     (3,886,959 )     (3,851,617 )
Loans, net   $ 265,245,672     $ 256,724,498  

 

We had $101.1 million and $101.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank Discount Window at September 30, 2017 and at December 31, 2016, respectively.

 

Our portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Our internal credit risk grading system is based on experience with similarly graded loans, industry best practices, and regulatory guidance. Our portfolio is graded in its entirety.

 

Our internally assigned grades pursuant to the Board-approved lending policy are as follows:

 

Excellent (1) The borrowing entity has no overdrafts, more than adequate cash flow, unquestionable strength, strong earnings and capital, where applicable.

 

Good (2) The borrowing entity has dependable cash flow, better than average financial condition, good capital and usually no overdrafts.

 

Satisfactory (3) The borrowing entity has adequate cash flow, satisfactory financial condition, and explainable overdrafts (if any).

 

Watch (4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical earnings, weak capital, loan to/from stockholders, and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and growth.

 

OAEM (5) The borrowing entity has marginal cash flow, occasional past dues, and frequent and unexpected working capital needs.

 

Substandard (6) The borrowing entity has a cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is a possiblility. The borrowing entity has declining sales, rising costs, and may need to look for secondary source of repayment.

 

Doubtful (7) The borrowing entity has negative cash flow. Survival of the business is at risk, full repayment is unlikely, and there are frequent and unexplained overdrafts. The borrowing entity shows declining trends and no operating profits.

 

14  

 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Loss (8) The borrowing entity has negative cash flow with no alternatives. Survival of the business is unlikely.

 

The following tables illustrate credit quality by class and internally assigned grades as of September 30, 2017 and December 31, 2016. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

September 30, 2017  
      Commercial    

Commercial

Real Estate

Construction

   

Commercial

Real Estate

Other

   


Consumer

Real Estate

    Consumer Other     Total  
                                       
Pass     $ 49,209,010     $ 1,453,646     $ 129,338,835     $ 73,172,945     $ 4,665,789     $ 257,840,225  
Watch       2,260,670       389,022       2,942,987       587,005       208,110       6,387,794  
OAEM       49,164             291,128                   340,292  
Sub-Standard       1,829,520             2,206,256       494,437       34,107       4,564,320  
Doubtful                                      
Loss                                      
                                                   
Total     $ 53,348,364     $ 1,842,668     $ 134,779,206     $ 74,254,387     $ 4,908,006     $ 269,132,631  

 

December 31, 2016  
      Commercial    

Commercial

Real Estate

Construction

   

Commercial

Real Estate

Other

   


Consumer
Real Estate

    Consumer Other     Total  
                                       
Pass     $ 48,289,944     $ 798,884     $ 116,490,396     $ 74,115,426     $ 6,728,367     $ 246,423,017  
Watch       1,004,957       410,017       2,625,079       899,306       147,992       5,087,351  
OAEM       1,666,048             995,549       630,957       28,939       3,321,493  
Sub-Standard       1,301,260             2,857,102       1,486,127       99,765       5,744,254  
Doubtful                                      
Loss                                      
                                                   
Total     $ 52,262,209     $ 1,208,901     $ 122,968,126     $ 77,131,816     $ 7,005,063     $ 260,576,115  

 

The following tables include an aging analysis of the recorded investment in loans segregated by class:

 

September 30, 2017
    30-59 Days Past Due     60-89 Days Past Due     Greater Than 90 Days     Total Past Due     Current     Total     Recorded Investment > 90 Days and Accruing  
Commercial   $ 78,271     $ 150,000     $ 13,902     $ 242,173     $ 53,106,191     $ 53,348,364     $ 13,902  
Commercial Real Estate - Construction                             1,842,668       1,842,668        
Commercial Real Estate - Other     675,000             1,415,738       2,090,738       132,688,468       134,779,206        
Consumer Real Estate     153,112       564,877             717,989       73,536,398       74,254,387        
Consumer Other     11,547                   11,547       4,896,459       4,908,006        
Total   $ 917,930     $ 714,877     $ 1,429,640     $ 3,062,447     $ 266,070,184     $ 269,132,631     $ 13,902  

 

15  

 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2016
    30-59 Days Past Due     60-89 Days Past Due     Greater Than 90 Days     Total Past Due     Current     Total     Recorded Investment > 90 Days and Accruing  
Commercial   $ 438,159     $     $     $ 438,159     $ 51,824,050     $ 52,262,209     $  
Commercial Real Estate - Construction                             1,208,901       1,208,901        
Commercial Real Estate - Other     6,363             1,501,153       1,507,516       121,460,610       122,968,126       89,908  
Consumer Real Estate     415,457                   415,457       76,716,359       77,131,816        
Consumer Other     56,784             33,322       90,106       6,914,957       7,005,063       33,322  
Total   $ 916,763     $     $ 1,534,475     $ 2,451,238     $ 258,124,877     $ 260,576,115     $ 123,230  

 

As of September 30, 2017 and December 31, 2016, there were one and two loans over 90 days past due and still accruing, respectively.

 

The following table summarizes the balances of non-accrual loans:

 

      Loans Receivable on Non-Accrual  
      September 30,
2017
      December 31,
2016
 
Commercial   $ 46,899     $ 61,781  
Commercial Real Estate - Construction            
Commercial Real Estate - Other     1,554,368       1,678,876  
Consumer Real Estate            
Consumer Other           964  
                 
Total
  $ 1,601,267     $ 1,741,621  

 

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by class for the three and nine months ended September 30, 2017 and September 30, 2016. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.

 

Three Months Ended September 30, 2017
    Commercial     Commercial Real Estate-Construction    

Commercial

Real Estate-Other

   

Consumer

Real Estate

   

Consumer

Other

    Total  
Allowance for Loan Losses                                                
Beginning Balance   $ 1,628,672     $ 52,763     $ 1,382,919     $ 771,853     $ 91,308     $ 3,927,515  
Charge-offs                       (80,787 )     (2,489 )     (83,276 )
Recoveries                       21,000       1,720       22,720  
Provisions     403,920       (7,235 )     (209,108 )     (150,697 )     (16,880 )     20,000  
Ending Balance   $ 2,032,592     $ 45,528     $ 1,173,811     $ 561,369     $ 73,659     $ 3,886,959  

 

16  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Nine Months Ended September 30, 2017
    Commercial     Commercial Real Estate-Construction    

Commercial

Real Estate-Other

   

Consumer

Real Estate

   

