SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For
the quarterly period ended
|
September 30,
2009
|
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission
file number: 0-27702
Bank of South Carolina
Corporation
(Exact
name of registrant issuer as specified in its charter)
South Carolina
|
|
57-1021355
|
(State
or other jurisdiction of
|
|
(IRS
Employer
|
incorporation
or organization)
|
|
Identification
Number)
|
256 Meeting Street,
Charleston, SC 29401
(Address
of principal executive offices)
(843)
724-1500
(Registrant’s
telephone number)
Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its Company Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large accelerated filer
|
¨
|
Accelerated Filer
|
¨
|
Non-accelerated filer
|
¨
|
Smaller reporting Company
|
x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of
September 30, 2009 there were 4,002,910 Common Shares
outstanding.
Table of
Contents
BANK OF
SOUTH CAROLINA CORPORATION
Report on
Form 10-Q
for
quarter ended
September
30, 2009
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Item
1. Financial Statements (Unaudited)
|
|
|
|
Consolidated
Balance Sheets – September 30, 2009 and December 31, 2008
|
3
|
Consolidated
Statements of Income - Three months ended September 30, 2009 and
2008
|
4
|
Consolidated
Statements of Income - Nine months ended September 30, 2009 and
2008
|
5
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income - Nine months
ended September 30, 2009 and 2008
|
6
|
Consolidated
Statements of Cash Flows - Nine months ended September 30, 2009 and
2008
|
7
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
Item
2. |
Management's
Discussion and Analysis of Financial Condition
and Results of Operations
|
16 |
|
Off-Balance
Sheet Arrangements
|
30
|
|
Liquidity
|
31
|
|
Capital
Resources
|
32
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
32
|
|
|
|
Item
4. Controls and Procedures
|
32
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
33
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
33
|
Item
3.
|
Defaults
Upon Senior Securities
|
33
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
33
|
Item
5.
|
Other
Information
|
33
|
Item
6.
|
Exhibits
|
33
|
|
|
|
Signatures
|
34
|
Certifications
|
|
PART I -
ITEM 1 - FINANCIAL STATEMENTS
BANK OF
SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
6,490,103 |
|
|
$ |
6,852,023 |
|
Interest
bearing deposits in other banks
|
|
|
8,256 |
|
|
|
8,212 |
|
Federal
funds sold
|
|
|
10,598,096 |
|
|
|
13,352,303 |
|
Investment
securities available for sale
|
|
|
37,518,938 |
|
|
|
37,896,250 |
|
Mortgage
loans to be sold
|
|
|
3,814,360 |
|
|
|
3,465,222 |
|
Loans
|
|
|
210,978,963 |
|
|
|
180,072,950 |
|
Allowance
for loan losses
|
|
|
(2,013,259 |
) |
|
|
(1,429,835 |
) |
Net
loans
|
|
|
208,965,704 |
|
|
|
178,643,115 |
|
Premises
and equipment, net
|
|
|
2,461,588 |
|
|
|
2,424,476 |
|
Accrued
interest receivable
|
|
|
1,037,194 |
|
|
|
1,016,659 |
|
Other
assets
|
|
|
577,122 |
|
|
|
7,670 |
|
Total
assets
|
|
$ |
271,471,361 |
|
|
$ |
243,665,930 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest
bearing demand
|
|
$ |
49,735,424 |
|
|
$ |
52,659,020 |
|
Interest
bearing demand
|
|
|
50,448,440 |
|
|
|
46,076,897 |
|
Money
market accounts
|
|
|
64,423,956 |
|
|
|
64,705,925 |
|
Certificates
of deposit $100,000 and over
|
|
|
43,520,164 |
|
|
|
27,356,516 |
|
Other
time deposits
|
|
|
17,296,581 |
|
|
|
15,697,678 |
|
Other
savings deposits
|
|
|
9,728,599 |
|
|
|
8,290,479 |
|
Total
deposits
|
|
|
235,153,164 |
|
|
|
214,786,515 |
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
7,713,896 |
|
|
|
1,000,000 |
|
Accrued
interest payable and other liabilities
|
|
|
1,051,575 |
|
|
|
1,071,351 |
|
Total
liabilities
|
|
|
243,918,635 |
|
|
|
216,857,866 |
|
|
|
|
|
|
|
|
|
|
Common
Stock - No par value; 12,000,000 shares authorized; issued 4,202,411
shares at September 30, 2009 and 4,176,100 December 31, 2008; outstanding
4,002,910 shares at September 30, 2009 and 3,976,599 shares December 31,
2008
|
|
|
- |
|
|
|
- |
|
Additional
paid in capital
|
|
|
23,505,632 |
|
|
|
23,229,045 |
|
Retained
earnings
|
|
|
4,697,366 |
|
|
|
4,375,166 |
|
Treasury
stock – 199,501 shares at September 30, 2009 and December 31,
2008
|
|
|
(1,692,964 |
) |
|
|
(1,692,964 |
) |
Accumulated
other comprehensive income, net of income taxes
|
|
|
1,042,692 |
|
|
|
896,817 |
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
27,552,726 |
|
|
|
26,808,064 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
271,471,361 |
|
|
$ |
243,665,930 |
|
See
accompanying notes to consolidated financial statements
BANK OF
SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Interest
and fee income
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
2,600,453 |
|
|
$ |
2,518,085 |
|
Interest
and dividends on investment securities
|
|
|
366,522 |
|
|
|
423,520 |
|
Other
interest income
|
|
|
4,703 |
|
|
|
62,900 |
|
Total
interest and fee income
|
|
|
2,971,678 |
|
|
|
3,004,505 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
340,391 |
|
|
|
356,618 |
|
Interest
on short-term borrowings
|
|
|
4,726 |
|
|
|
1,948 |
|
Total
interest expense
|
|
|
345,117 |
|
|
|
358,566 |
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
2,626,561 |
|
|
|
2,645,939 |
|
Provision
for loan losses
|
|
|
1,110,000 |
|
|
|
85,000 |
|
Net
interest income after provision for loan losses
|
|
|
1,516,561 |
|
|
|
2,560,939 |
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
Service
charges, fees and commissions
|
|
|
262,490 |
|
|
|
236,758 |
|
Mortgage
banking income
|
|
|
186,669 |
|
|
|
83,487 |
|
Gain
(loss) on sale of securities
|
|
|
57,756 |
|
|
|
(238 |
) |
Other
non-interest income
|
|
|
8,187 |
|
|
|
8,026 |
|
Total
other income
|
|
|
515,102 |
|
|
|
328,033 |
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
1,072,127 |
|
|
|
1,046,365 |
|
Net
occupancy expense
|
|
|
317,651 |
|
|
|
336,117 |
|
Other
operating expenses
|
|
|
468,798 |
|
|
|
412,371 |
|
Total
other expense
|
|
|
1,858,576 |
|
|
|
1,794,853 |
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
173,087 |
|
|
|
1,094,119 |
|
Income
tax expense
|
|
|
36,566 |
|
|
|
382,047 |
|
Net
income
|
|
$ |
136,521 |
|
|
$ |
712,072 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.03 |
|
|
$ |
0.18 |
|
Diluted
earnings per share
|
|
$ |
0.03 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,002,676 |
|
|
|
3,975,252 |
|
Diluted
|
|
|
4,002,676 |
|
|
|
3,981,056 |
|
See
accompanying notes to consolidated financial statements
BANK OF
SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Interest
and fee income
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
7,454,735 |
|
|
$ |
7,795,453 |
|
Interest
and dividends on investment securities
|
|
|
1,135,287 |
|
|
|
1,213,229 |
|
Other
interest income
|
|
|
10,916 |
|
|
|
298,801 |
|
Total
interest and fee income
|
|
|
8,600,938 |
|
|
|
9,307,483 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,007,424 |
|
|
|
1,532,122 |
|
Interest
on short-term borrowings
|
|
|
9,080 |
|
|
|
8,647 |
|
Total
interest expense
|
|
|
1,016,504 |
|
|
|
1,540,769 |
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
7,584,434 |
|
|
|
7,766,714 |
|
Provision
for loan losses
|
|
|
1,274,000 |
|
|
|
115,000 |
|
Net
interest income after provision for loan losses
|
|
|
6,310,434 |
|
|
|
7,651,714 |
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
Service
charges, fees and commissions
|
|
|
796,165 |
|
|
|
715,614 |
|
Mortgage
banking income
|
|
|
768,132 |
|
|
|
363,807 |
|
Gain
(loss) on sale of securities
|
|
|
180,071 |
|
|
|
(238 |
) |
Other
non-interest income
|
|
|
18,698 |
|
|
|
20,235 |
|
Total
other income
|
|
|
1,763,066 |
|
|
|
1,099,418 |
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
3,157,192 |
|
|
|
3,132,348 |
|
Net
occupancy expense
|
|
|
977,301 |
|
|
|
1,022,959 |
|
Other
operating expenses
|
|
|
1,503,952 |
|
|
|
1,262,439 |
|
Total
other expense
|
|
|
5,638,445 |
|
|
|
5,417,746 |
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
2,435,055 |
|
|
|
3,333,386 |
|
Income
tax expense
|
|
|
836,171 |
|
|
|
1,177,951 |
|
Net
income
|
|
$ |
1,598,884 |
|
|
$ |
2,155,435 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.40 |
|
|
$ |
0.54 |
|
Diluted
earnings per share
|
|
$ |
0.40 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,987,880 |
|
|
|
3,962,817 |
|
Diluted
|
|
|
3,987,880 |
|
|
|
3,972,475 |
|
See
accompanying notes to consolidated financial statements.
