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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - BANK OF SOUTH CAROLINA CORPex32-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - BANK OF SOUTH CAROLINA CORPex32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - BANK OF SOUTH CAROLINA CORPex31-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - BANK OF SOUTH CAROLINA CORPex31-1.htm
EX-10.13 - NORTH CHARLESTON LEASE AGREEMENT - BANK OF SOUTH CAROLINA CORPex10-13.htm
 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 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, smaller reporting company or an emerging growth 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 August 10, 2017 there were 4,980,009 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 – June 30, 2017 and December 31, 2016 3
Consolidated Statements of Income - Three months ended June 30, 2017 and 2016 4
Consolidated Statements of Income - Six months ended June 30, 2017 and 2016 5
Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2017 and 2016 6
Consolidated Statements of Shareholders’ Equity- Six months ended June 30, 2017 and 2016 7
Consolidated Statements of Cash Flows - Six months ended June 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 29
Off-Balance Sheet Arrangements 34
Liquidity 35
Capital Resources 35
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 36
     
Part II. Other Information  
     
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Mine Safety Disclosure 37
Item 5. Other Information 37
Item 6. Exhibits 37
     
Signatures 39
Certifications 40

 

2 

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

     
  

(Unaudited)

June 30, 2017

  

(Audited)

December 31,

2016

 
ASSETS          
Cash and due from banks  $8,746,291   $8,141,030 
Interest-bearing deposits at the Federal Reserve Bank   23,881,649    18,101,300 
Investment securities available for sale   132,660,381    119,978,944 
Mortgage loans to be sold   2,232,201    4,386,210 
Loans   260,229,745    260,576,115 
          Less: Allowance for loan losses   (3,927,515)   (3,851,617)
Net loans   256,302,230    256,724,498 
Premises, equipment and leasehold improvements, net   2,270,977    2,296,624 
Other real estate owned   475,800    521,943 
Accrued interest receivable   1,551,357    1,614,002 
Other assets   2,183,113    2,185,085 
Total assets  $430,303,999   $413,949,636 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Liabilities          
Deposits:          
Non-interest-bearing demand  $132,051,130   $126,034,478 
Interest-bearing demand   94,401,633    96,260,589 
Money market accounts   81,827,246    77,307,662 
Time deposits over $250,000   17,959,145    17,822,136 
Other time deposits   26,559,417    26,019,121 
Other savings deposits   33,493,698    29,078,865 
Total deposits   386,292,269    372,522,851 
    Accrued interest payable and other liabilities   958,771    813,811 
Total liabilities   387,251,040    373,336,662 
           
Shareholders’ equity          
Common stock-no par, 12,000,000 shares authorized; 5,211,285 and 5,197,535 shares issued at June 30, 2017 and December 31, 2016, respectively; 4,969,889 and 4,956,139 shares outstanding at June 30, 2017 and December 31, 2016, respectively        
Additional paid in capital   37,015,422    36,824,022 
Retained earnings   7,865,149    6,643,476 
Treasury stock: 241,396 shares at June 30, 2017 and December 31, 2016   (2,247,415)   (2,247,415)
Accumulated other comprehensive income (loss), net of income taxes   419,803    (607,109)
Total shareholders’ equity   43,052,959    40,612,974 
Total liabilities and shareholders’ equity  $430,303,999   $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
JUNE 30,
 
  

2017

  

2016

 
Interest and fee income          
Loans, including fees  $3,221,855   $3,208,836 
Taxable securities   399,909    290,486 
Tax-exempt securities   256,202    240,171 
Other   55,319    31,176 
Total interest and fee income   3,933,285    3,770,669 
           
Interest expense          
Deposits   106,522    92,981 
      Short-term borrowings       7 
Total interest expense   106,522    92,988 
           
Net interest income   3,826,763    3,677,681 
Provision for loan losses   30,000    140,000 
Net interest income after provision for loan losses   3,796,763    3,537,681 
           
Other income          
Service charges, fees and commissions   287,873    265,736 
Mortgage banking income   400,519    296,891 
Gains on sales of securities       160,391 
Other non-interest income   8,087    6,554 
Total other income   696,479    729,572 
           
Other expense          
Salaries and employee benefits   1,500,362    1,480,420 
Net occupancy expense   393,763    380,311 
Other operating expenses   649,855    576,150 
Net other real estate owned expenses   46,143     
Total other expenses   2,590,123    2,436,881 
           
Income before income tax expense   1,903,119    1,830,372 
Income tax expense   516,734    518,262 
           
Net income  $1,386,385   $1,312,110 
           
Weighted average shares outstanding          
Basic   4,967,907    4,929,722 
Diluted   5,072,908    5,056,523 
           
Basic income per common share  $0.28   $0.27 
Diluted income per common share  $0.27   $0.26 

 

See accompanying notes to consolidated financial statements.