Consumer

Other

    Total  
Allowance for Loan Losses                                                
Beginning Balance   $ 1,545,188     $ 51,469     $ 1,374,706     $ 726,391     $ 153,863     $ 3,851,617  
Charge-offs                       (80,786 )     (4,863 )     (85,649 )
Recoveries                       63,000       5,491       68,491  
Provisions     487,404       (5,941 )     (200,895 )     (147,236 )     (80,832 )     52,500  
Ending Balance   $ 2,032,592     $ 45,528     $ 1,173,811     $ 561,369     $ 73,659     $ 3,886,959  
                                                 

Three Months Ended September 30, 2016

    Commercial     Commercial Real Estate-Construction    

Commercial

Real Estate-Other

   

Consumer

Real Estate

   

Consumer

Other

    Total  
Allowance for Loan Losses                                                
Beginning Balance   $ 1,490,327     $ 57,374     $ 1,186,524     $ 629,773     $ 148,448     $ 3,512,446  
Charge-offs                                    
Recoveries     1,500             20,000             1,165       22,665  
Provisions     4,512       524       98,398       119,044       (12,478 )     210,000  
Ending Balance   $ 1,496,339     $ 57,898     $ 1,304,922     $ 748,817     $ 137,135     $ 3,745,111  

 

 

Nine Months Ended September 30, 2016
    Commercial     Commercial Real Estate-Construction    

Commercial

Real Estate-Other

   

Consumer

Real Estate

   

Consumer

Other

    Total  
Allowance for Loan Losses                                                
Beginning Balance   $ 896,854     $ 59,861     $ 1,345,094     $ 941,470     $ 174,548     $ 3,417,827  
Charge-offs     (33,045 )                 (82,015 )     (1,591 )     (116,651 )
Recoveries     2,784             44,000             2,151       48,935  
Provisions     629,746       (1,963 )     (84,172 )     (110,638 )     (37,973 )     395,000  
Ending Balance   $ 1,496,339     $ 57,898     $ 1,304,922     $ 748,817     $ 137,135     $ 3,745,111  

 

17  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans.

 

September 30, 2017
    Commercial     Commercial Real Estate-Construction    

Commercial

Real Estate-Other

    Consumer
Real Estate
   

Consumer

Other

    Total  
Allowance for Loan Losses                                                
Individually evaluated for impairment   $ 1,621,074     $     $ 268,347     $ 43,119     $ 34,107     $ 1,966,647  
Collectively evaluated for impairment     411,518       45,528       905,464       518,250       39,552       1,920,312  
Total Allowance for Losses   $ 2,032,592     $ 45,528     $ 1,173,811     $ 561,369     $ 73,659     $ 3,886,959  
Loans Receivable                                                
Individually evaluated for impairment   $ 1,829,520     $     $ 2,224,537     $ 494,437     $ 34,107     $ 4,582,601  
Collectively evaluated for impairment     51,518,844       1,842,668       132,554,669     73,759,950     4,873,899       264,550,030  

Total Loans Receivable

  $ 53,348,364     $ 1,842,668     $ 134,779,206     $ 74,254,387     $ 4,908,006     $ 269,132,631  

 

December 31, 2016
    Commercial     Commercial Real Estate-Construction    

Commercial

Real Estate-Other

    Consumer
Real Estate
   

Consumer

Other

    Total  
Allowance for Loan Losses                                                
Individually evaluated for impairment   $ 1,051,219     $     $ 324,587     $ 43,119     $ 89,047     $ 1,507,972  
Collectively evaluated for impairment     493,969       51,469       1,050,119       683,272       64,816       2,343,645  
Total Allowance for Losses   $ 1,545,188     $ 51,469     $ 1,374,706     $ 726,391     $ 153,863     $ 3,851,617  
Loans Receivable                                                
Individually evaluated for impairment   $ 1,301,259     $     $ 3,225,351     $ 1,286,127     $ 89,047     $ 5,901,784  
Collectively evaluated for impairment     50,960,950       1,208,901       119,742,775       75,845,689       6,916,016       254,674,331  
Total Loans Receivable   $ 52,262,209     $ 1,208,901     $ 122,968,126     $ 77,131,816     $ 7,005,063     $ 260,576,115  

 

18  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2017 and December 31, 2016, loans individually evaluated for impairment and the corresponding allowance for loan losses are presented in the following table:

 

    September 30, 2017     December 31, 2016  
    Unpaid Principal Balance     Recorded Investment     Related Allowance     Unpaid Principal Balance     Recorded Investment     Related Allowance  
With no related allowance recorded:                                                
Commercial   $ 161,880     $ 161,880     $     $ 250,040     $ 250,040     $  
Commercial Real Estate-Construction                                    
Commercial Real Estate-Other     1,283,137       1,283,137             2,174,770       2,174,770        
Consumer Real Estate     451,318       451,318             1,243,008       1,243,008        
Consumer Other                                    
    $ 1,896,335     $ 1,896,335     $     $ 3,667,818     $ 3,667,818     $  
                                                 
With an allowance recorded:                                                
Commercial   $ 1,667,640     $ 1,667,640     $ 1,621,074     $ 1,051,219     $ 1,051,219     $ 1,051,219  
Commercial Real Estate- Construction                                    
Commercial Real Estate-Other     941,400       941,400       268,347       1,050,581       1,050,581       324,587  
Consumer Real Estate     43,119       43,119       43,119       43,119       43,119       43,119  
Consumer Other     34,107       34,107       34,107       89,047       89,047       89,047  
    $ 2,686,266     $ 2,686,266     $ 1,966,647     $ 2,233,966     $ 2,233,966     $ 1,507,972  
                                                 
Total                                                
Commercial   $ 1,829,520     $ 1,829,520     $ 1,621,074     $ 1,301,259     $ 1,301,259     $ 1,051,219  
Commercial Real Estate-Construction                                    
Commercial Real Estate-Other     2,224,537       2,224,537       268,347       3,225,351       3,225,351       324,587  
Consumer Real Estate     494,437       494,437       43,119       1,286,127       1,286,127       43,119  
Consumer Other     34,107       34,107       34,107       89,047       89,047       89,047  
    $ 4,582,601     $ 4,582,601     $ 1,966,647     $ 5,901,784     $ 5,901,784     $ 1,507,972  

 

19  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present average investment in impaired loans and the related interest income recognized on those impaired loans, by class, for the periods indicated.

