United States


Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

 

For the quarterly period endedJune 30, 2017

For the quarterly period endedMarch 31, 2018

 

☐  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

Bank of South Carolina Corporation

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

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

 

256 Meeting Street, Charleston, SC 29401

256 Meeting Street, Charleston, SC 29401

(Address of principal executive offices)

 

(843) 724-1500

(843) 724-1500

(Registrant’s telephone number)

 

Indicate by check mark whether the issuerregistrant (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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

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

 

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

 

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

 

As of August 10, 2017May 11, 2018, there were 4,980,0095,491,177 Common Shares outstanding.

 

 

 

 

 

Bank of South Carolina Corporation and Subsidiary


Table of Contents

 

Page
Part I. Financial Information

Page

  
Item 1. Financial Statements (Unaudited) 
  
Consolidated Balance Sheets – June 30, 2017March 31, 2018 and December 31, 201620173
Consolidated Statements of Income -– Three months ended June 30,March 31, 2018 and 2017 and 20164
Consolidated Statements of Income - Six months ended June 30, 2017 and 20165
Consolidated Statements of Comprehensive Income – Three and six months ended June 30,March 31, 2018 and 20175
Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2018 and 201620176
Consolidated Statements of Shareholders’ Equity- SixCash Flows – Three months ended June 30,March 31, 2018 and 2017 and 20167
Consolidated Statements of Cash Flows - Six months ended June 30, 2017 and 20168
Notes to Consolidated Financial Statements98
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations2928
Off-Balance Sheet Arrangements3433
Liquidity3533
Capital Resources3534
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk3635
  
Item 4. Controls and Procedures3635
  
Part II. Other Information 
  
Item 1.Legal Proceedings3736
Item 1A.Risk Factors3736
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3736
Item 3.Defaults Upon Senior Securities3736
Item 4.Mine Safety Disclosure3736
Item 5.Other Information3736
Item 6.Exhibits3736
  
Signatures3938
Certifications4039


Part I. Financial Information

 

Item 1. Financial Statements

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

    
  

(Unaudited)

June 30, 2017

  

(Audited)

December 31,

2016

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

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

  

(Unaudited) 

March 31, 2018 

  

(Audited) 

December 31, 2017 

 
ASSETS        
Cash and due from banks $6,952,114  $8,486,025 
Interest-bearing deposits in other banks  27,468,258   24,034,194 
Investment securities available for sale  125,914,894   139,250,250 
Mortgage loans to be sold  3,640,385   2,093,723 
Loans  267,998,436   270,180,640 
Less: Allowance for loan losses  (3,830,520)  (3,875,398)
Net loans  264,167,916   266,305,242 
Premises, equipment and leasehold improvements, net  2,244,811   2,244,525 
Other real estate owned  435,479   435,479 
Accrued interest receivable  1,368,258   1,720,920 
Other assets  2,457,074   1,996,140 
Total assets $434,649,189  $446,566,498 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Liabilities        
Deposits:        
Non-interest-bearing demand $141,607,977  $139,256,748 
Interest-bearing demand  100,596,328   108,967,196 
Money market accounts  68,937,190   77,833,728 
Time deposits over $250,000  17,278,762   18,624,924 
Other time deposits  23,881,449   23,295,492 
Other savings deposits  38,383,858   34,910,212 
Total deposits  390,685,564   402,888,300 
Accrued interest payable and other liabilities  1,346,776   913,563 
Total liabilities  392,032,340   403,801,863 
         
Shareholders’ equity        
Common stock-no par, 12,000,000 shares authorized; 5,755,503 and 5,753,743 shares issued at March 31, 2018 and December 31, 2017, respectively; 5,489,967 and 5,488,207 shares outstanding at March 31, 2018 and December 31, 2017, respectively  —   — 
Additional paid in capital  46,608,558   37,236,566 
Retained earnings  —   8,471,780 
Treasury stock: 265,536 shares at March 31, 2018 and December 31, 2017  (2,247,415)  (2,247,415)
Accumulated other comprehensive loss, net of income taxes  (1,744,294)  (696,296)
Total shareholders’ equity  42,616,849   42,764,635 
Total liabilities and shareholders’ equity $434,649,189  $446,566,498 

 

See accompanying notes to consolidated financial statements.


BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 THREE MONTHS ENDED
JUNE 30,		  THREE MONTHS ENDED
MARCH 31,		 
 

2017

 

2016

  

2018 

 

2017 

 
Interest and fee income                
Loans, including fees $3,221,855  $3,208,836  $3,558,986  $3,141,738 
Taxable securities  399,909   290,486   470,503   338,847 
Tax-exempt securities  256,202   240,171   228,067   270,885 
Other  55,319   31,176   62,453   39,951 
Total interest and fee income  3,933,285   3,770,669   4,320,009   3,791,421 
                
Interest expense                
Deposits  106,522   92,981   109,830   96,782 
Short-term borrowings  —   7 
Total interest expense  106,522   92,988   109,830   96,782 
                
Net interest income  3,826,763   3,677,681   4,210,179   3,694,639 
Provision for loan losses  30,000   140,000   55,000   2,500 
Net interest income after provision for loan losses  3,796,763   3,537,681   4,155,179   3,692,139 
                
Other income                
Service charges, fees and commissions  287,873   265,736   295,291   269,566 
Mortgage banking income  400,519   296,891   139,915   275,105 
Gains on sales of securities  —   160,391   4,348   — 
Other non-interest income  8,087   6,554   8,391   7,203 
Total other income  696,479   729,572   447,945   551,874 
                
Other expense                
Salaries and employee benefits  1,500,362   1,480,420   1,572,720   1,470,209 
Net occupancy expense  393,763   380,311   383,332   364,145 
Other operating expenses  649,855   576,150   685,782   637,276 
Net other real estate owned expenses  46,143   — 
Total other expenses  2,590,123   2,436,881   2,641,834   2,471,630 
                
Income before income tax expense  1,903,119   1,830,372   1,961,290   1,772,383 
Income tax expense  516,734   518,262   349,060   546,295 
                
Net income $1,386,385  $1,312,110  $1,612,230  $1,226,088 
                
Weighted average shares outstanding                
Basic  4,967,907   4,929,722   5,489,087   5,458,475 
Diluted  5,072,908   5,056,523   5,583,371   5,580,412 
                
Basic income per common share $0.28  $0.27  $.29  $.22 
Diluted income per common share $0.27  $0.26  $.29  $.22 

 

See accompanying notes to consolidated financial statements.


BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

  SIX MONTHS ENDED
JUNE 30,		 
  

2017

  

2016

 
Interest and fee income        
Loans, including fees $6,363,593  $6,242,879 
Taxable securities  738,756   613,619 
Tax-exempt securities  527,087   479,485 
Other  95,270   66,750 
Total interest and fee income  7,724,706   7,402,733 
         
Interest expense        
Deposits  203,304   187,120 
      Short-term borrowings  —   7 
Total interest expense  203,304   187,127 
         
Net interest income  7,521,402   7,215,606 
Provision for loan losses  32,500   185,000 
Net interest income after provision for loan losses  7,488,902   7,030,606 
         
Other income        
Service charges, fees and commissions  557,439   526,267 
Mortgage banking income  675,624   648,764 
Gains on sales of securities  —   348,327 
Other non-interest income  15,290   12,243 
Total other income  1,248,353   1,535,601 
         
Other expense        
Salaries and employee benefits  2,970,571   2,995,446 
Net occupancy expense  757,908   756,710 
Other operating expenses  1,287,131   1,207,422 
Net other real estate owned expenses  46,143   13,450 
Total other expenses  5,061,753   4,973,028 
         
Income before income tax expense  3,675,502   3,593,179 
Income tax expense  1,063,029   1,085,333 
         
Net income $2,612,473  $2,507,846 
         
Weighted average shares outstanding        
Basic  4,965,094   4,923,266 
Diluted  5,069,024   5,047,601 
         
Basic income per common share $0.53  $0.51 
Diluted income per common share $0.52  $0.50 
  THREE MONTHS ENDED
MARCH 31,		 
  2018  2017 
Net income $1,612,230  $1,226,088 
Other comprehensive (loss) income:        
Unrealized (loss) gain on securities arising during the period  (1,337,571)  585,821 
Reclassification adjustment for securities gains realized in net income  (4,348)  — 
Other comprehensive (loss) income, before tax  (1,341,919)  585,821 
Income tax effect related to items of other comprehensive (loss) income  293,921   (216,753)
Other comprehensive (loss) income, after tax  (1,047,998)  369,068 
Total comprehensive income $564,232  $1,595,156 

 

See accompanying notes to consolidated financial statements.


BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMESHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (UNAUDITED)

 

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

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

See accompanying notes to consolidated financial statements.


BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)

  

 

ADDITIONAL

PAID IN

CAPITAL

  

 

 

RETAINED

EARNINGS

  

 

 

TREASURY

STOCK

  

ACCUMULATED

OTHER

COMPREHENSIVE

INCOME (LOSS)

  

 

 

 

TOTAL

 
December 31, 2015 $36,341,744  $4,064,834  $(2,247,415) $992,549  $39,151,712 
                     
Net income  —   2,507,846   —   —   2,507,846 
Other comprehensive income  —   —   —   838,910   838,910 
Exercise of stock options  260,546   —   —   —   260,546 
Stock-based compensation expense  39,683   —   —   —   39,683 
Cash dividends ($0.26 per common share)  —   (1,281,709)  —   —   (1,281,709)
June 30, 2016 $36,641,973  $5,290,971  $(2,247,415) $1,831,459  $41,516,988 
                     
December 31, 2016 $36,824,022  $6,643,476  $(2,247,415) $(607,109) $40,612,974 
                     
Net income  —   2,612,473   —   —   2,612,473 
Other comprehensive income  —   —   —   1,026,912   1,026,912 
Exercise of stock options  154,858   —   —   —   154,858 
Stock-based compensation expense  36,542   —   —   —   36,542 
Cash dividends ($0.28 per common share)  —   (1,390,800)  —   —   (1,390,800)
June 30, 2017 $37,015,422  $7,865,149  $(2,247,415) $419,803  $43,052,959 

See accompanying notes to consolidated financial statements.


BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

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

ADDITIONAL  

PAID IN  

CAPITAL  

  

RETAINED  

EARNINGS  

  

TREASURY  

STOCK  

  

ACCUMULATED  

OTHER  

COMPREHENSIVE

INCOME (LOSS)  

  TOTAL 
December 31, 2016 $36,824,022  $6,643,476  $(2,247,415) $(607,109) $40,612,974 
                     
Net income  —   1,226,088   —   —   1,226,088 
Other comprehensive income  —   —   —   369,068   369,068 
Exercise of stock options  113,190   —   —   —   113,190 
Stock-based compensation expense  18,835   —   —   —   18,835 
Cash dividends ($0.13 per common share)  —   (695,016)  —   —   (695,016)
March 31, 2017 $36,956,047  $7,174,548  $(2,247,415) $(238,041) $41,645,139 
                     
December 31, 2017 $37,236,566  $8,471,780  $(2,247,415) $(696,296) $42,764,635 
                     
Net income  —   1,612,230   —   —   1,612,230 
Other comprehensive loss  —   —   —   (1,047,998)  (1,047,998)
Exercise of stock options  18,768   —   —   —   18,768 
Stock-based compensation expense  18,882   —   —   —   18,882 
Cash dividends ($0.14 per common share)  —   (749,668)  —   —   (749,668)
Common stock dividend, 10%  9,334,342   (9,334,342)  —   —   — 
March 31, 2018 $46,608,558  $—  $(2,247,415) $(1,744,294) $42,616,849 

 

See accompanying notes to consolidated financial statements.


BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

  THREE MONTHS ENDED
MARCH 31,		 
Cash flows from operating activities: 2018  2017 
Net income $1,612,230  $1,226,088 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  49,061   47,518 
Gain on sale of securities  (4,348)  — 
Provision for loan losses  55,000   2,500 
Stock-based compensation expense  18,882   18,835 
Deferred income taxes  (52,568)  (163,611)
Net amortization of unearned discounts on investment securities  77,408   98,428 
Origination of mortgage loans held for sale  (13,589,623)  (14,107,053)
Proceeds from sale of mortgage loans held for sale  12,042,961   14,968,617 
Decrease in accrued interest receivable and other assets  238,217   436,712 
Increase in accrued interest payable and other liabilities  431,940   371,786 
Net cash provided by operating activities  879,160   2,899,820 
         
Cash flows from investing activities:        
Proceeds from calls and maturities of investment securities available for sale  4,950,000   1,212,150 
Proceeds from sale of available for sale securities  11,970,377   — 
Purchase of investment securities available for sale  (5,000,000)  (10,059,800)
Net decrease in loans  2,082,326   5,135,012 
Purchase of premises, equipment and leasehold improvements, net  (49,347)  (14,766)
Net cash provided (used) by investing activities  13,953,356   (3,727,404)
         
Cash flows from financing activities:        
Net (decrease) increase in deposit accounts  (12,202,736)  13,441,888 
Dividends paid  (748,395)  (693,864)
Stock options exercised  18,768   113,190 
Net cash (used) provided by financing activities  (12,932,363)  12,861,214 
Net increase in cash and cash equivalents  1,900,153   12,033,630 
Cash and cash equivalents at beginning of period  32,520,219   26,242,330 
         
Cash and cash equivalents at end of period $34,420,372  $38,275,960 
         
Supplemental disclosure of cash flow data:        
Cash paid during the year for:        
Interest $87,575  $91,352 
Income taxes $—  $879,432 
Supplemental disclosure for non-cash investing and financing activity:        
Change in unrealized loss on securities available for sale, net of income taxes $(1,047,998) $369,068 
Change in dividends payable $1,273  $1,152 

See accompanying notes to consolidated financial statements.


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1: Nature of Business and Basis of Presentation

 

Organization

 

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

 

Principles of Consolidation

 

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

 

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

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”)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 Securities and Exchange Commission (“SEC”) on March 3, 2017.2018. In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

 

Accounting Estimates and Assumptions

 

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

 

Reclassification

 

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

 

Income per share

 

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


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Subsequent Events

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognizedNon 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.disclosure except for the following.

 

On March 22, 2018, the Company approved a 10% stock dividend payable May 31, 2018 to shareholders of record as of April 30, 2018. Shares and share data have been adjusted retroactively to reflect the stock dividend.

Recent Accounting Pronouncements

 

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

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers, Topic 606606.. The core principle of the new standard is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. This guidance also includes expanded disclosure requirements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. In August 2015, the FASB deferred theThe guidance became effective date of the amendments. As a result of the deferral, the guidance will be effectiveJanuary 1, 2018. The amendment does not apply to revenue associated with financial instruments, such as loans and investment securities available for the Company for reporting periods beginning after December 15, 2017. We will apply this guidance using a modified retrospective approach. We do not expect this amendment to have asale, and therefore had no material effect on our consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall (Subtopic 825-10); Recognition and Measurement of Financial Instruments and Financial LiabilitiesLiabilities.. This update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will bebecame effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company doeson January 1, 2018 and did not expect this amendment to have a material effect on itsthe financial statements.

 

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

 

In March 2016, the FASB issued ASU 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),, to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will beguidance became effective forJanuary 1, 2018. The Company completed an assessment of revenue streams and a review of related contracts potentially affected by the ASU and, based on this assessment, the Company concluded that the ASU did not materially change the method in which the Company currently recognizes revenue for reporting periods beginning after December 15, 2017. The Company doesthese revenue streams. As such, a cumulative effect adjustment to opening retained earnings was not expect this amendment to have a material effect on its financial statements.deemed necessary.

 

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


BANK OF SOUTH CAROLINA CORPORATION

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In April 2016, the FASB issued ASU 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will beamendment became effective for the Company for reporting periods beginning after December 15, 2017. The Company doesJanuary 1, 2018 and did not expect these amendments to have a material effect on itsthe financial statements.


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In May 2016, the FASB issued ASU 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow- Scope Improvements and Practical Expedients, to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will beamendment became effective for the Company for reporting periods beginning after December 15, 2017. The Company doeson January 1, 2018 and did not expect these amendments to have a material effect on itsthe financial statements.

 

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

 

In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,, to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will beamendment became effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company doeson January 1, 2018 and did not expect these amendments to have a material effect on itsthe financial statements.

 

In December 2016, the FASB issued ASU 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The amendment became effective dateon January 1, 2018 and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will continue to evaluate the impact of this ASU and doesdid not expect these amendments to have a material effect on itsthe financial statements.

 

In January 2017, the FASB issued ASU 2017-01,Clarifying the Definition of a Business, which provided guidance to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The amendments arebecame effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective date. The Company doesJanuary 1, 2018 and did not expect this amendment to have a material effect on itsthe financial statements.

 

In February 2017, the FASB issued ASU 2017-05,Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, to clarify the scope of established guidance on nonfinancial asset derecognition, issued as part of ASU 2014-09,Revenue from Contracts with Customers, as well as accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ThisThe amendments became effective on January 1, 2018 and did not have a material effect on the financial statements.

In March 2017, the FASB issued ASU 2017-08,Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20):Premium Amortization of Purchased Callable Debt Securities, which shortens the amortization period for the premium to the earliest call date. The amendment iswill be effective for the Company for interim and annual periods beginning after December 15, 2017.2018. Early adoption is permitted. The Company does not expect this amendment to have a material effect on its financial statements.

In February 2018, the FASB issued ASU 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220):Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which requires companies to reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Cuts and Jobs Act (the 2017 Tax Act”). The Company adopted this pronouncement early by retrospective application to each period in which the effect of the change in the tax rate under the 2017 Tax Act is recognized. The impact of the reclassification from other comprehensive income to retained earnings was included in the Statement of Changes in Shareholders’ Equity for the year ended December 31, 2017.

In February 2018, the FASB issued ASU 2018-03,Technical Corrections and Improvements to Financial Instruments—Overall(Subtopic 825-10):Recognition and Measurement of Financial Assets and Financial Liabilities to clarify certain aspects of the guidance issued in ASU 2016-01. The amendments will be effective for the third quarter of 2018 subsequent to adopting the amendments in ASU 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted ASU 2016-01. The Company does not expect these amendments to have a material effect on its financial statements.


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In March 2018, the FASB issued ASU 2018-4,Investments—Debt Securities(Topic 320)and Regulated Operations(Topic 980):Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 which incorporate into the Accounting Standards Codification recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2018, the FASB issued ASU 2018-05,Income Taxes(Topic 740):Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments incorporate into the Accounting Standards Codification recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

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


BANK OF SOUTH CAROLINA CORPORATION

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2: Investment Securities

 

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

   
 JUNE 30, 2017  MARCH 31, 2018 
 AMORTIZED
COST		  GROSS  
UNREALIZED
GAINS		  GROSS  
UNREALIZED
LOSSES		  FAIR
VALUE		  

AMORTIZED

COST

 

GROSS

UNREALIZED

GAINS

 

GROSS

UNREALIZED

LOSSES

 

ESTIMATED

FAIR

VALUE

 
                  
U.S. Treasury Notes $24,139,912  $62,201  $(6,799) $24,195,314  $35,969,663  $—  $(794,786) $35,174,877 
Government-Sponsored Enterprises  66,708,908   391,749   (383,380)  66,717,277   61,374,556   2,135   (1,587,104)  59,789,587 
Municipal Securities  41,192,677   865,966   (310,853)  41,747,790   31,269,151   262,268   (580,989)  30,950,430 
                                
Total $132,041,497  $1,319,916  $(701,032) $132,660,381  $128,613,370  $264,403  $(2,962,879) $125,914,894 

  DECEMBER 31, 2017 
  

AMORTIZED

COST

  

GROSS

UNREALIZED

GAINS

  

GROSS

UNREALIZED

LOSSES

  

ESTIMATED

FAIR

VALUE

 
             
U.S. Treasury Notes $35,970,990  $—  $(411,145) $35,559,845 
Government-Sponsored Enterprises  64,444,315   —   (887,811)  63,556,504 
Municipal Securities  40,191,502   487,545   (545,146)  40,133,901 
                 