 

4 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   SIX MONTHS ENDED
JUNE 30,
 
  

2017

  

2016

 
Interest and fee income          
Loans, including fees  $6,363,593   $6,242,879 
Taxable securities   738,756    613,619 
Tax-exempt securities   527,087    479,485 
Other   95,270    66,750 
Total interest and fee income   7,724,706    7,402,733 
           
Interest expense          
Deposits   203,304    187,120 
      Short-term borrowings       7 
Total interest expense   203,304    187,127 
           
Net interest income   7,521,402    7,215,606 
Provision for loan losses   32,500    185,000 
Net interest income after provision for loan losses   7,488,902    7,030,606 
           
Other income          
Service charges, fees and commissions   557,439    526,267 
Mortgage banking income   675,624    648,764 
Gains on sales of securities       348,327 
Other non-interest income   15,290    12,243 
Total other income   1,248,353    1,535,601 
           
Other expense          
Salaries and employee benefits   2,970,571    2,995,446 
Net occupancy expense   757,908    756,710 
Other operating expenses   1,287,131    1,207,422 
Net other real estate owned expenses   46,143    13,450 
Total other expenses   5,061,753    4,973,028 
           
Income before income tax expense   3,675,502    3,593,179 
Income tax expense   1,063,029    1,085,333 
           
Net income  $2,612,473   $2,507,846 
           
Weighted average shares outstanding          
Basic   4,965,094    4,923,266 
Diluted   5,069,024    5,047,601 
           
Basic income per common share  $0.53   $0.51 
Diluted income per common share  $0.52   $0.50 

 

See accompanying notes to consolidated financial statements.

 

5 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   THREE MONTHS ENDED
JUNE 30,
 
   2017   2016 
Net income  $1,386,385   $1,312,110 
Other comprehensive income:          
Unrealized gain on securities arising during the period   996,733    553,433 
Reclassification adjustment for securities gains realized in net income       (160,391)
Other comprehensive income, before tax   996,733    393,042 
Income tax effect related to items of other comprehensive income   (338,889)   (145,426)
Other comprehensive income, after tax   657,844    247,616 
Total comprehensive income  $2,044,229   $1,559,726 

 

   SIX MONTHS ENDED
JUNE 30,
 
   2017   2016 
Net income  $2,612,473   $2,507,846 
Other comprehensive income:          
Unrealized gain on securities arising during the period   1,582,555    1,679,929 
Reclassification adjustment for securities gains realized in net income       (348,327)
Other comprehensive income, before tax   1,582,555    1,331,602 
Income tax effect related to items of other comprehensive income   (555,643)   (492,692)
Other comprehensive income, after tax   1,026,912    838,910 
Total comprehensive income  $3,639,385   $3,346,756 

 

See accompanying notes to consolidated financial statements.

 

6 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 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       2,507,846            2,507,846 
Other comprehensive income               838,910    838,910 
Exercise of stock options   260,546                260,546 
Stock-based compensation expense   39,683                39,683 
Cash dividends ($0.26 per common share)       (1,281,709)           (1,281,709)
June 30, 2016  $36,641,973   $5,290,971   $(2,247,415)  $1,831,459   $41,516,988 
                          
December 31, 2016  $36,824,022   $6,643,476   $(2,247,415)  $(607,109)  $40,612,974 
                          
Net income       2,612,473            2,612,473 
Other comprehensive income               1,026,912    1,026,912 
Exercise of stock options   154,858                154,858 
Stock-based compensation expense   36,542                36,542 
Cash dividends ($0.28 per common share)       (1,390,800)           (1,390,800)
June 30, 2017  $37,015,422   $7,865,149   $(2,247,415)  $419,803   $43,052,959 

 

See accompanying notes to consolidated financial statements.

 

7 

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

 

   SIX MONTHS ENDED
JUNE 30,
 
Cash flows from operating activities:  2017   2016 
Net income  $2,612,473   $2,507,846 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   94,994    95,732 
Gain on sale of securities       (348,327)
Loss on sale of other real estate       13,450 
Valuation and other adjustments to other real estate   46,143     
Provision for loan losses   32,500    185,000 
Stock-based compensation expense   36,542    39,683 
Deferred income taxes   (553,671)    
Net amortization of unearned discounts on investment securities   198,768    92,417 
Origination of mortgage loans held for sale   (32,568,879)   (36,412,202)
Proceeds from sale of mortgage loans held for sale   34,722,888    35,731,989 
Decrease  (increase) in accrued interest receivable and other assets   62,645    (292,725)
Increase (decrease)  in accrued interest payable and other liabilities   143,193    (99,874)
Net cash provided by operating activities   4,827,596    1,512,989 
           
Cash flows from investing activities:          
Proceeds from calls and maturities of investment securities available for sale   3,787,150    4,146,000 
Proceeds from sale of available for sale securities       21,113,400 
Purchase of investment securities available for sale   (15,084,800)   (9,033,245)
Proceeds from sale of other real estate       85,001 
Net decrease (increase) in loans   389,768    (27,767,765)
Purchase of premises, equipment and leasehold improvements, net   (69,347)   (24,658)
Net cash used in investing activities   (10,977,229)   (11,481,267)
           