 

    For the Three Months Ended
September 30,
 
    2017     2016  
    Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized  
With no related allowance recorded:                                
Commercial   $ 165,274     $ 2,429     $ 380,933     $ 4,674  
Commercial Real Estate-Construction                        
Commercial Real Estate-Other     1,276,906       9,999       2,253,994       19,738  
Consumer Real Estate     451,318       5,972       1,243,008       16,205  
Consumer Other                        
    $ 1,893,498     $ 18,400     $ 3,877,935     $ 40,617  
                                 
With an allowance recorded:                                
Commercial   $ 1,685,930     $ 26,484     $ 1,085,201     $ 19,406  
Commercial Real Estate-Construction                        
Commercial Real Estate-Other     933,243       2,792       1,068,622       5,330  
Consumer Real Estate     43,119       462       71,963       770  
Consumer  Other     34,579       463       95,367       473  
    $ 2,696,871     $ 30,201     $ 2,321,153     $ 25,979  
                                 
Total                                
Commercial   $ 1,851,204     $ 28,913     $ 1,466,134     $ 24,080  
Commercial Real Estate-Construction                        
Commercial Real Estate-Other     2,210,149       12,791       3,322,617       25,068  
Consumer Real Estate     494,437       6,434       1,314,971       16,975  
Consumer  Other     34,579       463       95,367       473  
    $ 4,590,369     $ 48,601     $ 6,199,088     $ 66,596  

 

    For the Nine Months Ended
September 30,
 
    2017     2016  
    Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized  
With no related allowance recorded:                                
Commercial   $ 173,964     $ 7,416     $ 392,826     $ 15,393  
Commercial Real Estate-Construction                        
Commercial Real Estate-Other     1,275,402       23,084       2,263,927       69,962  
Consumer Real Estate     451,025       16,938       1,242,373       43,220  
Consumer Other                        
    $ 1,900,391     $ 47,438     $ 3,899,126     $ 128,575  
                                 
With an allowance recorded:                                
Commercial   $ 1,711,259     $ 76,544     $ 1,095,411     $ 49,770  
Commercial Real Estate-Construction                        
Commercial Real Estate-Other     930,420       5,367       1,070,048       12,008  
Consumer Real Estate     43,119       1,296       72,025       1,776  
Consumer  Other     36,056       1,419       99,864       3,777  
    $ 2,720,854     $ 84,626     $ 2,337,348     $ 67,331  
                                 
Total                                
Commercial   $ 1,885,223     $ 83,960     $ 1,488,237     $ 65,163  
Commercial Real Estate-Construction                        
Commercial Real Estate-Other     2,205,822       28,451       3,333,976       81,970  
Consumer Real Estate     494,144       18,234       1,314,398       44,996  
Consumer  Other     36,056       1,419       99,864       3,777  
    $ 4,621,245     $ 132,064     $ 6,236,474     $ 195,906  

 

20  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Restructured loans, also known as troubled debt restructurings (“TDR”), are loans, still accruing interest, which have been renegotiated at below-market interest rates or have been granted other concessions. As of September 30, 2017 and December 31, 2016, there were $33,300 (1 loan) and $378,392 (2 loans) in restructured loans, respectively. Our restructured loans were granted extended payment terms with no principal or rate reductions. All TDRs were performing as agreed as of September 30, 2017 and December 31, 2016, respectively. There were no additional loans identified as a TDR during the three or nine months ended September 30, 2017 or 2016. No TDRs defaulted during the three or nine months ended September 30, 2017 and 2016, which were modified within the previous twelve months.

 

Note 4: Fair Value of Financial Instruments

Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or the most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would use in pricing an asset or liability.

 

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

 

Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

 

Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

 

Fair value estimates are made at a specific point of time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale our entire holdings of a particular financial instrument. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value also would affect significantly the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

 

Investment Securities Available for Sale

 

Investment securities are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

21  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Derivative Instruments

 

Derivative instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on the change in the value of the underlying loan between the commitment date and the end of the period. We classify these instruments as Level 3. The fair value of these commitments was not significant at September 30, 2017 or December 31, 2016.

 

We have no embedded derivative instruments requiring separate accounting treatment. We have freestanding derivative instruments consisting of fixed rate conforming loan commitments as interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on the short term fair value of the mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of September 30, 2017 and December 31, 2016.

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016 are as follows:

 

September 30, 2017
    Quoted Market Price in active markets
(Level 1)
    Significant Other Observable Inputs
(Level 2)
    Significant Unobservable Inputs
(Level 3)
    Total  
U.S. Treasury Notes   $ 26,097,501     $     $     $ 26,097,501  
Government Sponsored Enterprises           59,369,405             59,369,405  
Municipal Securities           29,120,850       11,909,128       41,029,978  
Total   $ 26,097,501     $ 88,490,255     $ 11,909,128     $ 126,496,884  

 

December 31, 2016
    Quoted Market Price in active markets
(Level 1)
    Significant Other Observable Inputs
(Level 2)
    Significant Unobservable Inputs
(Level 3)
    Total  
U.S. Treasury Notes   $ 23,939,063     $     $     $ 23,939,063  
Government Sponsored Enterprises           51,034,091             51,034,091  
Municipal Securities           31,027,933       13,977,857       45,005,790  
Total   $ 23,939,063     $ 82,062,024     $ 13,977,857     $ 119,978,944  

 

There were no liabilities recorded at fair value on a recurring basis as of September 30, 2017 or December 31, 2016.

 

22  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017 and 2016:

 

    Three Months Ended
September 30,
 
    2017     2016  
Beginning balance   $ 12,488,995     $ 7,704,814  
Total gains or (losses) (realized/unrealized)                
 Included in earnings            
 Included in other comprehensive income     13,852       (27,965 )
 Purchases, issuances and settlements, net of maturities     (593,719 )     3,717,482  
 Transfers in and/or out of Level 3            
Ending balance   $ 11,909,128     $ 11,394,331  

 

 

    Nine Months Ended
September 30,
 
    2017     2016  
Beginning balance   $ 13,977,857     $ 5,217,678  
Total gains or (losses) (realized/unrealized)                
 Included in earnings            
 Included in other comprehensive income     254,990       5,171  
 Purchases, issuances and settlements, net of maturities     (2,323,719 )     6,171,482  
 Transfers in and/or out of Level 3            
Ending balance   $ 11,909,128     $ 11,394,331  

 

There were no transfers between fair value levels during the three or nine months ended September 30, 2017 or September 30, 2016.

 

The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

 

Other Real Estate Owned (“OREO”)

 

Loans secured by real estate are adjusted to the lower of the recorded investment in the loan or the fair value of the real estate upon transfer to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, or our estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraisal, we record the asset as nonrecurring Level 2. When an appraised value is not available or we determine the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the asset as nonrecurring Level 3.

