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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

 

 

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 March 31, 2016
  
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 incorporation or organization)  

(IRS Employer

Identification Number)

 

256 Meeting Street, Charleston, SC 29401

(Address of principal executive offices)

 

(843) 724-1500

(Registrant’s telephone number)

 

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

Yes  ☒    No  ☐

 

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

Yes  ☒    No  ☐

 

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

 

Large accelerated filer   Accelerated Filer
Non-accelerated filer   Smaller reporting Company

 

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 May 6, 2016 there were 4,928,507 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 – March 31, 2016 and December 31, 2015   3
  Consolidated Statements of Income – Three months ended March 31, 2016 and 2015   4
  Consolidated Statements of Comprehensive Income – Three months ended March 31, 2016 and 2015   5
  Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2016 and 2015   6
  Consolidated Statements of Cash Flows – Three months ended March 31, 2016 and 2015   7
  Notes to Consolidated Financial Statements   8
       
Item 2. Management’s Discussion and Analysis of Financial    
  Condition and Results of Operations   25
  Off-Balance Sheet Arrangements   31
  Liquidity   31
  Capital Resources   32
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   33
       
Item 4. Controls and Procedures   33
       
  Part II. Other Information    
       
Item 1.   Legal Proceedings   34
       
Item 1A. Risk Factors   34
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   34
       
Item 3. Defaults Upon Senior Securities   34
       
Item 4.   Mine Safety Disclosure   34
       
Item 5.   Other Information   34
       
Item 6.   Exhibits   34
       
  Signatures   36
       
  Certifications   37

 

2 
 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 
 
 
 
(Unaudited)
March 31, 2016
 
 
(Audited)
December 31, 2015
ASSETS      
Cash and due from banks  $7,622,989   $5,295,924 
Interest-bearing deposits in other bank   30,503,030    23,898,862 
Investment securities available for sale   107,353,804    119,997,585 
Mortgage loans to be sold   3,929,539    5,820,239 
Loans   253,325,633    242,622,705 
Less: Allowance for loan losses   (3,436,762)   (3,417,827)
Net loans   249,888,871    239,204,878 
Premises, equipment and leasehold improvements, net   2,265,079    2,289,228 
Other real estate owned   521,943    620,394 
Accrued interest receivable   1,040,677    1,284,063 
Other assets   568,060    761,339 
           
Total assets  $403,693,992   $399,172,512 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Liabilities          
Deposits:          
Non-interest-bearing demand  $119,022,680   $122,073,396 
Interest-bearing demand   96,992,732    84,977,640 
Money market accounts   63,935,267    70,233,422 
Time deposits over $250,000   24,095,180    25,896,768 
Other time deposits   28,657,047    28,871,044 
Other savings deposits   28,966,396    26,666,342 
Total deposits   361,669,302    358,718,612 
           
Accrued interest payable and other liabilities   1,694,180    1,302,188 
Total Liabilities   363,363,482    360,020,800 
           
Shareholders’ Equity          
Common Stock-No par value: 12,000,000 shares authorized; shares issued 5,158,903 at March 31, 2016 and 5,157,996 at December 31, 2015; shares outstanding 4,917,507 at March 31, 2016 and 4,916,600 at December 31, 2015        
Additional paid in capital   36,372,788    36,341,744 
Retained earnings   4,621,294    4,064,834 
Treasury stock; 241,396 shares at March 31, 2016 and December 31, 2015   (2,247,415)   (2,247,415)
Accumulated other comprehensive income, net of income taxes   1,583,843    992,549 
Total shareholders’ equity   40,330,510    39,151,712 
           
Total liabilities and shareholders’ equity  $403,693,992   $399,172,512 

 

See accompanying notes to consolidated financial statements.

  

3 
 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Three Months Ended
   March 31,
   2016  2015
Interest and fee income      
Loans, including fees  $3,034,043   $2,864,766 
Taxable securities   323,133    339,781 
Tax-exempt securities   239,314    263,181 
Other   35,575    6,874 
Total interest and fee income   3,632,065    3,474,602 
           
Interest expense          
Deposits   94,139    92,734 
Short-term borrowings       737 
Total interest expense   94,139    93,471 
           
Net interest income   3,537,926    3,381,131 
Provision for loan losses   45,000    5,000 
Net interest income after provisions for loan   3,492,926    3,376,131 
losses          
           
Other income          
Service charges, fees and commissions   260,531    237,285 
Mortgage banking income   351,873    377,146 
Other non-interest income   5,689    4,914 
Loss on sale of other real estate   (13,450)    
Gain on sale of securities   187,936    111,313 
Total other income   792,579    730,658 
           
Other expense          
Salaries and employee benefits   1,515,027    1,416,173 
Net occupancy expense   376,399    363,599 
Other operating expenses   631,272    559,282 
Total other expense   2,522,698    2,339,054 
           
Income before income tax expense   1,762,807    1,767,735 
Income tax expense   567,071    562,775 
Net income  $1,195,736   $1,204,960 
           
Weighted average shares outstanding          
Basic   4,917,334    4,907,223 
Diluted   5,067,563    5,054,687 
           
Earnings per common share          
Basic income per common share  $0.24   $0.25 
Diluted income per common share  $0.24   $0.24 

All share and per share data have been restated to reflect a 10% stock dividend declared August 27, 2015.

 

See accompanying notes to consolidated financial statements.

  

4 
 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Three Months Ended
   March 31,
   2016  2015
Net income  $1,195,736   $1,204,960 
Other comprehensive income:          
Unrealized gain on securities arising during the period  (net of tax)   709,731    682,022 
Reclassification adjustment for securities gains realized in net income    (187,936)   (111,313)
Other comprehensive income, before tax   521,795    570,709 
Income tax effect related to items of other comprehensive income   69,499    41,186 
Other comprehensive income, after tax   591,294    611,895 
Total comprehensive income  $1,787,030   $1,816,855 

 

See accompanying notes to consolidated financial statements.