Cash flows from financing activities:          
Net increase in deposit accounts   13,769,418    23,503,668 
Dividends paid   (1,389,033)   (1,278,434)
Stock options exercised   154,858    260,546 
Net cash provided by financing activities   12,535,243    22,485,780 
Net increase in cash and cash equivalents   6,385,610    12,517,502 
Cash and cash equivalents at beginning of year   26,242,330    29,194,786 
           
Cash and cash equivalents at end of year  $32,627,940   $41,712,288 
           
Supplemental disclosure of cash flow data:          
Cash paid during the year for:          
Interest  $254,933   $190,343 
Income taxes  $1,511,965   $1,069,840 
Supplemental disclosure for non-cash investing and financing activity:          
Change in unrealized gain on securities available for sale, net of income taxes  $1,026,912   $838,910 
Change in dividends payable  $1,767   $3,275 

 

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. We do not expect this amendment to have a material effect on our consolidated financial statements.

 

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 financial position, results of operations, and cash flows.

 

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.

 

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.

 

 11

 

 

BANK OF SOUTH CAROLINA CORPORATION

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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:

     
   JUNE 30, 2017 
   AMORTIZED
COST
   GROSS  
UNREALIZED
GAINS
   GROSS  
UNREALIZED
LOSSES
   FAIR
VALUE
 
                 
U.S. Treasury Notes  $24,139,912   $62,201   $(6,799)  $24,195,314 
Government-Sponsored Enterprises   66,708,908    391,749    (383,380)   66,717,277 
Municipal Securities   41,192,677    865,966    (310,853)   41,747,790 
                     
Total  $132,041,497   $1,319,916   $(701,032)  $132,660,381 

     
   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 June 30, 2017 and December 31, 2016, by contractual maturity are as follows:

         
   JUNE 30, 2017   DECEMBER 31, 2016 
   AMORTIZED
COST
   FAIR
VALUE
   AMORTIZED
COST
   FAIR
  VALUE
 
                 
Due in one year or less  $3,017,513   $3,038,231   $3,343,347   $3,350,205 
Due in one year to five years   91,871,936    92,428,862    82,848,411    82,682,901 
Due in five years to ten years   33,599,190    33,748,377    29,662,030    29,169,228 
Due in ten years and over   3,552,859    3,444,911    5,088,827    4,776,610 
                     
Total  $132,041,498   $132,660,381   $120,942,615   $119,978,944 

 

Investment securities pledged to secure public deposits and for other purposes required or permitted by law at June 30, 2017 and December 31, 2016, had a fair value of $53.1 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 June 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 
   #   Fair Value   Gross Unrealized Loss   #   Fair Value   Gross Unrealized Loss   #   Fair Value   Gross Unrealized Loss 
June 30, 2017                                    
Available for sale                                             
U.S. Treasury notes   2   $10,142,188   $(6,799)      $   $    2   $10,142,188   $(6,799)
Government-sponsored enterprises   4    12,441,218    (326,380)   1    2,928,357    (57,000)   5    15,369,575    (383,380)
Municipal securities   36    15,193,138    (310,853)               36    15,193,138    (310,853)
Total   42   $37,776,544   $(644,032)   1   $2,928,357   $(57,000)   43   $40,704,901   $(701,032)
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 from sales of securities available for sale and gross realized gains and losses as follows:

 

   For the Three Months Ended
June 30,
 
   2017   2016 
Gross proceeds  $   $5,135,609 
Gross realized gains       160,391 
Gross realized losses        

 

   For the Six Months Ended
June 30,
 
   2017   2016 
Gross proceeds  $   $21,113,400 
Gross realized gains       348,327 
Gross realized losses        

 

The tax provision related to these gains was $59,382 and $128,881 for the three and six months ended June 30, 2016, 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 $143,374 at June 30, 2017 and $136,446 at December 31, 2016) are as follows:

 

   June 30,
2017
   December 31,
2016
 
Commercial loans  $56,281,569   $52,262,209 
Commercial real estate:          
Construction   1,457,591    1,208,901 
Other   121,477,838    122,968,126 
Consumer:          
Real Estate   75,702,877    77,131,816 
Other   5,309,870    7,005,063 
    260,229,745    260,576,115 
Allowance for loan losses   (3,927,515)   (3,851,617)
Loans, net  $256,302,230   $256,724,498 

 

We had $103.4 million and $101.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at June 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 internally assigned grades pursuant to the Board-approved lending policy are as follows:

 

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

 

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 June 30, 2017 and December 31, 2016. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

June 30, 2017 
    Commercial  

Commercial

Real Estate

Construction

  

Commercial

Real Estate

Other

  

Consumer

Real Estate

   Consumer Other   Total 
                          
Pass   $51,883,004   $1,061,069   $117,318,419   $73,856,986   $5,097,028   $249,216,506 
Watch    2,480,236    396,522    1,425,095    1,351,454    177,229    5,830,536 
OAEM    662,989        295,490            958,479 
Sub-Standard    1,255,340        2,438,834    494,437    35,613    4,224,224 
Doubtful                         
Loss                         
                                