 

Impaired Loans

 

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, we review the most recent appraisal and if it is over 12 to 18 months old we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired.

 

23  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

However, as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These valuations are reviewed and updated on a quarterly basis.

 

In accordance with ASC 820, Fair Value Measurement , impaired loans, where an allowance is established based on the fair value of collateral, require classification in the fair value hierarchy. At September 30, 2017 and December 31, 2016, substantially all of the impaired loans were evaluated based on the fair value of the collateral. These impaired loans are classified as Level 3. Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value.

 

Loans Held for Sale

 

Loans held for sale include mortgage loans and are carried at the lower of cost or market value. The fair values of mortgage loans held for sale are based on current market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates fair value.

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

The following tables present information about certain assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016:

 

September 30, 2017
   

Quoted Market Price in active markets

(Level 1)

   

Significant
Other
Observable
Inputs

(Level 2)

   

Significant Unobservable Inputs

(Level 3)

   

Total

 
Impaired loans   $     $     $ 2,407,508     $ 2,407,508  
Other real estate owned                 566,632       566,632  
Loans held for sale           3,117,830             3,117,830  
Total   $     $ 3,117,830     $ 2,974,140     $ 6,091,970  

 

 

December 31, 2016
   

Quoted Market Price in active markets

(Level 1)

   

Significant
Other
Observable
Inputs

(Level 2)

   

Significant Unobservable Inputs

(Level 3)

    Total  
Impaired loans   $     $     $ 4,143,772     $ 4,143,772  
Other real estate owned                 521,943       521,943  
Loans held for sale           4,386,210             4,386,210  
Total   $     $ 4,386,210     $ 4,665,715     $ 9,051,925  

 

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2017 or December 31, 2016.

 

24  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2017:

 

    Inputs
   
Valuation Technique
 
Unobservable Input
  General Range of Inputs
             
 Impaired Loans   Discounted Appraisals   Collateral Discounts   0 – 35%
             
Other Real Estate Owned   Appraisal Value/ Comparison Sales/Other Estimates   Appraisals and/or Sales of Comparable Properties   Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs

 

GAAP requires disclosure of fair value information for all of our assets and liabilities that are considered financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate fair value.

 

Under the accounting standard, fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of the assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts of existing financial instruments do not represent the underlying value of those instruments on our books.

 

The following paragraphs describe the methods and assumptions we use in estimating the fair values of financial instruments that have not been previously discussed:

 

a. Cash and due from banks, interest-bearing deposits at the Federal Reserve Bank

The carrying value approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.

 

b. Loans

The carrying values of variable rate consumer and commercial loans and consumer and commercial loans with remaining maturities of three months or less, approximate fair value. The fair values of fixed rate consumer and commercial loans with maturities greater than three months are determined using a discounted cash flow analysis and assume the rate being offered on these types of loans at September 30, 2017 and December 31, 2016, approximate market.

 

For lines of credit, the carrying value approximates fair value.

 

c. Deposits

The estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is estimated by discounting contractual cash flows, using interest rates currently being offered on the deposit products.

 

d. Accrued interest receivable and payable

Since these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are deemed to be a reasonable estimate of fair value.

 

e. Loan commitments

Estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

 

25  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of September 30, 2017 and December 31, 2016.

 

Fair Value Measurements at September 30, 2017
   

 

Carrying

Amount

   

 

Estimated

Fair Value

   

 

Level 1

   

 

Level 2

   

 

Level 3

 
Financial Assets:                                        
Cash and due from banks   $ 8,009,824     $ 8,009,824     $ 8,009,824     $     $  
 Interest-bearing deposits at the Federal Reserve     22,159,373       22,159,373       22,159,373              
 Investment securities available for sale     126,496,884       126,496,884       26,097,501       88,490,255       11,909,128  
Mortgage loans to be sold     3,117,830       3,117,830             3,117,830        
 Net loans     265,245,672       264,645,984                   264,645,984  
Accrued interest receivable     1,328,542       1,328,542             1,328,542        
Financial Liabilities:                                        
Demand deposits     342,857,357       342,857,357             342,857,357        
Time deposits     43,689,681       43,577,033             43,577,033        
Accrued interest payable     76,360       76,360             76,360        

 

Fair Value Measurements at December 31, 2016
   

 

Carrying

Amount

   

 

Estimated

Fair Value

   

 

Level 1

   

 

Level 2

   

 

Level 3

 
Financial Assets:                                        
Cash and due from banks   $ 8,141,030     $ 8,141,030     $ 8,141,030     $     $  
 Interest-bearing deposits at the Federal Reserve     18,101,300       18,101,300       18,101,300              
 Investment securities available for sale     119,978,944       119,978,944       23,939,063       82,062,024       13,977,857  
Mortgage loans to be sold     4,386,210       4,386,210             4,386,210        
 Net loans     256,724,498       256,555,052                   256,555,052  
Accrued interest receivable     1,614,002       1,614,002             1,614,002        
Financial Liabilities:                                        
Demand deposits     328,681,594       328,681,594             328,681,594        
Time deposits     43,841,257       43,856,383             43,856,383        
Accrued interest payable     51,629       51,629             51,629        

 

Note 5: Income Per Common Share

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and potential common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock.

 

26  

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables are a summary of the reconciliation of average shares outstanding:

 

    Three Months Ended
September 30,
 
    2017     2016  
Net income   $ 1,440,653     $ 1,426,338  
                 
Weighted average shares outstanding - basic     4,978,515       4,931,185  
Effect of dilutive shares     89,046       123,538  
Weighted average shares outstanding - diluted     5,067,561       5,054,723  
                 
Earnings per share - basic   $ 0.29     $ 0.29  
Earnings per share - diluted   $ 0.28     $ 0.28  

 

    Nine Months Ended
September 30,
 
    2017     2016  
Net income   $ 4,053,126     $ 3,934,183  
                 
Weighted average shares outstanding - basic     4,969,617       4,929,977  
Effect of dilutive shares     89,341       128,860  
Weighted average shares outstanding - diluted     5,058,958       5,058,837  
                 
Earnings per share - basic   $ 0.82     $ 0.80  
Earnings per share - diluted   $ 0.80     $ 0.78  

 

27  

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis is designed to provide a better understanding of various factors related to the Company’s consolidated financial condition, results of operations, liquidity, and capital resources. It should be read in conjunction with the Company’s audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10k for the year ended December 31, 2016 and other financial information appearing elsewhere in this report.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report, including information included or incorporated by reference in this document, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1934. 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 our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors that are beyond our control. 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, 2016 as filed with 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 and ability to attract and retain key personnel

Technological changes

Increased cybersecurity risk, including potential business disruptions or financial losses

Ability to control expenses

Changes in compensation

Risks associated with income taxes and deferred tax assets 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 and changes in political conditions

Reputational risk

 

These risks are exacerbated by the developments over the last ten years in national and international markets. Sweeping reform has entered our industry yet we are unable to fully predict its impact and perhaps its unintentional consequences. There can be no assurance that these changes will not materially and adversely affect our business, financial condition and results of operation.