  

5 
 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015 (UNAUDITED)

 

    
ADDITIONAL
PAID IN

CAPITAL
   
 
RETAINED
EARNINGS
   
 
TREASURY
STOCK
  ACCUMULATED
OTHER

COMPREHENSIVE
INCOME
  TOTAL
December 31, 2014  $28,779,108   $8,640,291   $(1,902,439)  $1,243,022   $36,759,982 
Net income       1,204,960            1,204,960 
Other comprehensive income               611,895    611,895 
Stock-based compensation expense   19,192                19,192 
Cash dividends ($0.13 per common share)       (579,981)           (579,981)
March 31, 2015  $28,798,300   $9,265,270   $(1,902,439)  $1,854,917   $38,016,048 
                          
December 31, 2015  $36,341,744   $4,064,834   $(2,247,415)  $992,549   $39,151,712 
Net income       1,195,736            1,195,736 
Other comprehensive income               591,294    591,294 
Exercise of stock options   12,462                12,462 
Stock-based compensation expense   18,582                18,582 
Cash dividends ($0.13 per common share)       (639,276)           (639,276)
March 31, 2016  $36,372,788   $4,621,294   $(2,247,415)  $1,583,843   $40,330,510 

 

See accompanying notes to consolidated financial statements.

 

6 
 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   Three Months Ended
   March 31,
   2016  2015
Cash flows from operating activities:      
Net income  $1,195,736   $1,204,960 
Adjustments to reconcile net income to net cash provided by operating activities:              
Depreciation   48,807    48,128 
Gain on sale of securities   (187,936)   (111,313)
Loss on sale of other real estate   13,450     
Provision for loan losses   45,000    5,000 
Stock-based compensation expense   18,582    19,192 
Net amortization of unearned discounts on investments   44,680    25,813 
Origination of mortgage loans held for sale   (15,696,295)   (18,927,142)
Proceeds from sale of mortgage loans held for sale   17,586,995    22,046,921 
Decrease in accrued interest receivable and other assets   277,334    138,244 
Increase in accrued interest payable and other liabilities   391,874    570,085 
Net cash provided by operating activities   3,738,227    5,019,888 
           
Cash flows from investing activities:          
Proceeds from maturities of investment securities available for sale   2,000,000    1,400,000 
Proceeds from sale of investment securities available for sale   15,629,464    10,845,887 
Purchase of investment securities available for sale   (4,091,802)   (5,111,800)
Proceeds from sale of other real estate owned   85,001     
Net increase in loans   (10,728,993)   (3,575,680)
Purchase of premises, equipment, and leasehold improvements   (24,658)   (85,607)
Net cash provided by investing activities   2,869,012    3,472,800 
           
Cash flows from financing activities:          
Net increase in deposit accounts   2,950,690    10,535,019 
Net decrease in short-term borrowings       (2,999,664)
Dividends paid   (639,158)   (579,981)
Stock options exercised   12,462     
Net cash provided by financing activities   2,323,994    6,955,374 
Net increase in cash and cash equivalents   8,931,233    15,448,062 
Cash and cash equivalents at beginning of period   29,194,786    10,379,048 
Cash and cash equivalents at end of period  $38,126,019   $25,827,110 
           
Supplemental disclosure of cash flow data:          
Cash paid during the period for:          
Interest  $100,926   $98,961 
Income taxes  $   $ 
           
Supplemental disclosure for non-cash investing and financing activity:          
Change in unrealized gain on available for sale securities, net of tax  $591,294   $611,895 
Change in dividends payable  $118   $ 

 

See accompanying notes to consolidated financial statements.

 

7 
 

 

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 Bank of South Carolina Corporation (the “Company”) and its wholly-owned subsidiary, The Bank of South Carolina (the “Bank”). In 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, or 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 SEC on March 4, 2016. 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, asset prepayment rates 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 year’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 which 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.

 

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.

 

8 
 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance 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. The guidance will be effective 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 August 2015, the FASB deferred the effective date of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for reporting periods beginning after December 15, 2017. We will apply this guidance using the modified retrospective approach. We do not expect this amendment to have a material effect on our financial statements.

 

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments became effective for the Company for the first interim or annual period beginning after December 31, 2014. We applied the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. This adjustment did not have a material effect on our financial statements.

 

In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued. This amendment will be effective for annual periods ending after December 31, 2016, and for annual and interim periods thereafter. We do not expect this amendment to have any effect on our financial statements.

 

In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendment will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We will apply the guidance prospectively. We do not expect this amendment to have a material effect on our financial statements.

 

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendment will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. We do not expect this amendment to have a material effect on our financial statements.

 

9 
 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In April 2015, the FASB issued guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This update affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. The amendment will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. We do not expect this amendment to have a material effect on our financial statements.

 

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (ASC), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We do not expect these amendments to have a material effect on our financial statements.

 

In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. We do not expect these amendments to have a material effect on our financial statements.

 

In January 2016, the FASB amended the Financial Instruments topic of Accounting Standards Codification to address 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. We do not expect this amendment to have a material effect on our financial statements.

 

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise 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 amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification 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. We do not expect these amendments to have a material effect on our financial statements.

 

In March 2016, the FASB issued guidance 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 will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We do not expect these amendments to have a material effect on our 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.