BANK OF
SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR NINE
MONTHS SEPTEMBER 30, 2008 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Paid In Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
$ |
- |
|
|
$ |
22,978,812 |
|
|
$ |
3,976,706 |
|
|
$ |
(1,692,964 |
) |
|
$ |
430,016 |
|
|
$ |
25,692,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
2,155,435 |
|
|
|
- |
|
|
|
- |
|
|
|
2,155,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on securities (net of tax effect of
$54,898)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
93,475 |
|
|
|
93,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,248,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
- |
|
|
|
198,333 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
198,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
35,456 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
35,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends ($0.48 per common share)
|
|
|
- |
|
|
|
- |
|
|
|
(1,904,582 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,904,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
$ |
- |
|
|
$ |
23,212,601 |
|
|
$ |
4,227,559 |
|
|
$ |
(1,692,964 |
) |
|
$ |
523,491 |
|
|
$ |
26,270,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
$ |
- |
|
|
$ |
23,229,045 |
|
|
$ |
4,375,166 |
|
|
$ |
(1,692,964 |
) |
|
$ |
896,817 |
|
|
$ |
26,808,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
1,598,884 |
|
|
|
- |
|
|
|
- |
|
|
|
1,598,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on securities (net of tax effect of
$152,301)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
259,322 |
|
|
|
259,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for gains included in net income (net of tax effect
$66,624)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(113,447 |
) |
|
|
(113,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,744,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
- |
|
|
|
235,315 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
235,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
41,272 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
41,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends ($0.32 per common share)
|
|
|
- |
|
|
|
- |
|
|
|
(1,276,684 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,276,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
$ |
- |
|
|
$ |
23,505,632 |
|
|
$ |
4,697,366 |
|
|
$ |
(1,692,964 |
) |
|
$ |
1,042,692 |
|
|
$ |
27,552,726 |
|
See
accompanying notes to consolidated financial statements.
BANK OF
SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,598,884 |
|
|
$ |
2,155,435 |
|
Adjustments
to reconcile net income to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
161,393 |
|
|
|
195,152 |
|
(Gain)
loss on sale of securities
|
|
|
(180,071 |
) |
|
|
238 |
|
Provision
for loan losses
|
|
|
1,274,000 |
|
|
|
115,000 |
|
Stock-based
compensation expense
|
|
|
41,272 |
|
|
|
35,456 |
|
Net
(accretion) and amortization of unearned discounts and premiums on
investments
|
|
|
33,201 |
|
|
|
(18,782 |
) |
Origination
of mortgage loans held for sale
|
|
|
(82,579,449 |
) |
|
|
(29,541,199 |
) |
Proceeds
from sale of mortgage loans held for sale
|
|
|
82,230,311 |
|
|
|
28,875,929 |
|
(Increase)
decrease in accrued interest receivable and other assets
|
|
|
(675,660 |
) |
|
|
241,659 |
|
Increase
in accrued interest payable and other liabilities
|
|
|
616,480 |
|
|
|
39,356 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
2,520,361 |
|
|
|
2,098,244 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of investment securities available for sale
|
|
|
(11,959,800 |
) |
|
|
(5,785,881 |
) |
Maturities
and calls of investment securities available for sale
|
|
|
2,376,600 |
|
|
|
4,975,000 |
|
Net
increase in loans
|
|
|
(31,596,589 |
) |
|
|
(17,708,003 |
) |
Purchase
of premises and equipment
|
|
|
(198,505 |
) |
|
|
(35,182 |
) |
Proceeds
from sale of available for sale securities
|
|
|
10,338,930 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
(31,039,364 |
) |
|
|
(18,554,066 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposit accounts
|
|
|
20,366,649 |
|
|
|
9,495,898 |
|
Net
increase (decrease) in short-term borrowings
|
|
|
6,713,896 |
|
|
|
(4,601 |
) |
Dividends
paid
|
|
|
(1,912,940 |
) |
|
|
(1,901,044 |
) |
Stock
options exercised
|
|
|
235,315 |
|
|
|
198,333 |
|
Net
cash provided by financing activities
|
|
|
25,402,920 |
|
|
|
7,788,586 |
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(3,116,083 |
) |
|
|
(8,667,236 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
20,212,538 |
|
|
|
28,082,316 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
17,096,455 |
|
|
$ |
19,415,080 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow data:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
1,009,280 |
|
|
$ |
1,729,669 |
|
Income
taxes
|
|
$ |
920,348 |
|
|
$ |
1,063,747 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure for non-cash investing and financing activity:
|
|
|
|
|
|
|
|
|
Change
in dividends payable
|
|
$ |
(636,256 |
) |
|
$ |
3,538 |
|
|
|
|
|
|
|
|
|
|
Change
in unrealized losses on available for sale securities
|
|
$ |
145,875 |
|
|
$ |
93,475 |
|
See
accompanying notes to consolidated financial statements.
BANK OF
SOUTH CAROLINA CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER
30, 2009
NOTE 1: Basis of
Presentation
The Bank
of South Carolina (the “Bank”) began operations on February 26, 1987 as a state
chartered bank and later became a subsidiary of Bank of South Carolina
Corporation (the “Company”), a South Carolina corporation, in a
reorganization effective on April 17, 1995. The Bank currently has
four locations, two in Charleston, South Carolina, one in Summerville, South
Carolina and one in Mt. Pleasant, South Carolina. The consolidated financial
statements in this report are unaudited, except for the December 31, 2008
consolidated balance sheet. All adjustments consisting of normal
recurring accruals which are, in the opinion of management, necessary for fair
presentation of the interim consolidated financial statements have been included
and fairly and accurately present the financial position, results of operations
and cash flows of the Company. The results of operations for the
three and nine months ended September 30, 2009, are not necessarily indicative
of the results which may be expected for the entire year.
The
preparation of the consolidated financial statements are in conformity with
accounting principles generally accepted in the United States of America (GAAP)
which 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 at the date of the financial
statements. In addition, they affect the reported amounts of income
and expense during the reporting period. Actual results could differ
from these estimates and assumptions.
In
preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure through October 28, 2009,
the date the financial statements were available to be issued.
NOTE
2: Investment Securities
The
Company accounts for its investment securities in accordance with
Accounting Standards Codification (FASB ASC) Topic 320: Investments- Debt and
Equity Securities. Investment securities are classified as “Held to Maturity”,
“Trading” and "Available for Sale". Currently the Company has only investments
classified as “Available for Sale”. These securities are carried at fair value
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity (net of estimated tax
effects). Unrealized losses on securities due to fluctuations in fair
value are recognized when it is determined that an other than temporary decline
in value has occurred. Realized gains or losses on the sale of
investments are based on the specific identification method, trade date
basis.
NOTE 3: Stock Based
Compensation
The
Company has an Incentive Stock Option Plan which was approved in 1998, and
expired on April 14, 2008. This plan is intended to assist the
Company in recruiting and retaining employees with ability and initiative, by
enabling employees to participate in its future success and to associate their
interest with those of the Company and its shareholders. Under the
1998 Incentive Stock Option Plan, options are periodically granted to employees
at a price not less than 100% of the fair market value of the shares at the date
of the grant. All employees are eligible to participate in this plan if the
Committee, in its sole discretion, determines that such person has contributed
or can be expected to contribute to the profits or growth of the Company or its
subsidiary. Options may be exercised in whole at any time or in part
from time to time at such times and in compliance with such requirements as the
Committee shall determine. The maximum period in which an Option may be
exercised is determined at the date of grant and shall not exceed 10 years from
the date of grant.
The
options are not transferable except by will or by the laws of descent and
distribution. No options may be granted under this Plan after April 14,
2008. Options granted before that date shall remain valid in
accordance with their terms.
There
were 4,500 shares granted during the nine months ended September 30,
2008. Fair value was estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used for the
4,500 options granted in 2008: dividend yield of 3.94%, historical volatility of
32.01%, risk-free interest rate of 3.34%, and expected life of the options of 10
years. For purposes of the calculation, compensation expense is recognized on a
straight-line basis over the vesting period.
The
following is a summary of the activity under the Incentive Stock Options Plan
for the three and nine months ending September 30, 2009 and September 30,
2008.
