United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period endedJune 30, 2018 Commission file number: 0-27702 Bank of South Carolina Corporation (Exact name of registrant issuer as specified in its charter) 256 Meeting Street, Charleston, SC 29401 (Address of principal executive offices) (843) 724-1500 (Registrant’s telephone number) Indicate by check mark whether the 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. 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 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 Bank of South Carolina Corporation and Subsidiary Table of Contents BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY (Unaudited) September 30, (Audited) December 31, 2016 See accompanying notes to consolidated financial statements. BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) See accompanying notes to consolidated financial statements. BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) See accompanying notes to consolidated financial statements. BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) See accompanying notes to consolidated financial statements. BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY See accompanying notes to consolidated financial statements. BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF ADDITIONAL PAID IN CAPITAL RETAINED EARNINGS TREASURY STOCK ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) TOTAL 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. References to “we”, “us”, “our”, “the Bank”, or “the Company” refer to the parent and its subsidiary that are consolidated for financial purposes. Basis of Presentation The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), for the interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 3, 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 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. BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Subsequent Events Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. We have reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure. Recent Accounting Pronouncements The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure of financial information by the Company. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers, Topic 606.The core principle of the new standard is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. This guidance also includes expanded disclosure requirements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall (Subtopic 825-10); Recognition and Measurement of Financial Instruments and Financial Liabilities.This update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842),which revises certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the effect that implementation of the new standard will have on our results of operations and cash flows, 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 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 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 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 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED 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 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 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. In March 2017, the FASB issued ASU 2017-08,Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20):Premium Amortization of Purchased Callable Debt Securities, which shortens the amortization period for the premium to the earliest call date. The amendment will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect this amendment to have a material effect on its financial statements. 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. 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. In May 2018, the FASB amended the Financial Services – Depository and Lending Topic of the ASC to remove outdated guidance related to Circular 202. The amendments were effective upon issuance and did not have a material effect on the 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 estimated fair value of investment securities available for sale are summarized as follows: AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES VALUE Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value The amortized cost and estimated fair value of investment securities available for sale as of AMORTIZED FAIR AMORTIZED FAIR Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Investment securities pledged to secure BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, September 30, 2017 Available for sale December 31, 2016 Available for sale BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We received proceeds For the Note 3: Loans and Allowance for Loan Losses Major classifications of loans (net of deferred loan fees of June 30, 2018 We had 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: BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables illustrate credit quality by class and internally assigned grades as of Commercial Real Estate Construction Commercial Real Estate Other Real Estate Commercial Real Estate Construction Commercial Real Estate Other Commercial Real Estate - Construction Commercial Real Estate - Other Consumer Real Estate Commercial Real Estate - Construction Commercial Real Estate - Other Consumer Real Estate 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: BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the balances of non-accrual loans: The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by class for the three and Commercial Real Estate-Other Consumer Real Estate Consumer Other Commercial Real Estate-Other Consumer Real Estate Consumer Other Three Months Ended September 30, 2016 Commercial Real Estate-Other Consumer Real Estate Consumer Other Commercial Real Estate-Other Consumer Real Estate Consumer Other BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in Commercial Real Estate-Other Consumer Other Total Loans Receivable Commercial Real Estate - Consumer Other Commercial Real Estate-Other Consumer Other Commercial Real Estate - Consumer Other Total Loans Receivable BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of Unpaid Principal Balance BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following Average Recorded Investment Interest Recognized Average Recorded Investment Interest Recognized Average Recorded Investment Interest Recognized Average Recorded Investment Interest Recognized In general, the modification or restructuring of a debt is considered a troubled debt BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4: Disclosure Regarding Fair Value of Financial Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or the most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would use in pricing an asset or liability. The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows: Fair value estimates are made at a specific point of time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale our entire holdings of a particular financial instrument. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value also would affect significantly the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis: Investment Securities Available for Sale Investment 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 We BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets and liabilities measured at fair value on a recurring basis There were no liabilities recorded at fair value on a recurring basis as of 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 months and There were no transfers between fair value levels during the The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis: Other Real Estate Owned (“OREO”) Loans secured by real estate are adjusted to the lower of the recorded investment in the loan or the fair value of the real estate upon transfer to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, or our estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraisal, we record the asset as nonrecurring Level 2. When an appraised value is not available or we determine the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the asset as nonrecurring Level 3. Impaired Loans Impaired loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to sell is the most frequently used method. However, as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These valuations are reviewed and updated on a quarterly basis. In accordance with ASC 820 BANK OF SOUTH CAROLINA CORPORATION Mortgage Loans Mortgage loans 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 Quoted Market Price in active markets (Level 1) Significant (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 Quoted Market Price in active markets (Level 1) Significant (Level 2) Significant Unobservable Inputs (Level 3) Quoted Market Price in active markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total There were no liabilities measured at fair value on a nonrecurring basis as of 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 Valuation Technique Unobservable Input General Range of Inputs 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 a.Cash and due from banks, interest-bearing deposits The carrying value approximates fair value. All mature within 90 days and do not present unanticipated credit concerns. b. 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 As of June 30, 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 For BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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). 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. 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 The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 Carrying Estimated Level 1 Level 2 Level 3 $ $ — — — — Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 BANK OF SOUTH CAROLINA CORPORATION Note 5: Income Per Common Share Basic income per share is computed by dividing net income by the weighted-average number of common shares The following The following table is a summary of the reconciliation of average shares outstanding for the six months ended June 30: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This These risks are exacerbated by the developments over the last ten years in national and international markets. Sweeping reform has entered our industry yet we are unable to fully predict its impact and perhaps its unintentional consequences. There can be no assurance that these changes will not materially and adversely affect our business, financial condition and results of operation. We will undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings with the SEC, in our press releases, and in oral and written statements, which are not statements of historical fact, constitute forward-looking statements. Overview Bank of South Carolina Corporation (the “Company”) is a financial institution holding company headquartered in Charleston, South Carolina, with We derive most of our income from interest on loans and investments (interest bearing assets). The primary source of funding for making these loans and investments is our interest and non-interest bearing deposits. Consequently, one of the key measures of our success is the amount of net interest income, or the difference between the income on our interest bearing assets and the expense on our interest bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The reserve for credit losses consists of the allowance for loan losses (the 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 Critical Accounting Policies Our critical