 

10 
 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2: Investment Securities

 

The amortized cost and fair value of investment securities available for sale are summarized as follows:

 

    March 31, 2016
    AMORTIZED COST   GROSS UNREALIZED GAINS   GROSS UNREALIZED LOSSES   ESTIMATED FAIR VALUE
U.S. Treasury Notes   $ 23,989,841     $ 252,503     $     $ 24,242,344  
Government-Sponsored Enterprises     46,018,755       897,653             46,916,408  
Municipal Securities     34,831,179       1,367,484       3,611       36,195,052  
Total   $ 104,839,775     $ 2,517,640     $ 3,611     $ 107,353,804  

 

    December 31, 2015
    AMORTIZED COST   GROSS UNREALIZED GAINS   GROSS UNREALIZED LOSSES   ESTIMATED FAIR VALUE
U.S. Treasury Notes   $ 34,517,996     $ 161,037     $ 45,360     $ 34,633,673  
Government-Sponsored Enterprises     51,136,426       281,650       133,744       51,284,332  
Municipal Securities     32,767,694       1,340,610       28,724       34,079,580  
Total   $ 118,422,116     $ 1,783,297     $ 207,828     $ 119,997,585  

 

The following table presents the amortized cost and estimated fair value of investment securities available for sale by contractual maturity for the periods indicated:

 

   March 31, 2016  December 31, 2015
   AMORTIZED COST  ESTIMATED FAIR VALUE  AMORTIZED COST  ESTIMATED FAIR VALUE
Due in one year or less  $1,857,755   $1,870,311   $3,311,346   $3,326,249 
Due in one year to five years   65,340,811    66,667,079    69,870,930    70,584,179 
Due in five years to ten years   34,889,466    36,018,411    41,930,801    42,670,986 
Due in ten years and over   2,751,743    2,798,003    3,309,039    3,416,171 
Total  $104,839,775   $107,353,804   $118,422,116   $119,997,585 

 

Securities pledged to secure deposits and repurchase agreements at March 31, 2016 and December 31, 2015, had a carrying amount of $46.5 million and $48.0 million, respectively.

 

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 March 31, 2016 and December 31, 2015. We believe that all unrealized losses have resulted from temporary changes in the interest rate market 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.

 

11 
 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Less Than 12 months   12 months or longer   Total
Available for sale   #   Fair Value   Unrealized Losses   #   Fair Value   Unrealized Losses   #   Fair Value   Unrealized Losses
As of March 31, 2016
U.S. Treasury Notes         $     $           $     $           $     $  
Government Sponsored Enterprises                                                      
Municipal Securities     2       785,389       3,611                         2       785,389       3,611  
Total     2     $ 785,389     $ 3,611         $     $       2     $ 785,389     $ 3,611  
                                                                         
As of December 31, 2015
U.S. Treasury Notes     2     $ 10,064,063     $ 45,360           $     $       2     $ 10,064,063     $ 45,360  
Government Sponsored Enterprises     2       7,475,445       38,538       1       5,002,335       95,206       3       12,477,780       133,744  
Municipal Securities     6       4,361,149       28,724                         6       4,361,149       28,724  
Total     10     $ 21,900,657     $ 112,622       1     $ 5,002,335     $ 95,206       11     $ 26,902,992     $ 207,828  

 

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

 

   For the Three Months Ended
   March 31,
   2016  2015
Gross proceeds  $15,629,464   $10,845,887 
Gross realized gains   187,936    111,313 
Gross realized losses        

 

The tax provision related to these gains was $69,499 and $41,186 for the three months ended March 31, 2016 and 2015, respectively.

 

12 
 

 

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 $123,970 at March 31, 2016, and $118,188 at December 31, 2015) are as follows:

 

 
 
 
 
March 31,
2016
 
 
December 31,
2015
Commercial Loans  $52,101,572   $50,938,265 
Commercial real estate:          
Commercial real estate construction   1,160,893    1,005,118 
Commercial real estate other   121,300,195    115,736,034 
Consumer          
Consumer real estate   73,239,469    69,777,307 
Consumer other   5,523,504    5,165,981 
    253,325,633    242,622,705 
Allowance for Loan losses   (3,436,762)   (3,417,827)
Loans, net  $249,888,871   $239,204,878 

 

We had $104.1 million and $102.1 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2016 and at December 31, 2015, 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, 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, bankruptcy possible. 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.

 

13 
 

 

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 table illustrates credit risks by category and internally assigned grades at March 31, 2016 and December 31, 2015. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

    March 31, 2016
    Commercial  Commercial Real Estate Construction  Commercial Real Estate Other  Consumer Real Estate  Consumer Other  Total
Pass  $48,126,073   $730,876   $115,601,053   $69,362,054   $5,262,539   $239,082,595 
Watch   1,010,043    430,017    926,678    2,471,241    133,234    4,971,213 
OAEM   1,191,770        1,154,784    733,461    24,574    3,104,589 
Substandard   1,773,686        3,617,680    672,713    103,157    6,167,236 
Doubtful                        
Loss                        
Total  $52,101,572   $1,160,893   $121,300,195   $73,239,469   $5,523,504   $253,325,633 

 

    December 31, 2015
    Commercial  Commercial Real Estate Construction  Commercial Real Estate Other  Consumer Real Estate  Consumer Other  Total
Pass  $46,865,088   $572,101   $110,040,948   $65,941,806   $4,857,576   $228,277,519 
Watch   1,096,200    433,017    940,073    2,490,339    175,489    5,135,118 
OAEM   1,337,002        1,203,518    99,743    26,961    2,667,224 
Substandard   1,639,975        3,551,495    1,245,419    105,955    6,542,844 
Doubtful                        
Loss                        
Total  $50,938,265   $1,005,118   $115,736,034   $69,777,307   $5,165,981   $242,622,705 

 

The following tables include an aging analysis of the recorded investment of past-due financing receivable by class:

  

   March 31, 2016
   30-59 Days Past Due  60-89 Days Past Due  Greater Than 90 Days  Total Past Due  Current  Total Loans Receivable  Recorded Investment
> 90 Days and Accuring Interest
Commercial Loans  $39,664   $1,054,310      $1,093,974   $51,007,598   $52,101,572   $ 
Commercial real estate:                                   
Commercial real estate construction                   1,160,893    1,160,893     
Commercial real estate other       986,887    1,817,056    2,803,943    118,496,252    121,300,195     
Consumer                                   
Consumer real estate           150,255    150,255    73,089,214    73,239,469     
Consumer other       12,176    2,448    14,624    5,508,880    5,523,504     
Total  $39,664   $2,053,373   $1,969,759   $4,062,796   $249,262,837   $253,325,633   $ 

 