Three Months Ended September 30, 2009
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
Balance
at July 1, 2009
|
|
|
79,725 |
|
|
$ |
11.65 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
(638 |
) |
|
|
8.92 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Balance
at September 30, 2009
|
|
|
79,087 |
|
|
$ |
11.67 |
|
Nine Months Ended September 30, 2009
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
105,398 |
|
|
$ |
10.99 |
|
Exercised
|
|
|
(24,991 |
) |
|
|
8.92 |
|
Exercised
|
|
|
(1,320 |
) |
|
|
9.39 |
|
Balance
at September 30, 2009
|
|
|
79,087 |
|
|
$ |
11.67 |
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30, 2009
|
|
|
8,706 |
|
|
$ |
8.92 |
|
|
|
|
3,286 |
|
|
$ |
9.39 |
|
Three Months Ended September 30, 2008
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
Balance
at July 1, 2008
|
|
|
118,443 |
|
|
$ |
11.02 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
(1,331 |
) |
|
|
8.92 |
|
Exercised
|
|
|
(1,210 |
) |
|
|
9.39 |
|
Cancelled
|
|
|
(7,500 |
) |
|
|
16.62 |
|
Cancelled
|
|
|
(2,500 |
) |
|
|
14.19 |
|
Balance
at September 30, 2008
|
|
|
105,902 |
|
|
$ |
10.98 |
|
Nine Months Ended September 30, 2008
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
136,763 |
|
|
$ |
11.05 |
|
Granted
|
|
|
4,500 |
|
|
|
14.19 |
|
Exercised
|
|
|
(19,764 |
) |
|
|
8.92 |
|
Exercised
|
|
|
(2,347 |
) |
|
|
9.39 |
|
Cancelled
|
|
|
(10,750 |
) |
|
|
16.62 |
|
Cancelled
|
|
|
(2,500 |
) |
|
|
14.19 |
|
Balance
at September 30, 2008
|
|
|
105,902 |
|
|
$ |
10.98 |
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30, 2008
|
|
|
10,640 |
|
|
$ |
8.92 |
|
|
|
|
827 |
|
|
$ |
9.39 |
|
NOTE
4: Shareholders' Equity
Income
per common share for the three and nine months ended September 30, 2009 and for
the three and nine months ended September 30, 2008 were calculated as
follows:
|
|
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
|
|
|
|
INCOME
(NUMERATOR)
|
|
|
SHARES
(DENOMINATOR)
|
|
|
PER SHARE
AMOUNT
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
136,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income available to common shareholders
|
|
$ |
136,521 |
|
|
|
4,002,676 |
|
|
$ |
.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive options
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income available to common shareholders
|
|
$ |
136,521 |
|
|
|
4,002,676 |
|
|
$ |
.03 |
|
|
|
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
|
|
|
|
INCOME
(NUMERATOR)
|
|
|
SHARES
(DENOMINATOR)
|
|
|
PER SHARE
AMOUNT
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,598,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income available to common shareholders
|
|
$ |
1,598,884 |
|
|
|
3,987,880 |
|
|
$ |
.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive options
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income available to common shareholders
|
|
$ |
1,598,884 |
|
|
|
3,987,880 |
|
|
$ |
.40 |
|
|
|
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
|
|
|
|
INCOME
(NUMERATOR)
|
|
|
SHARES
(DENOMINATOR)
|
|
|
PER SHARE
AMOUNT
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
712,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income available to common shareholders
|
|
$ |
712,072 |
|
|
|
3,975,252 |
|
|
$ |
.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive options
|
|
|
|
|
|
|
5,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income available to common shareholders
|
|
$ |
712,072 |
|
|
|
3,981,056 |
|
|
$ |
.18 |
|
|
|
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
|
|
|
|
INCOME
(NUMERATOR)
|
|
|
SHARES
(DENOMINATOR)
|
|
|
PER SHARE
AMOUNT
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,155,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income available to common shareholders
|
|
$ |
2,155,435 |
|
|
|
3,962,817 |
|
|
$ |
.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive options
|
|
|
|
|
|
|
9,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income available to common shareholders
|
|
$ |
2,155,435 |
|
|
|
3,972,475 |
|
|
$ |
.54 |
|
The
future payment of a quarterly dividend will be evaluated by the Board of
Directors of the Company and will be paid as justified by the earnings of the
Bank.
NOTE 5: Comprehensive
Income
The
Company applies the provisions of FASB ASC Topic 220: Comprehensive Income, which establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive
income consists of net income and net unrealized gains or losses on securities
and is presented in the consolidated statements of shareholders’ equity and
comprehensive income.
Total
comprehensive income is $550,267 and $814,067, respectively for the three months
ended September 30, 2009 and 2008, and $1,744,759 and $2,248,910, respectively
for the nine months ended September 30, 2009 and 2008.
NOTE 6: Fair Value
Measurements
Effective
January 1, 2008, the Company adopted FASB ASC Topic 820: Fair Value Measurements
and Disclosures, which provides a framework for measuring and disclosing fair
value under generally accepted accounting principles. FASB ASC Topic 820
requires disclosures about the fair value of assets and liabilities recognized
in the balance sheet in periods subsequent to initial recognition, whether the
measurements are made on a recurring basis (for example, available-for-sale
investment securities) or on a nonrecurring basis (for example, impaired
loans).
FASB ASC
Topic 820 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. FASB ASC Topic 820 also establishes
a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:
Level
1
|
Quoted
prices in active markets for identical assets or liabilities. Level 1
assets and liabilities include debt and equity securities and derivative
contracts that are traded in an active exchange market, as well as U.S.
Treasury Securities.
|
Level
2
|
Observable
inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data. Level 2 assets and liabilities include debt securities with quoted
prices that are traded less frequently than exchange-traded instruments,
mortgage-backed securities, municipal bonds, corporate debt securities and
derivative contracts whose value is determined using a pricing model with
inputs that are observable in the market or can be derived principally
from or corroborated by observable market data. This category generally
includes certain derivative contracts and impaired loans.
|
Level
3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3 assets
and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methodologies, or similar
techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation. For example,
this category generally includes certain private equity investments,
retained residual interests in securitizations, residential mortgage
servicing rights, and highly-structured or long-term derivative
contracts.
|
Assets
and liabilities measured at fair value on a recurring basis at September 30,
2009 are as follows:
|
|
Quoted
Market Price
in active
markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance
at
September 30, 2009
|
|
Available
for Sale Securities
|
|
$ |
3,142,031 |
|
|
$ |
34,376,907 |
|
|
$ |
- |
|
|
$ |
37,518,938 |
|
Mortgage
loans held for sale
|
|
|
- |
|
|
|
3,814,360 |
|
|
|
- |
|
|
$ |
3,814,360 |
|
Total
|
|
$ |
3,142,031 |
|
|
$ |
38,191,267 |
|
|
$ |
- |
|
|
$ |
41,333,328 |
|
The
Company has no liabilities carried at fair value or measured at fair value on a
nonrecurring basis.
The
Company is predominantly a cash flow lender with real estate serving as
collateral on a majority of loans. Loans which are deemed to be impaired are
primarily valued on a nonrecurring basis at the fair values of the underlying
real estate collateral. Such fair values are obtained using independent
appraisals, which the Company considers to be level 2 inputs. The aggregate
carrying amount of impaired loans at September 30, 2009 was
$1,844,204.
The
Company has no assets or liabilities whose fair values are measured using level
3 inputs.
FABS ASC
Topic 825: Financial Instruments, requires disclosure of fair value information
about financial instruments whether or not recognized on the balance sheet, for
which it is practicable to estimate fair value. Fair value
estimates are made as of a specific point in time based on the characteristics
of the financial instruments and the relevant market
information. Where available, quoted market prices are
used. In other cases, fair values are based on estimates using
present value or other valuation techniques. These techniques involve
uncertainties and are significantly affected by the assumptions used and the
judgments made regarding risk characteristics of various financial instruments,
discount rates, prepayments, estimates of future cash flows, future expected
loss experience and other factors. Changes in assumptions could
significantly affect these estimates. Derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
may or may not be realized in an immediate sale of the instrument.
Under
FASB ASC Topic 825, 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 financing instruments do not represent the underlying value of those
instruments on the books of the Company.
The
following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments:
|
a.
|
Cash and due from
banks, interest bearing deposits in other banks and federal funds
sold
|
The
carrying value approximates fair value. All mature within 90 days and do not
present unanticipated credit concerns.
|
b.
|
Investment securities
available for sale
|
The fair value of investment
securities is derived from quoted market prices.
The
carrying values of variable rate consumer and commercial loans and consumer and
commercial loans with remaining maturities of three months or less approximate
fair value. The fair values of fixed rate consumer and commercial
loans with maturities greater than three months are determined using a
discounted cash flow analysis and assume the rate being offered on these types
of loans by the Company at September 30, 2009 and December 31, 2008, approximate
market.
The
carrying value of mortgage loans held for sale approximates fair
value.
For lines
of credit, the carrying value approximates fair value.
Under
FASB ASC Topic 825, 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, by applying interest rates
currently being offered on the deposit products. Under FASB ASC Topic
825, 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).
The
carrying amount approximates fair value due to the short-term nature of these
instruments.
The
estimated fair values of the Company's financial instruments at September 30,
2009 and December 31, 2008 are as follows:
|
|
September 30, 2009
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
6,490,103 |
|
|
$ |
6,490,103 |
|
Interest
bearing deposits in other banks
|
|
|
8,256 |
|
|
|
8,256 |
|
Federal
funds sold
|
|
|
10,598,096 |
|
|
|
10,598,096 |
|
Investment
securities available for sale
|
|
|
37,518,938 |
|
|
|
37,518,938 |
|
Loans
(1)
|
|
|
214,793,323 |
|
|
|
217,442,538 |
|
Deposits
|
|
|
235,153,164 |
|
|
|
235,481,509 |
|
Short-term
borrowings
|
|
|
7,713,896 |
|
|
|
7,713,896 |
|
|
|
December 31, 2008
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
6,852,023 |
|
|
$ |
6,852,023 |
|
Interest
bearing deposits in other banks
|
|
|
8,212 |
|
|
|
8,212 |
|
Federal
funds sold
|
|
|
13,352,303 |
|
|
|
13,352,303 |
|
Investments
available for sale
|
|
|
37,896,250 |
|
|
|
37,896,250 |
|
Loans
(1)
|
|
|
183,538,172 |
|
|
|
189,496,730 |
|
Deposits
|
|
|
214,786,515 |
|
|
|
215,012,751 |
|
Short-term
borrowings
|
|
|
1,000,000 |
|
|
|
1,000,000 |
|
(1)
Includes mortgage loans to be sold
NOTE 7: Recently Issued
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards
Codification TM and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards
Codification TM
(“Codification”) as the source of authoritative generally accepted
accounting principles (“GAAP”) for nongovernmental entities. The
Codification does not change GAAP. Instead, it takes the thousands of individual
pronouncements that currently comprise GAAP and reorganizes them into
approximately 90 accounting Topics, and displays all Topics using a consistent
structure. Contents in each Topic are further organized first by
Subtopic, then Section and finally Paragraph. The Paragraph level is the only
level that contains substantive content. Citing
particular content in the Codification
involves specifying the unique numeric path to the content through the Topic,
Subtopic, Section and Paragraph structure. FASB suggests that all citations
begin with “FASB ASC,” where ASC stands for Accounting Standards
Codification. Changes to
the ASC subsequent to June 30, 2009 are referred to as Accounting Standards
Updates (“ASU”).
In
conjunction with the issuance of SFAS 168, the FASB also issued its first
Accounting Standards Update No. 2009-1, “Topic 105 –Generally Accepted
Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as
a transition to the ASC. ASU 2009-1 is effective for
interim and annual periods ending after September 15, 2009 and will not have an
impact on the Company’s financial position or results of operations but will
change the referencing system for accounting standards.