accounting policies which involve significant Balance Sheet Cash and Cash Equivalents Total cash and cash equivalents 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. As of During the six months ended June 30, 2018, six Municipal Securities totaling $2.5 million matured and twelve Municipal Securities in the amount of $3.5 million were called. We Loans We focus our lending activities on small and middle market businesses, professionals and individuals in our geographic markets. Substantially all of our loans were to borrowers located in our market area of Charleston, Dorchester and Berkeley Counties of South Carolina. Net loans increased The following table is a summary of our loan portfolio composition (net of deferred fees of Nonperforming Nonperforming We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges. As of 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 The following table is a summary of our nonperforming assets: June 30, 2018 Allowance for Loan Losses The allowance for loan losses was $4.0 million as of June 30, 2018 and $3.9 million as of During the three months ended Deposits Deposits remain our primary source of funding for loans and investments. Average interest bearing deposits provided funding for The breakdown of total deposits by type and the respective percentage of total deposits are as follows: Deposits Comparison of Three Months Ended Net income increased 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 The average balance of interest bearing deposits 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 Non-Interest Income Other income decreased Non-Interest Expense Non-interest expense Income Tax Expense We incurred income tax expense of Comparison of Net income increased 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 The average balance of interest bearing deposits at the Federal Reserve 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 Non-Interest Income Other income decreased Non-Interest Expense Non-interest expense increased $231,596 or 4.58% to $5.3 million for the six months ended June 30, 2018 from $5.1 million for the six months ended June 30, 2017. The increase was Income Tax Expense We incurred income tax expense of 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 Standby letters of credit represent either 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 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 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 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 Our coredeposits consist of non-interest bearing accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our level of certificates of deposit greater than $250,000 and other large deposits. We maintain a Contingency Funding Plan (“CFP’) that identifies liquidity needs and weighs alternate courses of action designed to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. 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 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 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 We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, The Company 35 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 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/ 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 The Audit and Compliance Committee, composed entirely of independent Directors, meets periodically with management, the Bank’s Compliance Officer, Risk Management Officer and Elliott Davis, LLC (separately and jointly) to discuss audit, financial and related matters. Elliott Davis, LLC, the Compliance Officer, and the Risk Management Officer have direct access to the Audit and Compliance Committee. 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. 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. None. 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. 39☒ Quarterly☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For☐Transition report pursuant to Section 13 or 15(d) of the quarterly period endedSeptember 30, 2017Securities Exchange Act of 1934☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934South Carolina 57-1021355 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 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.Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company☒(Do not check if a smaller reporting company) Smaller reporting company ☒ Emerging growth company ☐ 13 (a)13(a) of the Exchange ActAct. ☐ Yes ☐November 9, 2017July 31, 2018, there were 4,984,4795,510,538 Common Shares outstanding.2 BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
2017 ASSETS Cash and due from banks $ 8,009,824 $ 8,141,030 Interest-bearing deposits at the Federal Reserve Bank 22,159,373 18,101,300 Investment securities available for sale 126,496,884 119,978,944 Mortgage loans to be sold 3,117,830 4,386,210 Loans 269,132,631 260,576,115 Less: Allowance for loan losses (3,886,959 ) (3,851,617 ) Net loans 265,245,672 256,724,498 Premises, equipment and leasehold improvements, net 2,252,832 2,296,624 Other real estate owned 566,632 521,943 Accrued interest receivable 1,328,542 1,614,002 Other assets 2,296,720 2,185,085 Total assets $ 431,474,309 $ 413,949,636 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits: Non-interest-bearing demand $ 124,661,171 $ 126,034,478 Interest-bearing demand 99,066,299 96,260,589 Money market accounts 84,417,700 77,307,662 Time deposits over $250,000 17,695,869 17,822,136 Other time deposits 25,993,812 26,019,121 Other savings deposits 34,712,187 29,078,865 Total deposits 386,547,038 372,522,851 Accrued interest payable and other liabilities 1,217,803 813,811 Total liabilities 387,764,841 373,336,662 Shareholders’ equity Common stock-no par, 12,000,000 shares authorized; 5,225,875 and 5,197,535 shares issued at September 30, 2017 and December 31, 2016, respectively; 4,984,479 and 4,956,139 shares outstanding at September 30, 2017 and December 31, 2016, respectively — — Additional paid in capital 37,172,768 36,824,022 Retained earnings 8,558,442 6,643,476 Treasury stock: 241,396 shares at September 30, 2017 and December 31, 2016 (2,247,415 ) (2,247,415 ) Accumulated other comprehensive income (loss), net of income taxes 225,673 (607,109 ) Total shareholders’ equity 43,709,468 40,612,974 Total liabilities and shareholders’ equity $ 431,474,309 $ 413,949,636 (Unaudited) (Audited) June 30, December 31, 2018 2017 ASSETS Cash and due from banks $ 7,945,003 $ 8,486,025 Interest-bearing deposits at the Federal Reserve 14,319,336 24,034,194 Investment securities available for sale 119,831,325 139,250,250 Mortgage loans to be sold 3,651,150 2,093,723 Loans 278,104,537 270,180,640 Less: Allowance for loan losses (4,007,464 ) (3,875,398 ) Net loans 274,097,073 266,305,242 Premises, and equipment and leasehold improvements, net 2,279,016 2,244,525 Other real estate owned 411,842 435,479 Accrued interest receivable 1,568,814 1,720,920 Other assets 2,667,346 1,996,140 Total assets $ 426,770,905 $ 446,566,498 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing demand $ 130,654,687 $ 139,256,748 Interest bearing demand 97,358,521 108,967,196 Money market accounts 74,370,149 77,833,728 Time deposits over $250,000 21,917,734 18,624,924 Other time deposits 23,573,597 23,295,492 Other savings deposits 34,464,921 34,910,212 Total deposits 382,339,609 402,888,300 Accrued interest payable and other liabilities 1,206,562 913,563 Total liabilities 383,546,171 403,801,863 Shareholders' equity Common stock - no par 12,000,000 shares authorized; Issued 5,767,173 shares at June 30, 2018 and 5,753,743 shares at December 31, 2017. Shares outstanding 5,500,616 and 5,488,207 at June 30, 2018 and December 31, 2017, respectively. — — Additional paid in capital 46,731,967 37,236,566 Retained earnings 894,779 8,471,780 Treasury stock: 266,557 shares as of June 30, 2018 and 265,536 shares as of December 31, 2017 (2,268,264 ) (2,247,415 ) Accumulated other comprehensive loss, net of income taxes (2,133,748 ) (696,296 ) Total shareholders' equity 43,224,734 42,764,635 Total liabilities and shareholders' equity $ 426,770,905 $ 446,566,498 3 BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED
SEPTEMBER 30, 2017 2016 Interest and fee income Loans, including fees $ 3,364,293 $ 3,360,151 Taxable securities 409,055 379,039 Tax-exempt securities 251,172 255,231 Other 92,512 35,722 Total interest and fee income 4,117,032 4,030,143 Interest expense Deposits 110,625 96,467 Short-term borrowings — — Total interest expense 110,625 96,467 Net interest income 4,006,407 3,933,676 Provision for loan losses 20,000 210,000 Net interest income after provision for loan losses 3,986,407 3,723,676 Other income Service charges and fees 278,204 265,769 Mortgage banking income 149,379 409,674 Gains on sales of securities 45,820 — Other non-interest income 8,479 11,143 Total other income 481,882 686,586 Other expense Salaries and employee benefits 1,487,207 1,485,621 Net occupancy expense 399,534 377,075 Other operating expenses 597,797 721,572 Net other real estate owned expenses — — Total other expenses 2,484,538 2,584,268 Income before income tax expense 1,983,751 1,825,994 Income tax expense 543,098 399,656 Net income $ 1,440,653 $ 1,426,338 Weighted average shares outstanding Basic 4,978,515 4,931,185 Diluted 5,067,561 5,054,723 Basic income per common share $ 0.29 $ 0.29 Diluted income per common share $ 0.28 $ 0.28 See accompanying notes to consolidated financial statements.4 NINE MONTHS ENDED
SEPTEMBER 30, 2017 2016 Interest and fee income Loans, including fees $ 9,727,886 $ 9,603,030 Taxable securities 1,147,811 992,658 Tax-exempt securities 778,259 734,716 Other 187,782 102,472 Total interest and fee income 11,841,738 11,432,876 Interest expense Deposits 313,929 283,588 Short-term borrowings — 7 Total interest expense 313,929 283,595 Net interest income 11,527,809 11,149,281 Provision for loan losses 52,500 395,000 Net interest income after provision for loan losses 11,475,309 10,754,281 Other income Service charges and fees 835,643 792,036 Mortgage banking income 825,003 1,058,438 Gains on sales of securities 45,820 348,327 Other non-interest income 23,769 23,385 Total other income 1,730,235 2,222,186 Other expense Salaries and employee benefits 4,457,778 4,481,067 Net occupancy expense 1,157,442 1,133,784 Other operating expenses 1,884,928 1,928,994 Net other real estate owned expenses 46,143 13,450 Total other expenses 7,546,291 7,557,295 Income before income tax expense 5,659,253 5,419,172 Income tax expense 1,606,127 1,484,989 Net income $ 4,053,126 $ 3,934,183 Weighted average shares outstanding Basic 4,969,617 4,929,977 Diluted 5,058,958 5,058,837 Basic income per common share $ 0.82 $ 0.80 Diluted income per common share $ 0.80 $ 0.78 Three Months Ended June 30, 2018 2017 Interest and fee income Loans, including fees $ 3,704,752 $ 3,221,855 Taxable securities 470,411 399,909 Tax-exempt securities 175,674 256,202 Other 73,030 55,319 Total interest and fee income 4,423,867 3,933,285 Interest expense Deposits 139,697 106,522 Total interest expense 139,697 106,522 Net interest income 4,284,170 3,826,763 Provision for loan losses 75,000 30,000 Net interest income after provision for loan losses 4,209,170 3,796,763 Other income Service charges, fees and commissions 296,372 287,873 Mortgage banking income 250,554 400,519 Gain on sales of securities 387 — Other non-interest income 7,783 8,087 Total other income 555,096 696,479 Other expense Salaries and employee benefits 1,576,452 1,500,362 Net occupancy expense 422,059 393,763 Other operating expenses 628,867 649,855 Net other real estate owned expenses 24,137 46,143 Total other expense 2,651,515 2,590,123 Income before income tax expense 2,112,751 1,903,119 Income tax expense 386,394 516,734 Net Income $ 1,726,357 $ 1,386,385 Weighted average shares outstanding Basic 5,492,896 5,464,697 Diluted 5,586,585 5,588,687 Basic income per common share $ 0.31 $ 0.25 Diluted income per common share $ 0.31 $ 0.25 5 Six Months Ended June 30, 2018 2017 Interest and fee income Loans, including fees $ 7,263,738 $ 6,363,593 Taxable securities 940,914 738,756 Tax-exempt securities 403,741 527,087 Other 135,483 95,270 Total interest and fee income 8,743,876 7,724,706 Interest expense Deposits 249,527 203,304 Total interest expense 249,527 203,304 Net interest income 8,494,349 7,521,402 Provision for loan losses 130,000 32,500 Net interest income after provision for loan losses 8,364,349 7,488,902 Other income Service charges, fees and commissions 591,663 557,439 Mortgage banking income 390,469 675,624 Gain on sales of securities 4,735 — Other non-interest income 16,174 15,290 Total other income 1,003,041 1,248,353 Other expense Salaries and employee benefits 3,149,172 2,970,571 Net occupancy expense 805,391 757,908 Other operating expenses 1,314,649 1,287,131 Net other real estate owned expenses 24,137 46,143 Total other expense 5,293,349 5,061,753 Income before income tax expense 4,074,041 3,675,502 Income tax expense 735,454 1,063,029 Net Income $ 3,338,587 $ 2,612,473 Weighted average shares outstanding Basic 5,339,187 5,461,603 Diluted 5,433,360 5,584,373 Basic income per common share $ 0.63 $ 0.48 Diluted income per common share $ 0.61 $ 0.47 THREE MONTHS ENDED