14 
 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

   December 31, 2015
   30-59 Days Past Due  60-89 Days Past Due  Greater Than 90 Days  Total Past Due  Current  Total Loans Receivable  Recorded Investment
> 90 Days and Accuring Interest
Commercial Loans  $1,162,676   $250,370   $4,317   $1,417,363   $49,520,902   $50,938,265   $ 
Commercial real estate:                                   
Commercial real estate construction                   1,005,118    1,005,118     
Commercial real estate other   91,607    1,215,473    1,152,774    2,459,854    113,276,180    115,736,034     
Consumer                                   
Consumer real estate   68,240    249,754    82,015    400,009    69,377,298    69,777,307     
Consumer other   69,333    58,116    6,056    133,505    5,032,476    5,165,981    1,606 
Total  $1,391,856   $1,773,713   $1,245,162   $4,410,731   $238,211,974   $242,622,705   $1,606 

There were no loans at March 31, 2016 and one loan at December 31, 2015, over 90 days past due and still accruing interest. The following table summarizes the balances of non-accrual loans:

 

   Loans Receivable on Non-Accrual
For the Period Ending
   March 31, 2016  December 31, 2015
Commercial Loans  $3,862   $4,317 
Commercial real estate:          
Commercial real estate construction        
Commercial real estate other   2,453,166    1,970,306 
Consumer          
Consumer real estate   150,255    82,015 
Consumer other   4,857    4,450 
Total  $2,612,140   $2,061,088 

 

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance by loan category for the three months ended March 31, 2016 and March 31, 2015. The allowance 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.

 

   March 31, 2016
   Commercial  Commercial Real Estate Construction  Commercial Real Estate Other  Consumer Real Estate  Consumer Other  Total
Beginning Balance  $896,854   $59,861   $1,345,094   $941,470   $174,548   $3,417,827 
Charge-offs   (33,045)                  (1,050)   (34,095)
Recoveries   1,284         6,000         746    8,030 
Provision   635,557    (15,593)   (242,391)   (328,228)   (4,345)   45,000 
Ending Balance  $1,500,650   $44,268   $1,108,703   $613,242   $169,899   $3,436,762 

  

15 
 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

   March 31, 2015
   Commercial  Commercial Real Estate Construction  Commercial Real Estate Other  Consumer Real Estate  Consumer Other  Total
Beginning Balance  $1,211,130   $42,904   $1,112,387   $863,351   $105,076   $3,334,848 
Charge-offs           (21,000)           (21,000)
Recoveries           15,000        240    15,240 
Provision   (110,328)   1,792    85,335    (12,093)   40,294    5,000 
Ending Balance  $1,100,802   $44,696   $1,191,722   $851,258   $145,610   $3,334,088 

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

    March 31, 2016
   Commercial  Commercial Real Estate Construction  Commercial Real Estate Other  Consumer Real Esate  Consumer Other  Total
Allowance for Loan Losses                  
Individually evaluated for impairment  $1,103,564   $   $338,142   $150,545   $103,157   $1,695,408 
Collectively evaluated for impairment   397,086    44,268    770,561    462,697    66,742    1,741,354 
Total Allowance for Losses  $1,500,650   $44,268   $1,108,703   $613,242   $169,899   $3,436,762 
                               
Loan Receivable                              
Individually evaluated for impairment  $1,773,687   $   $4,020,095   $604,472   $171,397   $6,569,651 
Collectively evaluated for impairment   50,327,885    1,160,893    117,280,100    72,634,997    5,352,107    246,755,982 
Total Loans Receivable  $52,101,572   $1,160,893   $121,300,195   $73,239,469   $5,523,504   $253,325,633 

    December 31, 2015
   Commercial  Commercial Real Estate Construction  Commercial Real Estate Other  Consumer Real Esate  Consumer Other  Total
Allowance for Loan Losses                  
Individually evaluated for impairment  $387,979   $   $253,105   $342,320   $100,103   $1,083,507 
Collectively evaluated for impairment   508,875    59,861    1,091,989    599,150    74,445    2,334,320 
Total Allowance for Losses  $896,854   $59,861   $1,345,094   $941,470   $174,548   $3,417,827 
                               
Loan Receivable                              
Individually evaluated for impairment  $1,639,974   $   $3,551,495   $1,245,419   $105,819   $6,542,707 
Collectively evaluated for impairment   49,298,291    1,005,118    112,184,539    68,531,888    5,060,162    236,079,998 
Total Loans Receivable  $50,938,265   $1,005,118   $115,736,034   $69,777,307   $5,165,981   $242,622,705 

16 
 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2016 and December 31, 2015, loans individually evaluated and considered impaired are presented in the following table:

   Impaired and Restructured Loans
As of
   March 31, 2016  December 31, 2015
   Unpaid Principal Balance  Recorded Investment  Related Allowance  Unpaid Principal Balance  Recorded Investment  Related Allowance
With no related allowance recorded:                  
Commercial  $670,123   $670,123   $   $692,831   $692,831   $ 
Commercial Real Estate Construction                        
Commercial Real Estate Other   2,686,274    2,686,274        2,476,018    2,476,018     
Consumer Real Estate   450,402    450,402        450,402    450,402     
Consumer Other   68,240    68,240        5,715    5,715     
   $3,875,039   $3,875,039   $   $3,624,966   $3,624,966   $ 
                               
With an allowance recorded:                              
Commercial  $1,103,564   $1,103,564   $1,103,564   $947,143   $947,143   $387,979 
Commercial Real Estate Construction                        
Commercial Real Estate Other   1,333,821    1,333,821    338,142    1,075,477    1,075,477    253,105 
Consumer Real Estate   154,070    154,070    150,545    795,017    795,017    342,320 
Consumer Other   103,157    103,157    103,157    100,104    100,104    100,103 
   $2,694,612   $2,694,612   $1,695,408   $2,917,741   $2,917,741   $1,083,507 
Total                              
Commercial  $1,773,687   $1,773,687   $1,103,564   $1,639,974   $1,639,974   $387,979 
Commercial Real Estate Construction                        
Commercial Real Estate Other   4,020,095    4,020,095    338,142    3,551,495    3,551,495    253,105 
Consumer Real Estate   604,472    604,472    150,545    1,245,419    1,245,419    342,320 
Consumer Other   171,397    171,397    103,157    105,819    105,819    100,103 
   $6,569,651   $6,569,651   $1,695,408   $6,542,707   $6,542,707   $1,083,507 

17 
 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for the periods indicated. 