Total $140,606,807  $487,545  $(1,844,102) $139,250,250 

BANK OF SOUTH CAROLINA CORPORATION

    
  DECEMBER 31, 2016 
  AMORTIZED
COST		  GROSS
UNREALIZED
GAINS		  GROSS
UNREALIZED
  LOSSES		  FAIR
VALUE		 
             
U.S. Treasury Notes $24,148,295  $41,153  $(250,385) $23,939,063 
Government-Sponsored Enterprises  51,737,930   129,482   (833,321)  51,034,091 
Municipal Securities  45,056,390   765,813   (816,413)  45,005,790 
                 
Total $120,942,615  $936,448  $(1,900,119) $119,978,944 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2017March 31, 2018 and December 31, 2016,2017, by contractual maturity are as follows:

      
 JUNE 30, 2017  DECEMBER 31, 2016  MARCH 31, 2018  DECEMBER 31, 2017 
 AMORTIZED
COST		  FAIR
VALUE		  AMORTIZED
COST		  FAIR
  VALUE		  

AMORTIZED

COST

 

ESTIMATED

FAIR

VALUE

 

AMORTIZED

COST

 

ESTIMATED

FAIR

VALUE

 
                  
Due in one year or less $3,017,513  $3,038,231  $3,343,347  $3,350,205  $13,072,183  $13,077,578  $11,554,040  $11,546,968 
Due in one year to five years  91,871,936   92,428,862   82,848,411   82,682,901   75,402,886   73,941,666   72,622,056   72,124,395 
Due in five years to ten years  33,599,190   33,748,377   29,662,030   29,169,228   38,882,831   37,675,784   53,290,088   52,576,036 
Due in ten years and over  3,552,859   3,444,911   5,088,827   4,776,610   1,255,470   1,219,866   3,140,623   3,002,851 
                                
Total $132,041,498  $132,660,381  $120,942,615  $119,978,944  $128,613,370  $125,914,894  $140,606,807  $139,250,250 

 

Investment securitiesSecurities pledged to secure public deposits and for other purposes required or permitted by law at June 30, 2017both March 31, 2018 and December 31, 2016,2017, had a fair value of $53.1 million and $47.6 million, respectively.


BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS$49.4 million.

 

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2017March 31, 2018 and December 31, 2016.2017. We believe that all unrealized losses have resulted from temporary changes in the interest rates and currentrate market conditions and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

                            
Less Than 12 Months  12 Months or Longer  Total 
  #  Fair Value  Gross Unrealized Loss  #  Fair Value  Gross Unrealized Loss  #  Fair Value  Gross Unrealized Loss 
June 30, 2017                           
Available for sale                                    
U.S. Treasury notes  2  $10,142,188  $(6,799)  —  $—  $—   2  $10,142,188  $(6,799)
Government-sponsored enterprises  4   12,441,218   (326,380)  1   2,928,357   (57,000)  5   15,369,575   (383,380)
Municipal securities  36   15,193,138   (310,853)  —   —   —   36   15,193,138   (310,853)
Total  42  $37,776,544  $(644,032)  1  $2,928,357  $(57,000)  43  $40,704,901  $(701,032)
December 31, 2016                                    
Available for sale                                    
U.S. Treasury notes  4  $17,968,594  $(250,385)  —  $—  $—   4  $17,968,594  $(250,385)
Government-sponsored enterprises  8   30,136,720   (833,321)  —   —   —   8   30,136,720   (833,321)
Municipal securities  54   22,606,430   (816,413)  —   —   —   54   22,606,430   (816,413)
Total  66  $70,711,744  $(1,900,119)  —  $—  $—   66  $70,711,744  $(1,900,119)

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

March 31, 2018

Available for sale

 

                        
U.S. Treasury notes  8  $35,174,877  $(794,786)  —  $—  $—   8  $35,174,877  $(794,786)
Government-sponsored enterprises  10   44,687,077   (1,011,933)  3   10,100,375   (575,171)  13   54,787,452   (1,587,104)
Municipal securities  20   8,241,345   (194,145)  19   7,368,491   (386,844)  39   15,609,836   (580,989)
Total  38  $88,103,299  $(2,000,864)  22  $17,468,866  $(962,015)  60  $105,572,165  $(2,962,879)
                                     

December 31, 2017

Available for sale

                                    
U.S. Treasury notes  8  $35,559,845  $(411,145)  —  $—  $—   8  $35,559,845  $(411,145)
Government-sponsored enterprises  12   53,275,064   (462,174)  3   10,281,440   (425,637)  15   63,556,504   (887,811)
Municipal securities  20   7,815,221   (134,998)  29   11,056,185   (410,148)  49   18,871,406   (545,146)
Total  40  $96,650,130  $(1,008,317)  32  $21,337,625  $(835,785)  72  $117,987,755  $(1,844,102)

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 For the Six Months Ended
June 30,		  For the Three Months Ended
March 31,		 
 2017  2016  2018  2017 
Gross proceeds $—  $21,113,400  $11,970,377  $— 
Gross realized gains  —   348,327   79,143   — 
Gross realized losses  —   —   (74,795)  — 

 

TheFor the three months ended March 31, 2018, the tax provision related to these gains was $59,382 and $128,881 for the three and six months ended June 30, 2016, respectively.$913.


BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3: Loans and Allowance for Loan Losses

 

Major classifications of loans (net of deferred loan fees of $143,374$156,185 at June 30, 2017March 31, 2018 and $136,446$152,047 at December 31, 2016)2017) are as follows:

 

 June 30,
2017		 December 31,
2016		  

March 31,

2018

  December 31,
2017		 
Commercial loans $56,281,569  $52,262,209  $53,805,976  $51,723,237 
Commercial real estate:                
Construction  1,457,591   1,208,901   1,660,573   2,317,857 
Other  121,477,838   122,968,126   137,493,443   140,186,324 
Consumer:                
Real Estate  75,702,877   77,131,816   69,729,343   70,797,973 
Other  5,309,870   7,005,063   5,309,101   5,155,249 
  260,229,745   260,576,115   267,998,436   270,180,640 
Allowance for loan losses  (3,927,515)  (3,851,617)  (3,830,520)  (3,875,398)
Loans, net $256,302,230  $256,724,498  $264,167,916  $266,305,242 

 

We had $103.4$107.7 million and $101.2$113.4 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at June 30, 2017March 31, 2018 and at December 31, 2016,2017, respectively.

 

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

 

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

 

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

 

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

 

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

 

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

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

●Substandard (6) The borrowing entity has a cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is a possiblility.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.

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

The following tables illustrate credit quality by class and internally assigned grades as of June 30, 2017at March 31, 2018 and December 31, 2016.2017. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

June 30, 2017 
March 31, 2018March 31, 2018 
  Commercial  

Commercial

Real Estate

Construction

 

Commercial

Real Estate

Other

 

Consumer

Real Estate

  Consumer Other Total  Commercial  

Commercial

Real Estate

Construction

 

Commercial

Real Estate

Other

 

Consumer

Real Estate

  Consumer Other  Total 
                          
Pass  $51,883,004  $1,061,069  $117,318,419  $73,856,986  $5,097,028  $249,216,506  $50,674,476  $1,660,573  $132,409,734  $67,700,455  $5,013,141  $257,458,379 
Watch   2,480,236   396,522   1,425,095   1,351,454   177,229   5,830,536   1,363,848   —   3,021,215   1,779,134   220,139   6,384,336 
OAEM   662,989   —   295,490   —   —   958,479   —   —   602,563   —   —   602,563 
Sub-Standard   1,255,340   —   2,438,834   494,437   35,613   4,224,224 
Sub- standard  1,767,652   —   1,459,931   249,754   75,821   3,553,158 
Doubtful   —   —   —   —   —   —   —   —   —   —   —   — 
Loss   —   —   —   —   —   —   —   —   —   —   —   — 
                                                 
Total  $56,281,569  $1,457,591  $121,477,838  $75,702,877  $5,309,870  $260,229,745  $53,805,976  $1,660,573  $137,493,443  $69,729,343  $5,309,101  $267,998,436 

 

December 31, 2016 
   Commercial  

Commercial

Real Estate

Construction

  

Commercial

Real Estate

Other

  

Consumer

Real Estate

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

December 31, 2017 
  Commercial  

Commercial

Real Estate

Construction

  

Commercial

Real Estate

Other

  

Consumer

Real Estate

  Consumer Other  Total 
                   
Pass $47,456,205  $1,936,335  $134,401,977  $68,570,298  $4,933,696  $257,298,511 
Watch  2,403,978   381,522   3,605,621   1,934,802   185,746   8,511,669 
OAEM  —   —   610,806   —   —   610,806 
Sub-standard  1,863,054   —   1,567,920   292,873   35,807   3,759,654 
Doubtful  —   —   —   —   —   — 
Loss  —   —   —   —   —   — 
                         
Total $51,723,237  $2,317,857  $140,186,324  $70,797,973  $5,155,249  $270,180,640 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

June 30, 2017
March 31, 2018March 31, 2018
 30-59 Days Past Due  60-89 Days Past Due  Greater Than 90 Days  Total Past Due  Current  Total  Recorded Investment > 90 Days and Accruing  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 Accruing		 
Commercial $225,212  $19,467  $—  $244,679  $56,036,890  $56,281,569  $—  $85,774  $80,000  $—  $165,774  $53,640,202  $53,805,976  $— 
Commercial Real Estate -Construction  —   —   —   —   1,457,591   1,457,591   —   —   —   —   —   1,660,573   1,660,573   — 
Commercial Real Estate -Other  280,689   —   1,552,910   1,833,599   119,644,239   121,477,838   —   75,003   197,238   819,877   1,092,118   136,401,325   137,493,443   — 
Consumer Real Estate  140,920   21,200   —   162,120   75,540,757   75,702,877   —   34,364   —   —   34,364   69,694,979   69,729,343   — 
Consumer-Other  —   99,982   —   99,982   5,209,888   5,309,870   — 
Consumer Other  21,720   17,500   —   39,220   5,269,881   5,309,101   — 
Total $646,821  $140,649  $1,552,910  $2,340,380  $257,889,365  $260,229,745  $—  $216,861  $294,738  $819,877  $1,331,476  $266,666,960  $267,998,436  $— 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2016
December 31, 2017December 31, 2017
 30-59 Days Past Due  60-89 Days Past Due  Greater Than 90 Days  Total Past Due  Current  Total  Recorded Investment > 90 Days and Accruing  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 Accruing 
Commercial $438,159  $—  $—  $438,159  $51,824,050  $52,262,209  $—  $3,531  $192,846  $—  $196,377  $51,526,860  $51,723,237  $— 
Commercial Real Estate -Construction  —   —   —   —   1,208,901   1,208,901   —   —   —   —   —   2,317,857   2,317,857   — 
Commercial Real Estate -Other  6,363   —   1,501,153   1,507,516   121,460,610   122,968,126   89,908   —   —   651,578   651,578   139,534,746   140,186,324   — 
Consumer Real Estate  415,457   —   —   415,457   76,716,359   77,131,816   —   —   —   —   —   70,797,973   70,797,973   — 
Consumer-Other  56,784   —   33,322   90,106   6,914,957   7,005,063   33,322 
Consumer Other  10,302   —   34,107   44,409   5,110,840   5,155,249   34,107 
Total $916,763  $—  $1,534,475  $2,451,238  $258,124,877  $260,576,115  $123,230  $13,833  $192,846  $685,685  $892,364  $269,288,276  $270,180,640  $34,107 

 

There were no loans at June 30, 2017March 31, 2018 and two loans at December 31, 20162017 over 90 days past due and still accruing.