SEPTEMBER 30, 2017 2016 Net income $ 1,440,653 $ 1,426,338 Other comprehensive income: Unrealized gain on securities arising during the period (339,956 ) — Reclassification adjustment for securities gains realized in net income 45,820 (387,289 ) Other comprehensive income, before tax (294,136 ) (387,289 ) Income tax effect related to items of other comprehensive income 100,006 104,687 Other comprehensive income, after tax (194,130 ) (282,602 ) Total comprehensive income $ 1,246,523 $ 1,143,736 Three Months Ended
June 30, 2018 2017 Net Income $ 1,726,357 $ 1,386,385 Other comprehensive (loss) income Unrealized (loss) gain on securities arising during the period (477,253 ) 996,733 Reclassification adjustment for securities gains realized in net income (387 ) — Other comprehensive (loss) income before tax (477,640 ) 996,733 Income tax effect related to items of other comprehensive (loss) income before tax 88,816 (338,889 ) Other comprehensive (loss) income after tax (388,824 ) 657,844 Total comprehensive income $ 1,337,533 $ 2,044,229 NINE MONTHS ENDED
SEPTEMBER 30, 2017 2016 Net income $ 4,053,126 $ 3,934,183 Other comprehensive income: Unrealized gain on securities arising during the period 1,242,599 — Reclassification adjustment for securities gains realized in net income 45,820 944,314 Other comprehensive income, before tax 1,288,419 944,314 Income tax effect related to items of other comprehensive income (455,637 ) (388,005 ) Other comprehensive income, after tax 832,782 556,309 Total comprehensive income $ 4,885,908 $ 4,490,492 Six Months Ended
June 30, 2018 2017 Net Income $ 3,338,587 $ 2,612,473 Other comprehensive (loss) income Unrealized (loss) gain on securities arising during the period (1,814,824 ) 1,582,555 Reclassification adjustment for securities gains realized in net income (4,735 ) — Other comprehensive (loss) income before tax (1,819,559 ) 1,582,555 Income tax effect related to items of other comprehensive (loss) income before tax 382,107 (555,643 ) Other comprehensive (loss) income after tax (1,437,452 ) 1,026,912 Total comprehensive income $ 1,901,135 $ 3,639,385
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017 (UNAUDITED) 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 — 2,612,473 — — 2,612,473 Other comprehensive loss — — — 1,026,912 1,026,912 Stock option exercises 154,858 — — — 154,858 Stock-based comp 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 December 31, 2017 $ 37,236,566 $ 8,471,780 $ (2,247,415 ) $ (696,296 ) $ 42,764,635 Net income — 3,338,587 — — 3,338,587 Other comprehensive loss — — — (1,437,452 ) (1,437,452 ) Stock option exercises 123,296 — (20,849 ) — 102,447 Stock-based comp expense 37,763 — — — 37,763 Cash dividends ($0.29 per common share) — (1,581,246 ) — — (1,581,246 ) Common stock dividend, 10% 9,334,342 (9,334,342 ) — — — June 30, 2018 $ 46,731,967 $ 894,779 $ (2,268,264 ) $ (2,133,748 ) $ 43,224,734 6 SHAREHOLDERS’ EQUITYCASH FLOWS (UNAUDITED)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (UNAUDITED) December 31, 2015 $ 36,341,744 $ 4,064,834 $ (2,247,415 ) $ 992,549 $ 39,151,712 Net income — 3,934,183 — — 3,934,183 Other comprehensive income — — — 556,309 556,309 Exercise of stock options 333,704 — — — 333,704 Stock-based compensation expense 58,112 — — — 58,112 Cash dividends ($0.40 per common share) — (1,974,529 ) — — (1,974,529 ) September 30, 2016 $ 36,733,560 $ 6,024,488 $ (2,247,415 ) $ 1,548,858 $ 42,059,491 December 31, 2016 $ 36,824,022 $ 6,643,476 $ (2,247,415 ) $ (607,109 ) $ 40,612,974 Net income — 4,053,126 — — 4,053,126 Other comprehensive income — — — 832,782 832,782 Exercise of stock options 294,342 — — — 294,342 Stock-based compensation expense 54,404 — — — 54,404 Cash dividends ($0.43 per common share) — (2,138,160 ) — — (2,138,160 ) September 30, 2017 $ 37,172,768 $ 8,558,442 $ (2,247,415 ) $ 225,673 $ 43,709,468 Six Months Ended June 30, 2018 2017 Cash flows from operating activities: Net income $ 3,338,587 $ 2,612,473 Adjustments to reconcile net income net cash provided by operating activities: Depreciation 94,347 94,994 (Gain) sale of investment securities (4,735 ) — Valuation and other adjustments to other real estate owned 23,637 46,143 Provision for loan losses 130,000 32,500 Stock-based compensation expense 37,763 36,542 Deferred income taxes (289,099 ) (553,671 ) Net amortization of unearned discounts on investment securities available for sale 152,517 198,768 Origination of mortgage loans held for sale (29,065,349 ) (32,568,879 ) Proceeds from sale of mortgage loans held for sale 27,507,922 34,722,888 Decrease in accrued interest receivable and other assets 152,106 62,645 Increase in accrued interest payable and other liabilities 208,777 143,193 Net cash provided by operating activities 2,286,473 4,827,596 Cash flows from investing activities: Proceeds from calls and maturities of investment securities available for sale 5,995,000 3,787,150 Proceeds from sale of investment securities available for sale 21,434,634 — Purchase of investment securities available for sale (9,978,050 ) (15,084,800 ) Net (decrease) increase in loans (7,921,831 ) 389,768 Purchase of premises, equipment, and leasehold improvements, net (128,838 ) (69,347 ) Net cash provided by (used in) investing activities 9,400,915 (10,977,229 ) Cash flows from financing activities: Net (decrease) increase in deposit accounts (20,548,691 ) 13,769,418 Dividends paid (1,497,024 ) (1,389,033 ) Stock options exercised 102,447 154,858 Net cash (used in) provided by financing activities (21,943,268 ) 12,535,243 Net (decrease) increase in cash and cash equivalents (10,255,880 ) 6,385,610 Cash and cash equivalents at the beginning of the period 32,520,219 26,242,330 Cash and cash equivalents at the end of the period $ 22,264,339 $ 32,627,940 Cash paid during the period for: Interest $ 210,971 $ 254,933 Income Taxes $ 636,760 $ 1,511,965 Supplemental disclosures for non-cash investing and financing activity: Change in unrealized gain on securities available for sale, net of tax effect $ 1,437,452 $ 1,026,912 Change in dividends payable $ 84,222 $ 1,767 Stock dividend $ 9,334,342 $ — 7 AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) NINE MONTHS ENDED
SEPTEMBER 30, 2017 2016 Cash flows from operating activities: Net income $ 4,053,126 $ 3,934,183 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 142,859 140,276 Gain on sale of securities (45,820 ) (446,041 ) Loss on sale of other real estate — 13,450 Valuation and other adjustments to other real estate 46,143 — Provision for loan losses 52,500 395,000 Stock-based compensation expense 54,404 58,112 Deferred income taxes (567,272 ) — Net amortization of unearned discounts on investment securities 293,080 223,272 Origination of mortgage loans held for sale (43,420,076 ) (57,759,783 ) Proceeds from sale of mortgage loans held for sale 44,688,456 58,617,055 Decrease (increase) in accrued interest receivable and other assets 285,460 (721,562 ) Increase in accrued interest payable and other liabilities 350,649 744,530 Net cash provided by operating activities 5,933,509 5,198,492 Cash flows from investing activities: Proceeds from calls and maturities of investment securities available for sale 4,380,870 4,728,518 Proceeds from sale of available for sale securities 20,231,265 26,113,400 Purchase of investment securities available for sale (30,088,916 ) (24,759,858 ) Proceeds from sale of other real estate — 85,000 Net increase in loans (8,664,506 ) (23,828,667 ) Purchase of premises, equipment and leasehold improvements, net (99,067 ) (69,303 ) Net cash used in investing activities (14,240,354 ) (17,730,910 ) Cash flows from financing activities: Net increase in deposit accounts 14,024,187 6,687,942 Dividends paid (2,084,817 ) (1,920,866 ) Stock options exercised 294,342 333,704 Net cash provided by financing activities 12,233,712 5,100,780 Net increase (decrease) in cash and cash equivalents 3,926,867 (7,431,638 ) Cash and cash equivalents at beginning of period 26,242,330 29,194,786 Cash and cash equivalents at end of period $ 30,169,197 $ 21,763,148 Supplemental disclosure of cash flow data: Cash paid during the year for: Interest $ 365,558 $ 308,857 Income taxes $ 2,055,063 $ 1,669,840 Supplemental disclosure for non-cash investing and financing activity: Change in unrealized gain on securities available for sale, net of income taxes $ 832,782 $ 556,309 Change in dividends payable $ 53,343 $ 53,663 Transfer of loans to other real estate owned $ 90,832 $ — See accompanying notes to consolidated financial statements.8 BANK OF SOUTH CAROLINA CORPORATIONDuringIn consolidation, all significant intercompany balances and transactions have been eliminated.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.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.9 In August 2015, the FASB deferred theThe guidance became effective date of the amendments. As a result of the deferral, the guidance will be effective for the Company for reporting periods beginning after December 15, 2017. We will apply this guidance using a modified retrospective approach. Because theJanuary 1, 2018. The amendment does not apply to revenue associated with financial instruments, such as loans and investment securities available for sale, we do not expect this amendment to have aand therefore had no material effect on our consolidated financial statements. We are still evaluating the effects of the amendment regarding its applicability and related impact on credit card fees and deposit service charges.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.but expect the effect on theand 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.position.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 for reporting periods beginning after December 15, 2017. The Company doesconcluded that the ASU did not expect this amendment to have a material effect on its financial statements.In March 2016,materially change 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 formethod in which the Company on January 1, 2017 and this amendment didcurrently recognizes revenue for these revenue streams. As such, a cumulative effect adjustment to opening retained earnings was not have a material effect on its financial statements.deemed necessary.10 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSamendments 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.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.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.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.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.This amendment isThe amendments became effective for annual periods beginning after December 15, 2017. The Company doeson January 1, 2018 and did not expect this amendment to have a material effect on itsthe financial statements.11 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2017 U.S. Treasury Notes $ 26,112,531 $ 24,169 $ (39,199 ) $ 26,097,501 Government-Sponsored Enterprises 59,497,890 179,426 (307,911 ) 59,369,405 Municipal Securities 40,561,715 765,902 (297,639 ) 41,029,978 Total $ 126,172,136 $ 969,497 $ (644,749 ) $ 126,496,884 DECEMBER 31, 2016 June 30, 2018