   Three Months Ended
   March 31, 2016  March 31, 2015
   Average Recorded Investment  Interest Income Recognized  Average Recorded Investment  Interest Income Recognized
With no related allowance recorded:                    
Commercial  $1,106,771   $16,647   $784,435   $11,992 
Commercial Real Estate Construction                
Commercial Real Estate Other   1,334,158    6,705    3,290,380    42,894 
Consumer Real Estate   154,105    1,119    522,468    5,385 
Consumer Other   106,011    2,374         
   $2,701,045   $26,845   $4,597,283   $60,271 
With an allowance recorded:                    
Commercial  $682,992   $11,033   $1,176,492   $13,207 
Commercial Real Estate Construction                
Commercial Real Estate Other   2,650,492    29,127    1,111,464    12,938 
Consumer Real Estate   450,403    6,742    748,701    5,431 
Consumer Other   68,240        88,346    1,400 
   $3,852,127   $46,902   $3,125,003   $32,976 
Total                    
Commercial  $1,789,763   $27,680   $1,960,927   $25,199 
Commercial Real Estate Construction                
Commercial Real Estate Other   3,984,650    35,832    4,401,844    55,832 
Consumer Real Estate   604,508    7,861    1,271,169    10,816 
Consumer Other   174,251    2,374    88,346    1,400 
   $6,553,172   $73,747   $7,722,286   $93,247 

 

Restructured loans (loans, still accruing interest, which have been renegotiated at below-market interest rates or for which other concessions have been granted) were $451,264 (3 loans) and $458,268 (3 loans) at March 31, 2016 and December 31, 2015, respectively. Restructured loans were granted extended payment terms with no principal reduction. All restructured loans were performing as agreed as of March 31, 2016 and December 31, 2015, respectively. There were no additional loans identified as a troubled debt restructuring (“TDR”) during the three months ended March 31, 2016 or 2015. No TDRs defaulted during the three months ended March 31, 2016 and 2015, which were modified within the previous twelve months.

 

Note 4: Disclosure Regarding Fair Value of Financial Statements

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 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. The fair value standard 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. 

 

18 
 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

 

Investment Securities Available for Sale

 

Securities available for sale 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.

 

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 March 31, 2016 or December 31, 2015.

  

We had 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 March 31, 2016 and December 31, 2015.

  

19 
 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Assets and liabilities measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015 are as follows:

 

   March 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  $24,242,344   $   $   $24,242,344 
Government-Sponsored Enterprises           46,916,408             46,916,408  
Municipal Securities       30,945,701    5,249,351    36,195,052 
Total  $24,242,344   $77,862,109   $5,249,351   $107,353,804 

 

   December 31, 2015
   Quoted Market Price in
Active Markets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3)
  Total
U.S. Treasury Notes  $34,633,673   $   $   $34,633,673 
Government-Sponsored Enterprises           51,284,332             51,284,332  
Municipal Securities       28,861,902    5,217,678    34,079,580 
Total  $34,633,673   $80,146,234   $5,217,678   $119,997,585 

There were no liabilities recorded at fair value on a recurring basis as of March 31, 2016 or December 31, 2015.

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 months ended March 31, 2016 and the three months ended March 31, 2015:

 

   March 31,
2016
  March 31,
2015
Beginning Balance  $5,217,678   $1,377,089 
Total gains or (losses) (realized/unrealized) included in earnings
Included in other comprehensive income   31,673    (8,646)
Purchases, issuances and settlements        
Transfers in and/or out of level 3        
Ending balance  $5,249,351   $1,368,443 

20 
 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

There were no transfers between fair value levels during the three months ended March 31, 2016 or March 31, 2015.

 

Following is a description of 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. 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 Accounting Standards Codification (“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 March 31, 2016 and December 31, 2015, 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. These loans are classified as Level 2.

 

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).

  

21 
 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents information about certain assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2016, and December 31, 2015:

 

   March 31, 2016
   Quoted Market Price in Active Markets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3)
  Total
Impaired loans  $   $   $4,874,243   $4,874,243 
Other real estate owned           521,943    521,943 
Loans held for sale       3,929,539        3,929,539 
Total  $   $3,929,539   $5,396,186   $9,325,725 

 

    December 31, 2015
   Quoted Market Price in Active Markets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3)
  Total
Impaired loans  $   $   $5,459,200   $5,459,200 
Other real estate owned           620,394    620,394 
Loans held for sale       5,820,239        5,820,239 
Total  $   $5,820,239   $6,079,594   $11,899,833 

  

There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2016 or December 31, 2015.

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2016:

 

        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

 

Accounting standards require 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. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and the relevant market information. When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, prepayments, and estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may or may not be realized in an immediate sale of the instrument.

  

22 
 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 describes the methods and assumptions we use in estimating the fair values of financial instruments:

 

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.   Investment securities available for sale
    The fair value of investment securities is derived from quoted market prices.
     
c.   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 March 31, 2016 and December 31, 2015, approximate market.
     
    The carrying value of mortgage loans held for sale approximates fair value. For lines of credit, the carrying value approximates fair value.
     
d.   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. The fair value estimates for deposits do not include the benefit that results from the low cost funding provided by the deposit liabilities as compared to the cost of alternative forms of funding (deposit base intangibles).
     
d.   Short-term borrowings
    The carrying amount approximates fair value due to the short-term nature of these instruments.
     
e.   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.
     
f.   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.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of March 31, 2016 and December 31, 2015. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.