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 Loans Receivable on Non-Accrual  Loans Receivable on Non-Accrual 
  June 30,
2017		   December 31,
2016		  March 31, 2018  December 31, 2017 
Commercial $52,050  $61,781  $36,309  $41,651 
Commercial Real Estate - Construction  —   —   —   — 
Commercial Real Estate - Other  1,782,819   1,678,876   858,705   790,208 
Consumer - Real Estate  —   — 
Consumer - Other  —   964 
        
Consumer Real Estate  —   — 
Consumer Other  6,443   — 
Total $1,834,869  $1,741,621  $901,457  $831,859 

 

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by classloan category for the three and six months ended June 30, 2017March 31, 2018 and June 30, 2016.March 31, 2017. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.

 

Three Months Ended June 30, 2017
March 31, 2018March 31, 2018
 Commercial  Commercial Real Estate-Construction  

Commercial

Real Estate-Other

 

Consumer

Real Estate

 

Consumer

Other

  Total  Commercial  Commercial Real Estate- Construction  

Commercial

Real Estate-Other

 

Consumer

Real Estate

 

Consumer

Other

  Total 
Allowance for Loan Losses                                                
Beginning Balance $1,553,159  $57,071  $1,418,575  $756,892  $91,160  $3,876,857  $1,403,588  $23,638  $1,549,755  $796,918  $101,499  $3,875,398 
Charge-offs  —   —   —   —   (2,372)  (2,372)  (31,250)  —   —   —   (71,843)  (103,093)
Recoveries  —   —   —   21,000   2,030   23,030   1,500   —   1,575   —   140   3,215 
Provisions  75,513   (4,308)  (35,656)  (6,039)  490   30,000   (47,592)  (12,502)  (510,242)  (229,843)  855,179   55,000 
Ending Balance $1,628,672  $52,763  $1,382,919  $771,853  $91,308  $3,927,515  $1,326,246  $11,136  $1,041,088  $567,075  $884,975  $3,830,520 

March 31, 2017
  Commercial  

Commercial Real Estate-

Construction

  

Commercial

Real Estate-Other

  

Consumer

Real Estate

  

Consumer

Other

  Total 
Allowance for Loan Losses                        
Beginning Balance $1,545,188  $51,469  $1,374,706  $726,391  $153,863  $3,851,617 
Charge-offs  —   —   —   —   —   — 
Recoveries  —   —   —   21,000   1,740   22,740 
Provisions  7,971   5,602   43,869   9,501   (64,443)  2,500 
Ending Balance $1,553,159  $57,071  $1,418,575  $756,892  $91,160  $3,876,857 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2017
  Commercial  Commercial Real Estate-Construction  

Commercial

Real Estate-Other

  

Consumer

Real Estate

  

Consumer

Other

  Total 
Allowance for Loan Losses                        
Beginning Balance $1,545,188  $51,469  $1,374,706  $726,391  $153,863  $3,851,617 
Charge-offs  —   —   —   —   (2,372)  (2,372)
Recoveries  —   —   —   42,000   3,770   45,770 
Provisions  83,484   1,294   8,213   3,462   (63,953)  32,500 
Ending Balance $1,628,672  $52,763  $1,382,919  $771,853  $91,308  $3,927,515 

Three Months Ended June 30, 2016

   Commercial   Commercial Real Estate-Construction   

Commercial

Real Estate-Other

   

Consumer

Real Estate

   

Consumer

Other

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

Six Months Ended June 30, 2016
  Commercial  Commercial Real Estate-Construction  

Commercial

Real Estate-Other

  

Consumer

Real Estate

  

Consumer

Other

  Total 
Allowance for Loan Losses                        
Beginning Balance $896,854  $59,861  $1,345,094  $941,470  $174,548  $3,417,827 
Charge-offs  (33,045)  —   —   (82,015)  (1,591)  (116,651)
Recoveries  1,284   —   24,000   —   986   26,270 
Provisions  625,234   (2,487)  (182,570)  (229,682)  (25,495)  185,000 
Ending Balance $1,490,327  $57,374  $1,186,524  $629,773  $148,448  $3,512,446 

BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

June 30, 2017
March 31, 2018March 31, 2018
 Commercial  Commercial Real Estate-Construction  

Commercial

Real Estate-Other

  Consumer Real Estate  

Consumer

Other

  Total  Commercial  Commercial Real Estate- Construction  

Commercial

Real Estate-Other

  Consumer Real
Estate		  

Consumer

Other

  Total 
Allowance for Loan Losses                                                
Individually evaluated for impairment $1,032,461  $—  $259,972  $43,119  $35,614  $1,371,166  $771,153  $—  $53,535  $—  $28,300  $852,988 
Collectively evaluated for impairment  596,211   52,763   1,122,947   728,734   55,694   2,556,349   555,093   11,136   987,553   567,075   856,675   2,977,532 
Total Allowance for Losses $1,628,672  $52,763  $1,382,919  $771,853  $91,308  $3,927,515  $1,326,246  $11,136  $1,041,088  $567,075  $884,975  $3,830,520 
Loans Receivable                                                
Individually evaluated for impairment $1,255,033  $—  $2,458,870  $494,437  $35,613  $4,243,953  $1,723,756  $—  $1,475,124  $249,754  $28,300  $3,476,934 
Collectively evaluated for impairment  55,026,536   1,457,591   119,018,968   75,208,440   5,274,257   255,985,792   52,082,220   1,660,573   136,018,319   69,479,589   5,280,801   264,521,502 
Total Loans Receivable $56,281,569  $1,457,591  $121,477,838  $75,702,877  $5,309,870  $260,229,745  $53,805,976  $1,660,573  $137,493,443  $69,729,343  $5,309,101  $267,998,436 
                        

December 31, 2016
  Commercial  Commercial Real Estate-Construction  

Commercial

Real Estate-Other

  Consumer Real Estate  

Consumer

Other

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

December 31, 2017
  Commercial  Commercial Real Estate- Construction  

Commercial

Real Estate-
Other

  Consumer Real
Estate		  

Consumer

Other

  Total 
Allowance for Loan Losses                        
Individually evaluated for impairment $832,571  $—  $99,523  $43,042  $34,107  $1,009,243 
Collectively evaluated for impairment  571,017   23,638   1,450,232   753,876   67,392   2,866,155 
Total Allowance for Losses $1,403,588  $23,638  $1,549,755  $796,918  $101,499  $3,875,398 
Loans Receivable                        
Individually evaluated for impairment $1,812,461  $—  $1,584,821  $292,873  $34,107  $3,724,262 
Collectively evaluated for impairment  49,910,776   2,317,857   138,601,503   70,505,100   5,121,142   266,456,378 

Total Loans Receivable

 $51,723,237  $2,317,857  $140,186,324  $70,797,973  $5,155,249  $270,180,640 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2017March 31, 2018 and December 31, 2016,2017, loans individually evaluated for impairment and the corresponding allowance for loan lossesconsidered impaired are presented in the following table:

 

Impaired and Restructured Loans As of

Impaired and Restructured Loans As of

 

 June 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
  Unpaid Principal Balance   Recorded Investment   Related Allowance   Unpaid Principal Balance   Recorded Investment   Related Allowance  Unpaid Principal Balance  Recorded Investment  Related Allowance  Unpaid Principal Balance  Recorded Investment  Related Allowance 
With no related allowance recorded:                                                
Commercial $171,136  $171,136  $—  $250,040  $250,040  $—  $179,637  $179,637  $—  $152,490  $152,490  $— 
Commercial Real Estate-Construction  —   —   —   —   —   —   —   —   —   —   —   — 
Commercial Real Estate-Other  1,435,014   1,435,014   —   2,174,770   2,174,770   —   1,052,562   1,052,562   —   1,058,601   1,058,601   — 
Consumer Real Estate  451,318   451,318   —   1,243,008   1,243,008   —   249,754   249,754   —   249,754   249,754   — 
Consumer Other  —   —   —   —   —   —   —   —   —   —   —   — 
 $2,057,468  $2,057,468  $—  $3,667,818  $3,667,818  $—   1,481,953   1,481,953   —   1,460,845   1,460,845   — 
                                                
With an allowance recorded:                                                
Commercial $1,083,897  $1,083,897  $1,032,461  $1,051,219  $1,051,219  $1,051,219   1,544,119   1,544,119   771,153   1,659,971   1,659,971   832,571 
Commercial Real Estate- Construction  

—

   —   —   —   —   —   —   —   —   —   —   — 
Commercial Real Estate-Other  1,023,856   1,023,856   259,973   1,050,581   1,050,581   324,587   522,363   422,562   53,535   626,021   526,220   99,523 
Consumer Real Estate  43,119   43,119   43,119   43,119   43,119   43,119   —   —   —   43,119   43,119   43,042 
Consumer Other  35,613   35,613   35,613   89,047   89,047   89,047   28,300   28,300   28,300   34,107   34,107   34,107 
 $2,186,485  $2,186,485  $1,371,166  $2,233,966  $2,233,966  $1,507,972   2,094,782   1,994,981   852,988   2,363,218   2,263,417   1,009,243 
                                                