Total   $56,281,569   $1,457,591   $121,477,838   $75,702,877   $5,309,870   $260,229,745 

 

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:

 

June 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  $225,212   $19,467   $   $244,679   $56,036,890   $56,281,569   $ 
Commercial Real Estate -Construction                   1,457,591    1,457,591     
Commercial Real Estate -Other   280,689        1,552,910    1,833,599    119,644,239    121,477,838     
Consumer Real Estate   140,920    21,200        162,120    75,540,757    75,702,877     
Consumer-Other       99,982        99,982    5,209,888    5,309,870     
Total  $646,821   $140,649   $1,552,910   $2,340,380   $257,889,365   $260,229,745   $ 

 

 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 

 

There were no loans at June 30, 2017 and two loans at December 31, 2016 over 90 days past due and still accruing.

 

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

 

   Loans Receivable on Non-Accrual 
    June 30,
2017
    December 31,
2016
 
Commercial  $52,050   $61,781 
Commercial Real Estate - Construction        
Commercial Real Estate - Other   1,782,819    1,678,876 
Consumer - Real Estate        
Consumer - Other       964 
           
Total  $1,834,869   $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 six months ended June 30, 2017 and June 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 June 30, 2017
   Commercial   Commercial Real Estate-Construction  

Commercial

Real Estate-Other

  

Consumer

Real Estate

  

Consumer

Other

   Total 
Allowance for Loan Losses                              
Beginning Balance  $1,553,159   $57,071   $1,418,575   $756,892   $91,160   $3,876,857 
Charge-offs                   (2,372)   (2,372)
Recoveries               21,000    2,030    23,030 
Provisions   75,513    (4,308)   (35,656)   (6,039)   490    30,000 
Ending Balance  $1,628,672   $52,763   $1,382,919   $771,853   $91,308   $3,927,515 

 

 16

 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Six Months Ended June 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                   (2,372)   (2,372)
Recoveries               42,000    3,770    45,770 
Provisions   83,484    1,294    8,213    3,462    (63,953)   32,500 
Ending Balance  $1,628,672   $52,763   $1,382,919   $771,853   $91,308   $3,927,515 

 

Three Months Ended June 30, 2016

    Commercial    Commercial Real Estate-Construction    

Commercial

Real Estate-Other

    

Consumer

Real Estate

    

Consumer

Other

    Total 
Allowance for Loan Losses                              
Beginning Balance  $1,500,650   $44,268   $1,108,703   $613,242   $169,899   $3,436,762 
Charge-offs               (82,015)   (541)   (82,556)
Recoveries           18,000        240    18,240 
Provisions   (10,323)   13,106    59,821    98,546    (21,150)   140,000 
Ending Balance  $1,490,327   $57,374   $1,186,524   $629,773   $148,448   $3,512,446 

 

Six Months Ended June 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   1,284        24,000        986    26,270 
Provisions   625,234    (2,487)   (182,570)   (229,682)   (25,495)   185,000 
Ending Balance  $1,490,327   $57,374   $1,186,524   $629,773   $148,448   $3,512,446 

 

 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.

 

June 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  $1,032,461   $   $259,972   $43,119   $35,614   $1,371,166 
Collectively evaluated for impairment   596,211    52,763    1,122,947    728,734    55,694    2,556,349 
Total Allowance for Losses  $1,628,672   $52,763   $1,382,919   $771,853   $91,308   $3,927,515 
Loans Receivable                              
Individually evaluated for impairment  $1,255,033   $   $2,458,870   $494,437   $35,613   $4,243,953 
Collectively evaluated for impairment   55,026,536    1,457,591    119,018,968    75,208,440    5,274,257    255,985,792 
Total Loans Receivable  $56,281,569   $1,457,591   $121,477,838   $75,702,877   $5,309,870   $260,229,745 
                               

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

 

   June 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  $171,136   $171,136   $   $250,040   $250,040   $ 
Commercial Real Estate-Construction                        
Commercial Real Estate-Other   1,435,014    1,435,014        2,174,770    2,174,770     
Consumer Real Estate   451,318    451,318        1,243,008    1,243,008     
Consumer Other                        
   $2,057,468   $2,057,468   $   $3,667,818   $3,667,818   $ 
                               
With an allowance recorded:                              
Commercial  $1,083,897   $1,083,897   $1,032,461   $1,051,219   $1,051,219   $1,051,219 
Commercial Real Estate- Construction   

                     
Commercial Real Estate-Other   1,023,856    1,023,856    259,973    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   35,613    35,613    35,613    89,047    89,047    89,047 
   $2,186,485   $2,186,485   $1,371,166   $2,233,966   $2,233,966   $1,507,972 
                               
Total                              
Commercial  $1,255,033   $1,255,033   $1,032,461   $1,301,259   $1,301,259   $1,051,219 
Commercial Real Estate-Construction                        
Commercial Real Estate-Other   2,458,870    2,458,870    259,973    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   35,613    35,613    35,613    89,047    89,047    89,047 
   $4,243,953   $4,243,953   $1,371,166   $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 June 30, 
   2017   2016 
   Average Recorded Investment   Interest
Income Recognized
   Average Recorded Investment   Interest
Income Recognized
 