Certain
of the following pronouncements were issued prior to the issuance of the ASC and
adoption of the ASUs. For such pronouncements, citations to the applicable
Codification by Topic, Subtopic and Section are provided where applicable in
addition to the original standard type and number.
In
December 2008 the FASB issued FASB Staff Position (“FSP”) SFAS 132(R)-1 (FASB
ASC 715-20-65), “Employers’ Disclosures about Postretirement Benefit Plan
Assets,” (“FSP SFAS 132(R)-1”). This FSP provides guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. The objective of the FSP is to provide the users
of financial statements with an understanding of: (a) how investment allocation
decisions are made, including the factors that are pertinent to an understanding
of investment policies and strategies; (b) the major categories of plan assets;
(c) the inputs and valuation techniques used to measure the fair value of plan
assets; (d) the effect of fair value measurements using significant unobservable
inputs (Level 3) on changes in plan assets for the period; and (e) significant
concentrations of risk within plan assets. The FSP also requires a
nonpublic entity, as defined in Statement of Financial Accounting Standard
(“SFAS”) 132, to disclose net periodic benefit cost for each period for which a
statement of income is presented. FSP SFAS 132(R)-1 is effective for
fiscal years ending after December 15, 2009. The Staff Position will
require the Company to provide additional disclosures related to its benefit
plan.
The FASB
issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140,” (“SFAS 166”) in June
2009. SFAS 166 limits the circumstances in which a financial asset
should be derecognized when the transferor has not transferred the entire
financial asset by taking into consideration the transferor’s continuing
involvement. The standard requires that a transferor recognize and
initially measure at fair value all assets obtained (including a transferor’s
beneficial interest) and liabilities incurred as a result of a transfer of
financial assets accounted for as a sale. The concept of a qualifying
special-purpose entity is removed from SFAS 140 along with the exception from
applying FIN 46(R). The standard is effective for the first annual
reporting period that begins after November 15, 2009, for interim periods within
the first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company
does not expect the standard to have any impact on the Company’s financial
statements.
SFAS 167
(not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),”
(“SFAS 167”) was also issued in June 2009. The standard amends FIN
46(R) to require a company to analyze whether its interest in a variable
interest entity (“VIE”) gives it a controlling financial interest. A
company must assess whether it has an implicit financial responsibility to
ensure that the VIE operates as designed when determining whether it has the
power to direct the activities of the VIE that significantly impact its economic
performance. Ongoing reassessments of whether a company is the
primary beneficiary are also required by the standard. SFAS 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates
certain exceptions that were available under FIN 46(R). SFAS 167 is
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. Comparative
disclosures will be required for periods after the effective
date. The Company does not expect the standard to have any impact on
the Company’s financial position.
The FASB
issued ASU 2009–05, “Fair Value Measurements and Disclosures (Topic 820) –
Measuring Liabilities at Fair Value” in August, 2009 to provide guidance when
estimating the fair value of a liability. When a quoted price in an
active market for the identical liability is not available, fair value should be
measured using (a) the quoted price of an identical liability when traded as an
asset; (b) quoted prices for similar liabilities or similar liabilities when
traded as assets; or (c) another valuation technique consistent with the
principles of Topic 820 such as an income approach or a market
approach. If a restriction exists that prevents the transfer of the
liability, a separate adjustment related to the restriction is not required when
estimating fair value. The ASU was effective October 1, 2009 for the
Company and will have no impact on financial position or
operations.
ASU
2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),”
issued in September, 2009, allows a company to measure the fair value of an
investment that has no readily determinable fair market value on the basis of
the investee’s net asset value per share as provided by the investee. This
allowance assumes that the investee has calculated net asset value in accordance
with the GAAP measurement principles of Topic 946 as of the reporting entity’s
measurement date. Examples of such investments include
investments in hedge funds, private equity funds, real estate funds and venture
capital funds. The update also provides guidance on how the investment should be
classified within the fair value hierarchy based on the value for which the
investment can be redeemed. The amendment is effective for interim
and annual periods ending after December 15, 2009 with early adoption
permitted. The Company does not have investments in such entities
and, therefore, there will be no impact to our financial
statements.
ASU
2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements – a consensus of the FASB Emerging Issues Task Force” was issued in
October, 2009 and provides guidance on accounting for products or services
(deliverables) separately rather than as a combined unit utilizing a selling
price hierarchy to determine the selling price of a deliverable. The
selling price is based on vendor-specific evidence, third-party evidence or
estimated selling price. The amendments in the Update are effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 with early adoption
permitted. The Company does not expect the update to have an impact
on its financial statements.
Issued
October, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic
470 and provides guidance for accounting and reporting for own-share lending
arrangements issued in contemplation of a convertible debt
issuance. At the date of issuance, a share-lending arrangement
entered into on an entity’s own shares should be measured at fair value in
accordance with Topic 820 and recognized as an issuance cost, with an offset to
additional paid-in capital. Loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs. The amendments also require several disclosures including a
description and the terms of the arrangement and the reason for entering into
the arrangement. The effective dates of the amendments are dependent
upon the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15, 2009. The
Company has no plans to issue convertible debt and, therefore, does not expect
the update to have an impact on its financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s financial position, results of operations or cash flows.
ITEM
2
MANAGEMENT'S
DISCUSSION AND ANALYSIS
OR
PLAN OF OPERATION
Management’s
discussion and analysis is included to assist shareholders in understanding the
Company’s financial condition, results of operations, and cash
flow. This discussion should be reviewed in conjunction with the
consolidated financial statements (unaudited) and notes included in this report
and the supplemental financial data appearing throughout this
report. Since the primary asset of the Company is its wholly-owned
subsidiary, most of the discussion and analysis relates to the
Bank.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations and
other portions of this quarterly report contain certain “forward-looking
statements” concerning the future operations of the Bank of South Carolina
Corporation. Management desires to take advantage of the “safe
harbor” provisions of the Private Securities Litigation Reform Act of 1996 and
is 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. The Company has used “forward-looking
statements” to describe future plans and strategies including its expectations
of the Company’s future financial results. The following are
cautionary statements. Management’s ability to predict results or the effect of
future plans or strategies is inherently uncertain. A variety of
factors may affect the operations, performance, business strategy and results of
the Company including, but not limited to 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,
|
|
·
|
Ability
to control expenses,
|
|
·
|
Changes
in compensation,
|
|
·
|
Risks
associated with income taxes including potential for adverse
adjustments,
|
|
·
|
Changes
in accounting policies and
practices,
|
|
·
|
Changes
in regulatory actions, including the potential for adverse
adjustments,
|
|
·
|
Recently
enacted or proposed legislation,
|
|
·
|
Current
disarray in the financial service
industry.
|
Such
forward looking statements speak only as of the date on which such statements
are made and shall be deemed to be updated by any future filings made by the
Company with the SEC. The Company 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 by the Company with the SEC, in press releases, and in oral and written
statements made by or with the approval of the Company, 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 $271.5 million in
assets as of September 30, 2009 and net income of $1,598,884 for the nine months
ended September 30, 2009. 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 principally 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.
The
following is a discussion of the Company’s financial condition as of September
30, 2009 as compared to December 31, 2008 and the results of operations for the
three and nine months ended September 30, 2009 as compared to September 30,
2008. The discussion and analysis identifies significant factors that
have affected the Company’s financial position and operating results and should
be read in conjunction with the financial statements and the related notes
included in this report.
The
Company derives most of its income from interest on loans and investments
(interest bearing assets). The primary source of funding for making
these loans and investments is the Company’s deposits, on which the Company pays
interest. Consequently, one of the key measures of the Company’s success is the
amount of net interest income, or the difference between the income on its
interest-earning assets, such as loans and investments, and the expense on its
interest bearing liabilities, such as deposits. Another key measure
is the spread between the yield the Company earns on these interest-bearing
assets and the rate the Company pays on its interest-bearing
liabilities.
There are
risks inherent in all loans; therefore, the Company maintains an allowance for
loan losses to absorb estimated losses on existing loans that may become
uncollectible. The Company established and maintains this allowance by charging
a provision for loan losses against its operating earnings. In the following
section the Company has included a discussion of this process, as well as
several tables describing its allowance for loan losses and the allocation of
this allowance among its various categories of loans.
The
Company’s results of operations depend not only on the level of its net interest
income from loans and investments, but also on its non-interest income and its
operating expenses. Net interest income depends upon the volumes,
rates and mix associated with interest earning assets and interest bearing
liabilities which result in the net interest spread. The Company’s
net interest spread for the nine months ended September 30, 2009 was 3.95%,
compared to 4.95% for the nine months ended September 30, 2008.
Non-interest
income includes fees and other expenses charged to customers. A more
detailed discussion of interest income, non-interest income and operating
expenses follows.
For the
nine months ended September 30, 2009, the Bank has paid $905,000 to the Company
for dividend payments.
CRITICAL ACCOUNTING
POLICIES
The
Company has adopted various accounting policies that govern the application
principles generally accepted in the United States and with general practices
within the banking industry in the preparation of its financial
statements. The Company’s significant accounting policies are
described in the footnotes to its unaudited consolidated financial statements as
of September 30, 2009 and its notes included in the consolidated financial
statements in its 2008 Annual Report on Form 10-K as filed with the
SEC.
Certain
accounting policies involve significant judgments and assumptions by the Company
that have a material impact on the carrying value of certain assets and
liabilities. The Company considers these accounting policies to be
critical accounting policies. The judgment and assumptions the
Company uses are based on historical experience and other factors, which the
Company believes to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions the Company makes, actual results
could differ from these judgments and estimates that could have a material
impact on the carrying values of its assets and liabilities and its results of
operations.