FAIR U.S. Treasury Notes $ 24,148,295 $ 41,153 $ (250,385 ) $ 23,939,063 $ 32,969,932 $ — $ (939,735 ) $ 32,030,197 Government-Sponsored Enterprises 51,737,930 129,482 (833,321 ) 51,034,091 60,768,977 — (1,847,892 ) 58,921,085 Municipal Securities 45,056,390 765,813 (816,413 ) 45,005,790 29,268,532 179,950 (568,439 ) 28,880,043 Total $ 120,942,615 $ 936,448 $ (1,900,119 ) $ 119,978,944 $ 123,007,441 $ 179,950 $ (3,356,066 ) $ 119,831,325 December 31, 2017 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 SeptemberJune 30, 20172018 and December 31, 2016,2017, by contractual maturity are as follows: SEPTEMBER 30, 2017 DECEMBER 31, 2016
COST
VALUE
COST
VALUE Due in one year or less $ 8,561,255 $ 8,586,020 $ 3,343,347 $ 3,350,205 Due in one year to five years 70,669,406 71,024,994 82,848,411 82,682,901 Due in five years to ten years 43,799,734 43,853,008 29,662,030 29,169,228 Due in ten years and over 3,141,741 3,032,862 5,088,827 4,776,610 Total $ 126,172,136 $ 126,496,884 $ 120,942,615 $ 119,978,944 June 30, 2018 December 31, 2017 Due in one year or less $ 4,371,538 $ 4,391,446 $ 11,554,040 $ 11,546,968 Due in one year to five years 94,804,499 92,553,106 72,622,056 72,124,395 Due in five years to ten years 22,991,242 22,088,221 53,290,088 52,576,036 Due in ten years and over 840,162 798,552 3,140,623 3,002,851 Total $ 123,007,441 $ 119,831,325 $ 140,606,807 $ 139,250,250 public deposits and for other purposes required or permitted by law at September 30, 2017 and December 31, 2016, had a fair value of $54.2$43.4 million and $47.6$49.4 million as of June 30, 2018 and December 31, 2017, respectively.12 at Septemberas of June 30, 20172018 and December 31, 2016.2017. We believe that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.Less Than 12 Months 12 Months or Longer Total Gross Gross Gross Unrealized Unrealized Unrealized # Fair Value Loss # Fair Value Loss # Fair Value Loss U.S. Treasury notes 3 $ 15,146,094 $ (39,199 ) — $ — $ — 3 $ 15,146,094 $ (39,199 ) Government-sponsored enterprises 4 17,620,585 (129,779 ) 2 5,347,950 (178,132 ) 6 22,968,535 (307,911 ) Municipal securities 11 3,541,927 (50,316 ) 20 8,246,598 (247,323 ) 31 11,788,525 (297,639 ) Total 18 $ 36,308,606 $ (219,294 ) 22 $ 13,594,548 $ (425,455 ) 40 $ 49,903,154 $ (644,749 ) 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 June 30, 2018
Available for sale U.S. Treasury Notes 7 $ 32,030,197 $ (939,735 ) — $ — $ — 7 $ 32,030,197 $ (939,735 ) Government-Sponsored Enterprises 10 48,880,925 (1,245,021 ) 3 10,040,160 (602,871 ) 13 58,921,085 (1,847,892 ) Municipal Securities 19 8,158,197 (187,439 ) 19 7,368,072 (381,000 ) 38 15,526,269 (568,439 ) Total 36 $ 89,069,319 $ (2,372,195 ) 22 $ 17,408,232 $ (983,871 ) 58 $ 106,477,551 $ (3,356,066 ) 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 ) and gross realized gains and losses from sales of securities available for sale and gross realized gains and losses as follows: For the Three Months Ended
September 30, 2017 2016 Gross proceeds $ 20,231,265 $ 4,902,286 Gross realized gains 154,692 97,714 Gross realized losses 108,872 — Three Months Ended June 30, 2018 2017 Gross proceeds $ 11,970,378 $ — Gross realized gains 25,490 — Gross realized losses (25,103 ) — $ 11,970,765 $ — For the Nine Months Ended
September 30, 2017 2016 Gross proceeds $ 20,231,265 $ 25,667,359 Gross realized gains 154,692 446,041 Gross realized losses 108,872 — Six Months Ended June 30, 2018 2017 Gross proceeds $ 21,434,634 $ — Gross realized gains 104,634 — Gross realized losses (99,899 ) — $ 21,439,369 $ — threesix months ended SeptemberJune 30, 2017 and 2016,2018, the tax provision related to these gains was $15,578 and $36,154, respectively. For the nine months ended September 30, 2017 and 2016, the tax provision related to these gains was $15,578 and $165,035, respectively.$994.13 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS$149,640 at September$158,808 as of June 30, 20172018 and $136,446 at$152,047 as of December 31, 2016)2017) are as follows: September 30, December 31, 2017 2016 December 31,
2017 Commercial loans $ 53,348,364 $ 52,262,209 $ 55,495,828 $ 51,723,237 Commercial real estate: Construction 1,842,668 1,208,901 4,340,323 2,317,857 Other 134,779,206 122,968,126 139,665,319 140,186,324 Consumer: Real Estate 74,254,387 77,131,816 Real estate 73,570,322 70,797,973 Other 4,908,006 7,005,063 5,032,745 5,155,249 269,132,631 260,576,115 278,104,537 270,180,640 Allowance for loan losses (3,886,959 ) (3,851,617 ) (4,007,464 ) (3,875,398 ) Loans, net $ 265,245,672 $ 256,724,498 $ 274,097,073 $ 266,305,242 $101.1$104.7 million and $101.2$113.4 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at Septemberas of June 30, 20172018 and atas of December 31, 2016,2017, respectively.● Excellent(1) The borrowing entity has no overdrafts, more than adequate cash flow, unquestionable strength, strong earnings and capital, and where applicable.applicable, no overdrafts.● Good(2) The borrowing entity has dependable cash flow, better than average financial condition, good capital and usually no overdrafts. ● Satisfactory(3) The borrowing entity has adequate cash flow, satisfactory financial condition, and explainable overdrafts (if any). ● Watch(4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical earnings, weak capital, loan to/from stockholders, and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and growth. ● OAEM(5) The borrowing entity has marginal cash flow, occasional past dues, and frequent and unexpected working capital needs. ● Substandard(6) The borrowing entity has a cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is a possiblility.possibility. The borrowing entity has declining sales, rising costs, and may need to look for secondary source of repayment.● Doubtful(7) The borrowing entity has negative cash flow. Survival of the business is at risk, full repayment is unlikely, and there are frequent and unexplained overdrafts. The borrowing entity shows declining trends and no operating profits. 14 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS● Loss(8) The borrowing entity has negative cash flow with no alternatives. Survival of the business is unlikely. SeptemberJune 30, 20172018 and December 31, 2016.2017. “Pass” includes loans internally graded as excellent, good and satisfactory.September 30, 2017 Commercial
Consumer Consumer Other Total Pass $ 49,209,010 $ 1,453,646 $ 129,338,835 $ 73,172,945 $ 4,665,789 $ 257,840,225 Watch 2,260,670 389,022 2,942,987 587,005 208,110 6,387,794 OAEM 49,164 — 291,128 — — 340,292 Sub-Standard 1,829,520 — 2,206,256 494,437 34,107 4,564,320 Doubtful — — — — — — Loss — — — — — — Total $ 53,348,364 $ 1,842,668 $ 134,779,206 $ 74,254,387 $ 4,908,006 $ 269,132,631 December 31, 2016 Commercial
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 June 30, 2018 Commercial Consumer Other Total Pass $ 52,482,953 $ 4,340,323 $ 134,593,256 $ 71,539,014 $ 4,734,323 $ 267,689,869 Watch 1,279,459 — 3,144,222 1,781,555 213,412 6,418,648 OAEM 13,400 — 600,071 — — 613,471 Sub-standard 1,720,016 — 1,327,770 249,753 85,010 3,382,549 Doubtful — — — — — — Loss — — — — — — Total $ 55,495,828 $ 4,340,323 $ 139,665,319 $ 73,570,322 $ 5,032,745 $ 278,104,537 December 31, 2017 Commercial 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 September 30, 2017 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Total Past Due Current Total Recorded Investment > 90 Days and Accruing Commercial $ 78,271 $ 150,000 $ 13,902 $ 242,173 $ 53,106,191 $ 53,348,364 $ 13,902 Commercial Real Estate - Construction — — — — 1,842,668 1,842,668 — Commercial Real Estate - Other 675,000 — 1,415,738 2,090,738 132,688,468 134,779,206 — Consumer Real Estate 153,112 564,877 — 717,989 73,536,398 74,254,387 — Consumer Other 11,547 — — 11,547 4,896,459 4,908,006 — Total $ 917,930 $ 714,877 $ 1,429,640 $ 3,062,447 $ 266,070,184 $ 269,132,631 $ 13,902 June 30, 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 Commercial $ 259,506 $ 65,000 $ — $ 324,506 $ 55,171,322 $ 55,495,828 $ — Commercial Real Estate - Construction — — — — 4,340,323 4,340,323 — Commercial Real Estate - Other 73,115 158,228 571,292 802,635 138,862,684 139,665,319 — Consumer Real Estate 64,424 — — 64,424 73,505,898 73,570,322 — Consumer Other 21,531 424 — 21,955 5,010,790 5,032,745 — Total $ 418,576 $ 223,652 $ 571,292 $ 1,213,520 $ 276,891,017 $ 278,104,537 $ — December 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 Commercial $ 3,531 $ 192,846 $ — $ 196,377 $ 51,526,860 $ 51,723,237 $ — Commercial Real Estate - Construction — — — — 2,317,857 2,317,857 — Commercial Real Estate - Other — — 651,578 651,578 139,534,746 140,186,324 — Consumer Real Estate — — — — 70,797,973 70,797,973 — Consumer Other 10,302 — 34,107 44,409 5,110,840 5,155,249 34,107 Total $ 13,833 $ 192,846 $ 685,685 $ 892,364 $ 269,288,276 $ 270,180,640 $ 34,107 15 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Total Past Due Current Total Recorded Investment > 90 Days and Accruing Commercial $ 438,159 $ — $ — $ 438,159 $ 51,824,050 $ 52,262,209 $ — Commercial Real Estate - Construction — — — — 1,208,901 1,208,901 — Commercial Real Estate - Other 6,363 — 1,501,153 1,507,516 121,460,610 122,968,126 89,908 Consumer Real Estate 415,457 — — 415,457 76,716,359 77,131,816 — Consumer Other 56,784 — 33,322 90,106 6,914,957 7,005,063 33,322 Total $ 916,763 $ — $ 1,534,475 $ 2,451,238 $ 258,124,877 $ 260,576,115 $ 123,230 AsThere were no loans as of SeptemberJune 30, 2017 and December 31, 2016, there were one2018 and two loans as of December 31, 2017 over 90 days past due and still accruing, respectively.accruing. Loans Receivable on Non-Accrual September 30,
2017 December 31,
2016 Commercial $ 46,899 $ 61,781 Commercial Real Estate - Construction — — Commercial Real Estate - Other 1,554,368 1,678,876 Consumer Real Estate — — Consumer Other — 964 Total $ 1,601,267 $ 1,741,621 Loans Receivable on Non-Accrual June 30,
2018 December 31,