With no related allowance recorded:                    
Commercial  $175,568   $4,886   $486,498   $4,221 
Commercial Real Estate-Construction                
Commercial Real Estate-Other   1,383,621    21,894    2,883,625    20,215 
Consumer Real Estate   451,035    5,630    1,242,703    14,334 
Consumer-Other                
   $2,010,224   $32,410   $4,612,826   $38,770 
                     
With an allowance recorded:                    
                     
Commercial  $1,091,779   $36,481   $1,097,191   $13,912 
Commercial Real Estate-Construction                
Commercial Real Estate-Other   1,020,012    5,331    1,065,261    10,949 
Consumer Real Estate   43,119    431    72,034    387 
Consumer Other   36,107    516    100,212    1,177 
   $2,191,017   $42,759   $2,334,698   $26,425 
                     
Total                    
                     
Commercial  $1,267,347   $41,367   $1,583,689   $18,133 
Commercial Real Estate-Construction                
Commercial Real Estate-Other   2,403,633    27,225    3,948,886    31,164 
Consumer Real Estate   494,154    6,061    1,314,737    14,721 
Consumer Other   36,107    516    100,212    1,177 
   $4,201,241   $75,169   $6,947,524   $65,195 

 

20 

 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

   For the Six Months Ended June 30, 
   2017   2016 
   Average Recorded Investment   Interest
Income Recognized
   Average Recorded Investment   Interest
Income Recognized
 
With no related allowance recorded:                    
Commercial  $179,698   $10,032   $494,572   $10,718 
Commercial Real Estate-Construction                
Commercial Real Estate-Other   1,324,984    43,806    2,889,248    42,855 
Consumer Real Estate   450,860    11,025    1,242,069    27,781 
Consumer-Other                
   $1,955,542   $64,863   $4,625,889   $81,354 
                     
With an allowance recorded:                    
                     
Commercial  $1,098,449   $71,193   $1,101,252   $30,364 
Commercial Real Estate-Construction                
Commercial Real Estate-Other   1,020,012    7,941    1,031,087    18,265 
Consumer Real Estate   43,119    838    72,059    1,006 
Consumer Other   36,848    1,086    102,264    3,510 
   $2,198,428   $81,058   $2,306,662   $53,145 
                     
Total                    
                     
Commercial  $1,278,147   $81,225   $1,595,824   $41,082 
Commercial Real Estate-Construction                
Commercial Real Estate-Other   2,344,996    51,747    3,920,335    61,120 
Consumer Real Estate   493,979    11,863    1,314,128    28,787 
Consumer Other   36,848    1,086    102,264    3,510 
   $4,153,970   $145,921   $6,932,552   $134,499 

 

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. At June 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 June 30, 2017 and December 31, 2016, respectively. There were no additional loans identified as a TDR during the three or six months ended June 30, 2017 or 2016. No TDRs defaulted during the three or six months ended June 30, 2017 and 2016, which were modified within the previous twelve months.

 

21 

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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.

 

22 

 

 

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 June 30, 2017 or December 31, 2016.

 

We have no embedded derivative instruments requiring separate accounting treatment. We had 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 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 June 30, 2017 and December 31, 2016.

 

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

 

June 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  $24,195,314   $   $   $24,195,314 
Government Sponsored
Enterprises
       66,717,277        66,717,277 
Municipal Securities       29,258,845    12,488,945    41,747,790 
Total  $24,195,314   $95,976,122   $12,488,945   $132,660,381 

 

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 June 30, 2017 or December 31, 2016.

 

23 

 

 

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 six months ended June 30, 2017 and 2016:

 

   Three Months Ended
June 30,
 
   2017   2016 
Beginning balance  $13,458,445   $5,249,351 
Total gains or (losses) (realized/unrealized)          
Included in earnings        
Included in other comprehensive income   215,500    (1,463)
Purchases, issuances and settlements, net of maturities   (1,185,000)   2,454,000 
Transfers in and/or out of level 3        
Ending balance  $12,488,945   $7,704,814 

 

   Six Months Ended
June 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   241,088    (33,136)
Purchases, issuances and settlements, net of maturities   (1,730,000)   2,454,000 
Transfers in and/or out of level 3        
Ending balance  $12,488,945   $7,704,814 

 

There were no transfers between fair value levels during the three or six months ended June 30, 2017 or June 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.

 

24 

 

 

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 June 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 June 30, 2017 and December 31, 2016:

 

June 30, 2017
  

Quoted Market Price
in active
markets

(Level 1) 

  

Significant
Other
Observable
Inputs

(Level 2) 

  

Significant Unobservable Inputs 

(Level 3) 

   Total 
Impaired loans  $   $   $2,650,215   $2,650,215 
Other real estate owned           475,800    475,800 
Loans held for sale       2,232,201        2,232,201 
Total  $   $2,232,201   $3,126,015   $5,358,216 

 

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 June 30, 2017 or December 31, 2016.