Total                                                
Commercial $1,255,033  $1,255,033  $1,032,461  $1,301,259  $1,301,259  $1,051,219   1,723,756   1,723,756   771,153   1,812,461   1,812,461   832,571 
Commercial Real Estate-Construction  —   —   —   —   —   —   —   —   —   —   —   — 
Commercial Real Estate-Other  2,458,870   2,458,870   259,973   3,225,351   3,225,351   324,587   1,574,925   1,475,124   53,535   1,684,622   1,584,821   99,523 
Consumer Real Estate  494,437   494,437   43,119   1,286,127   1,286,127   43,119   249,754   249,754   —   292,873   292,873   43,042 
Consumer Other  35,613   35,613   35,613   89,047   89,047   89,047   28,300   28,300   28,300   34,107   34,107   34,107 
 $4,243,953  $4,243,953  $1,371,166  $5,901,784  $5,901,784  $1,507,972  $3,576,735  $3,476,934  $852,988  $3,824,063  $3,724,262  $1,009,243 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

  For the Three Months Ended June 30, 
  2017  2016 
  Average Recorded Investment  Interest
Income Recognized		  Average Recorded Investment  Interest
Income Recognized		 
With no related allowance recorded:                
Commercial $175,568  $4,886  $486,498  $4,221 
Commercial Real Estate-Construction  —   —   —   — 
Commercial Real Estate-Other  1,383,621   21,894   2,883,625   20,215 
Consumer Real Estate  451,035   5,630   1,242,703   14,334 
Consumer-Other  —   —   —   — 
  $2,010,224  $32,410  $4,612,826  $38,770 
                 
With an allowance recorded:                
                 
Commercial $1,091,779  $36,481  $1,097,191  $13,912 
Commercial Real Estate-Construction  —   —   —   — 
Commercial Real Estate-Other  1,020,012   5,331   1,065,261   10,949 
Consumer Real Estate  43,119   431   72,034   387 
Consumer Other  36,107   516   100,212   1,177 
  $2,191,017  $42,759  $2,334,698  $26,425 
                 
Total                
                 
Commercial $1,267,347  $41,367  $1,583,689  $18,133 
Commercial Real Estate-Construction  —   —   —   — 
Commercial Real Estate-Other  2,403,633   27,225   3,948,886   31,164 
Consumer Real Estate  494,154   6,061   1,314,737   14,721 
Consumer Other  36,107   516   100,212   1,177 
  $4,201,241  $75,169  $6,947,524  $65,195 


BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 For the Six Months Ended June 30,  For the Three Months Ended
March 31,		 
 2017  2016  2018  2017 
 Average Recorded Investment  Interest
Income Recognized		  Average Recorded Investment  Interest
Income Recognized		  Average Recorded Investment  Interest Income Recognized  Average Recorded Investment  Interest Income Recognized 
With no related allowance recorded:                                
Commercial $179,698  $10,032  $494,572  $10,718  $186,580  $2,411  $183,126  $5,146 
Commercial Real Estate-Construction  —   —   —   —   —   —   —   — 
Commercial Real Estate-Other  1,324,984   43,806   2,889,248   42,855   1,055,999   7,006   1,300,763   20,043 
Consumer Real Estate  450,860   11,025   1,242,069   27,781   249,754   3,702   450,570   5,394 
Consumer-Other  —   —   —   —   —   —   —   — 
 $1,955,542  $64,863  $4,625,889  $81,354   1,492,333   13,119   1,934,459   30,583 
                                
With an allowance recorded:                                
                
Commercial $1,098,449  $71,193  $1,101,252  $30,364   1,570,019   25,663   1,105,705   34,712 
Commercial Real Estate-Construction  —   —   —   —   —   —   —   — 
Commercial Real Estate-Other  1,020,012   7,941   1,031,087   18,265   529,297   2,995   1,050,581   4,479 
Consumer Real Estate  43,119   838   72,059   1,006   —   —   43,119   408 
Consumer Other  36,848   1,086   102,264   3,510   31,411   439   37,594   570 
 $2,198,428  $81,058  $2,306,662  $53,145   2,130,727   29,097   2,236,999   40,169 
                                
Total                                
                
Commercial $1,278,147  $81,225  $1,595,824  $41,082   1,756,599   28,074   1,288,831   39,858 
Commercial Real Estate-Construction  —   —   —   —   —   —   —   — 
Commercial Real Estate-Other  2,344,996   51,747   3,920,335   61,120   1,585,296   10,002   2,351,344   24,522 
Consumer Real Estate  493,979   11,863   1,314,128   28,787   249,754   3,702   493,689   5,802 
Consumer Other  36,848   1,086   102,264   3,510   31,411   437   37,594   570 
 $4,153,970  $145,921  $6,932,552  $134,499  $3,623,060  $42,217  $4,171,458  $70,752 

 

Restructured loans, also known asIn general, the modification or restructuring of a debt is considered a troubled debt restructuringsrestructuring (“TDR”), are loans, still accruing interest, which have been renegotiated at below-market interest rates if we, for economic or have been granted other concessions. At June 30, 2017 andlegal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of March 31, 2018, there was one TDR with a balance of $28,300, compared to one TDR with a total balance of $33,300 as of December 31, 2016, there were $33,300 (1 loan) and $378,392 (2 loans) in restructured loans, respectively. Our restructured loans2017. These TDRs were granted extended payment terms with no principal or rate reductions.reduction. All TDRs were performing as agreed as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. There were no additional loans identified as a TDR during the three or six months ended June 30, 2017 or 2016. No TDRs defaulted during the three or six months ended June 30,March 31, 2018 and 2017, and 2016, which were modified within the previous twelve months.


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 4: Disclosure Regarding Fair Value of Financial InstrumentsStatements

Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or the most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. GAAPThe 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.

 

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

 

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

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

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

 

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

 

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

 

Investment Securities Available for Sale

 

Investment securitiesSecurities 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.


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Derivative Instruments

 

Derivative instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on the change in the value of the underlying loan between the commitment date and the end of the period. We classify these instruments as Level 3. The fair value of these commitments was not significant at June 30, 2017March 31, 2018 or December 31, 2016.2017.

 

We havehad no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments as interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on short term fair value of the mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of June 30, 2017March 31, 2018 and December 31, 2016.2017.

 

Assets and liabilities measured at fair value on a recurring basis at June 30, 2017March 31, 2018 and December 31, 20162017 are as follows:

 

June 30, 2017
  Quoted Market Price in active markets 
(Level 1)		  Significant Other Observable
Inputs 
(Level 2)		  Significant Unobservable Inputs 
(Level 3)		  Total 
U.S. Treasury Notes $24,195,314  $—  $—  $24,195,314 
Government Sponsored
Enterprises		  —   66,717,277   —   66,717,277 
Municipal Securities  —   29,258,845   12,488,945   41,747,790 
Total $24,195,314  $95,976,122  $12,488,945  $132,660,381 

Balance at

March 31, 2018

  Quoted
Market Price
in active
markets
(Level 1)		  Significant
Other
Observable
Inputs
(Level 2)		  Significant
Unobservable
Inputs
(Level 3)		  Total 
US Treasury Notes $35,174,877  $—  $—  $35,174,877 
Government Sponsored Enterprises  —   59,789,587   —   59,789,587 
Municipal Securities  —   23,466,734   7,483,696   30,950,430 
Total $35,174,877  $83,256,321  $7,483,696  $125,914,894 

 

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

Balance at

December 31, 2017

  Quoted
Market Price
in active
markets
(Level 1)		  Significant Other Observable Inputs
(Level 2)		  Significant Unobservable Inputs
(Level 3)		  Total 
US Treasury Notes $35,559,845  $—  $—  $35,559,845 
Government Sponsored Enterprises  —   63,556,504   —   63,556,504 
Municipal Securities  —   28,675,012   11,458,889   40,133,901 
Total $35,559,845  $92,231,516  $11,458,889  $139,250,250 

 

There were no liabilities recorded at fair value on a recurring basis as of June 30, 2017March 31, 2018 or December 31, 2016.2017.

 


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2017March 31, 2018 and 2016:2017:

 

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

 Six Months Ended
June 30,		  2018  2017 
 2017  2016 
Beginning balance $13,977,857  $5,217,678 
Beginning Balance $11,458,889  $13,977,857 
Total gains or (losses) (realized/unrealized)                
Included in earnings  —   —   —   — 
Included in other comprehensive income  241,088   (33,136)  64,807   25,588 
Purchases, issuances and settlements, net of maturities  (1,730,000)  2,454,000   (4,040,000)  (545,000)
Transfers in and/or out of level 3  —   —   —   — 
Ending balance $12,488,945  $7,704,814 
Ending Balance $7,483,696  $13,458,445 

 

There were no transfers between fair value levels during the three or six months ended June 30, 2017March 31, 2018 or June 30, 2016.March 31, 2017.

 

The following paragraphs describe theare 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.


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Mortgage Loans Held for Saleto be Sold

 

Loans held for sale include mortgageMortgage loans andto be sold are carried at the lower of cost or market value. The fair values of mortgage loans held for saleto be sold 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).

 

The following tables presenttable presents information about certain assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2017March 31, 2018 and December 31, 2016:2017:

 

June 30, 2017
March 31, 2018March 31, 2018
 

Quoted Market Price
in active
markets

(Level 1) 

 

Significant
Other
Observable
Inputs

(Level 2) 

 

Significant Unobservable Inputs 

(Level 3) 

  Total   

Quoted
Market Price
in active
markets
(Level 1)

   

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs
(Level 3)

   

Total

 
Impaired loans $—  $—  $2,650,215  $2,650,215  $—  $—  $1,671,342  $1,671,342 
Other real estate owned  —   —   475,800   475,800   —   —   435,479   435,479 
Loans held for sale  —   2,232,201   —   2,232,201   —   3,640,385   —   3,640,385 
Total $—  $2,232,201  $3,126,015  $5,358,216  $—  $3,640,385  $2,106,821  $5,747,206 

 

December 31, 2016
  

Quoted
Market Price
in active
markets 

(Level 1) 

  

Significant
Other
Observable
Inputs 

(Level 2) 

  

Significant Unobservable Inputs 

(Level 3) 

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

December 31, 2017
 
   

Quoted
Market Price
in active
markets
(Level 1)

   

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs
(Level 3)

   

Total

 
Impaired loans $—  $—  $1,735,051  $1,735,051 
Other real estate owned  —   —   435,479   435,479 
Loans held for sale  —   2,093,723   —   2,093,723 
Total $—  $2,093,723  $2,170,530  $4,264,253 

 

There were no liabilities measured at fair value on a nonrecurring basis as of June 30, 2017March 31, 2018 or December 31, 2016.2017.