Of the
significant accounting policies, the Company considers its policies regarding
the allowance for loan losses to be its most subjective accounting policy due to
the significant degree of management judgment. The Company has
developed what it believes to be appropriate policies and procedures for
assessing the adequacy of the allowance for loan losses, recognizing that this
process requires a number of assumptions and estimates with respect to its loan
portfolio. The Company’s assessments may be impacted in future periods by
changes in economic conditions, the impact of regulatory examinations and the
discovery of information with respect to borrowers which were not known by
management at the time of the issuance of the consolidated financial statements.
For additional discussion concerning the Company’s allowance for loan losses and
related matters, see “Allowance for Loan Losses.”
BALANCE
SHEET
LOANS
The
Company focuses its lending activities on small and middle market businesses,
professionals and individuals in its geographic markets. At September
30, 2009 outstanding loans (less deferred loan fees of $27,046) totaled
$210,978,963 which equaled 89.72% of total deposits and 77.72% of total
assets. The major components of the loan portfolio were commercial
loans and commercial real estate loans totaling 21.34% and 54.12%, respectively
of total loans. Substantially all loans were to borrowers located in
the Company’s market areas in the counties of Charleston, Dorchester and
Berkeley in South Carolina. The breakdown of total loans by type and the
respective percentage of total loans are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Commercial
loans
|
|
$ |
45,025,696 |
|
|
$ |
47,325,082 |
|
|
$ |
45,805,794 |
|
Commercial
real estate
|
|
|
114,190,915 |
|
|
|
88,234,503 |
|
|
|
92,106,908 |
|
Residential
mortgage
|
|
|
21,383,693 |
|
|
|
14,836,405 |
|
|
|
16,254,781 |
|
Consumer
loans
|
|
|
5,699,769 |
|
|
|
5,107,548 |
|
|
|
5,348,559 |
|
Personal
banklines
|
|
|
24,519,797 |
|
|
|
18,233,182 |
|
|
|
20,313,172 |
|
Other
|
|
|
186,139 |
|
|
|
291,151 |
|
|
|
308,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
211,006,009 |
|
|
|
174,027,871 |
|
|
|
180,138,081 |
|
Deferred
loan fees (net)
|
|
|
(27,046 |
) |
|
|
(56,189 |
) |
|
|
(65,131 |
) |
Allowance
for loan losses
|
|
|
(2,013,259 |
) |
|
|
(1,365,761 |
) |
|
|
(1,429,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net
|
|
$ |
208,965,704 |
|
|
$ |
172,605,921 |
|
|
$ |
178,643,115 |
|
Percentage of Loans
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Commercial
loans
|
|
|
21.34 |
% |
|
|
27.19 |
% |
|
|
25.43 |
% |
Commercial
real estate
|
|
|
54.12 |
% |
|
|
50.70 |
% |
|
|
51.13 |
% |
Residential
mortgage
|
|
|
10.13 |
% |
|
|
8.53 |
% |
|
|
9.02 |
% |
Consumer
loans
|
|
|
2.70 |
% |
|
|
2.93 |
% |
|
|
2.97 |
% |
Personal
banklines
|
|
|
11.62 |
% |
|
|
10.48 |
% |
|
|
11.28 |
% |
Other
|
|
|
.09 |
% |
|
|
.17 |
% |
|
|
0.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
Total
loans, not including deferred loan fees, increased $36,978,138 or 21.25% to
$211,006,009 at September 30, 2009 from $174,027,871 at September 30, 2008 and
increased $30,867,928 or 17.14% from $180,138,081 at December 31, 2008. This
increase can be attributed to the stability of the Company, strong business
development efforts, the hiring of two additional loan officers and the slow
down of lending in the Company’s market.
Commercial
real estate loans increased $25,956,412 or 29.42%, residential mortgages
increased $6,547,288 or 44.13% and personal banklines increased 34.48% or
$6,286,615 from September 30, 2008 to September 30, 2009. Commercial
real estate loans increased $22,084,007 or 23.98%, residential mortgages
increased $5,128,912 or 31.55% and personal banklines increased $4,206,625 or
20.71% from December 31, 2008.
INVESTMENT SECURITIES
AVAILABLE FOR SALE
The
Company uses 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 pledges on public funds. Investments are classified
into three categories (1) Held to Maturity (2) Trading and (3) Available for
Sale. Management believes that maintaining its securities in the Available for
Sale category provides greater flexibility in the management of the overall
investment portfolio. The average yield on investments at September
30, 2009 was 4.14% compared to 4.39% at September 30, 2008. The
carrying values of the investments available for sale at September 30, 2009 and
2008 and percentage of each category to total investments are as
follows:
INVESTMENT PORTFOLIO
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
US
Treasury Notes
|
|
$ |
2,976,860 |
|
|
$ |
2,959,996 |
|
Government-Sponsored
Enterprises
|
|
|
12,028,603 |
|
|
|
21,014,292 |
|
Municipal
Securities
|
|
|
20,858,408 |
|
|
|
12,012,592 |
|
|
|
$ |
35,863,871 |
|
|
$ |
35,986,880 |
|
|
|
|
|
|
|
|
|
|
US
Treasury Notes
|
|
|
8.30 |
% |
|
|
8.22 |
% |
Government-Sponsored
Enterprises
|
|
|
33.54 |
% |
|
|
58.40 |
% |
Municipal
Securities
|
|
|
58.16 |
% |
|
|
33.38 |
% |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
The
Company accounts for its investment securities in accordance with FASB ASC Topic
320: Investments - Debt and Equity Securities. All securities were
classified as Available for Sale (debt and equity securities that may be sold
under certain conditions), at September 30, 2009 and September 30,
2008. The securities were reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of income taxes. Unrealized losses on
securities due to fluctuations in fair value are recognized when it is
determined that an other than temporary decline in value has occurred. Gains or
losses on the sale of securities are recognized on a specific identification,
trade date basis.
The
amortized cost and fair value of investment securities available for sale are
summarized as follows:
|
|
September 30, 2009
|
|
|
|
AMORTIZED
COST
|
|
|
GROSS
UNREALIZED
GAINS
|
|
|
GROSS
UNREALIZED
LOSSES
|
|
|
ESTIMATED
FAIR
VALUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Notes
|
|
$ |
2,976,860 |
|
|
$ |
165,171 |
|
|
$ |
- |
|
|
$ |
3,142,031 |
|
Government-Sponsored
Enterprises
|
|
|
12,028,603 |
|
|
|
591,202 |
|
|
|
- |
|
|
|
12,619,805 |
|
Municipal
Securities
|
|
|
20,858,408 |
|
|
|
921,205 |
|
|
|
22,511 |
|
|
|
21,757,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
35,863,871 |
|
|
$ |
1,677,578 |
|
|
$ |
22,511 |
|
|
$ |
37,518,938 |
|
The
amortized cost and estimated fair value of investment securities available for
sale at September 30, 2009, by contractual maturity are as follows:
|
|
AMORTIZED
COST
|
|
|
ESTIMATED
FAIR
VALUE
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
3,412,936 |
|
|
$ |
3,527,158 |
|
Due
in one year to five years
|
|
|
14,589,417 |
|
|
|
15,358,440 |
|
Due
in five years to ten years
|
|
|
5,960,169 |
|
|
|
6,381,630 |
|
Due
in ten years and over
|
|
|
11,901,349 |
|
|
|
12,251,710 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
35,863,871 |
|
|
$ |
37,518,938 |
|
September 30, 2009
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Notes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Government-Sponsored
Enterprises
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Municipal
Securities
|
|
|
1,515,001 |
|
|
|
22,511 |
|
|
|
- |
|
|
|
- |
|
|
|
1,515,001 |
|
|
|
22,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,515,001 |
|
|
$ |
22,511 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,515,001 |
|
|
$ |
22,511 |
|
December 31, 2008
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Notes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Government-Sponsored
Enterprises
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Municipal
Securities
|
|
|
1,526,724 |
|
|
|
19,899 |
|
|
|
- |
|
|
|
- |
|
|
|
1,526,724 |
|
|
|
19,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,526,724 |
|
|
$ |
19,899 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,526,724 |
|
|
$ |
19,899 |
|
At
September 30, 2009, there were two Municipal Securities with an unrealized loss
of $22,511 as compared to five Municipal Securities with an unrealized loss of
$19,899, at December 31, 2008. These investments are not considered
other-than-temporarily impaired. The Company has the ability and the
intent to hold these investments until a market price recovery or
maturity. The unrealized losses on these investments were caused by
interest rate increases. The contractual terms of these investments
do not permit the issuer to settle the securities at a price less than the
amortized cost of the investment.
DEPOSITS
Deposits
remain the Company’s primary source of funding for loans and investments.