2017 Commercial $ 30,892 $ 41,651 Commercial Real Estate - Construction — — Commercial Real Estate - Other 933,364 790,208 Consumer Real Estate — — Consumer Other 4,914 — Total $ 969,170 $ 831,859 ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016.2017. 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 September 30, 2017 Commercial Commercial Real Estate-Construction Total Allowance for Loan Losses Beginning Balance $ 1,628,672 $ 52,763 $ 1,382,919 $ 771,853 $ 91,308 $ 3,927,515 Charge-offs — — — (80,787 ) (2,489 ) (83,276 ) Recoveries — — — 21,000 1,720 22,720 Provisions 403,920 (7,235 ) (209,108 ) (150,697 ) (16,880 ) 20,000 Ending Balance $ 2,032,592 $ 45,528 $ 1,173,811 $ 561,369 $ 73,659 $ 3,886,959 Three Months Ended June 30, 2018 Commercial Commerical Real Estate - Construction Commercial Real Estate - Other Consumer Real Estate Consumer Other Total Allowance for Loan Losses: Beginning Balance $ 1,326,246 $ 11,136 $ 1,041,088 $ 567,075 $ 884,975 $ 3,830,520 Charge-offs — — — — — — Recoveries 1,000 — 55,252 45,412 280 101,944 Provisions 16,514 17,955 (124,302 ) (23,436 ) 188,269 75,000 Ending Balance $ 1,343,760 $ 29,091 $ 972,038 $ 589,051 $ 1,073,524 $ 4,007,464 16 Six Months Ended June 30, 2018 Commercial Commerical Real Estate - Construction Commercial Real Estate - Other Consumer Real Estate Consumer Other Total Allowance for Loan Losses: Beginning Balance $ 1,403,588 $ 23,638 $ 1,549,755 $ 796,918 $ 101,499 $ 3,875,398 Charge-offs (31,250 ) — — — (71,843 ) (103,093 ) Recoveries 2,500 — 56,827 45,412 420 105,159 Provisions (31,078 ) 5,453 (634,544 ) (253,279 ) 1,043,448 130,000 Ending Balance $ 1,343,760 $ 29,091 $ 972,038 $ 589,051 $ 1,073,524 $ 4,007,464 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSThree Months Ended June 30, 2017 Commercial Commerical Real Estate - Construction Commercial Real Estate - Other Consumer Real Estate Consumer Other Total Allowance for Loan Losses: Beginning Balance $ 1,553,159 $ 57,071 $ 1,418,575 $ 756,892 $ 91,160 $ 3,876,857 Charge-offs — — — — (2,372 ) (2,372 ) Recoveries — — — 21,000 2,030 23,030 Provisions 75,513 (4,308 ) (35,656 ) (6,039 ) 490 30,000 Ending Balance $ 1,628,672 $ 52,763 $ 1,382,919 $ 771,853 $ 91,308 $ 3,927,515 Nine Months Ended September 30, 2017 Six Months Ended June 30, 2017 Six Months Ended June 30, 2017 Commercial Commercial Real Estate-Construction Total Commercial Commerical Real Estate - Construction Commercial Real Estate - Other Consumer Real Estate Consumer Other Total Allowance for Loan Losses Allowance for Loan Losses: Beginning Balance $ 1,545,188 $ 51,469 $ 1,374,706 $ 726,391 $ 153,863 $ 3,851,617 $ 1,545,188 $ 51,469 $ 1,374,706 $ 726,391 $ 153,863 $ 3,851,617 Charge-offs — — — (80,786 ) (4,863 ) (85,649 ) — — — — (2,372 ) (2,372 ) Recoveries — — — 63,000 5,491 68,491 — — — 42,000 3,770 45,770 Provisions 487,404 (5,941 ) (200,895 ) (147,236 ) (80,832 ) 52,500 83,484 1,294 8,213 3,462 (63,953 ) 32,500 Ending Balance $ 2,032,592 $ 45,528 $ 1,173,811 $ 561,369 $ 73,659 $ 3,886,959 $ 1,628,672 $ 52,763 $ 1,382,919 $ 771,853 $ 91,308 $ 3,927,515 Commercial Commercial Real Estate-Construction Total Allowance for Loan Losses Beginning Balance $ 1,490,327 $ 57,374 $ 1,186,524 $ 629,773 $ 148,448 $ 3,512,446 Charge-offs — — — — — — Recoveries 1,500 — 20,000 — 1,165 22,665 Provisions 4,512 524 98,398 119,044 (12,478 ) 210,000 Ending Balance $ 1,496,339 $ 57,898 $ 1,304,922 $ 748,817 $ 137,135 $ 3,745,111 Nine Months Ended September 30, 2016 Commercial Commercial Real Estate-Construction Total Allowance for Loan Losses Beginning Balance $ 896,854 $ 59,861 $ 1,345,094 $ 941,470 $ 174,548 $ 3,417,827 Charge-offs (33,045 ) — — (82,015 ) (1,591 ) (116,651 ) Recoveries 2,784 — 44,000 — 2,151 48,935 Provisions 629,746 (1,963 ) (84,172 ) (110,638 ) (37,973 ) 395,000 Ending Balance $ 1,496,339 $ 57,898 $ 1,304,922 $ 748,817 $ 137,135 $ 3,745,111 17 loans.loans:September 30, 2017 Commercial Commercial Real Estate-Construction Consumer
Real Estate Total Allowance for Loan Losses Individually evaluated for impairment $ 1,621,074 $ — $ 268,347 $ 43,119 $ 34,107 $ 1,966,647 Collectively evaluated for impairment 411,518 45,528 905,464 518,250 39,552 1,920,312 Total Allowance for Losses $ 2,032,592 $ 45,528 $ 1,173,811 $ 561,369 $ 73,659 $ 3,886,959 Loans Receivable Individually evaluated for impairment $ 1,829,520 $ — $ 2,224,537 $ 494,437 $ 34,107 $ 4,582,601 Collectively evaluated for impairment 51,518,844 1,842,668 132,554,669 73,759,950 4,873,899 264,550,030 $ 53,348,364 $ 1,842,668 $ 134,779,206 $ 74,254,387 $ 4,908,006 $ 269,132,631 June 30, 2018 Commercial Commercial
Real Estate -
Construction
Other Consumer
Real Estate Total Allowance for Loan Losses Individually evaluated for impairment $ 756,080 $ — $ 45,375 $ — $ 38,087 $ 839,542 Collectively evaluated for impairment 587,680 29,091 926,663 589,051 1,035,437 3,167,922 Total Allowance for Losses $ 1,343,760 $ 29,091 $ 972,038 $ 589,051 $ 1,073,524 $ 4,007,464 Loans Receivable Individually evaluated for impairment $ 1,677,581 $ — $ 1,341,159 $ 249,754 $ 38,087 $ 3,306,581 Collectively evaluated for impairment 53,818,247 4,340,323 138,324,160 73,320,568 4,994,658 274,797,956 Total Loans Receivable $ 55,495,828 $ 4,340,323 $ 139,665,319 $ 73,570,322 $ 5,032,745 $ 278,104,537 December 31, 2016 Commercial Commercial Real Estate-Construction Consumer
Real Estate 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
Other Consumer
Real Estate 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 $ 51,723,237 $ 2,317,857 $ 140,186,324 $ 70,797,973 $ 5,155,249 $ 270,180,640 18 SeptemberJune 30, 20172018 and December 31, 2016,2017, loans individually evaluated for impairment and the corresponding allowance for loan losses are presented in the following table: September 30, 2017 December 31, 2016 Unpaid Principal Balance Recorded Investment Related Allowance Unpaid Principal Balance Recorded Investment Related Allowance With no related allowance recorded: Commercial $ 161,880 $ 161,880 $ — $ 250,040 $ 250,040 $ — Commercial Real Estate-Construction — — — — — — Commercial Real Estate-Other 1,283,137 1,283,137 — 2,174,770 2,174,770 — Consumer Real Estate 451,318 451,318 — 1,243,008 1,243,008 — Consumer Other — — — — — — $ 1,896,335 $ 1,896,335 $ — $ 3,667,818 $ 3,667,818 $ — With an allowance recorded: Commercial $ 1,667,640 $ 1,667,640 $ 1,621,074 $ 1,051,219 $ 1,051,219 $ 1,051,219 Commercial Real Estate- Construction — — — — — — Commercial Real Estate-Other 941,400 941,400 268,347 1,050,581 1,050,581 324,587 Consumer Real Estate 43,119 43,119 43,119 43,119 43,119 43,119 Consumer Other 34,107 34,107 34,107 89,047 89,047 89,047 $ 2,686,266 $ 2,686,266 $ 1,966,647 $ 2,233,966 $ 2,233,966 $ 1,507,972 Total Commercial $ 1,829,520 $ 1,829,520 $ 1,621,074 $ 1,301,259 $ 1,301,259 $ 1,051,219 Commercial Real Estate-Construction — — — — — — Commercial Real Estate-Other 2,224,537 2,224,537 268,347 3,225,351 3,225,351 324,587 Consumer Real Estate 494,437 494,437 43,119 1,286,127 1,286,127 43,119 Consumer Other 34,107 34,107 34,107 89,047 89,047 89,047 $ 4,582,601 $ 4,582,601 $ 1,966,647 $ 5,901,784 $ 5,901,784 $ 1,507,972 19 Impaired and Restructured Loans As of June 30, 2018 December 31, 2017 Unpaid
Principal
Balance Recorded Investment Related Allowance Recorded Investment Related Allowance With no related allowance recorded: Commercial $ 134,155 $ 134,155 $ — $ 152,490 $ 152,490 $ — Commercial Real Estate - Construction — — — — — — Commercial Real Estate - Other 926,758 926,758 — 1,058,601 1,058,601 — Consumer Real Estate 249,754 249,754 — 249,754 249,754 — Consumer Other — — — — — — Total 1,310,667 1,310,667 — 1,460,845 1,460,845 — With an allowance recorded: Commercial 1,543,426 1,543,426 756,080 1,659,971 1,659,971 832,571 Commercial Real Estate - Construction — — — — — — Commercial Real Estate - Other 414,401 414,401 45,375 626,021 526,220 99,523 Consumer Real Estate — — — 43,119 43,119 43,042 Consumer Other 38,087 38,087 38,087 34,107 34,107 34,107 Total 1,995,914 1,995,914 839,542 2,363,218 2,263,417 1,009,243 Commercial 1,677,581 1,677,581 756,080 1,812,461 1,812,461 832,571 Commercial Real Estate - Construction — — — — — — Commercial Real Estate - Other 1,341,159 1,341,159 45,375 1,684,622 1,584,821 99,523 Consumer Real Estate 249,754 249,754 — 292,873 292,873 43,042 Consumer Other 38,087 38,087 38,087 34,107 34,107 34,107 Total $ 3,306,581 $ 3,306,581 $ 839,542 $ 3,824,063 $ 3,724,262 $ 1,009,243 tables presenttable presents average investment in impaired loans and the related interest income recognized on those impaired loans, by class, for the periods indicated.indicated: For the Three Months Ended
September 30, Three Months Ended June 30, 2017 2016 2018 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
Income
Income With no related allowance recorded: Commercial $ 165,274 $ 2,429 $ 380,933 $ 4,674 $ 137,684 $ 2,227 $ 175,568 $ 4,886 Commercial Real Estate-Construction — — — — Commercial Real Estate-Other 1,276,906 9,999 2,253,994 19,738 Commercial Real Estate - Construction — — — — Commercial Real Estate - Other 916,094 10,518 1,383,621 21,894 Consumer Real Estate 451,318 5,972 1,243,008 16,205 249,754 3,548 451,035 5,630 Consumer Other — — — — — — — — $ 1,893,498 $ 18,400 $ 3,877,935 $ 40,617 Total $ 1,303,532 $ 16,293 $ 2,010,224 $ 32,410 With an allowance recorded: Commercial $ 1,685,930 $ 26,484 $ 1,085,201 $ 19,406 $ 1,563,849 $ 19,438 $ 1,091,779 $ 36,481 Commercial Real Estate-Construction — — — — Commercial Real Estate-Other 933,243 2,792 1,068,622 5,330 Commercial Real Estate - Construction — — — — Commercial Real Estate - Other 517,936 1,840 1,020,012 5,331 Consumer Real Estate 43,119 462 71,963 770 — — 43,119 431 Consumer Other 34,579 463 95,367 473 39,396 483 36,107 516 Total $ 2,121,181 $ 21,761 $ 2,191,017 $ 42,759 $ 2,696,871 $ 30,201 $ 2,321,153 $ 25,979 Total Commercial $ 1,851,204 $ 28,913 $ 1,466,134 $ 24,080 $ 1,701,533 $ 21,665 $ 1,267,347 $ 41,367 Commercial Real Estate-Construction — — — — Commercial Real Estate-Other 2,210,149 12,791 3,322,617 25,068 Commercial Real Estate - Construction — — — — Commercial Real Estate - Other 1,434,030 12,358 2,403,633 27,225 Consumer Real Estate 494,437 6,434 1,314,971 16,975 249,754 3,548 494,154 6,061 Consumer Other 34,579 463 95,367 473 39,396 483 36,107 516 $ 4,590,369 $ 48,601 $ 6,199,088 $ 66,596 Total $ 3,424,713 $ 38,054 $ 4,201,241 $ 75,169 For the Nine Months Ended
September 30, 2017 2016 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial $ 173,964 $ 7,416 $ 392,826 $ 15,393 Commercial Real Estate-Construction — — — — Commercial Real Estate-Other 1,275,402 23,084 2,263,927 69,962 Consumer Real Estate 451,025 16,938 1,242,373 43,220 Consumer Other — — — — $ 1,900,391 $ 47,438 $ 3,899,126 $ 128,575 With an allowance recorded: Commercial $ 1,711,259 $ 76,544 $ 1,095,411 $ 49,770 Commercial Real Estate-Construction — — — — Commercial Real Estate-Other 930,420 5,367 1,070,048 12,008 Consumer Real Estate 43,119 1,296 72,025 1,776 Consumer Other 36,056 1,419 99,864 3,777 $ 2,720,854 $ 84,626 $ 2,337,348 $ 67,331 Total Commercial $ 1,885,223 $ 83,960 $ 1,488,237 $ 65,163 Commercial Real Estate-Construction — — — — Commercial Real Estate-Other 2,205,822 28,451 3,333,976 81,970 Consumer Real Estate 494,144 18,234 1,314,398 44,996 Consumer Other 36,056 1,419 99,864 3,777 $ 4,621,245 $ 132,064 $ 6,236,474 $ 195,906 20 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSRestructured loans, also known as Six Months Ended June 30, 2018 2017
Income