 

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 future filings with the SEC, in our press releases, and in oral and written statements, which are not statements of historical fact, constitute forward-looking statements.

 

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Overview

Bank of South Carolina Corporation (the “Company”) is a financial institution holding company headquartered in Charleston, South Carolina, with $431.5 million in assets as of September 30, 2017 and net income of $1.4 million and $4.1 million for the three and nine months ended September 30, 2017. 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.

 

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 bearing assets 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 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 losses (the “allowance”) and a reserve for unfunded commitments (the “unfunded reserve”). The allowance provides for probable and estimable losses inherent in our loan portfolio while the unfunded reserve provides for potential losses related to unfunded lending commitments.

 

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. The discussion and analysis also identifies significant factors that have affected our financial position and operating results as of September 30, 2017 and December 31, 2016, and should be read in conjunction with the financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion.

 

Critical Accounting Policies

Our critical accounting policies which involve significant judgements and assumptions that have a material impact on the carrying value of certain assets and liabilities, and used in the preparation of the Consolidated Financial Statements as of September 30, 2017, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Balance Sheet

Cash and Cash Equivalents

Total cash and cash equivalents increased 14.96% or $3.9 million to $30.2 million as of September 30, 2017, from $26.2 million as of December 31, 2016. This increase was primarily due to an increase in deposit balances for both new and existing customers. Funds are placed in interest bearing deposits at the Federal Reserve Bank until opportunities arise for investment in higher yielding assets.

 

Investment Securities Available for Sale

Our primary objective in managing the investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We are required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. We maintain investment balances based on continuing assessment of cash flows, the level of current and expected loan production, current interest rate risk strategies and the assessment of potential future direction of market interest rate changes. Investment securities differ in terms of default, interest rate, liquidity and expected rate of return risk.

 

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 pledging of public funds.

 

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As of September 30, 2017, our available for sale investment portfolio included U. S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $126.5 million and an amortized cost of $126.2 million for a net unrealized gain of $324,748. As of September 30, 2017 and December 31, 2016, our investment securities portfolio represented approximately 29.32% and 28.98% of our total assets, respectively. The average yield on our investment securities was 2.03% and 1.99% at September 30, 2017 and December 31, 2016, respectively.

 

We had eight Municipal Securities with an approximate total book value of $3.4 million that matured and three Municipal Securities with an approximate total book value of $1.0 million that were called in the nine months ended September 30, 2017. Additionally, we sold five investment securities issued by Government Sponsored Enterprises and one US Treasury Note, with a total ending book value of $20.2 million, resulting in a net gain of $45,820 during the nine months ended September 30, 2017. We also purchased five investment securities issued by Government Sponsored Enterprises and one US Treasury Note, with a total face value of $30.1 million during the nine months ended September 30, 2017.

 

Loans

We focus our lending activities on small and middle market businesses, professionals and individuals in our geographic markets. Substantially all of our loans were to borrowers located in our market area of Charleston, Dorchester and Berkeley Counties of South Carolina.

 

Net loans increased $8.5 million, or 3.31%, to $265.2 million at September 30, 2017 from $256.7 million at December 31, 2016. We attribute the increase in net loans to multiple large loans originated late in the quarter as well as an increase in the usage of lines of credit. Early payoffs of real estate loans continued, which we attribute to Charleston’s strong real estate market and national popularity.

 

The following table is a summary of our loan portfolio composition (net of deferred fees of $149,640 at September 30, 2017 and $136,446 at December 31, 2016) and the corresponding percentage of total loans as of the dates indicated.

 

    September 30, 2017     December 31, 2016  
    Amount     Percent     Amount     Percent  
Commercial loans   $ 53,348,364       19.82 %   $ 52,262,209       20.06 %
Commercial real estate – construction     1,842,668       0.68 %     1,208,901       0.46 %
Commercial real estate – other     134,779,206       50.08 %     122,968,126       47.19 %
Consumer real estate     74,254,387       27.59 %     77,131,816       29.60 %
Consumer other     4,908,006       1.83 %     7,005,063       2.69 %
Total     269,132,631       100.00 %     260,576,115       100.00 %
Allowance for loan loss     (3,886,959 )             (3,851,617 )        
Total loans, net   $ 265,245,672             $ 256,724,498          

 

Nonperforming assets

Nonperforming assets include real estate acquired through foreclosure or deeds taken in lieu of foreclosure, loans on nonaccrual status and TDRs. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of September 30, 2017, we had one loan 90 days past due still accruing interest.

 

We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges. As of September 30, 2017, we determined that we had one loan totaling $33,300 that we considered a TDR. As of December 31, 2016, we had two loans totaling $378,382 that we considered TDRs.

 

Nonperforming loans include all loans past due 90 days and over, certain impaired loans (some of which may be contractually current), and TDR loans that have not yet established a satisfactory period of payment performance (some of which may be contractually current). Nonperforming assets include other real estate owned, which increased $44,689 from $521,943 as of December 31, 2016 to $566,632 as of September 30, 2017. The increase is attributed to the transfer of one loan to OREO. This balance represents two properties.

 

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The following table is a summary of our nonperforming assets:

 

    September 30, 2017     December 31, 2016  
Commercial loans   $ 46,899     $ 61,781  
Commercial real estate - other     1,554,368       1,678,876  
Consumer other           964  
Total nonaccrual loans     1,601,267       1,741,621  
Other real estate owned     566,632       521,943  
Total nonperforming assets   $ 2,167,899     $ 2,263,564  

 

Allowance for Loan Losses

The allowance for loan losses was $3.9 million as of September 30, 2017 and December 31, 2016, or 1.44% and 1.48% of outstanding loans, respectively. At September 30, 2017 and December 31, 2016, the allowance for loan losses represented 179.30% and 170.16% of the total amount of nonperforming assets, respectively. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses at September 30, 2017 is adequate.