Average interest bearing deposits provided funding for 70.66% of average earning
assets for the nine months ended September 30, 2009, and 67.17% for the nine
months ended September 30, 2008. The Company encounters strong competition from
other financial institutions as well as consumer and commercial finance
companies, insurance companies and brokerage firms located in the primary
service area of the Bank. However, the percentage of funding provided by
deposits has remained stable. The breakdown of total deposits by type and the
respective percentage of total deposits are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Non-interest
bearing demand
|
|
$ |
49,735,424 |
|
|
$ |
55,896,220 |
|
|
$ |
52,659,020 |
|
Interest
bearing demand
|
|
$ |
50,448,440 |
|
|
$ |
46,750,818 |
|
|
$ |
46,076,897 |
|
Money
market accounts
|
|
$ |
64,423,956 |
|
|
$ |
59,906,162 |
|
|
$ |
64,705,925 |
|
Certificates
of deposit $100,000 and over
|
|
$ |
43,520,164 |
|
|
$ |
22,562,427 |
|
|
$ |
27,356,516 |
|
Other
time deposits
|
|
$ |
17,296,581 |
|
|
$ |
15,863,140 |
|
|
$ |
15,697,678 |
|
Other
savings deposits
|
|
$ |
9,728,599 |
|
|
$ |
8,863,589 |
|
|
$ |
8,290,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits
|
|
$ |
235,153,164 |
|
|
$ |
206,842,356 |
|
|
$ |
214,786,515 |
|
Percentage of Deposits
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Non-interest
bearing demand
|
|
|
21.15 |
% |
|
|
27.02 |
% |
|
|
24.52 |
% |
Interest
bearing demand
|
|
|
21.45 |
% |
|
|
22.60 |
% |
|
|
21.45 |
% |
Money
Market accounts
|
|
|
27.40 |
% |
|
|
27.51 |
% |
|
|
30.13 |
% |
Certificates
of deposit $100,000 and over
|
|
|
18.51 |
% |
|
|
10.91 |
% |
|
|
12.74 |
% |
Other
time deposits
|
|
|
7.35 |
% |
|
|
7.67 |
% |
|
|
7.31 |
% |
Other
savings deposits
|
|
|
4.14 |
% |
|
|
4.29 |
% |
|
|
3.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
Total
deposits increased $28,310,808 or 13.69% to $235,153,164 at September 30, 2009
from $206,842,356 at September 30, 2008 and increased $20,366,649 or 9.48% from
$214,786,515 at December 31, 2008. Total certificates of deposit
$100,000 and over and money market accounts increased 92.89% and 13.21%,
respectively, from September 30, 2008 to September 30,
2009. For the nine months ended September 30, 2009 when
compared to December 31, 2008, certificates of deposit $100,000 and over
increased $16,163,648 or 59.09%, offset by a decrease of 5.55% in non-interest
bearing accounts.
SHORT-TERM
BORROWINGS
The Bank
has a demand note through the US Treasury, Tax and Loan system with the Federal
Reserve Bank of Richmond. The Bank may borrow up to $1,000,000 at
September 30, 2009 and 2008 under the arrangement at an interest rate set by the
Federal Reserve. The note is secured by Government Sponsored
Enterprise Securities with a market value of $1,122,021 at September 30, 2009
and $1,020,696 at September 30, 2008. The amount outstanding under
the note totaled $213,896 and $923,272 at September 30, 2009 and 2008,
respectively. At September 30, 2009, the Company had no outstanding
federal funds purchased with the option to borrow up to $22,000,000 on short
term lines of credit. The Company has also established a Borrower-In-Custody
arrangement with the Federal Reserve. This arrangement permits the
Company to retain possession of loans pledged as collateral to secure advances
from the Federal Reserve Discount Window. The Company established
this arrangement as a secondary source of liquidity. In addition, on September
10, 2009 the Company borrowed $7,500,000 from the Federal Reserve Bank’s Term
Auction Facility (TAF) at a rate of .25% for a term of 84 days. The Board of
Governor’s of the Federal Reserve System established this program to allow
depository institutions to place a bid for an advance from its local Federal
Reserve Bank at a fixed interest rate determined via centralized single-price
auction. The collateral pledged to secure advances from the Federal
Reserve Discount Window, serves as collateral.
Comparison of Three Months
Ended September 30, 2009 to Three Months Ended September 30,
2008
Net
income decreased $575,551 or 80.83% to $136,521, or basic and diluted earnings
per share of $.03 and $.03, respectively, for the three months ended September
30, 2009, from $712,072, or basic and diluted earnings per share of $.18 and
$.18, respectively, for the three months ended September 30, 2008. During the
three months ended September 30, 2009 the Company increased its Allowance for
Loan Losses to $1,110,000 as compared to $85,000 for the three months ended
September 30, 2008. The increase in the Allowance for Loan Losses was based on
management’s evaluation of the adequacy of the Allowance at September 30, 2009,
as discussed in the Allowance for Loan Loss section.
Net Interest
Income
Net
interest income, the major component of the Company’s net income, decreased
$19,378 or .73% to $2,626,561 for the three months ended September 30, 2009,
from $2,645,939 for the three months ended September 30, 2008. Total
interest and fee income decreased $32,827 or 1.09% for the three months ended
September 30, 2009, to $2,971,678 from $3,004,505 for the three months ended
September 30, 2008. This decrease was primarily due to significant
decreases in short-term rates by the Federal Reserve, and the resulting decrease
in yields generated on earning assets (from variable rate loan repricing and new
loans at lower rates). Interest and dividends on federal funds sold decreased
$58,197 or 92.52% to $4,703 for the three months ended September 30, 2009 from
$62,900 for the three months ended September 30, 2008. Interest on
investment securities decreased $56,998 or 13.46% to $366,522 for the three
months ended September 30, 2009 from $423,520 for the three months ended
September 30, 2008.
Average
interest earning assets increased from $218.9 million for the three months ended
September 30, 2008, to $252.2 million for the three months ended September 30,
2009. The yield on interest earning assets decreased 82 basis points
between periods to 4.64% for the three months ended September 30, 2009, compared
to 5.46% for the same period in 2008. This decrease is primarily due to a
decrease in the yield on federal funds sold of 198 basis points and a decrease
of 96 basis points in loans.
Total
interest expense decreased $13,449 or 3.75% to $345,117 for the three months
ended September 30, 2009, from $358,566 for the three months ended September 30,
2008. The decrease in interest expense is primarily due to a decrease
in average cost of deposits. Interest on deposits for the three
months ended September 30, 2009, was $340,391 compared to $356,618 for the three
months ended September 30, 2008, a decrease of $16,227 or
4.55%. Total interest bearing deposits averaged approximately $176.8
million for the three months ended September 30, 2009, as compared to $146.4
million for the three months ended September 30, 2008. The average cost of
interest bearing deposits was .76% and .97% for the three months ended September
30, 2009 and 2008, respectively, a decrease of 21 basis points. Short term
borrowings for the three months ended September 30, 2009 averaged approximately
$7.9 million as
compared
to $443,675 for the three months ended September 30, 2008.
Allowance for Loan
Losses
The
allowance for loan losses represents management’s estimate of probable losses
inherent in the loan portfolio. The adequacy of the allowance for
loan losses (the “Allowance”) is reviewed monthly by the Loan Committee and on a
quarterly basis by the Board of Directors. For purposes of this
analysis, adequacy is defined as a level sufficient to absorb estimated losses
in the loan portfolio as of the balance sheet date presented. The
methodology employed for this analysis was modified in the third quarter of
2007, the fourth quarter of 2008 and again in the third quarter 2009. The
revised methodology is based on a Reserve Model that is comprised of the three
components listed below.
|
1)
|
Specific
Reserve analysis for impaired loans based on SFAS 114 “Accounting by
Creditors for Impairment of a Loan, an amendment of FASB Statements No. 5
and 15.” (FASB ASC
310-10-35).
|
|
2)
|
General
reserve analysis applying historical loss rates based on SFAS No 5
“Accounting for Contingencies,” (FASB ASC
450-20).
|
|
3)
|
Qualitative
or environmental factors.
|
Loans are
reviewed for impairment which is measured in accordance with SFAS No. 114
“Accounting by Creditors for Impairment of a Loan, an amendment of FASB
Statements No. 5 and 15.” (FASB ASC 310-10-35). Impaired loans can either be
secured or unsecured, not including large groups of smaller balance loans that
are collectively evaluated. Impairment is measured by the difference
between the loan amount and the present value of the future cash flow discounted
at the loan’s effective interest rate, or, alternatively the fair value of the
collateral if the loan is collateral dependent. An impaired loan may
not represent an expected loss.
A general
reserve analysis is performed on individually reviewed loans, but not impaired
loans, and excluded individually reviewed impaired loans, based on SFAS No. 5
“Accounting for Contingencies,” (FASB ASC 450-20). Historical losses are
segregated into risk-similar groups and a loss ratio is determined for each
group over a three year period. The three year average loss ratio by type is
then used to calculate the estimated loss based on the current balance of each
group. The company shortened its historical loss percentage for this
component from five years to three years. The change resulted in an
increase in the historical loss percentage from .64% to .91%. This
increase was reasonable given the Company’s historical lack of losses and, more
importantly, represents the current lending environment.
Qualitative
and environmental factors include external risk factors that Management believes
are representative of the overall lending environment of the
Bank. Management believes that the following factors create a more
comprehensive system of controls in which the Bank can monitor the quality of
the loan portfolio.
|
2)
|
National
and local economic trends and
conditions
|
|
3)
|
Effects
of changes in risk selection and underwriting
practices
|
|
4)
|
Experience,
ability and depth of lending management
staff
|
|
6)
|
Effects
of changes in credit concentrations
|
|
7)
|
Loan
and credit administration risk
|
Portfolio
risk includes the levels and trends in delinquencies, impaired loans and changes
in the loan rating matrix, trends in volume and terms of loans and overmargined
real estate lending. Management is satisfied with the stability of the past due
and non-performing loans and believes there has been no decline in the quality
of the loan portfolio due to any trend in delinquent or adversely classified
loans. Although the aggregate total of classified loans has increased,
management is confident in the adequacy of the sources of
repayment. Sizable unsecured principal balances on a non-amortizing
basis are monitored. Within the portfolio risk factor the Company
elected to increase the risk percentage for “trends in volume and term of loan”
as a result of the increased volume in its loan portfolio. Loans have
increased 21% or approximately $36,359,783 from September 30, 2008 to September
30, 2009. In addition the Company elected to increase the risk percentage for
“over margined real estate lending risk”. Although the vast majority
of the Company’s real estate loans are underwritten on a cash flow basis, the
secondary source of repayment is typically tied to the Company’s ability to
realize on the collateral. Given the contraction in real estate values, the
Company closely monitors its loan to value. The Company recently
amended its Loan Policy to allow for a maximum 80% collateral advance percentage
on real estate transactions.
Although
significantly under the threshold of 100% of capital (currently approximately
$27 million), the Company’s list and number of over margined real estate loans
currently totals approximately $16 million or approximately 7.5% of its loan
portfolio.