Income With no related allowance recorded: Commercial $ 141,909 $ 4,430 $ 179,698 $ 10,032 Commercial Real Estate - Construction — — — — Commercial Real Estate - Other 917,140 14,233 1,324,984 43,806 Consumer Real Estate 249,754 7,007 450,860 11,025 Consumer Other — — — — Total $ 1,308,803 $ 25,670 $ 1,955,542 $ 64,863 With an allowance recorded: Commercial $ 1,584,430 $ 48,660 $ 1,098,449 $ 71,193 Commercial Real Estate - Construction — — — — Commercial Real Estate - Other 523,141 5,507 1,020,012 7,941 Consumer Real Estate — — 43,119 838 Consumer Other 41,823 1,131 36,848 1,086 Total $ 2,149,394 $ 55,298 $ 2,198,428 $ 81,058 Commercial $ 1,726,339 $ 53,090 $ 1,278,147 $ 81,225 Commercial Real Estate - Construction — — — — Commercial Real Estate - Other 1,440,281 19,740 2,344,996 51,747 Consumer Real Estate 249,754 7,007 493,979 11,863 Consumer Other 41,823 1,131 36,848 1,086 Total $ 3,458,197 $ 80,968 $ 4,153,970 $ 145,921 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.legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of SeptemberJune 30, 2017 and2018, there was one TDR with a balance of $25,717, 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 SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. There were no additional loans identified as a TDR during the three or nine months ended September 30, 2017 or 2016. No TDRs defaulted during the three or ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, which were modified within the previous twelve months.InstrumentsStatements● 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. securitiesSecurities are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.21 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSat Septemberas of June 30, 20172018 or December 31, 2016.2017.havehad no embedded derivative instruments requiring separate accounting treatment. We havehad freestanding derivative instruments consisting of fixed rate conforming loan commitments as interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on the short term fair value of the mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of SeptemberJune 30, 20172018 and December 31, 2016.2017.at Septemberas of June 30, 20172018 and December 31, 20162017 are as follows:September 30, 2017 Quoted Market Price in active markets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3) Total U.S. Treasury Notes $ 26,097,501 $ — $ — $ 26,097,501 Government Sponsored Enterprises — 59,369,405 — 59,369,405 Municipal Securities — 29,120,850 11,909,128 41,029,978 Total $ 26,097,501 $ 88,490,255 $ 11,909,128 $ 126,496,884 Balance at June 30, 2018 Quoted Market Price in active markets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3) Total U.S. Treasury Notes $ 32,030,197 $ — $ — $ 32,030,197 Government Sponsored Enterprises — 58,921,085 — 58,921,085 Municipal Securities — 21,783,687 7,096,356 28,880,043 Total $ 32,030,197 $ 80,704,772 $ 7,096,356 $ 119,831,325 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 U.S. 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 SeptemberJune 30, 20172018 or December 31, 2016.22 ninesix months ended SeptemberJune 30, 20172018 and 2016:2017: Three Months Ended June 30, Six Months Ended June 30, 2018 2017 2018 2017 Beginning Balance $ 7,483,696 $ 13,458,445 $ 11,458,889 $ 13,977,857 Total gains or (losses) (realized/unrealized) Included in earnings — — — — Included in other comprehensive income 2,660 215,500 67,467 241,088 Purchases, issuances, and settlements net of maturities (390,000 ) (1,185,000 ) (4,430,000 ) (1,730,000 ) Transfers in and/or out of level 3 — — — — Ending Balance $ 7,096,356 $ 12,488,945 $ 7,096,356 $ 12,488,945 Three Months Ended
September 30, 2017 2016 Beginning balance $ 12,488,995 $ 7,704,814 Total gains or (losses) (realized/unrealized) Included in earnings — — Included in other comprehensive income 13,852 (27,965 ) Purchases, issuances and settlements, net of maturities (593,719 ) 3,717,482 Transfers in and/or out of Level 3 — — Ending balance $ 11,909,128 $ 11,394,331 Nine Months Ended
September 30, 2017 2016 Beginning balance $ 13,977,857 $ 5,217,678 Total gains or (losses) (realized/unrealized) Included in earnings — — Included in other comprehensive income 254,990 5,171 Purchases, issuances and settlements, net of maturities (2,323,719 ) 6,171,482 Transfers in and/or out of Level 3 — — Ending balance $ 11,909,128 $ 11,394,331 three or ninesix months ended SeptemberJune 30, 20172018 or SeptemberJune 30, 2016.2017. Typically, we review the most recent appraisal and if it is over 12 to 18 months old we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal, and the value of the collateral relative to the recorded investment in the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired.23 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFair “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 September 30, 2017 and December 31, 2016, substantially all of the impaired loans were evaluated based on the fair value of the collateral. These impaired loans are classified as Level 3. Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value.Loans Held for SaleNOTES TO CONSOLIDATED FINANCIAL STATEMENTSheld for sale include mortgageto be Soldandto 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.tables presenttable presents information about certain assets and liabilities measured at fair value on a nonrecurring basis at Septemberas of June 30, 20172018 and December 31, 2016:2017:September 30, 2017 June 30, 2018
Other
Observable
Inputs Impaired loans $ — $ — $ 2,407,508 $ 2,407,508 $ — $ — $ 1,545,538 $ 1,545,538 Other real estate owned — — 566,632 566,632 — — 411,842 411,842 Loans held for sale — 3,117,830 — 3,117,830 — 3,651,150 — 3,651,150 Total $ — $ 3,117,830 $ 2,974,140 $ 6,091,970 $ — $ 3,651,150 $ 1,957,380 $ 5,608,530 December 31, 2016 December 31, 2017
Other
Observable
Inputs Total Impaired loans $ — $ — $ 4,143,772 $ 4,143,772 $ — $ — $ 1,735,051 $ 1,735,051 Other real estate owned — — 521,943 521,943 — — 435,479 435,479 Loans held for sale — 4,386,210 — 4,386,210 — 2,093,723 — 2,093,723 Total $ — $ 4,386,210 $ 4,665,715 $ 9,051,925 $ — $ 2,093,723 $ 2,170,530 $ 4,264,253 SeptemberJune 30, 20172018 or December 31, 2016.2017.24 at Septemberas of June 30, 2017:2018: Inputs Impaired Loans Discounted Appraisal Value/Comparison Sales/Other EstimatesAppraisals and/or Sales of Comparable Properties Collateral Discounts0 – 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.instruments that have not been previously discussed:instruments:at the Federal Reserve Bankin other banksLoansInvestment securities available for salecarrying 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.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 September 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.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.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.e.Accrued interest receivable and payablee.f.Loan commitments25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptemberJune 30, 20172018 and December 31, 2016.2017. Fair Value Measurements at June 30, 2018 Carrying
Amount Estimated
Fair Value Level 1 Level 2 Level 3 Financial Assets: Cash and due from banks $ 7,945,003 $ 7,945,003 $ 7,945,003 $ — $ — Interest-bearing deposits at the Federal Reserve 14,319,336 14,319,336 14,319,336 — — Investment securities available for sale 119,831,325 119,831,325 32,030,197 80,704,772 7,096,356 Mortgage loans to be sold 3,651,150 3,651,150 — 3,651,150 — Loans, net 274,097,073 269,509,849 — — 269,509,849 Accrued interest receivable 1,568,814 1,568,814 — 1,568,814 — Financial Liabilities: Demand deposits 336,848,278 336,848,278 — 336,848,278 — Time deposits 45,491,331 45,356,971 — 45,356,971 — Accrued interest payable 134,746 134,746 — 134,746 — Fair Value Measurements at September 30, 2017 Fair Value Measurements at December 31, 2017 Fair Value Measurements at December 31, 2017
Amount
Fair Value Financial Assets: Cash and due from banks $ 8,009,824 $ 8,009,824 $ 8,009,824 $ — $ — 8,486,025 $ 8,486,025 8,486,025 $ $ Interest-bearing deposits at the Federal Reserve 22,159,373 22,159,373 22,159,373 — — 24,034,194 24,034,194 24,034,194 Investment securities available for sale 126,496,884 126,496,884 26,097,501 88,490,255 11,909,128 139,250,250 139,250,250 35,559,845 92,231,516 11,458,889 Mortgage loans to be sold 3,117,830 3,117,830 — 3,117,830 — 2,093,723 2,093,723 — 2,093,723 — Net loans 265,245,672 264,645,984 — — 264,645,984 Loans, net 266,305,242 265,277,204 — — 265,277,204 Accrued interest receivable 1,328,542 1,328,542 — 1,328,542 — 1,720,920 1,720,920 — 1,720,920 — Financial Liabilities: Demand deposits 342,857,357 342,857,357 — 342,857,357 — 360,967,884 360,967,884 — 360,967,884 — Time deposits 43,689,681 43,577,033 — 43,577,033 — 41,920,416 40,722,870 — 40,722,870 — Accrued interest payable 76,360 76,360 — 76,360 — 96,190 96,190 — 96,190 — Fair Value Measurements at December 31, 2016 Financial Assets: Cash and due from banks $ 8,141,030 $ 8,141,030 $ 8,141,030 $ — $ — Interest-bearing deposits at the Federal Reserve 18,101,300 18,101,300 18,101,300 — — Investment securities available for sale 119,978,944 119,978,944 23,939,063 82,062,024 13,977,857 Mortgage loans to be sold 4,386,210 4,386,210 — 4,386,210 — Net loans 256,724,498 256,555,052 — — 256,555,052 Accrued interest receivable 1,614,002 1,614,002 — 1,614,002 — Financial Liabilities: Demand deposits 328,681,594 328,681,594 — 328,681,594 — Time deposits 43,841,257 43,856,383 — 43,856,383 — Accrued interest payable 51,629 51,629 — 51,629 —
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSoutstanding.outstanding, after giving retroactive effect to a stock dividend paid on 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.26 BANK OF SOUTH CAROLINA CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTStables aretable is a summary of the reconciliation of average shares outstanding:outstanding for the three months ended June 30: Three Months Ended
September 30, 2017 2016 2018 2017 Net income $ 1,440,653 $ 1,426,338 $ 1,726,357 $ 1,386,385 Weighted average shares outstanding - basic 4,978,515 4,931,185 Weighted average shares outstanding 5,492,896 5,464,697 Effect of dilutive shares 89,046 123,538 93,689 123,990 Weighted average shares outstanding - diluted 5,067,561 5,054,723 5,586,585 5,588,687 Earnings per share - basic $ 0.29 $ 0.29 $ 0.31 $ 0.25 Earnings per share - diluted $ 0.28 $ 0.28 $ 0.31 $ 0.25 Nine Months Ended