 

At September 30, 2017, impaired loans totaled $4.6 million, for which $2.7 million of these loans had a reserve of approximately $2.0 million allocated in the allowance for loan losses. Comparatively, impaired loans totaled $5.9 million at December 31, 2016, and $2.2 million of these loans had a reserve of approximately $1.5 million allocated in the allowance for loan losses.

 

During the three months ended September 30, 2017, we recorded $83,276 of charge-offs and $22,720 of recoveries on loans previously charged-off, resulting in net charge-offs of $60,556. Comparatively, we recorded $22,665 of recoveries on loans previously charged-off and no charge-offs, resulting in net recoveries of $22,665 during the three months ended September 30, 2016. During the nine months ended September 30, 2017, we recorded $85,649 of charge-offs and $68,491 of recoveries on loans previously charged-off, resulting in net charge-offs of $17,158. Comparatively, during the same period in 2016, we recorded $116,651 of charge-offs and $48,935 of recoveries on loans previously charged-off, resulting in net charge-offs of $67,716 for the nine months ended September 30, 2016.

 

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest bearing deposits provided funding for 61.17% of average earning assets for the nine months ended September 30, 2017, and 65.70% for the twelve months ended December 31, 2016. 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:

 

    September 30, 2017     December 31, 2016  
    Amount     Percent     Amount     Percent  
Deposits:                        
Non-interest-bearing demand   $ 124,661,171       32.25 %   $ 126,034,478       33.83 %
Interest-bearing demand     99,066,299       25.63 %     96,260,589       25.84 %
Money market accounts     84,417,700       21.84 %     77,307,662       20.75 %
Time deposits over $250,000     17,695,869       4.58 %     17,822,136       4.78 %
Other time deposits     25,993,812       6.72 %     26,019,121       6.98 %
Other savings deposits     34,712,187       8.98 %     29,078,865       7.81 %
Total deposits   $ 386,547,038       100.00 %   $ 372,522,851       100.00 %

 

Deposits increased 3.76% or $14.0 million from December 31, 2016 to September 30, 2017. These increases were primarily due to larger balances in existing customer accounts as well as the addition of new accounts during the period.

 

At September 30, 2017 and December 31, 2016, deposits with an aggregate deficit balance of $16,947 and $24,963, respectively were re-classified as other loans.

 

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Comparison of Three Months Ended September 30, 2017 to Three Months Ended September 30, 2016

Net income increased $14,315 or 1.00% to $1.4 million, or basic and diluted earnings per share of $0.29 and $0.28, respectively, for the three months ended September 30, 2017, from $1.4 million, or basic and diluted earnings per share of $0.29 and $0.28, respectively, for the three months ended September 30, 2016. Our returns on average assets and average equity for the three months ended September 30, 2017 were 1.32% and 13.01%, respectively, compared with 1.39% and 13.74%, respectively, for the three months ended September 30, 2016.

 

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 $72,731 or 1.85% to $4.0 million for the three months ended September 30, 2017 from $3.9 million for the three months ended September 30, 2016. This increase was primarily due to higher rates on loans and our cash balances tied to the Federal Funds target rate, which increased 25 basis points in March 2017 and an additional 25 basis points in June 2017. Meanwhile, average loans decreased $10.7 million or 3.88% to $264.0 million for the three months ended September 30, 2017, compared to $274.8 million for the three months ended September 30, 2016. However, the yield on average loans (including fees) was 5.29% and 4.86% for the three months ended September 30, 2017 and September 30, 2016, respectively. Interest income on loans increased $4,142 for the three months ended September 30, 2017 to $3.4 million from $3.4 million for the three months ended September 30, 2016.

 

The average balance of interest bearing deposits at the Federal Reserve Bank increased $1.2 million or 4.50% to $28.5 million for the three months ended September 30, 2017, with a yield of 1.30% as compared to $27.3 million for the three months ended September 30, 2016, with a yield of 0.52%.

 

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy for loan losses. For the three months ended September 30, 2017, we had a provision of $20,000 compared to a provision of $210,000 for the same period in the prior year. The decrease in the provision for loan losses was supported by our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income decreased $204,704 or 29.81% to $481,882 for the three months ended September 30, 2017, from $686,586 for the three months ended September 30, 2016. This reduction was primarily due to less income derived from mortgage banking activities but was partially offset by increases in service charges and fees, as well as gains realized on the sale of investment securities.

 

Non-Interest Expense

Non-interest expense decreased $99,730 or 3.86% to $2.5 million for the three months ended September 30, 2017 from $2.6 million for the three months ended September 30, 2016. This decrease was primarily due to a reduction in other operating expenses of $123,775, largely comprised of a lower FDIC assessment and other miscellaneous operating expenses. This was partially offset by increases in net occupancy expenses.

 

Income Tax Expense

We incurred income tax expense of $543,098 for the three months ended September 30, 2017 as compared to $399,656 during the same period in 2016. Our effective tax rate was 27.38% and 21.89% for the three months ended September 30, 2017 and 2016, respectively. The effective tax rate for both periods was directly related to our investment in a South Carolina Rehabilitation Tax Credit in 2016.

 

Comparison of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016

Net income increased $118,943 or 3.02% to $4.1 million, or basic and diluted earnings per share of $0.82 and $0.80, respectively, for the nine months ended September 30, 2017, from $3.9 million, or basic and diluted earnings per share of $0.80 and $0.78, respectively, for the nine months ended September 30, 2016. Our return on average assets and average equity for the nine months ended September 30, 2017 were 1.28% and 12.66%, respectively, compared with 1.29% and 12.73%, respectively, for the nine months ended September 30, 2016.

 

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Net Interest Income

Net interest income increased $378,528 or 3.40% to $11.5 million for the nine months ended September 30, 2017 from $11.1 million for the nine months ended September 30, 2016. This increase was primarily due to increased income derived from investment securities. Additionally, the increase in interest and fees on loans was primarily due to higher rates on loans and our cash balances tied to the Federal Funds target rate, which increased 25 basis points in March 2017 and an additional 25 basis points in June 2017. Average loans decreased $2.4 million or 0.91% to $262.0 million for the nine months ended September 30, 2017, compared to $264.4 million for the nine months ended September 30, 2016. However, the yield on average loans (including fees) was 5.33% and 4.85% for the nine months ended September 30, 2017 and September 30, 2016, respectively. Interest income on loans increased $124,856 for the nine months ended September 30, 2017 to $9.7 million from $9.6 million for the nine months ended September 30, 2016.