Management
revised the credit rating matrix in order to rate all extensions of credit
providing a more specified picture of the risk each loan poses to the quality of
the loan portfolio. There are eight possible ratings based on ten
different qualifying characteristics. The ten characteristics are: cash flow,
collateral quality, guarantor strength, financial condition, management quality,
operating performance, the relevancy of the financial statements, historical
loan performance, debt service coverage and the borrower’s leverage. A weighted
average method is used to determine the loan grade with cash flow and financial
statements being weighted double. The matrix is designed to meet management’s
standards and expectations of loan quality. In addition to the rating
matrix, the Company rates its credit exposure on the basis of each loan and the
quality of each borrower.
Occasional
extensions of credit occur beyond the policy thresholds of the Company’s normal
collateral advance margins for real estate lending. The aggregate of
these loans represents 7.48% of the Company’s total loans. These
loans are monitored and the balances reported to the Board every quarter. An
excessive level of this practice could result in additional examiner scrutiny,
competitive disadvantages and potential losses if forced to convert the
collateral. The consideration of overmargined real estate loans directly relates
to the capacity of the borrower. Management often requests additional collateral
to bring the loan to value ratio within the policy guidelines and also require a
strong secondary source of repayment in addition to the primary source of
repayment.
National
and local economic trends and conditions are constantly changing and results in
both positive and negative impact on borrowers. Most macroeconomic
conditions are not controllable by the Company and are incorporated into the
qualitative risk factors. Natural disasters, wars and the recent fallout of the
subprime lending market as well as problems in the traditional mortgage market
are a few of the trends and conditions that are currently affecting the
Company’s national and local economy. Changes in the national and
local economy have impacted borrowers’ ability, in many cases, to repay loans in
a timely manner. On occasion a loan’s primary source of repayment
(i.e., personal income, cash flow, or lease income) may be eroded as a result of
unemployment, lack of revenues, or the inability of a tenant to make rent
payments. According to the Bureau of Labor Statistics, national
unemployment as of September 30, 2009, is 9.70% and, for the State of South
Carolina, 11.5%. Local vacancy rates have increased to over
8%. Accordingly, the Company has elected to increase the risk
percentage for this factor.
The
quality of the Bank’s loan portfolio is contingent upon its risk selection and
underwriting practices. Every credit with over $100,000 in exposure
is summarized by the Bank’s Credit Department and reviewed by the Loan Committee
on a monthly basis. The Board of Directors review credits over
$500,000 monthly with an annual credit analysis is conducted on credits in
excess of $350,000 upon the receipt of updated financial information. Prior to
any extension of credit, every significant commercial loan goes through sound
credit underwriting. The Credit Department conducts detailed cash
flow analysis on each proposal using the most current financial
information. Relevant trends and ratios are evaluated.
The Bank
has over 300 years of lending management experience among eleven members of its
lending staff. In addition to the lending staff the Bank has an
Advisory Board for each branch comprised of business and community leaders from
the specific branch’s market area. Management meets with these boards
quarterly to discuss the trends and conditions in each respective market.
Management is aware of the many challenges currently facing the banking
industry. Specifically, assessing banks to replenish the insurance
fund and its corresponding impact on bank profits, increased regulatory scrutiny
in and or on lending practices, pending changes in deposit and or funding source
type and mix, to name a few, continue to impact the Company’s
environment. As other banks look to increase earnings in the short
term, the Company will continue to emphasize the need to maintain its sound
lending practices and core deposit growth. Accordingly the Company
has elected to increase the risk percentage for this factor.
There has
been an influx of new banks within the Company’s geographic
area. This increase has decreased the local industry’s overall
margins as a result of pricing competition. Management believes that
the borrowing base of the Bank is well established and therefore unsound price
competition is not necessary.
The risks
associated with the effects of changes in credit concentration include loan
concentration, geographic concentration and regulatory
concentration.
As of
September 30, 2009, there were only four Standard Industrial Code groups that
comprised more than three percent of the Bank’s total outstanding
loans. The four groups are non-residential building operations,
offices and clinics of doctors, real estate agents and managers and legal
services.
The
Company is located along the coast and on an earthquake fault, increasing the
chances that a natural disaster may impact the Bank and its
borrowers. The Company has a Disaster Recovery Plan in place,
however, the amount of time it would take for its customers to return to normal
operations is unknown.
Loan and
credit administration risk includes collateral documentation, insurance risk and
maintaining financial information risk.
The
majority of the Bank’s loan portfolio is collateralized with a variety of its
borrowers assets. The execution and monitoring of the documentation
to properly secure the loan lies with the Bank’s lenders and Loan
Department. The Bank requires insurance coverage naming the Bank as
the mortgagee or loss payee. Although insurance risk is also
considered collateral documentation risk, the actual coverage, amounts of
coverage and increased deductibles are important to management.
Risk
includes a function of time and the borrower’s financial condition may change;
therefore, keeping financial information up to date is important to the
Bank. The policy of the Bank is that all new loans, regardless of the
customer’s history with the Bank, should have updated financial information, as
long as exposure is greater than $10,000.
The
aforementioned changes to the Company’s Allowance for Loan Loss methodology were
not made as a result of dramatic or patterned history of loan losses, increases
in past due loans, or non-performing assets, but rather because of specific
changes in the Company’s lending environment. These changes have
precipitated the need for additional reserves in a period of time when the
Company’s loan portfolio has grown significantly. Based on the
evaluation described above, the Company recorded a provision for loan losses
during the three months ended September 30, 2009 of $1,110,000, compared to a
provision of $85,000 for the three months ended September 30,
2008. At September 30, 2009 the three year average loss ratios were:
..459% Commercial, .322% Consumer, .012% 1-4 Residential, .000% Real Estate
Construction and .043% Real Estate Mortgage. The historical loss
ratio used at September 30, 2009 was .91% compared to .065% (five year
historical loss ratio) at September 30, 2008.
During
the quarter ended September 30, 2009, there were charge-offs of $261,918 and
recoveries of $857 were recorded to the allowance for loan losses resulting in
an allowance for loan losses of $2,013,259 or .95% of total loans. During the
three months ended September 30, 2008, there were charge-offs of $75,965 and
recoveries of $5,861 recorded to the allowance for loan losses resulting in an
allowance for loan losses of $1,365,761 or .79% of total loans.
The Bank
had impaired loans totaling $1,844,204 as of September 30, 2009, compared to
$64,416 as of September 30, 2008. The impaired loans at September 30,
2009 include four non-accrual loans with a combined balance of $240,667.
Impaired loans at September 30, 2008 included two non-accrual loans with a
combined balance of $12,847 and one loan classified by the examiners/auditors as
impaired with a combined balance of $41,000. Included in the impaired loans is
one credit totaling $1,211,166 which is secured by accounts receivable,
inventory and furniture, fixtures and equipment. Management does not know of any
loans which will not meet their contractual obligations that are not otherwise
discussed herein.
The
accrual of interest is generally discontinued on loans, which become 90 days
past due as to principal or interest. The accrual of interest on some
loans, however, may continue even though they are 90 days past due if the loans
are well secured or in the process of collection and management deems it
appropriate. If non-accrual loans decrease their past due status to
less than 30 days for a period of nine months, they are reviewed individually by
management to determine if they should be returned to accrual status. There were
no loans over 90 days past due still accruing interest as of September 30, 2009
and one loan over 90 days past due still accruing interest as of September 30,
2008.
Net
charge-offs for the three months ended September 30, 2009 were $261,061 compared
to net charge-offs of $70,104 for the three months ended September 30, 2008.
Uncertainty in the economic outlook still exists, making charge-off levels in
future periods less predictable; however, loss exposure in the portfolio is
identified, reserved and closely monitored to ensure that changes are promptly
addressed in the analysis of reserve adequacy.
The
Company had $382,615 unallocated reserves at September 30, 2009 related to other
inherent risk in the portfolio compared to no unallocated reserves at September
30, 2008. Management believes the allowance for loan losses at September 30,
2009, is adequate to cover estimated losses in the loan portfolio; however,
assessing the adequacy of the allowance is a process that requires considerable
judgment. Management's judgments are based on numerous assumptions
about current events which it believes to be reasonable, but which may or may
not be valid. Thus there can be no assurance that loan losses in
future periods will not exceed the current allowance amount or that future
increases in the allowance will not be required. No assurance can be
given that management's ongoing evaluation of the loan portfolio in light of
changing economic conditions and other relevant circumstances will not require
significant future additions to the allowance, thus adversely affecting the
operating results of the Company.
The
Allowance is also subject to examination testing by regulatory agencies, which
may consider such factors as the methodology used to determine adequacy and the
size of the Allowance relative to that of peer institutions, and other adequacy
tests. In addition, such regulatory agencies could require the
Company to adjust its Allowance based on information available to them at the
time of their examination.
The
methodology used to determine the reserve for unfunded lending commitments,
which is included in other liabilities, is inherently similar to that used to
determine the allowance for loan losses described above adjusted for factors
specific to binding commitments, including the probability of funding and
historical loss ratio. During the three months ended September 30,
2009, no entry was made to the allowance for unfunded loans and commitments
leaving a balance of $20,825.
Other
Income
Other
income for the three months ended September 30, 2009, increased $187,069 or
57.03% to $515,102 from $328,033 for the three months ended September 30,
2008. This increase is primarily due to an increase in mortgage
banking income of $103,182 or 123.59% to $186,669 for the three months ended
September 30, 2009 as compared to $83,487 for the three months ended September
30, 2008. Mortgage origination fees, discount fees and service release premiums
increased 170.52%, 275.56% and 156.16%, respectively. This increase is primarily
due to a decrease in mortgage rates allowing for new home purchases and current
home owners to refinance, taking advantage of lower rates. Service charges, fees
and commissions also increased 10.87% to $262,490 from $236,758 for the three
months ended September 30, 2009 and 2008, respectively. Activity service charges
on business accounts increased 83.61%, due to a reduction in the earnings
credit. The Company realized a gain of $57,756 on the sale of an investment
security during the three months ended September 30, 2009, and a loss of $238 on
a municipal bond called during the three months ended September 30,
2008.