September 30, 2017 2016 Net income $ 4,053,126 $ 3,934,183 Weighted average shares outstanding - basic 4,969,617 4,929,977 Effect of dilutive shares 89,341 128,860 Weighted average shares outstanding - diluted 5,058,958 5,058,837 Earnings per share - basic $ 0.82 $ 0.80 Earnings per share - diluted $ 0.80 $ 0.78 2018 2017 Net income $ 3,338,587 $ 2,612,473 Weighted average shares outstanding 5,339,187 5,461,603 Effect of dilutive shares 94,173 122,770 Weighted average shares outstanding - diluted 5,433,360 5,584,373 Earnings per share - basic $ 0.63 $ 0.48 Earnings per share - diluted $ 0.61 $ 0.47 27 OperationsThe 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.Operationreport,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 28 $431.5$426.8 million in assets as of SeptemberJune 30, 20172018, and net income of $1.4$1.7 million and $4.1$3.3 million for the three and ninesix months ended SeptemberJune 30, 2017.2018, respectively. 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.interest bearinginterest-bearing assets and the rate we pay on our interest bearinginterest-bearing liabilities.“allowance”"allowance") and a reserve for unfunded commitments (the “unfunded reserve”"unfunded reserve"). The allowance provides for probable and estimable losses inherent in our loan portfolio while the unfunded reserve provides for potential losses related to unfunded lending commitments.identifiesidentify significant factors that have affected our financial position and operating results as of Septemberand for the periods ending June 30, 20172018 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.judgementsjudgments 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 SeptemberJune 30, 2017,2018, 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.increased 14.96%decreased 31.54% or $3.9$10.2 million to $30.2$22.3 million as of SeptemberJune 30, 2017,2018, from $26.2$32.5 million as of 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 bearinginterest-bearing deposits at the Federal Reserve Bank until opportunities arise for investment in higher yielding assets.29 SeptemberJune 30, 2017,2018, our available for sale investment portfolio included U. S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $126.5$119.8 million and an amortized cost of $126.2$123.0 million for a net unrealized gainloss of $324,748.approximately $3.2 million. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, our investment securities portfolio represented approximately 29.32%28.08% and 28.98%31.18% of our total assets, respectively. The average yield on our investment securities was 2.03%2.08% and 1.99% at September2.01% as of June 30, 20172018 and December 31, 2016,2017, respectively.hadsold four Government Sponsored Enterprise securities, eight Municipal Securities, with an approximate total book value of $3.4 million that matured and three Municipal Securities with an approximate total book value of $1.0 million that were called inone U.S. Treasury Note during the ninesix months ended SeptemberJune 30, 2017. Additionally, we sold five investment securities issued by Government Sponsored Enterprises and one US Treasury Note, with a total ending book value2018 for gross proceeds of $20.2 million, resulting in a net gain of $45,820 during the nine months ended September 30, 2017.$21.4 million. We also purchased five investment securities issued bytwo Government Sponsored Enterprises and one US Treasury Note,Enterprise securities with a total face value of $30.1$10.0 million during the ninesix months ended SeptemberJune 30, 2017.2018.$8.5$7.8 million, or 3.31%8.84%, to $265.2$274.1 million at Septemberas of June 30, 20172018 from $256.7$266.3 million atas of December 31, 2016. We attribute the2017. The increase in net loans is due to multiple large loans originated late in the quarter as well as an increase in the usage of lines of credit. Early payoffs of real estate loans continued, which we attribute to Charleston’s strong real estate market and national popularity.loan demand.$149,640 at September$158,808 as of June 30, 20172018 and $136,446 at$152,047 as of December 31, 2016)2017) and the corresponding percentage of total loans as of the dates indicated. September 30, 2017 December 31, 2016 Amount Percent Amount Percent Commercial loans $ 53,348,364 19.82 % $ 52,262,209 20.06 % Commercial real estate – construction 1,842,668 0.68 % 1,208,901 0.46 % Commercial real estate – other 134,779,206 50.08 % 122,968,126 47.19 % Consumer real estate 74,254,387 27.59 % 77,131,816 29.60 % Consumer other 4,908,006 1.83 % 7,005,063 2.69 % Total 269,132,631 100.00 % 260,576,115 100.00 % Allowance for loan loss (3,886,959 ) (3,851,617 ) Total loans, net $ 265,245,672 $ 256,724,498 June 30, 2018 December 31, 2017 Amount Percent Amount Percent Commercial $ 55,495,828 19.96 % $ 51,723,237 19.14 % Commercial Real Estate - Construction 4,340,323 1.56 % 2,317,857 0.86 % Commercial Real Estate - Other 139,665,319 50.22 % 140,186,324 51.89 % Consumer Real Estate 73,570,322 26.45 % 70,797,973 26.20 % Consumer Other 5,032,745 1.81 % 5,155,249 1.91 % Total 278,104,537 100.00 % 270,180,640 100.00 % Allowance for Loan Losses (4,007,464 ) (3,875,398 ) Total Loans, Net $ 274,097,073 $ 266,305,242 assetsAssetsassetsAssets include real estate acquired through foreclosure or deedsdeed 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 SeptemberJune 30, 2017,2018, we had one loanno loans 90 days past due still accruing interest.SeptemberJune 30, 2017,2018, we determined that we had one loan totaling $25,717 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.increased $44,689 from $521,943represents one commercial property valued at $411,842 as of December 31, 2016 to $566,632 as of SeptemberJune 30, 2017. The increase is attributed to the transfer of one loan to OREO. This balance represents two properties.2018.30 September 30, 2017 December 31, 2016 Commercial loans $ 46,899 $ 61,781 Commercial real estate - other 1,554,368 1,678,876 Consumer other — 964 Total nonaccrual loans 1,601,267 1,741,621 Other real estate owned 566,632 521,943 Total nonperforming assets $ 2,167,899 $ 2,263,564 December 31, 2017 Commercial loans $ 30,892 $ 41,651 Commercial real estate - other 933,364 790,208 Consumer - other 4,914 — Nonaccruing troubled debt restructuring — — Total nonaccruing loans 969,170 831,859 Other real estate owned 411,842 435,479 Total nonperforming assets $ 1,381,012 $ 1,267,338 September 30, 2017 and December 31, 2016,2017, or 1.44% and 1.48%1.43% of outstanding loans, respectively. At SeptemberAs of June 30, 20172018 and December 31, 2016,2017, the allowance for loan losses represented 179.30%284.88% and 170.16%305.79% of the total amount of nonperforming assets,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 Septemberas of June 30, 20172018 is adequate.At SeptemberAs of June 30, 2017,2018, impaired loans totaled $4.6$3.3 million, for which $2.7$2.2 million of these loans had a reserve of approximately $2.0$1.0 million 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.SeptemberJune 30, 2018, we recorded no charge-offs and $101,944 in recoveries on loans previously charged-off, resulting in net recoveries of $101,944. During the same period in 2017, we recorded $83,276$2,372 of charge-offs and $22,720$23,030 of recoveries on loans previously charged-off, resulting in net charge-offsrecoveries of $60,556. Comparatively,$20,658. During the six months ended June 30, 2018, we recorded $22,665$103,093 of charge-offs and $105,159 of recoveries on loans previously charged-off, and no charge-offs, resulting infor net recoveries of $22,665 during the three months ended September 30, 2016. During the nine months ended September 30, 2017,$2,066. Comparatively, we recorded $85,649$2,372 of charge-offs and $68,491$45,770 of recoveries on loans previously charged-off, resulting in net charge-offsrecoveries of $17,158. Comparatively, during the same period in 2016, we recorded $116,651 of charge-offs and $48,935 of recoveries on loans previously charged-off, resulting in net charge-offs of $67,716$43,398 for the ninesix months ended SeptemberJune 30, 2016.2017.61.17%58.95% of average earning assets for the ninesix months ended SeptemberJune 30, 2017,2018, 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. September 30, 2017 December 31, 2016 Amount Percent Amount Percent Deposits: Non-interest-bearing demand $ 124,661,171 32.25 % $ 126,034,478 33.83 % Interest-bearing demand 99,066,299 25.63 % 96,260,589 25.84 % Money market accounts 84,417,700 21.84 % 77,307,662 20.75 % Time deposits over $250,000 17,695,869 4.58 % 17,822,136 4.78 % Other time deposits 25,993,812 6.72 % 26,019,121 6.98 % Other savings deposits 34,712,187 8.98 % 29,078,865 7.81 % Total deposits $ 386,547,038 100.00 % $ 372,522,851 100.00 % June 30, 2018 December 31, 2017 Amount Percent Amount Percent Deposits Non-interest bearing demand $ 130,654,687 34.17 % $ 139,256,748 34.56 % Interest bearing demand 97,358,521 25.46 % 108,967,196 27.05 % Money market accounts 74,370,149 19.45 % 77,833,728 19.32 % Time deposits over $250,000 21,917,734 5.73 % 18,624,924 4.62 % Other time deposits 23,573,597 6.17 % 23,295,492 5.78 % Other savings deposits 34,464,921 9.01 % 34,910,212 8.66 % Total deposits $ 382,339,609 100.00 % $ 402,888,300 100.00 % increased 3.76%decreased 5.0% or $14.0$20.5 million from December 31, 20162017 to SeptemberJune 30, 2017.2018. These increasesdecreases were primarily due to larger balances in existing customer accounts as well asnormal, seasonal fluctuations and the additionknown loss of new accounts during the period.temporary deposits.At SeptemberAs of June 30, 20172018 and December 31, 2016,2017, deposits with an aggregate deficit balance of $16,947$15,591 and $24,963,$66,479, respectively were re-classified as other loans.31 SeptemberJune 30, 20172018 to Three Months Ended SeptemberJune 30, 20162017$14,315$339,972 or 1.00%24.52% to $1.4$1.7 million, or basic and diluted earnings per share of $0.29 and $0.28, respectively,$0.31, for the three months ended SeptemberJune 30, 2017,2018, from $1.4 million, or basic and diluted earnings per share of $0.29 and $0.28, respectively,$0.25, for the three months ended SeptemberJune 30, 2016.2017. Our returnsannualized return on average assets and average equity for the three months ended SeptemberJune 30, 20172018 were 1.32%1.64% and 13.01%16.11%, respectively, compared with 1.39%1.31% and 13.74%12.97%, respectively, for the three months ended SeptemberJune 30, 2016.2017.$72,731$457,407 or 1.85%11.95% to $4.0$4.2 million for the three months ended SeptemberJune 30, 20172018 from $3.9$3.8 million for the three months ended SeptemberJune 30, 2016.2017. This increase was primarily due to higher ratesinterest and fee income on loans and our cash balances tiedrelated to the Federal Funds target rate, whichincreases in interest rates. Average loans increased 25 basis points in March 2017 and an additional 25 basis points in June 2017. Meanwhile, average loans decreased $10.7$13.6 million or 3.88%5.22% to $264.0$274.9 million for the three months ended SeptemberJune 30, 2017,2018, compared to $274.8$261.3 million for the three months ended SeptemberJune 30, 2016. However, theThe yield on average loans (including fees) was 5.29%5.71% and 4.86%5.55% for the three months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016,2017, respectively. Interest income on loans increased $4,142$482,897 for the three months ended SeptemberJune 30, 20172018 to $3.4$3.7 million from $3.4$3.2 million for the three months ended SeptemberJune 30, 2016.2017.at the Federal Reserve Bank increased $1.2in other banks decreased $5.1 million or 4.50%24.09% to $28.5$15.9 million for the three months ended SeptemberJune 30, 2018, with a yield of 1.84% as compared to $21.0 million for the three months ended June 30, 2017, with a yield of 1.30% as compared to $27.3 million for the three months ended September 30, 2016, with a yield of 0.52%1.06%.SeptemberJune 30, 2017,2018, we had a provision of $20,000$75,000 compared to a provision of $210,000$30,000 for the same period in the prior year. The decreaseincrease in the provision for loan losses was supported bybased on our analysis of the adequacy of the allowance for loan losses.$204,704$141,383 or 29.81%20.30% to $481,882$555,096 for the three months ended SeptemberJune 30, 2017,2018, from $686,586$696,479 for the three months ended SeptemberJune 30, 2016.2017. This reduction was primarily due to less income derived from mortgage banking activities but was partially offset by increases in service charges and fees,income. Mortgage banking income decreased $149,965 to $250,554 as wellof June 30, 2018 from $400,519 as gains realized on the sale of investment securities.June 30, 2017.decreased $99,730increased $61,392 or 3.86%2.37% to $2.5$2.7 million for the three months ended SeptemberJune 30, 20172018 from $2.6 million for the three months ended SeptemberJune 30, 2016.2017. This decreaseincrease was primarily due to a reductionan increase in other operating expensessalaries and employee benefits of $123,775, largely comprised of a lower FDIC assessment and other miscellaneous operating expenses. This was partially offset by increases in net occupancy expenses.