 

The average balance of interest bearing deposits at the Federal Reserve Bank decreased $3.5 million or 13.08% to $23.0 million for the nine months ended September 30, 2017, with a yield of 1.09% as compared to $26.5 million for the nine months ended September 30, 2016, with a yield of 0.52%.

 

Provision for Loan Losses

For the nine months ended September 30, 2017, we had a provision of $52,500 compared to a provision of $395,000 for the same period in the prior year. The decrease in the provision for loan losses was supported by our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income decreased $491,951 or 22.14% to $1.7 million for the nine months ended September 30, 2017, from $2.2 million for the nine months ended September 30, 2016. This reduction is primarily due to less income derived from the sale of investment securities and mortgage banking activities. For the nine months ended September 30, 2017, we realized gains on the sale of investment securities of $45,820 compared to realized gains on the sale of investment securities of $348,327 during the same period in 2016.

 

Non-Interest Expense

Non-interest expense decreased $11,004 or 0.15% to $7.5 million for the nine months ended September 30, 2017 from $7.6 million for the nine months ended September 30, 2016. This decrease was primarily due to a reduction in other operating expenses of $44,066, largely comprised of a lower FDIC assessment. This was offset by a write-down of OREO in the amount of $46,143 as well as increases in net occupancy expenses.

 

Income Tax Expense

We incurred income tax expense of $1.6 million for the nine months ended September 30, 2017 as compared to $1.5 million during the same period in 2016. Our effective tax rate was 28.38% and 27.40% for the nine months ended September 30, 2017 and 2016, respectively. The effective tax rate for both periods was directly related to our investment in a South Carolina Rehabilitation Tax Credit in 2016.

 

Off Balance Sheet Arrangements

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on our credit evaluation of the borrower. Collateral held varies but may include accounts receivable, negotiable instruments, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to $96.7 million and $85.4 million at September 30, 2017 and December 31, 2016, respectively.

 

Standby letters of credit represent our obligation to a third party contingent upon the failure of our customer to perform under the terms of an underlying contract with the third party or obligates us to guarantee or stand as surety for the benefit of the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be drawn only when the underlying event fails to occur as intended. We can seek recovery of the amounts paid from the borrower. The majority of these standby letters of credit are unsecured. Commitments under standby letters of credit are usually for one year or less. The maximum potential amount of undiscounted future payments related to standby letters of credit at September 30, 2017 and December 31, 2016 was $969,644 and $793,992, respectively.

 

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We originate certain fixed rate residential loans and commit these loans for sale. The commitments to originate fixed rate residential loans and the sales commitments are freestanding derivative instruments. We had forward sales commitments, totaling $2.3 million at September 30, 2017, to sell loans held for sale of $3.1 million, compared to forward sales commitments of $4.4 million at December 31, 2016, to sell loans held for sale of $4.4 million. The fair value of these commitments was not significant at September 30, 2017 or December 31, 2016. We had no embedded derivative instruments requiring separate accounting treatment.

 

Once we sell certain fixed rate residential loans, the loans are no longer reportable on our balance sheet. With most of these sales, we have an obligation to repurchase the loan in the event of a default of principal or interest on the loan. This recourse period ranges from three to nine months. Misrepresentation or fraud carries unlimited time for recourse. The unpaid principal balance of loans sold with recourse was $44.7 million at September 30, 2017 and $18.1 million at December 31, 2016. For the three and nine months ended September 30, 2017 and September 30, 2016, there were no loans repurchased.

 

Liquidity

Historically, we have maintained our liquidity at levels believed by management to be adequate to meet requirements of normal operations, potential deposit outflows and strong loan demand and still allow for optimal investment of funds and return on assets.

 

We manage our assets and liabilities to ensure there is sufficient liquidity to enable management to fund deposit withdrawals, loan demand, capital expenditures, reserve requirements, operating expenses, dividends and to manage daily operations on an ongoing basis. Funds are primarily provided by the Bank through customer deposits, principal and interest payments on loans, mortgage loan sales, the sale or maturity of securities, temporary investments and earnings.

 

Proper liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our primary liquid assets are cash and due from banks, federal funds sold, investments available for sale, other short-term investments and mortgage loans held for sale. Our primary liquid assets accounted for 37.03 % and 36.38% of total assets at September 30, 2017 and December 31, 2016, respectively. Securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates and liquidity needs. All of the securities presently owned are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity. At September 30, 2017, we had unused short-term lines of credit totaling approximately $23 million (which can be withdrawn at the lender’s option). Additional sources of funds available to us for additional liquidity needs include borrowing on a short-term basis from the Federal Reserve System, increasing deposits by raising interest rates paid and liquidation of mortgage loans held for sale. We have a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits us to retain possession of assets pledged as collateral to secure advances from the Federal Reserve Discount Window. At September 30, 2017, we could borrow up to $78 million. There have been no borrowings under this arrangement during the reporting periods.

 

Our core deposits consist of non-interest bearing accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our level of certificates of deposit greater than $250,000 and other large deposits. We maintain a Contingency Funding Plan (“CFP’) that identifies liquidity needs and weighs alternate courses of action designed to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. At September 30, 2017 and December 31, 2016, our liquidity ratio was 35.08% and 38.27%, respectively.

 

Capital Resources

Our capital needs have been met to date through the $10.6 million in capital raised in our initial offering, the retention of earnings less dividends paid and the exercise of stock options to purchase. Total shareholders’ equity at September 30, 2017 was $43.7 million. The rate of asset growth since our inception has not negatively impacted this capital base.

 

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On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for US banks (“Basel III”). Following the actions by the Federal Reserve, the FDIC also approved regulatory capital requirements on July 9, 2013. The FDIC’s rules are identical in substance to the final rules issued by the Federal Reserve Bank.

 

Basel III became effective on January 1, 2015. The purpose is to improve the quality and increase the quantity of capital for all banking organizations. The minimum requirements for the quantity and quality of capital were increased. The rule includes a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and requires a minimum leverage ratio of 4%. In addition, the rule also implements strict eligibility criteria for regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Full compliance with all of the final rule requirements will be phased in over a multi-year schedule. The Bank’s total risk-based capital ratio at September 30, 2017 and December 31, 2016 was 16.13% and 15.36%, respectively.

 

At September 30, 2017, the Company and the Bank were categorized as “well capitalized” under Basel III. To be categorized as “well capitalized” the Company and the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 10%, 8.0%, 6.5% and 5%, respectively, and to be categorized as “adequately capitalized,” the Company and the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital, and Tier 1 leverage ratios of 8%, 6%, 4.5%, and 4.0%, respectively.