 


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at June 30, 2017:March 31, 2018:

 

    Inputs
  

Valuation Technique

 

Unobservable Input

 

General Range of
Inputs

       
 Impaired Loans Discounted AppraisalsAppraisal Value/ Comparison Sales/Other Estimates Collateral DiscountsAppraisals and/or Sales of Comparable Properties 0 – 35%Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs
       
 Other Real Estate Owned Appraisal Value/ Comparison Sales/Other Estimates Appraisals and/or Sales of Comparable Properties Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs

 

GAAP requiresAccounting 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.

 

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

 

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

 

a.Cash and due from banks, interest-bearing deposits in other banks

a.Cash and due from banks, interest-bearing deposits in other banks

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

 

b.Loans

b.Investment securities available for sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are 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.

c.Loans, net

During the first quarter of 2018, the Company adopted ASU 2016-01,Recognition and Measurement of Financial Assets and Liabilities. The carrying valuesamendments included within this standard, which are applied prospectively, require the Company to measure and disclose fair value of balance sheet financial instruments using an exit price notion. Prior to adopting the amendments included in the standard, the Company measured fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets.

As of March 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. The fair value of the Company’s loan portfolio has always included a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate consumer and commercialloans, impaired loans and consumer and commercial loans with remaining maturitiesall other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use 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 assumemodel to compensate for illiquidity risk, based on certain assumptions included within the rate being offered on these typesdiscounted cash flow model, primarily the use of loans at June 30, 2017 and December 31, 2016, approximate market.discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio.


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

For linesvariable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of credit, the carrying value approximates fair value.underlying collateral.

 

c.Deposits

As of December 31, 2017, the fair value of the Company’s loan portfolio included a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption was intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price as of December 31, 2017.

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.

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.

 

e.

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.

 


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of June 30, 2017March 31, 2018 and December 31, 2016.2017.

 

Fair Value Measurements at June 30, 2017
Fair Value Measurements at March 31, 2018Fair Value Measurements at March 31, 2018
 

Carrying

Amount

 

Estimated

Fair Value

 

Level

1

 

Level

2

 

Level

3

 

 

 

Carrying
Amount

 

Estimated

Fair Value

 

Level 1

 

Level 2

 

Level 3

Financial Assets:                       
Cash and due from banks

$

8,746,291$ 8,746,291

$

8,746,291$

—

$

—

 $6,952,114 $ 6,952,114 $ 6,952,114 $ — $ — 
Interest-bearing deposits in other banks 23,881,649 23,881,649 23,881,649

—

 

—

  27,468,258   27,468,258   27,468,258   —   — 
Investment securities available for sale 132,660,381 132,660,381 24,195,314 95,976,122 12,488,945  125,914,894   125,914,894   35,174,877   83,256,321   7,483,696 
Mortgage loans to be sold  2,232,201  2,232,201 —  2,232,201  -  3,640,385   3,640,385   —   3,640,385   — 
Net loans  256,302,230 255,780,927 — — 255,780,927
Loans, net  264,167,916   260,538,313   —   —   260,538,313 
Accrued interest receivable 1,551,357  1,551,357 —  1,551,357 —  1,368,258   1,368,258   —   1,368,258   — 
Financial Liabilities:                              

Demand deposits

  341,773,707  341,773,707 —  341,773,707 —  349,525,353   349,525,353   —   349,525,353   — 

Time deposits

 44,518,562 44,734,936 — 44,734,936 —  41,160,211   45,037,591   —   45,037,591   — 
Accrued interest payable  59,031  59,031 —  59,031 —  118,444   118,444   —   118,444   — 

 

Fair Value Measurements at December 31, 2016
Fair Value Measurements at December 31, 2017Fair Value Measurements at December 31, 2017
 

Carrying

Amount

 

Estimated

Fair Value

 

Level

1

 

Level

2

 

Level

3

 

 

 

Carrying
Amount

 

Estimated

Fair Value

 

Level 1

 

Level 2

 

Level 3

Financial Assets:                     
Cash and due from banks

$

8,141,030$8,141,030

$

8,141,030$

—

$

—

 $8,486,025 $ 8,486,025 $ 8,486,025 $ — $ — 
Interest-bearing deposits in other banks 18,101,300 18,101,300 18,101,300 

—

 

—

  24,034,194   24,034,194   24,034,194   —   — 
Investment securities available for sale 119,978,944 119,978,944 23,939,063 82,062,024 13,977,857  139,250,250   139,250,250   35,559,845   92,231,516   11,458,889 
Mortgage loans to be sold 4,386,210 4,386,210 — 4,386,210 —  2,093,723   2,093,723   —   2,093,723   — 
Net loans 256,724,498 256,555,052 — — 256,555,052
Loans, net  266,305,242   265,277,204   —   —   265,277,204 
Accrued interest receivable 1,614,002 1,614,002 — 1,614,002 —  1,720,920   1,720,920   —   1,720,920   — 
Financial Liabilities:                              

Demand deposits

 328,681,594 328,681,594 — 328,681,594 —  360,967,884   360,967,884   —   360,967,884   — 

Time deposits

 43,841,257 43,856,383 — 43,856,383 —  41,920,416   40,722,870   —   40,722,870   — 
Accrued interest payable 51,629 51,629 — 51,629 —  96,190   96,190   —   96,190   — 

 

27 


BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

Note 5: Income Per Common Share

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding.outstanding, after giving retroactive effect to a stock dividend payable May 31, 2018. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and potential common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock.

 

The following tables aretable is a summary of the reconciliation of average shares outstanding:outstanding for the three months ended March 31:

  2018  2017 
Numerator:        
Net income $1,612,230  $1,226,088 
         
Denominator:        
         
Weighted average shares outstanding  5,489,087   5,458,475 
Effect of dilutive shares  94,284   121,937 
Weighted average shares outstanding - diluted  5,583,371   5,580,412 
         
Earnings per share - basic $0.29  $0.22 
Earnings per share - diluted $0.29  $0.22 

Note 6: Accumulated Other Comprehensive Income (Loss)

 

The following is changes in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2018 and 2017:

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

 

  Six Months Ended
June 30		 
  2017  2016 
Net income $2,612,473  $2,507,846 
         
Weighted average shares outstanding - basic  4,965,094   4,923,266 
Effect of dilutive shares  103,930   124,335 
Weighted average shares outstanding - diluted  5,069,024   5,047,601 
         
Earnings per share - basic $0.53  $0.51 
Earnings per share - diluted $0.52  $0.50 
Available for sale securities  
Beginning Balance December 31, 2017 $(696,296)
Change in net unrealized losses on securities available for sale  (1,337,571)
Reclassification adjustment for net securities gains included in net income  (4,348)
Income tax benefit  293,921 
Ending Balance at March 31, 2018 $(1,744,294)
     
Beginning Balance December 31, 2016 $(607,109)
Change in net unrealized losses on securities available for sale  585,821 
Reclassification adjustment for net securities gains included in net income  — 
Income tax expense  (216,753)
Ending Balance at March 31, 2017 $(238,041)

 

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

28 

 

  Three Months Ended
March 31,
  2018  2017 
Gain on sale of investments, net $4,348  $— 
Tax effect  (913)  — 
Total reclassification, net of tax $3,435  $— 

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

 

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report,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“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, 20162017 as filed with the SEC and the following:

 

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

●Changes in interest rates, shape of the yield curve, deposit rates, the net interest margin and funding sources

●Market risk (including net income at risk analysis and economic value of equity risk analysis) and inflation

●Risk inherent in making loans including repayment risks and changes in the value of collateral

●Loan growth, the adequacy of the allowance for loan losses, provisions for loan losses, and the assessment of problem loans

●Level, composition, and re-pricing characteristics of the securities portfolio

●Deposit growth, change in the mix or type of deposit products and services

●Continued availability of senior management and ability to attract and retain key personnel

●Technological changes

●Increased cybersecurity risk, including potential business disruptions or financial losses

●Ability to control expenses

●Changes in compensation

●Risks associated with income taxes and deferred tax assets including potential for adverse adjustments

●Changes in accounting policies and practices

●Changes in regulatory actions, including the potential for adverse adjustments

●Recently enacted or proposed legislation and changes in political conditions

●Reputational risk

 

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

 

We will undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings with the SEC, in our press releases, and in oral and written statements, which are not statements of historical fact, constitute forward-looking statements.

 


Overview

Bank of South Carolina Corporation (the “Company”) is a financial institution holding company headquartered in Charleston, South Carolina, with $430.3$434.6 million in assets as of June 30, 2017March 31, 2018 and net income of $1.4 million and $2.6$1.6 million for the three and six months ended June 30, 2017.March 31, 2018. The Company offers a broad range of financial services through its wholly-owned subsidiary, The Bank of South Carolina (the “Bank”). The Bank is a state-chartered commercial bank which operates primarily in the Charleston, Dorchester and Berkeley counties of South Carolina. The Bank’s original and current concept is to be a full service financial institution specializing in personal service, responsiveness, and attention to detail to foster long standing relationships.

 

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

 

A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The reserve for credit losses consists of the allowance for loan losses (the “allowance”) and a reserve for unfunded commitments (the “unfunded reserve”). The allowance provides for probable and estimable losses inherent in our loan and lease portfolio while the unfunded reserve provides for potential losses related to unfunded lending commitments.