$76,090.$543,098$386,394 for the three months ended SeptemberJune 30, 20172018 as compared to $399,656$516,734 during the same period in 2016.2017. Our effective tax rate was 27.38%18.29% and 21.89%27.15% for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. The decrease in the effective tax rate during the 2018 period is a result of the 2017 Tax Act that reduced the U.S. corporate income tax rate from 34% to 21% for both periods was directly related to our investment in a South Carolina Rehabilitation Tax Credit in 2016.tax years beginning after December 31, 2017.NineSix Months Ended SeptemberJune 30, 20172018 to NineSix Months Ended SeptemberJune 30, 20162017$118,943$726,114 or 3.02%27.79% to $4.1$3.3 million, or basic and diluted earnings per share of $0.82$0.63 and $0.80,$0.61, respectively, for the ninesix months ended SeptemberJune 30, 2017,2018, from $3.9$2.6 million, or basic and diluted earnings per share of $0.80$0.48 and $0.78,$0.47, respectively, for the ninesix months ended SeptemberJune 30, 2016.2017. Our annualized return on average assets and average equity for the ninesix months ended SeptemberJune 30, 20172018 were 1.28%1.57% and 12.66%15.59%, respectively, compared with 1.29%1.26% and 12.73%12.47%, respectively, for the ninesix months ended SeptemberJune 30, 2016.2017.32 $378,528$972,947 or 3.40%12.94% to $11.5$8.5 million for the ninesix months ended SeptemberJune 30, 20172018 from $11.1$7.5 million for the ninesix months ended SeptemberJune 30, 2016.2017. This increase was primarily due to increased income derived from investment securities. Additionally, the increase in interest and fees on loans was primarily due to higher rates on loans and our cash balances tied to the Federal Funds target rate, which increased 25 basis points in March 2017 and an additional 25 basis points in June 2017.fee income from loans. Average loans decreased $2.4increased $13.1 million or 0.91%5.01% to $262.0$274.1 million for the ninesix months ended SeptemberJune 30, 2017,2018, compared to $264.4$261.0 million for the ninesix months ended SeptemberJune 30, 2016. However, the2017. The yield on average loans (including fees) was 5.33%5.61% and 4.85%5.39% for the ninesix months ended SeptemberJune 30, 20172018 and September 30, 2016,2017, respectively. Interest income on loans increased $124,856$900,145 for the ninesix months ended SeptemberJune 30, 20172018 to $9.7$7.3 million from $9.6$6.4 million for the ninesix months ended SeptemberJune 30, 2016.2017.Bank decreased $3.5$4.1 million or 13.08%79.90% to $23.0$16.1 million for the ninesix months ended SeptemberJune 30, 2018, with a yield of 1.18% as compared to $20.3 million for the six months ended June 30, 2017, with a yield of 1.09% as compared to $26.5 million for the nine months ended September 30, 2016, with a yield of 0.52%0.95%.ninesix months ended SeptemberJune 30, 2017,2018, we had a provision of $52,500$130,000 compared to a provision of $395,000$32,500 for the same period in the prior year. The decreaseincrease in the provision for loan losses was supported bybased on our analysis of the adequacy of the allowance for loan losses.$491,951$245,312 or 22.14%19.65% to $1.7$1.0 million for the ninesix months ended SeptemberJune 30, 2017,2018, from $2.2$1.2 million for the ninesix months ended SeptemberJune 30, 2016.2017. This reduction is primarily due to less income derived from the sale of investment securities and mortgage banking activities. For the nine months ended September 30, 2017, we realized gains on the sale of investment securities of $45,820 compared to realized gains on the sale of investment securities of $348,327 during the same period in 2016.Non-Interest ExpenseNon-interest expense decreased $11,004 or 0.15% to $7.5 million for the nine months ended September 30, 2017 from $7.6 million for the nine months ended September 30, 2016. This decrease was primarily due to a reduction in other operating expensesmortgage banking income, which decreased $285,155 or 42.21% due to a decrease in originations. For the six months ended June 30, 2018, we had realized gains of $44,066, largely comprised$4,735 from the sale of a lower FDIC assessment. Thisinvestment securities. There were no sales of investment securities during the six months ended June 30, 2017.offset by a write-downprimarily due to an increase in salaries and employee benefits of OREO in$178,601 or 6.01% from $3.1 million for the amount of $46,143 as well as increases in net occupancy expenses.six months ended June 30, 2017 to $3.0 million for the six months ended June 30, 2018.$1.6 million$735,454 for the ninesix months ended SeptemberJune 30, 20172018 as compared to $1.5 million$1,063,029 during the same period in 2016.2017. Our effective tax rate was 28.38%18.05% and 27.40%28.92% for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. The decrease in the effective tax rate during the 2018 period is a result of the 2017 Tax Act that reduced the U.S. corporate income tax rate from 34% to 21% for both periods was directly related to our investment in a South Carolina Rehabilitation Tax Credit in 2016.tax years beginning after December 31, 2017.$96.7$106.0 million and $85.4$92.9 million at Septemberas of June 30, 20172018 and December 31, 2016,2017, respectively.obligates usour obligation 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 Septemberas of June 30, 20172018 and December 31, 20162017 was $969,644$1.3 million and $793,992,$1.2 million, respectively.33 $2.3$3.7 million as of June 30, 2018, to sell loans held for sale of $3.7 million, compared to forward sales commitments of $2.1 million at September 30,December 31, 2017, to sell loans held for sale of $3.1 million, compared to forward sales commitments of $4.4 million at December 31, 2016, to sell loans held for sale of $4.4$2.1 million. The fair value of these commitments was not significant at Septemberas of June 30, 20172018 or December 31, 2016.2017. We had no embedded derivative instruments requiring separate accounting treatment.$44.7$15.5 million at Septemberas of June 30, 20172018 and $18.1$13.4 million at December 31, 2016.2017. For the three and ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016,2017, there were no loans repurchased.37.0334.15%and 36.38%38.93% of total assets at Septemberas of June 30, 20172018 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 SeptemberAs of June 30, 2017,2018, we had unused short-term lines of credit totaling approximately $23$23.0 million (which can be withdrawn at the lender’slender'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 haveestablished 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 SeptemberAs of June 30, 2017,2018, we could borrow up to $78$104.7 million. There have been no borrowings under this arrangement during the reporting periods.arrangement.At SeptemberAs of June 30, 20172018 and December 31, 2016,2017, our liquidity ratio was35.08% 33.59% and 38.27%37.68%, respectively.purchase.purchase stock. Total shareholders’ equity at Septemberas of June 30, 20172018 was $43.7$43.2 million. The rate of asset growth since our inception has not negatively impacted this capital base.34 rules arerule is identical in substance to the final rules issued by the Federal Reserve Bank.at Septemberas of June 30, 20172018 and December 31, 20162017 was 16.13%16.78% and 15.36%15.69%, respectively.At SeptemberAs of June 30, 2017,2018, 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%10.00%, 8.0%8.00%, 6.5%6.50% and 5%5.00%, 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%8.00%, 6%6.00%, 4.5%4.50%, and 4.0%4.00%, respectively.– 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.had no materialintends to open a North Charleston office in 2019. The Bank of South Carolina will be the anchor tenant in a two-story building at the corner of Highway 78 and Ingleside Drive, occupying the entire first floor. At this time, the commitments for capital expenditures as of September 30, 2017 and December 31, 2016, respectively.related to this office are not yet determined.SeptemberJune 30, 20172018 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 SeptemberJune 30, 2017,2018, 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.35 SeniorExecutive Vice President, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of SeptemberJune 30, 2017,2018, based on the 2013 framework established in a report entitled“Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.SeptemberJune 30, 2017.2018. Based on this assessment, management believes that as of SeptemberJune 30, 2017,2018, 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 SeptemberJune 30, 2017,2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.1. The Consolidated Financial Statements are included in this Form 10-Q and listed on pages as indicated. 36 Page (1) Consolidated Balance Sheets 3 (2) Consolidated Statements of Income 4 (3) Consolidated Statements of Comprehensive Income 6 (4) Consolidated Statements of Shareholders’ Equity 7 (5) Consolidated Statements of Cash Flows 8 (6) Notes to Consolidated Financial Statements 9-28 ExhibitsExhibits 2.0 Plan of Reorganization (Filed with 1995 10-KSB) 3.0 Articles of Incorporation of the Registrant (Filed with 1995 10-KSB) 3.1 By-laws of the Registrant (Filed with 1995 10-KSB) 3.2 3.2Amendments to the Articles of Incorporation of the Registrant (Filed with Form S on June 23, 2011) 4.0 20162018 Proxy Statement (Filed with 20152017 10-K)10.0 Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB) 10.1 Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB) 10.2 Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB) 10.3 Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB) 10.4 10.4Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed With 2010 10-K)Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with September 30, 2014 10-Q)2010 10-K)10.5Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with March 31, 2013 10-Q)10.5 1998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A) 10.6 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 2016 10-K) 10.7 2010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement) 10.8 10.8Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K) 10.9 10.9Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K) 10.10 10.10First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K) 10.11 10.11Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K) 10.12 10.12Extension to Lease Agreement for 256 Meeting Street (Filed within)with September 30, 2017 10-Q)10.13 10.13North Charleston Lease Agreement (Filed with June 30, 2017 10Q)10-Q)10.14 10.14Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed within)with September 30, 2017 10-Q)14.0 14.0Code of Ethics (Filed with 2004 10-KSB) 21.0 List of Subsidiaries of the Registrant (Filed with 1995 10-KSB) The Registrant’s only subsidiary is The Bank of South Carolina (Filed with 1995 10-KSB) 31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer 31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer 32.1 Certification pursuant to Section 1350 32.2 Certification pursuant to Section 1350 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 37 Bank of South Carolina Corporation November 9, 2017August 10, 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 President38