 

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a material effect on the financial statements. We must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Current and previous quantitative measures established by regulation to ensure capital adequacy require that we maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and to average assets. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well-capitalized minimum capital requirements.

 

The Company had no material commitments for capital expenditures as of September 30, 2017 and December 31, 2016, respectively.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures and internal controls and procedures for financial reporting

 

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934 as amended (the “Act”) was carried out as of September 30, 2017 under the supervision and with the participation of the Bank of South Carolina Corporation’s management, including its President/Chief Executive Officer and the Chief Financial Officer/Senior Vice President and several other members of the Company’s senior management. Based upon that evaluation, Bank of South Carolina Corporation’s management, including the President/Chief Executive Officer and the Chief Financial Officer/Senior Vice President concluded that, as of September 30, 2017, the Company’s disclosure controls and procedures were effective in ensuring that the information the Company is required to disclose in the reports filed or submitted under the Act has been (i) accumulated and communicated to management (including the President/Chief Executive Officer and Chief Financial Officer/Senior Vice President) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

 

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Under the supervision and with the participation of management, including the President/Chief Executive Officer and the Chief Financial Officer/Senior Vice President, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of September 30, 2017, based on the 2013 framework established in a report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2017. Based on this assessment, management believes that as of September 30, 2017, the Company’s internal control over financial reporting was effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

The Audit and Compliance Committee, composed entirely of independent Directors, meets periodically with management, the Bank’s Compliance Officer, Risk Management Officer and Elliott Davis, LLC (separately and jointly) to discuss audit, financial and related matters. Elliott Davis, LLC, the Compliance Officer, and the Risk Management Officer have direct access to the Audit and Compliance Committee.

 

Part II. Other Information

 

Item 1. Legal Proceedings

In our opinion, there are no other legal proceedings pending other than routine litigation incidental to our business involving amounts which are not material to our financial condition.

 

Item 1A. Risk Factors

Not required.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosure

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

    1. The Consolidated Financial Statements are included in this Form 10-Q and listed on pages as indicated.

 

      Page
       
    (1) Consolidated Balance Sheets 3
  (2) Consolidated Statements of Income 4-5
    (3) Consolidated Statements of Comprehensive Income 6
    (4) Consolidated Statements of Shareholders’ Equity 7
    (5) Consolidated Statements of Cash Flows 8
    (6) Notes to Consolidated Financial Statements 9-27

 

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Exhibits

2.0 Plan of Reorganization (Filed with 1995 10-KSB)

3.0 Articles of Incorporation of the Registrant (Filed with 1995 10-KSB)

3.1 By-laws of the Registrant (Filed with 1995 10-KSB)

3.2 Amendments to the Articles of Incorporation of the Registrant (Filed with Form S on June 23, 2011)

4.0 2016 Proxy Statement (Filed with 2015 10-K)

10.0 Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB)

10.1 Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB)

10.2 Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB)

10.3 Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB)

10.4 Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed With 2010 10-K)

  Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with September 30, 2014 10-Q)

10.5 1998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A)

10.6 Employee Stock Ownership Plan (Filed with 2008 10-K/A)

  Employee Stock Ownership Plan, Restated (Filed with 2011 Proxy Statement)

  Employee Stock Ownership Plan, Restated (Filed with 2016 10-K)

10.7 2010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement)

10.8 Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K)

10.9 Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)

10.10 First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)

10.11 Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)

10.12 Extension to Lease Agreement for 256 Meeting Street (Filed within)

10.13 North Charleston Lease Agreement (Filed with June 30, 2017 10Q)

10.14 Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed within)

14.0 Code of Ethics (Filed with 2004 10-KSB)

21.0 List of Subsidiaries of the Registrant (Filed with 1995 10-KSB)

  The Registrant’s only subsidiary is The Bank of South Carolina (Filed with 1995 10-KSB)

31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer

31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer

32.1 Certification pursuant to Section 1350

32.2 Certification pursuant to Section 1350
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

37  

 

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Bank of South Carolina Corporation
     
November 9, 2017    
  By: /s/Fleetwood S. Hassell
    Fleetwood S. Hassell
    President/Chief Executive Officer
     
  By: /s/Eugene H. Walpole, IV
    Eugene H. Walpole, IV
    Chief Financial Officer/
    Senior Vice President

 

38  
 

Bank of South Carolina Corporation 10-Q  

Exhibit 10.12

 
 

 
 

 
 

 

 

 

Bank of South Carolina Corporation 10-Q  

Exhibit 10.14

 
 

 
 

 

 

 

Bank of South Carolina Corporation 10-Q  

Exhibit 31.1

 

Certification Pursuant to 13a-14(a)/15d-14(a) by the Chief Executive Officer

 

I, Fleetwood S. Hassell, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of the Bank of South Carolina Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report.

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within the entity, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  39

 

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 9, 2017  
   
  /s/Fleetwood S. Hassell
  Fleetwood S. Hassell
  President/Chief Executive Officer

 

  40

 

Bank of South Carolina Corporation 10-Q  

Exhibit 31.2

 

Certification Pursuant to 13a-14(a)/15d-14(a) by the Chief Financial Officer

 

I, Eugene H. Walpole, IV, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of the Bank of South Carolina Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report.

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within the entity, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  41

 

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 9, 2017  
   
  /s/Eugene H. Walpole, IV
  Eugene H. Walpole, IV
  Chief Financial Officer/
  Senior Vice President

 

  42

 

Bank of South Carolina Corporation 10-Q  

Exhibit 32.1

 

Certification of the Chief Executive Officer Pursuant to 18 USC 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

 

I, Fleetwood S. Hassell, President/Chief Executive Officer of Bank of South Carolina Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

 

1. the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (U.S.C. 78m or 78o(d)); and

 

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 9, 2017    
     
  By: /s/ Fleetwood S. Hassell
    Fleetwood S. Hassell
    President/Chief Executive Officer

 

  43

 

Bank of South Carolina Corporation 10-Q  

Exhibit 32.2

 

Certification of the Chief Financial Officer Pursuant to 18 USC 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

 

I, Eugene H. Walpole, IV, Chief Financial Officer/Senior Vice President of Bank of South Carolina Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

 

1. the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (U.S.C. 78m or 78o(d)); and

 

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 9, 2017    
     
  By: /s/ Eugene H. Walpole, IV
    Eugene H. Walpole, IV
    Chief Financial Officer/
    Senior Vice President

 

  44