  

23 
 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

   March 31, 2016
   Carrying Amount  Estimated Fair Value  Level 1  Level 2  Level 3
Financial Assets:                         
Cash and due from banks  $7,622,989   $7,622,989   $7,622,989   $   $ 
Interest-bearing deposits in other banks   30,503,030    30,503,030    30,503,030           
Investments available for sale   107,353,804    107,353,804    24,242,344    77,862,109    5,249,351 
Mortgage loans to be sold   3,929,539    3,929,539         3,929,539      
Loans   253,325,633    253,194,574              253,194,574 
Accrued interest receivable   1,040,677    1,040,677         1,040,677      
Financial Liabilities:                         
Demand deposits   308,917,075    308,917,075         308,917,075      
Time deposits   52,752,227    52,764,119         52,764,119      
Accrued interest payable   66,634    66,634         66,634      

 

   December 31, 2015
   Carrying Amount  Estimated Fair Value  Level 1  Level 2  Level 3
Financial Assets:                         
Cash and due from banks  $5,295,924   $5,295,924   $5,295,924   $   $ 
Interest-bearing deposits in other banks   23,898,862    23,898,862    23,898,862           
Investments available for sale   119,997,585    119,997,585    34,633,673    80,146,234    5,217,678 
Mortgage loans to be sold   5,820,239    5,820,239         5,820,239      
Loans   242,622,705    242,581,154              242,581,154 
Accrued interest receivable   1,284,063    1,284,063         1,284,063      
Financial Liabilities:                         
Demand deposits   303,950,800    303,950,800         303,950,800      
Time deposits   54,767,812    54,780,915         54,780,915      
Accrued interest payable   73,421    73,421         73,421      

 

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.

 

     March 31,
2016
   March 31,
2015
Numerator:      
Net Income  $1,195,736   $1,204,960 
           
Denominator:          
Weighted average shares outstanding   4,917,334    4,907,223 
Effect of dilutive shares   150,229    147,464 
Weighted average shares outstanding-diluted   5,067,563    5,054,687 
Earnings per share          
Basic  $0.24   $0.25 
Diluted  $0.24   $0.24 

 

On August 27, 2015, the Company’s Board of Directors declared a ten percent stock dividend to our shareholders. The record date was September 8, 2015 and the distribution date was September 28, 2015. Earnings per share and average shares outstanding have been adjusted to reflect the stock dividend in our consolidated financial statements.

 

 

24 
 

 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6: Accumulated Other Comprehensive Income

 

The following table summarizes the components of accumulated other comprehensive income and changes in those components as of and for the three months March 31, 2016 and 2015:

 

Available for sale secutities   
Beginning Balance December 31, 2015  $992,549 
Change in net unrealized gains on securities available for sale, net of income taxes   709,731 
Reclasssification adjustment for net securities gains included in net income   (187,936)
Income tax expense   69,499 
Balance at March 31, 2016  $1,583,843 
      
     
Beginning Balance December 31, 2014  $1,243,022 
Change in net unrealized gains on securities available for sale, net of income taxes   682,022 
Reclasssification adjustment for net securities gains included in net income   (111,313)
Income tax expense   41,186 
Balance at March 31, 2015  $1,854,917 

 

The following table shows the line items in the consolidated Statements of Income affected by amounts reclassified from accumulated other comprehensive income:

 

   March 31,
2016
  March 31,
2015
Gain on sale of investments, net  $187,936   $111,313 
Tax effect        
Total reclassification, net of tax  $187,936   $111,313 

 

Item 2. Management’s Discussion and Analysis or Plan of Operation

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, 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, 2015 as filed with the Securities and Exchange Commission (the “SEC”) and the following:

 

  Risk from changes in economic, monetary policy, and industry conditions

 

25 
 

  

  Changes in interest rates, shape of the yield curve, deposit rates, the net interest margin and funding sources
  Market risk (including net income at risk analysis and economic value of equity risk analysis) and inflation
  Risk inherent in making loans including repayment risks and changes in the value of collateral
  Loan growth, the adequacy of the allowance for loan losses, provisions for loan losses, and the assessment of problem loans
  Level, composition, and re-pricing characteristics of the securities portfolio
  Deposit growth, change in the mix or type of deposit products and services
  Continued availability of senior management
  Technological changes
  Ability to control expenses
  Changes in compensation
  Risks associated with income taxes including potential for adverse adjustments
  Changes in accounting policies and practices
  Changes in regulatory actions, including the potential for adverse adjustments
  Recently enacted or proposed legislation

 

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.

 

Overview

Bank of South Carolina Corporation (the “Company”) is a financial institution holding company headquartered in Charleston, South Carolina, with $403.7 million in assets as of March 31, 2016 and net income of $1.2 million for the three months ended March 31, 2016. 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, primarily 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.

 

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 March 31, 2016 and December 31, 2015, 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.

 

26 
 

 

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 March 31, 2016 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K.

 

Balance Sheet

Cash and Cash Equivalents

Total cash and cash equivalents increased 30.59% or $8.9 million to $38.1 million at March 31, 2016, from $29.2 at December 31, 2015. This increase was primarily due to an increase in deposits as well as the maturities and sales of investment securities.

 

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.

 

At March 31, 2016, our available for sale investment portfolio included U. S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $107.4 million and an amortized cost of $104.8 million for a net unrealized gain of $2.5 million. At March 31, 2016 and December 31, 2015, our investment securities portfolio represented approximately 26.59% and 30.06% of our total assets, respectively.  The average yield on our investment securities was 2.08% and 2.16% at March 31, 2016 and December 31, 2015, respectively.

 

We had four Municipal Securities totaling $2.0 million that matured in the three months ended March 31, 2016. In addition, we sold three U.S. Treasury Notes and one Government Sponsored Enterprise totaling $15.8 million during the same period. We purchased eleven Municipal Securities with a face value of $3.8 million during the three months ended March 31, 2016.