 

25 

 

 

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 June 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 in other banks

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 June 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.

 

26 

 

 

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 June 30, 2017 and December 31, 2016.

 

Fair Value Measurements at June 30, 2017
   

Carrying

Amount

 

Estimated

Fair Value

 

Level

1

 

Level

2

 

Level

3

Financial Assets:                    
Cash and due from banks

$

8,746,291 $  8,746,291

$

8,746,291 $

$

Interest-bearing deposits in other banks   23,881,649   23,881,649   23,881,649

 

Investment securities available for sale   132,660,381   132,660,381   24,195,314   95,976,122   12,488,945
Mortgage loans to be sold    2,232,201    2,232,201      2,232,201    -
Net loans    256,302,230   255,780,927       255,780,927
Accrued interest receivable   1,551,357    1,551,357      1,551,357  
Financial Liabilities:                    

Demand deposits

   341,773,707    341,773,707      341,773,707  

Time deposits

  44,518,562   44,734,936     44,734,936  
Accrued interest payable    59,031    59,031      59,031  

 

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 in other banks   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  

 

27 

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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

 

   Three Months Ended
June 30
 
   2017   2016 
Net income  $1,386,385   $1,312,110 
           
Weighted average shares outstanding - basic   4,967,907    4,929,722 
Effect of dilutive shares   105,001    126,801 
Weighted average shares outstanding - diluted   5,072,908    5,056,523 
           
Earnings per share - basic  $0.28   $0.27 
Earnings per share - diluted  $0.27   $0.26 

 

   Six Months Ended
June 30
 
   2017   2016 
Net income  $2,612,473   $2,507,846 
           
Weighted average shares outstanding - basic   4,965,094    4,923,266 
Effect of dilutive shares   103,930    124,335 
Weighted average shares outstanding - diluted   5,069,024    5,047,601 
           
Earnings per share - basic  $0.53   $0.51 
Earnings per share - diluted  $0.52   $0.50 

 

28 

 

 

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 for some time. 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.

 

 29

 

 

Overview

Bank of South Carolina Corporation (the “Company”) is a financial institution holding company headquartered in Charleston, South Carolina, with $430.3 million in assets as of June 30, 2017 and net income of $1.4 million and $2.6 million for the three and six months ended June 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 earning assets, such as loans and investments, and the expense on our interest bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-bearing assets and the rate we pay on our interest-bearing liabilities.

 

A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The reserve for credit losses consists of the allowance for loan losses (the “allowance”) and a reserve for unfunded commitments (the “unfunded reserve”). The allowance provides for probable and estimable losses inherent in our loan and lease portfolio 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 June 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 June 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 24.33% or $6.4 million to $32.6 million at June 30, 2017, from $26.2 million at 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 with the Federal Reserve Bank until opportunities arise for 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.

 

 30

 

 

At June 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 $132.7 million and an amortized cost of $132.0 million for a net unrealized gain of $618,883. At June 30, 2017 and December 31, 2016, our investment securities portfolio represented approximately 30.83% and 28.00% of our total assets, respectively. The average yield on our investment securities was 2.00% and 1.99% at June 30, 2017 and December 31, 2016, respectively.

 

We had seven Municipal Securities with an approximate total book value of $2.8 million that matured and three Municipal Securities with an approximate total book value of $1.0 million that were called in the six months ended June 30, 2017. We purchased three investment securities issued by Government Sponsored Enterprises with a face value of $15.1 million during the six months ended June 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 decreased approximately $400,000, or 0.16%, to $256.3 million at June 30, 2017 from $256.7 million at December 31, 2016. While loan demand remains consistent, we believe the decrease in net loans is due to an increase in loan payoffs related to the sale of real estate held as collateral and decrease in the usage of lines of credit.

 

The following table is a summary of our loan portfolio composition (net of deferred fees of $143,374 at June 30, 2017 and $136,446 at December 31, 2016) and the corresponding percentage of total loans as of the dates indicated.

 

   June 30, 2017   December 31, 2016 
   Amount   Percent   Amount   Percent 
Commercial loans  $56,281,569    21.63%  $52,262,209    20.06%
Commercial real estate – construction   1,457,591    0.56%   1,208,901    0.46%
Commercial real estate – other   121,477,838    46.68%   122,968,126    47.19%
Consumer real estate   75,702,877    29.09%   77,131,816    29.60%
Consumer other   5,309,870    2.04%   7,005,063    2.69%
Total   260,229,745    100.00%   260,576,115    100.00%
Allowance for loan loss   (3,927,515)        (3,851,617)     
Total loans, net  $256,302,230        $256,724,498      

 

Nonperforming assets

Nonperforming assets include real estate acquired through foreclosure or deed 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 June 30, 2017, we had no loans 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 in the current economic environment. As of June 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 decreased $46,143 from $521,943 as of December 31, 2016 to $475,800 as of June 30, 2017. The balance represents one property.