 

In addition to earning interest on loans and investments, we earn income through fees and other expenses we charge to the customer. The various components of non-interest income as well as non-interest expense are described in the following discussion. The discussion and analysis also identifies significant factors that have affected our financial position and operating results as of June 30, 2017and for the periods ending March 31, 2018 and December 31, 2016,2017, and should be read in conjunction with the financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion.

 

Critical Accounting Policies

Our critical accounting policies which involve significant judgements and assumptions that have a material impact on the carrying value of certain assets and liabilities, and used in the preparation of the Consolidated Financial Statements as of June 30, 2017,March 31, 2018, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2016.2017, except with respect to calculations of the fair value of our loan portfolio as described in Note 4. to our Financial Statements above.

 

Balance Sheet

Cash and Cash Equivalents

Total cash and cash equivalents increased 24.33%5.8% or $6.4$1.9 million to $32.6$34.4 million at June 30, 2017,March 31, 2018, from $26.2$32.5 million at December 31, 2016. This increase was primarily due to an increase in deposit balances for both new and existing customers.2017. Funds are placed in interest bearing deposits with the Federal Reserve Bankother banks until opportunities arise for investment in higher yielding assets.

 

Investment Securities Available for Sale

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

 

We use the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income from investment of funds, to provide liquidity to meet funding requirements, and to provide collateral for pledging of public funds.

 


At June 30, 2017,March 31, 2018, our available for sale investment portfolio included U. S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $132.7$125.9 million and an amortized cost of $132.0$128.6 million for a net unrealized gainloss of $618,883.approximately $2.7 million. At June 30, 2017March 31, 2018 and December 31, 2016,2017, our investment securities portfolio represented approximately 30.83%28.97% and 28.00%31.18% of our total assets, respectively. The average yield on our investment securities was 2.00%2.12% and 1.99%2.01% at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

 

During the first quarter of 2018, three Municipal Securities totaling $1.5 million matured and twelve Municipal Securities in the amount of $3.5 million were called. We hadsold two Government Sponsored Enterprise securities and seven Municipal Securities with an approximate total book valueduring the quarter for proceeds of $2.8 million that matured and three Municipal Securities with an approximate total book value of $1.0 million that were called in the six months ended June 30, 2017.$12.0 million. We also purchased three investment securities issued byone Government Sponsored EnterprisesEnterprise with a face value of $15.1$5.0 million during the sixthree months ended June 30, 2017.March 31, 2018.

 

Loans

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

 

Net loans decreased approximately $400,000,$2.1 million, or 0.16%0.8%, to $256.3$264.2 million at June 30, 2017March 31, 2018 from $256.7$266.3 million at December 31, 2016.2017. While loan demand remains consistent, we believe the decrease in net loans is due to an increase in loan payoffs related to the sale of real estate held as collateral and decrease in the usage of lines of credit.

 

The following table is a summary of our loan portfolio composition (net of deferred fees of $143,374$156,185 at June 30, 2017March 31, 2018 and $136,446$152,047 at December 31, 2016)2017) and the corresponding percentage of total loans as of the dates indicated.

 

 June 30, 2017 December 31, 2016  March 31, 2018  December 31, 2017 
 Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
Commercial loans $56,281,569   21.63% $52,262,209   20.06% $53,805,976   20.1% $51,723,237   19.1%
Commercial real estate:                
Commercial real estate – construction  1,457,591   0.56%  1,208,901   0.46%  1,660,573   0.6%  2,317,857   0.9%
Commercial real estate – other  121,477,838   46.68%  122,968,126   47.19%  137,493,443   51.3%  140,186,324   51.9%
Consumer:                
Consumer real estate  75,702,877   29.09%  77,131,816   29.60%  69,729,343   26.0%  70,797,973   26.2%
Consumer other  5,309,870   2.04%  7,005,063   2.69%  5,309,101   2.0%  5,155,249   1.9%
Total  260,229,745   100.00%  260,576,115   100.00%  267,998,436   100.00%  270,180,640   100.00%
Allowance for loan loss  (3,927,515)      (3,851,617)      (3,830,520)      (3,875,398)    
Total loans, net $256,302,230      $256,724,498      $264,167,916      $266,305,242     

 

Nonperforming assetsAssets

Nonperforming assetsAssets include real estate acquired through foreclosure or deed taken in lieu of foreclosure, loans on nonaccrual status and TDRs. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of June 30, 2017,March 31, 2018, 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.challenges. As of June 30, 2017,March 31, 2018, we determined that we had one loan totaling $28,300 that we considered a TDR. As of December 31, 2017, we had one loan totaling $33,300 that we considered a TDR. As of December 31, 2016, we had two loans totaling $378,382 that we considered TDRs.

 


Nonperforming loans include all loans past due 90 days and over, certain impaired loans (some of which may be contractually current), and TDR loans that have not yet established a satisfactory period of payment performance (some of which may be contractually current). Nonperforming assets include other real estate owned, which decreased $46,143 from $521,943 as ofremained unchanged compared to December 31, 2016 to $475,800 as of June 30, 2017. The balance at March 31, 2018 of $435,479 represents one commercial property.

 


The following table is a summary of our nonperforming assets:

 

 June 30,
2017		 December 31,
2016		 March 31, 2018  December 31, 2017 
Commercial loans $52,050 $61,781 $36,309  $41,651 
Commercial real estate – other  1,782,819  1,678,876  858,705   790,208 
Consumer – other  —  964  6,443   — 
Total nonaccrual loans  1,834,869  1,741,621  901,457   831,859 
Other real estate owned  475,800  521,943  435,479   435,479 
Total nonperforming assets $2,310,669 $2,263,564 $1,336,936  $1,267,338 

 

Allowance for Loan Losses

The allowance for loan losses was $3.8 million at March 31, 2018 and $3.9 million at June 30,December 31, 2017, or 1.43% of outstanding loans for each respective period. At March 31, 2018 and December 31, 2016, or 1.51% and 1.48% of outstanding loans, respectively. At June 30, 2017, and December 31, 2016, the allowance for loan losses represented 169.97%424.9% and 170.16%465.9% of the total amount of nonperforming loans, respectively. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses at June 30, 2017March 31, 2018 is adequate.

 

At June 30, 2017,March 31, 2018, impaired loans totaled $4.2$3.5 million, for which $2.2$2.0 million of these loans had a reserve of approximately $1.4 million$853 thousand allocated in the allowance for loan losses. Comparatively, impaired loans totaled $5.9$3.7 million at December 31, 2016,2017, and $2.2$2.3 million of these loans had a reserve of approximately $1.5$1.0 million allocated in the allowance for loan losses.

 

During the three months ended June 30, 2017,March 31, 2018, we recorded $2,372$103,093 of charge-offs and $23,030$3,215 of recoveries on loans previously charged-off, for net charge-offs of $99,878. Comparatively, we recorded no charge-offs and $22,740 of recoveries on loans previously charged-off, resulting in net recoveries of $20,658. Comparatively, we recorded $82,556 of charge-offs and $18,240 of recoveries on loans previously charged-off, resulting in net charge-offs of $64,316 during$22,740 for the three months ended June 30, 2016. During the six months ended June 30, 2017, we recorded $2,372 of charge-offs and we recorded $45,770 of recoveries on loans previously charged-off, resulting in net recoveries of $43,398. Comparatively, during the same period in 2016, we recorded $116,651 of charge-offs and $26,270 of recoveries on loans previously charged-off, resulting in net charge-offs of $90,381 for the six months ended June 30, 2016.March 31, 2017.

 

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest bearing deposits provided funding for 60.88%61.26% of average earning assets for the sixthree months ended June 30, 2017,March 31, 2018, and 65.70%61.14% for the twelve months ended December 31, 2016.2017. The Company encounters strong competition from other financial institutions as well as consumer and commercial finance companies, insurance companies and brokerage firms located in the primary service area of the Bank. However, the percentage of funding provided by deposits has remained stable.

 

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

 

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

  March 31, 2018  December 31, 2017 
  Amount  Percent  Amount  Percent 
Deposits:            
Non-interest bearing demand $141,607,977   36.24% $139,256,748   34.56%
Interest-bearing demand  100,596,328   25.75%  108,967,196   27.05%
Money market accounts  68,937,190   17.65%  77,833,728   19.32%
Time deposits over $250,000  17,278,762   4.42%  18,624,924   4.62%
Other time deposits  23,881,449   6.11%  23,295,492   5.78%
Other savings deposits  38,383,858   9.83%  34,910,212   8.67%
Total deposits $390,685,564   100.00% $402,888,300   100.00%

 

Deposits increased 3.70%decreased 3.0% or $13.8$12.2 million from December 31, 20162017 to June 30, 2017.March 31, 2018. These increasesdecreases were primarily due to larger balances in existing customer accounts as well as new accounts. Certificates of Deposit and other time deposits over $250,000 totaled $18.0 million and $17.8 million as of June 30, 2017normal, seasonal fluctuations.


At March 31, 2018 and December 31, 2016, respectively.

At June 30, 2017, and December 31, 2016, deposits with an aggregate deficit balance of $29,155$79,974 and $24,963,$66,479, respectively were re-classified as other loans.


Comparison of Three Months Ended June 30, 2017March 31, 2018 to Three Months Ended June 30, 2016March 31, 2017

Net income increased $74,275$386,142 or 5.66%31.5% to $1.4$1.6 million, or basic and diluted earnings per share of $0.28 and $0.27, respectively,$.29 for the three months ended June 30, 2017,March 31, 2018, from $1.3$1.2 million, or basic and diluted earnings per share of $0.27 and $0.26, respectively,$.22 for the three months ended June 30, 2016.March 31, 2017. Our annualized return on average assets and average equity for the three months ended June 30, 2017March 31, 2018 were 1.31%1.51% and 12.97%15.17%, respectively, compared with 1.30%1.21% and 12.82%11.96%, respectively, for the three months ended June 30, 2016.March 31, 2017.