 

Loans

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

 

Net loans increased $10.7 million, or 4.47%, to $249.9 million at March 31, 2016 from $239.2 million at December 31, 2015. We believe that economic conditions in our primary market area are continuing to improve, and that these improving conditions are contributing to an increase in loan demand. The amount of commercial real estate loans as a percentage of total loans continues to increase as a result of our strong commercial relationships in all of our markets.

 

Although significantly under the threshold of 100% of capital (currently approximately $40 million), the number of overmargined real estate loans currently totals approximately $11.2 million or approximately 4.34% of our loan portfolio at March 31, 2016 compared to $11.4 million or approximately 4.61% of the loan portfolio at December 31, 2015.

 

The following is a summary of our loan portfolio composition (net of deferred fees of $123,970 at March 31, 2016 and $118,188 at December 31, 2015) and the corresponding percentage of total loans as of the dates indicated. During the three months ended March 31, 2016 our loan portfolio increased $10.7 million or 4.47%. Our commercial real estate experienced the largest growth of $5.6 million or 4.81%.

 

27 
 

 

   March 31,
2016
  Percent  December 31,
2015
  Percent
Commercial Loans  $52,101,572    20.57%  $50,938,265    20.99%
Commercial real estate:                    
Commercial real estate construction   1,160,893    0.46%   1,005,118    0.41%
Commercial real estate other   121,300,195    47.88%   115,736,034    47.71%
Consumer                    
Consumer real estate   73,239,469    28.91%   69,777,307    28.76%
Consumer other   5,523,504    2.18%   5,165,981    2.13%
    253,325,633    100.00%   242,622,705    100.00%
Allowance for Loan losses   (3,436,762)        (3,417,827)     
Loans, net  $249,888,871        $239,204,878      

 

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 March 31, 2016 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 March 31, 2016, we determined that we had loans totaling $451,264, that we considered TDRs. As of December 31, 2015, we had loans totaling $458,268, that we considered TDRs.

 

Nonperforming assets include other real estate owned, which decreased by $98,451 from December 31, 2015 due to the sale of one property. We recorded a loss of $13,450 on this sale. The balance at March 31, 2016 of $521,943 represents one commercial property.

 

Following is a summary of our nonperforming assets, including nonaccruing TDRs.

 

   March 31,
2016
  December 31,
2015
Commercial  $3,862   $4,317 
Commercial real estate   2,453,166    1,970,305 
Consumer real estate   150,255    82,015 
Consumer other   4,857    4,450 
Nonaccruing troubled debt restructuring   451,264    458,268 
Total nonaccrual loans   3,063,404    2,519,355 
Other real estate owned   521,943    620,934 
Total nonperforming assets  $3,585,347   $3,140,289 

 

28 
 

 

Allowance for Loan Losses

The allowance for loan losses was $3.4 million and $3.4 million at March 31, 2016 and December 31, 2015, respectively, or 1.36% and 1.41% of outstanding loans, respectively. At March 31, 2016 and December 31, 2015, the allowance for loan losses represented 99.13% and 108.84% 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 March 31, 2016 is adequate.

 

At March 31, 2016, impaired loans totaled $6.6 million, for which $2.7 million of these loans had a reserve of approximately $1.7 million allocated in the allowance. Comparatively, impaired loans totaled $6.5 million at December 31, 2015, and $2.9 million of these loans had a reserve of approximately $1.1 million allocated in the allowance.

 

During the three months ended March 31, 2016, we charged-off $34,095 of loans and recorded $8,030 of recoveries on loans previously charged-off, for net charge-offs of $26,065. Comparatively, we charged-off $21,000 of loans and recorded $15,240 of recoveries on loans previously charged-off, resulting in net charge-offs of $5,760 for the three months ended March 31, 2015.

 

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest bearing deposits provided funding for 60.39% of average earning assets for the three months ended March 31, 2016, and 60.55% for the twelve months ended December 31, 2015. The Company encounters strong competition from other financial institutions as well as consumer and commercial finance companies, insurance companies and brokerage firms located in the primary service area of the Bank. However, the percentage of funding provided by deposits has remained stable.

 

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

 

   March 31, 2016  Percentage  December 31, 2015  Percentage
Deposits:            
Non-interest-bearing demand  $119,022,680    32.91%  $122,073,396    34.03%
Interest-bearing demand   96,992,732    26.82%   84,977,640    23.69%
Money market accounts   63,935,267    17.68%   70,233,422    19.58%
Time deposits over $250,000   24,095,180    6.66%   25,896,768    7.22%
Other time deposits   28,657,047    7.92%   28,871,044    8.05%
Other savings deposits   28,966,396    8.01%   26,666,342    7.43%
Total deposits  $361,669,302    100.00%  $358,718,612    100.00%

29 
 

 

Deposits increased 0.82% or $3.0 million from December 31, 2015 to March 31, 2016. 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 $24.1 million and $25.9 million at March 31, 2016 and December 31, 2015, respectively.

 

At March 31, 2016 and December 31, 2015, deposits with an aggregate deficit balance of $62,408 and $121,331, respectively were re-classified as other loans.

 

Comparison of Three Months Ended March 31, 2016 to Three Months Ended March 31, 2015

Net income decreased $9,224 or 0.77% to $1.2 million, or basic and diluted earnings per share of $.24 and $.24, respectively, for the three months ended March 31, 2016, from $1.2 million, or basic and diluted earnings per share of $.25 and $.24, respectively, for the three months ended March 31, 2015. Our return on average assets and average equity for the three months ended March 31, 2016 were 1.22% and 11.91%, respectively, compared with 1.32% and 12.93%, respectively, for the three months ended March 31, 2015.

 

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 $156,795 or 4.64% to $3.5 million for the three months ended March 31, 2016 from $3.4 million for the three months ended March 31, 2015. This increase was primarily due to interest and fee income from loans and interest bearing deposits in other banks (Federal Reserve). Average loans increased $12.0 million or 5.02% to $252.0 million for the three months ended March 31, 2016, compared to $240.0 million for the three months ended March 31, 2015. The yield on average loans (including fees) remained unchanged at 4.84% for the three months ended March 31, 2016 and 2015, respectively. Interest income on loans increased $169,277 for the three months ended March 31, 2016 to $3.0 million from $2.9 million for the three months ended March 31, 2015.