 

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The following table is a summary of our nonperforming assets:

 

    June 30,
2017
 December 31,
2016
Commercial loans   $52,050 $ 61,781
Commercial real estate – other    1,782,819   1,678,876
Consumer – other       964
Total nonaccrual loans    1,834,869   1,741,621
Other real estate owned    475,800   521,943
Total nonperforming assets   $2,310,669 $ 2,263,564

   

Allowance for Loan Losses

The allowance for loan losses was $3.9 million at June 30, 2017 and December 31, 2016, or 1.51% and 1.48% of outstanding loans, respectively. At June 30, 2017 and December 31, 2016, the allowance for loan losses represented 169.97% and 170.16% of the total amount of nonperforming loans, respectively. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses at June 30, 2017 is adequate.

 

At June 30, 2017, impaired loans totaled $4.2 million, for which $2.2 million of these loans had a reserve of approximately $1.4 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 June 30, 2017, we recorded $2,372 of charge-offs and $23,030 of recoveries on loans previously charged-off, resulting in net recoveries of $20,658. Comparatively, we recorded $82,556 of charge-offs and $18,240 of recoveries on loans previously charged-off, resulting in net charge-offs of $64,316 during the three months ended June 30, 2016. During the six months ended June 30, 2017, we recorded $2,372 of charge-offs and we recorded $45,770 of recoveries on loans previously charged-off, resulting in net recoveries of $43,398. Comparatively, during the same period in 2016, we recorded $116,651 of charge-offs and $26,270 of recoveries on loans previously charged-off, resulting in net charge-offs of $90,381 for the six months ended June 30, 2016.

 

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest bearing deposits provided funding for 60.88% of average earning assets for the six months ended June 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:

 

   June 30, 2017   December 31, 2016 
   Amount   Percent   Amount   Percent 
Deposits:                
 Non-interest bearing demand  $132,051,130    34.18%  $126,034,478    33.83%
 Interest-bearing demand   94,401,633    24.44%   96,260,589    25.84%
 Money market accounts   81,827,246    21.18%   77,307,662    20.75%
 Time deposits over $250,000   17,959,145    4.64%   17,822,136    4.78%
 Other time deposits   26,559,417    6.88%   26,019,121    6.98%
 Other savings deposits   33,493,698    8.68%   29,078,865    7.81%
Total deposits  $386,292,269    100.00%  $372,522,851    100.00%

 

Deposits increased 3.70% or $13.8 million from December 31, 2016 to June 30, 2017. These increases were primarily due to larger balances in existing customer accounts as well as new accounts. Certificates of Deposit and other time deposits over $250,000 totaled $18.0 million and $17.8 million as of June 30, 2017 and December 31, 2016, respectively.

 

At June 30, 2017 and December 31, 2016, deposits with an aggregate deficit balance of $29,155 and $24,963, respectively were re-classified as other loans.

 

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

Net income increased $74,275 or 5.66% to $1.4 million, or basic and diluted earnings per share of $0.28 and $0.27, respectively, for the three months ended June 30, 2017, from $1.3 million, or basic and diluted earnings per share of $0.27 and $0.26, respectively, for the three months ended June 30, 2016. Our return on average assets and average equity for the three months ended June 30, 2017 were 1.31% and 12.97%, respectively, compared with 1.30% and 12.82%, respectively, for the three months ended June 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 $149,082 or 4.05% to $3.8 million for the three months ended June 30, 2017 from $3.7 million for the three months ended June 30, 2016. This increase was primarily due to income from securities and interest bearing deposits at the Federal Reserve Bank. Average loans decreased $5.5 million or 2.01% to $261.3 million for the three months ended June 30, 2017, compared to $266.8 million for the three months ended June 30, 2016. The yield on average loans (including fees) was 5.55% and 4.84% for the three months ended June 30, 2017 and June 30, 2016, respectively. Interest income on loans increased $13,019 for the three months ended June 30, 2017 to $3.2 million from $3.2 million for the three months ended June 30, 2016.

 

The average balance of interest bearing deposits in other banks decreased $4.1 million or 16.33% to $21.0 million for the three months ended June 30, 2017, with a yield of 1.06% as compared to $25.1 million for the three months ended June 30, 2016, with a yield of 0.50%.

 

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 June 30, 2017, we had a provision of $30,000 compared to a provision of $140,000 for the same period in the prior year. The decrease in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income decreased $33,093 or 4.54% to $696,479 for the three months ended June 30, 2017, from $729,572 for the three months ended June 30, 2016. This reduction was primarily due to less income derived from the sale of investment securities, and was partially offset by increases in service charges, fees, and commissions and mortgage banking income. For the three months ended June 30, 2016, we realized gains of $160,391 from the sale of investment securities. However, during the three months ended June 30, 2017, there were no sales of investment securities.

 

Non-Interest Expense

Non-interest expense increased $153,242 or 6.29% to $2.6 million for the three months ended June 30, 2017 from $2.4 million for the three months ended June 30, 2016. This increase was primarily due to an increase in other operating expenses of $73,705 related to the amortization of the tax credit and a write down on OREO of $46,143.