 

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is a measure of the difference between interest income on earning assets and interest paid on interest bearing liabilities relative to the amount of interest bearing assets. Net interest income increased $149,082$515,540 or 4.05%14.0% to $4.2 million for the three months ended March 31, 2018 from $3.8 million for the three months ended June 30, 2017March 31, 2017. This increase was primarily due to interest and fee income from $3.7loans. Average loans increased $12.5 million or 4.8% to $273.4 million for the three months ended June 30, 2016. This increase was primarily dueMarch 31, 2018, compared to income from securities and interest bearing deposits at the Federal Reserve Bank. Average loans decreased $5.5 million or 2.01% to $261.3$260.8 million for the three months ended June 30, 2017, compared to $266.8 million for the three months ended June 30, 2016.March 31, 2017. The yield on average loans (including fees) was 5.55% and 4.84%5.28% for the three months ended June 30,March 31, 2018 and 4.99% March 31, 2017, and June 30, 2016, respectively. Interest income on loans increased $13,019$417,248 for the three months ended June 30, 2017March 31, 2018 to $3.2$3.6 million from $3.2$3.1 million for the three months ended June 30, 2016.March 31, 2017.

 

The average balance of interest bearing deposits in other banksat the Federal Reserve decreased $4.1$3.1 million or 16.33%15.8% to $21.0$16.4 million for the three months ended June 30, 2017,March 31, 2018, with a yield of 1.06%1.54% as compared to $25.1$19.5 million for the three months ended June 30, 2016,March 31, 2017, with a yield of 0.50%0.83%.

 

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy for loan losses. For the three months ended June 30, 2017,March 31, 2018, we had a provision of $30,000$55,000 compared to a provision of $140,000$2,500 for the same period in the prior year. The decreaseincrease in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income decreased $33,093$103,929 or 4.54%18.8% to $696,479$447,945 for the three months ended June 30, 2017,March 31, 2018, from $729,572$551,874 for the three months ended June 30, 2016.March 31, 2017. This reduction was primarily due to less income derived from the sale of investment securities, and was partially offset by increasesa reduction in service charges, fees, and commissions and mortgage banking income.income, which decreased $135,190 or 49.1% due to a decrease in originations. For the three months ended June 30, 2016,March 31, 2018, we had realized gains of $160,391$4,348 from the sale of investment securities. However,There were no sales of investment securities during the three months ended June 30, 2017, there were no sales of investment securities.March 31, 2017.

 

Non-Interest Expense

Non-interest expense increased $153,242$170,204 or 6.29%6.9% to $2.6 million for the three months ended June 30, 2017March 31, 2018 from $2.4$2.5 million for the three months ended June 30, 2016. ThisMarch 31, 2017. The increase was primarily due to an increase in other operating expensessalaries and employee benefits of $73,705 related$102,511 or 7.0% from $1.5 million for the three months ended March 31, 2017 to $1.6 million for the amortization of the tax credit and a write down on OREO of $46,143.three months ended March 31, 2018.

 

Income Tax Expense

We incurred income tax expense of $516,734$349,060 for the three months ended June 30, 2017March 31, 2018 as compared to $518,262$546,295 during the same period in 2016.2017. Our effective tax rate was 27.15%17.80% and 28.31%30.82% for the three months ended June 30,March 31, 2018 and 2017, and 2016, respectively. The decrease in the effective tax rate during the 20172018 period is a result of the Company’s 2016 investment in a South Carolina Historic Rehabilitation2017 Tax Credit.

Comparison of Six Months Ended June 30, 2017Act that reduced the U.S. corporate income tax rate from 34 percent to Six Months Ended June 30, 2016

Net income increased $104,627 or 4.17% to $2.6 million, or basic and diluted earnings per share of $0.53 and $0.52, respectively,21 percent for the six months ended June 30, 2017, from $2.5 million, or basic and diluted earnings per share of $0.51 and $0.50, respectively, for the six months ended June 30, 2016. Our return on average assets and average equity for the six months ended June 30, 2017 were 1.26% and 12.42%, respectively, compared with 1.26% and 12.37%, respectively, for the six months ended June 30, 2016.

tax years beginning after December 31, 2017.


Net Interest Income

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

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

Provision for Loan Losses

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

Non-Interest Income

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

Non-Interest Expense

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

Income Tax Expense

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

Off Balance Sheet Arrangements

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on our credit evaluation of the borrower. Collateral held varies but may include accounts receivable, negotiable instruments, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to $86.8$91.3 million and $81.2$92.9 million at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

 

Standby letters of credit represent our obligation to a third party contingent upon the failure of our customer to perform under the terms of an underlying contract with the third party or obligates us to guarantee or stand as surety for the benefit of the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be drawn only when the underlying event fails to occur as intended. We can seek recovery of the amounts paid from the borrower. The majority of these standby letters of credit are unsecured. Commitments under standby letters of credit are usually for one year or less. The maximum potential amount of undiscounted future payments related to standby letters of credit at June 30, 2017March 31, 2018 and December 31, 20162017 was $953,504$1.3 million and $793,992,$1.2 million, 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 $6.2$3.6 million at June 30,March 31, 2018, to sell loans held for sale of $3.6 million, compared to forward sales commitments of $2.1 million at December 31, 2017, to sell loans held for sale of $2.2 million, compared to forward sales commitments of $4.4 million at December 31, 2016, to sell loans held for sale of $4.4$2.1 million. The fair value of these commitments was not significant at June 30, 2017March 31, 2018 or December 31, 2016.2017. We had no embedded derivative instruments requiring separate accounting treatment.

 

Once we sell certain fixed rate residential loans, the loans are no longer reportable on our balance sheet. With most of these sales, we have an obligation to repurchase the loan in the event of a default of principal or interest on the loan. This recourse period ranges from three to nine months. Misrepresentation or fraud carries unlimited time for recourse. The unpaid principal balance of loans sold with recourse was $34.7$10.5 million at June 30, 2017March 31, 2018 and $18.1$13.4 million at December 31, 2016.2017. For the three and six months ended June 30,March 31, 2018 and March 31, 2017, and June 30, 2016, there were no loans repurchased.

 

Liquidity

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

 

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

 

Proper liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our primary liquid assets are cash and due from banks, interest-bearing deposits in other banks, federal funds sold, investments available for sale, other short-term investments and mortgage loans held for sale. Our primary liquid assets accounted for 38.93%37.7% and 36.38%38.9% of total assets at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. Securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates and liquidity needs. All of the securities presently owned are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity. At June 30, 2017,March 31, 2018, we had unused short-term lines of credit totaling approximately $18$23 million (which can be withdrawn at the lender’s option). Additional sources of funds available to us for additional liquidity needs include borrowing on a short-term basis from the Federal Reserve System, increasing deposits by raising interest rates paid and liquidation of mortgage loans held for sale. We established a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits us to retain possession of assets pledged as collateral to secure advances from the Federal Reserve Discount Window. At June 30, 2017,March 31, 2018, we could borrow up to $77$81 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$250,000 and other large deposits. We maintain a Contingency Funding Plan (“CFP’) that identifies liquidity needs and weighs alternate courses of action designed to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. At June 30, 2017March 31, 2018 and December 31, 2016,2017, our liquidity ratio was42.85% 36.1% and 38.27%37.7%, 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.purchase stock. Total shareholders’ equity at June 30, 2017March 31, 2018 was $43.1$42.6 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 June 30, 2017March 31, 2018 and December 31, 20162017 was 15.69%16.78% and 15.36%15.69%, respectively.

 

At June 30, 2017,March 31, 2018, the Company and the Bank were categorized as “well capitalized” under Basel III. To be categorized as “well capitalized” the Company and the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 10%, 8.0%, 6.5% and 5%, respectively, and to be categorized as “adequately capitalized,” the Company and the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital, and Tier 1 leverage ratios of 8%, 6%, 4.5%, and 4.0%, respectively.

 

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

 

The Company had no material commitments for capital expenditures as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

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

 

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934 as amended (the “Act”) was carried out as of June 30, 2017March 31, 2018 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/SeniorExecutive 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/SeniorExecutive Vice President concluded that, as of June 30, 2017,March 31, 2018, 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/SeniorExecutive 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/SeniorExecutive Vice President, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of June 30, 2017,March 31, 2018, based on the 2013 framework established in a report entitled“Internal Control-Integrated FrameworkFramework”” 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 June 30, 2017.March 31, 2018. Based on this assessment, management believes that as of June 30, 2017,March 31, 2018, the Company’s internal control over financial reporting was effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2017,March 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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


Part II. Other Information

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

Not required.

 

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

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosure

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

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

   Page
    
 (1)Consolidated Balance Sheets3
 (2)Consolidated Statements of Income4-5
 (3)Consolidated Statements of Comprehensive Income6
 (4)Consolidated Statements of Shareholders’ Equity7
 (5)Consolidated Statements of Cash Flows8
 (6)Notes to Consolidated Financial Statements9-28

 

1.The Consolidated Financial Statements are included in this Form 10-Q and listed on pages as indicated.
   Page
    
 (1)Consolidated Balance Sheets3
 (2)Consolidated Statements of Income4
 (3)Consolidated Statements of Comprehensive Income5
 (4)Consolidated Statements of Shareholders’ Equity6
 (5)Consolidated Statements of Cash Flows7
 (6)Notes to Consolidated Financial Statements8-27

Exhibits

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

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

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

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

4.020162018 Proxy Statement (Filed with 20152017 10-K)

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

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

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

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

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

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

Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with March 31, 2013 10-Q)
10.51998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A)

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

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

Employee Stock Ownership Plan, Restated (Filed with 2011 Proxy Statement)
Employee Stock Ownership Plan, Restated (Filed with 2016 10-K)
10.72010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement)

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

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

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

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

10.12Extension to Lease Agreement for 256 Meeting Street (Filed with September 30, 2017 10-Q)

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

10.14Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed with September 30, 2017 10-Q)
14.0Code of Ethics (Filed with 2004 10-KSB)

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

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

The Registrant’s only subsidiary is The Bank of South Carolina (Filed with 1995 10-KSB)
31.1Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer

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

32.1Certification pursuant to Section 1350

32.2Certification pursuant to Section 1350

101.INS101.INSXBRL Instance Document
 101.SCHXBRL Taxonomy Extension Schema Document
 101.CALXBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
 101.LABXBRL Taxonomy Extension Label Linkbase Document
 
101.PREXBRL Taxonomy Extension Presentation Linkbase Document



Signatures

 

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

 

 Bank of South Carolina Corporation
   
August 10, 2017May 11, 2018  
 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/
SeniorExecutive Vice President

 39