 

The average balance of interest bearing deposits in other banks increased $15.5 million or 133.82% to $27.1 million for the three months ended March 31, 2016, with a yield of 0.53% as compared to $11.6 million for the three months ended March 31, 2015, with a yield of 0.24%.

 

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 March 31, 2016, we had a provision of $45,000 compared to a provision of $5,000 for the same period in the prior year. The increase in the provision for loan losses was based on our analysis of the adequacy of the allowance.

 

Non-Interest Income

Other income increased $61,921or 8.47% to $792,579 for the three months ended March 31, 2016, from $730,658 for the three months ended March 31, 2015. This increase was primarily due to increases in service charge fees and commissions and gains realized on sale of investment securities. Service charge fees and commissions increased $23,246 or 9.80% to $260,531 primarily due to a $16,567 increase in debit card fees. Debit card fees increased resulting from greater utilization by our business customers. In addition, we had realized gains of $187,936 for the three months ended March 31, 2016 due to the sale of investment securities.

 

Non-Interest Expense

Non-interest expense increased $183,644 or 7.85% to $2,522,698 for the three months ended March 31, 2016, from $2,339,054 for the three months ended March 31, 2015. This increase was primarily due to increases in salaries and employee benefits of $98,854 or 6.98% from $1.4 million for the three months ended March 31, 2015 to $1.5 million for the three months ended March 31, 2016. Base wages increased $73,019 to $1.2 million for the three months ended March 31, 2016, as a result of annual merit increases. The cost of providing insurance for employees, including workers compensation, increased $11,554 from $142,960 for the three months ended March 31, 2015 to $154,514 for the three

 

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months ended March 31, 2016. Our Employee Stock Ownership Plan (“ESOP”) contribution increased $7,500 for the three months ended March 31, 2016, as our monthly contribution increased from $25,000 in 2015 to $27,500 in 2016. We also saw an increase of $71,990 in other operating expenses from $559,282 for the three months ended March 31, 2015, to $631,272 for the three months ended March 31, 2016. This increase was primarily due to the increases in professional fees, employee training and sundry losses. Our data processing fees fluctuate due to usage of electronic banking by our business and personal customers.

 

Income Tax Expense

We incurred income tax expense of $567,071 for the three months ended March 31, 2016 as compared to $562,775 during the same period in 2015. Our effective tax rate was 32.17% and 31.84% for the three months ended March 31, 2016 and 2015, respectively. The increase in the effective tax rate during the 2016 period is primarily a result of the lesser impact of tax-exempt income.

 

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 $85.1 million and $87.6 million at March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015 was $780,187 and $745,187, respectively.

 

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 $3.9 million at March 31, 2016, to sell loans held for sale of $3.9 million, compared to forward sales commitments of $5.8 million at December 31, 2015, to sell loans held for sale of $5.8 million. The fair value of these commitments was not significant at March 31, 2016 or December 31, 2015. 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 $14.1 million at March 31, 2016 and $13.1 million at December 31, 2015. For the three months ended March 31, 2016 and March 31, 2015, 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.

 

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Proper liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our primary liquid assets are cash and due from banks, federal funds sold, investments available for sale, other short-term investments and mortgage loans held for sale. Our primary liquid assets accounted for 37.01% and 38.83% of total assets at March 31, 2016 and December 31, 2015, 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 March 31, 2016, 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 selling 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 March 31, 2016 we could borrow up to $76 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 March 31, 2016 and December 31, 2015, our liquidity ratio was 33.35% and 33.27%, 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 March 31, 2016 was $40.3 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.

 

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 March 31, 2016 and December 31, 2015 was 15.11% and 15.42%, respectively.

 

At March 31, 2016, 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

 

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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 March 31, 2016 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 March 31, 2016 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 March 31, 2016, 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 March 31, 2016, based on the 2013 framework established in a report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

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

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2016. Based on this assessment, management believes that as of March 31, 2016, 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 March 31, 2016, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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The Audit and Compliance Committee, composed entirely of independent Directors, meets periodically with management, the Company’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
  (3)   Consolidated Statements of Comprehensive Income 5
  (4)   Consolidated Statements of Shareholders’ Equity 6
  (4)   Consolidated Statements of Cash Flows 7
  (5)   Notes to Consolidated Financial Statements 8-25

 

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2.   Exhibits
  2.0   Plan of Reorganization (Filed with 1995 10-KSB)
  3.0   Articles of Incorporation of the Registrant (Filed with 1995 10-KSB)
  3.1   By-laws of the Registrant (Filed with 1995 10-KSB)
  3.2   Amendments to the Articles of Incorporation of the Registrant (Filed with Form S on June 23, 2011)
  4.0   2016 Proxy Statement (Filed with 2015 10-K)
  10.0   Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB)
  10.1   Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB)
  10.2   Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB)
  10.3   Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB)
  10.4   Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed With 2010 10-K)
      Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with September 30, 2014 10-Q)
  10.5   1998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A)
  10.6   Employee Stock Ownership Plan (Filed with 2008 10-K/A)
      Employee Stock Ownership Plan, Restated (Filed with 2011 Proxy Statement)
  10.7   2010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement)
  10.8   Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K)
  10.9   Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
  10.10   First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
  10.11   Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
  14.0   Code of Ethics (Filed with 2004 10-KSB)
  21.0   List of Subsidiaries of the Registrant (Filed with 1995 10-KSB)
      The Registrant's only subsidiary is The Bank of South Carolina (Filed with 1995 10-KSB)
  31.1   Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer
  31.2   Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer
  32.1   Certification pursuant to Section 1350
  32.2   Certification pursuant to Section 1350
  101.INS   XBRL Instance Document
  101.SCH   XBRL Taxonomy Extension Schema Document
  101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
  101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
  101.LAB   XBRL Taxonomy Extension Label Linkbase Document
  101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
       

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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  

 

May 6, 2016 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

 

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