 

Income Tax Expense

We incurred income tax expense of $516,734 for the three months ended June 30, 2017 as compared to $518,262 during the same period in 2016. Our effective tax rate was 27.15% and 28.31% for the three months ended June 30, 2017 and 2016, respectively. The decrease in the effective tax rate during the 2017 period is a result of the Company’s 2016 investment in a South Carolina Historic Rehabilitation Tax Credit.

 

Comparison of Six Months Ended June 30, 2017 to Six Months Ended June 30, 2016

Net income increased $104,627 or 4.17% to $2.6 million, or basic and diluted earnings per share of $0.53 and $0.52, respectively, for the six months ended June 30, 2017, from $2.5 million, or basic and diluted earnings per share of $0.51 and $0.50, respectively, for the six months ended June 30, 2016. Our return on average assets and average equity for the six months ended June 30, 2017 were 1.26% and 12.42%, respectively, compared with 1.26% and 12.37%, respectively, for the six months ended June 30, 2016.

 

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Net Interest Income

Net interest income increased $305,796 or 4.24% to $7.5 million for the six months ended June 30, 2017 from $7.2 million for the six months ended June 30, 2016. This increase was primarily due income from securities and interest bearing deposits at the Federal Reserve Bank. Average loans increased $1.8 million or 0.68% to $261.2 million for the six months ended June 30, 2017, compared to $259.4 million for the six months ended June 30, 2016. The yield on average loans (including fees) was 5.39% and 4.84% for the six months ended June 30, 2017 and June 30, 2016, respectively. Interest income on loans increased $120,714 for the six months ended June 30, 2017 to $6.4 million from $6.2 million for the six months ended June 30, 2016.

 

The average balance of interest bearing deposits in other banks decreased $5.8 million or 22.43% to $20.3 million for the six months ended June 30, 2017, with a yield of 0.95% as compared to $26.1 million for the six months ended June 30, 2016, with a yield of 0.50%.

 

Provision for Loan Losses

For the six months ended June 30, 2017, we had a provision of $32,500 compared to a provision of $185,000 for the same period in the prior year. The decrease in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income decreased $287,248 or 18.71% to $1.2 million for the six months ended June 30, 2017, from $1.5 million for the six months ended June 30, 2016. This reduction is primarily due to less income derived from the sale of investment securities, and was partially offset by increases in service charges, fees, and commissions and mortgage banking income. For the six months ended June 30, 2016, we realized gains of $348,327 from the sale of investment securities. However, during six months ended June 30, 2017, there were no sales of investment securities.

 

Non-Interest Expense

Non-interest expense increased $88,725 or 1.78% to $5.1 million for the six months ended June 30, 2017 from $5.0 million for the six months ended June 30, 2016. This increase was primarily due to an increase in other operating expenses of $72,709 related to the amortization of the tax credit and a write-down of OREO in the amount of $46,143.

 

Income Tax Expense

We incurred income tax expense of $1.1 million for the six months ended June 30, 2017 as compared to $1.1 million during the same period in 2016. Our effective tax rate was 28.92% and 30.21% for the six months ended June 30, 2017 and 2016, respectively. The decrease in the effective tax rate during the 2017 period is a result of the Company’s 2016 investment in a South Carolina Historic Rehabilitation Tax Credit.

 

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 $86.8 million and $81.2 million at June 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 June 30, 2017 and December 31, 2016 was $953,504 and $793,992, respectively.

 

 34

 

 

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 $6.2 million at June 30, 2017, to sell loans held for sale of $2.2 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 June 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 $34.7 million at June 30, 2017 and $18.1 million at December 31, 2016. For the three and six months ended June 30, 2017 and June 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 38.93% and 36.38% of total assets at June 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 June 30, 2017, we had unused short-term lines of credit totaling approximately $18 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 established 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 June 30, 2017, we could borrow up to $77 million. There have been no borrowings under this arrangement.

 

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 $100,000 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 June 30, 2017 and December 31, 2016, our liquidity ratio was 42.85% 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 June 30, 2017 was $43.1 million. The rate of asset growth since our inception has not negatively impacted this capital base.

 

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 rule is identical in substance to the final rules issued by the Federal Reserve Bank.

 

 35

 

 

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 June 30, 2017 and December 31, 2016 was 15.69% and 15.36%, respectively.

 

At June 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 June 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 June 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 June 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.

 

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 June 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.

 

 36

 

 

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 June 30, 2017. Based on this assessment, management believes that as of June 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 June 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 Decosimo, LLC (separately and jointly) to discuss audit, financial and related matters. Elliott Davis Decosimo, 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 9-28

 

 37

 

  

Exhibits

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

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

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

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

4.02016 Proxy Statement (Filed with 2015 10-K)

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

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

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

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

10.4Lease 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)

10.51998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A)

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

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

10.72010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement)

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

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

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

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

10.12Extension to Lease Agreement for 256 Meeting Street

10.13North Charleston Lease Agreement (filed within)

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

21.0List 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)

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

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

32.1Certification pursuant to Section 1350

32.2Certification 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

 

 38

 

 

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
     
August 10, 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

 

 39