Other
Expense
Bank
overhead increased $63,723 or 3.55% to $1,858,576 for the three months ended
September 30, 2009, from $1,794,853 for the three months ended September 30,
2008. Other operating expenses increased $56,427 or 13.68% to
$468,798 for the three months ended September 30, 2009, from $412,371 for the
three months ended September 30, 2008. Fees paid to the FDIC
increased 137.13% to $74,948 for the three months ended September 30, 2009, from
$31,527 for the three months ended September 30, 2008.
Income Tax
Expense
For the
three months ended September 30, 2009, the Company’s effective tax rate was
21.13% compared to 34.92% during the three months ended September 30,
2008.
Comparison of Nine Months
Ended September 30, 2009 to Nine Months Ended September 30,
2008
Net
income decreased $556,551 or 25.82%, for the nine months ended September 30,
2009, to $1,598,884 (basic and diluted earnings per share of $.40) from
$2,155,435 (basic and diluted earnings per share of $.54) for the nine months
ended September 30, 2008. During the nine months ended September 30, 2009 the
Company increased its contribution to the Allowance for Loan Losses to
$1,274,000 as compared to $115,000 for the nine months ended September 30,
2008. This increase was based on management’s evaluation of the
Allowance for Loan Losses at September 30, 2009, as discussed previously. The
increase in outstanding loans, as well as the current economic and regulatory
environment, resulted in Management’s decision to increase the Allowance for
Loan Losses.
Net Interest
Income
Net
interest income, the Company’s primary source of revenue, is the difference
between interest earned on assets, including loan fees and interest on
investment securities, and the interest incurred for the liabilities to support
such assets. Net interest income decreased $182,280 or 2.35% to
$7,584,434 for the nine months ended September 30, 2009, from $7,766,714 for the
nine months ended September 30, 2008. Total interest and fee income
decreased $706,545 or 7.59% to $8,600,938 for the nine months ended September
30, 2009 from $9,307,483 for the nine months ended September 30,
2008. This decrease was primarily due to significant decreases in the
Federal Reserve short-term rates and the resulting decrease in yields generated
on earning assets (from variable rate loan repricing and new loans made at lower
rates). Interest and fees on loans decreased 4.37% from $7,795,453
for the nine months ended September 30, 2008, to $7,454,735. Average
loans increased from $162.0 million for the nine months ended September 30,
2008, to $198.6 million for the nine months ended September 30,
2009. The yield on average loans decreased 141 basis points from
6.43% at September 30, 2008, to 5.02% for the nine months ended September 30,
2009. Interest earned on federal funds sold decreased $287,885 to
$10,916 for the nine months ended September 30, 2009, from $298,801 for the nine
months ended September 30, 2008.
Interest
on investment securities decreased 6.42% to $1,135,287 for the nine months ended
September 30, 2009. The yield on average federal funds sold decreased
225 basis points from 2.45% for the nine months ended September 30, 2008 to .20%
for the nine months ended September 30, 2009. Average earning assets
increased from $215.6 million to $243.4 million for the nine months ended
September 30, 2008 and 2009, respectively. The yield on average
earning assets decreased 105 points to 4.72% for the nine months ended September
30, 2009, from 5.77% for the nine months ended September 30, 2008.
Provision for Loan
Losses
The
provision for loan losses for the nine months ended September 30, 2009 was
$1,274,000 compared to $115,000 for the nine months ended September 30,
2008. Net charge-offs for the nine months ended September 30, 2009
were $690,576 compared to $84,338 for the nine months ended September 30,
2008. Charge-offs for the nine months ended September 30, 2009 were
$694,383 with recoveries of $3,807, resulting in an allowance for loan losses of
$2,013,259 or .95% of total loans. This compares to charge-offs of $97,951 and
recoveries of $13,613 for the nine months ended September 30, 2008, for a total
allowance of $1,365,761, or .79% of total loans. Loss exposure
in the portfolio is identified, reserved and closely monitored to ensure that
changes are promptly addressed in the analysis of the reserve.
Other
Income
Total
other income includes service charges, fees and commissions, mortgage banking
income, other non-interest income. Other income decreased $1,537 or 7.60% to
$18,698 for the nine months ended September 30, 2009, from $20,235 for the nine
months ended September 30, 2008. Mortgage banking income increased $404,325 or
111.14% for the nine months ended September 30, 2009. This increase
is primarily due to a decrease in mortgage rates allowing home owners to
refinance, taking advantage of lower rates. The Company also
recognized a gain on the sale of investments of $180,071 for the nine months
ended September 30, 2009. There was one municipal bond called for a
loss of $238 during the nine months ended September 30, 2008.
Other
Expense
Bank
overhead increased $220,699 or 4.07% to $5,638,445 for the nine months ended
September 30, 2009. Other operating expense increased $241,513 to
$1,503,952 for the nine months ended September 30, 2009, from $1,262,439 for the
nine months ended September 30, 2008. Fees paid to the FDIC increased
430.42% to $300,875 for the nine months ended September 30, 2009, from $56,724
for the nine months ended September 30, 2008. This increase is due to
the FDIC Insurance Reform Legislation that allows the FDIC to price deposit
insurance according to risk for all insured institutions regardless of the level
of the reserve ratio. In addition $115,808 for a 5% special assessment by the
FDIC was accrued June 30, 2009 and was paid September 30, 2009.
Income Tax
Expense
The
Company’s effective tax rate for the nine months ended September 30, 2009 was
34.34%, compared to 35.34% for the nine months ended September 30,
2008.
Off Balance Sheet
Arrangements
In the
normal course of operations, the Company engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in the financial statements, or are recorded in amounts that
differ from the notional amounts. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity
risk. Such transactions are used by the Company for general corporate
purposes or for customer needs. Corporate purpose transactions are
used to help manage credit, interest rate and liquidity risk or to optimize
capital. Customer transactions are used to manage customer’s requests
for funding.
The
Company’s off-balance sheet arrangements consist principally of commitments to
extend credit described below. The Company estimates probable losses
related to binding unfunded lending commitments and records a reserve for
unfunded lending commitment in other liabilities on the consolidated balance
sheet. The balance of the reserve was $20,825 at September 30, 2009
and 2008. The Company had no interests in non-consolidated special purpose
entities.
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 management's 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 $50,266,385 and $47,148,909 at September 30, 2009 and
2008, respectively.
Standby
letters of credit represent an obligation of the Company to a third party
contingent upon the failure of the Company’s customer to perform under the terms
of an underlying contract with the third party or obligates the Company 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. The Company can seek recovery of the amounts paid from the
borrower. The majority of these standby letters of credit are unsecured.
Commitments under standby letters of credit are usually for one year or less.
The maximum potential amount of undiscounted future payments related to standby
letters of credit at September 2009 and 2008, was $521,610 and $980,838,
respectively.
The
Company originates certain fixed rate residential loans and commits these loans
for sale. The commitments to originate fixed rate residential loans
and the sale commitments are freestanding derivative instruments. The fair value
of the commitments to originate fixed rate conforming loans was not significant
at September 30, 2009. The Company has forward sales commitments, totaling $3.8
million at September 30, 2009, to sell loans held for sale of $3.8 million. The
fair value of these commitments was not significant at September 30,
2009. The Company has no embedded derivative instruments requiring
separate accounting treatment.
Liquidity
The
Company must maintain an adequate liquidity position in order to respond to the
short-term demand for funds caused by withdrawals from deposit accounts,
extensions of credit and for the payment of operating expenses. Primary liquid
assets of the Company are cash and due from banks, federal funds sold,
investments available for sale, other short-term investments and mortgage loans
held for sale. The Company’s primary liquid assets accounted for
21.52% and 25.03% of total assets at September 30, 2009 and 2008, respectively.
Proper liquidity management is crucial to ensure that the Company is able to
take advantage of new business opportunities as well as meet the credit needs of
its existing customers. Investment securities are an important tool
in the Company's liquidity management. Securities classified as
available for sale may be sold in response to changes in interest rates and
liquidity needs. All of the securities presently owned by the Bank are
classified as available for sale. At September 30, 2009, the Bank had short-term
lines of credit totaling approximately $22,000,000 (which are withdrawable at
the lender's option), with no outstanding balance at September 30,
2009. Additional sources of funds available to the Bank for
additional liquidity needs include borrowing on a short-term basis from the
Federal Reserve System, increasing deposits by raising interest rates paid and
selling mortgage loans for sale. In order to establish a secondary
source of liquidity, the Company has established a Borrower-In-Custody
arrangement with the Federal Reserve. This arrangement permits the
Company to retain possession of assets pledged as collateral to secure advances
from the Federal Reserve Discount Window.
As
of September 30, 2009 the Company could borrow up to
$56,190,912. In addition, on September 18, 2009 the Company
borrowed $7,500,000 from the Federal Reserve Bank’s Term Auction Facility (TAF)
at a rate of .25% for a term of 84 days. The Board of Governor’s of the Federal
Reserve System established this program to allow depository institutions to
place a bid for an advance from its local Federal Reserve Bank at a fixed
interest rate determined via centralized single-price auction. The
collateral pledged to secure advances from the Federal Reserve Discount Window,
serves as collateral.
The
Company’s core deposits consist of non-interest bearing accounts, NOW accounts,
money market accounts, time deposits and savings accounts. The Company closely
monitors its reliance on certificates of deposit greater than $100,000 and other
large deposits. The Company's management believes its liquidity sources are
adequate to meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse effect on the Company's
liquidity position. At September 30, 2009 and 2008, the Bank's liquidity ratio
was 8.48% and 14.75%, respectively.
Capital
Resources
The
capital needs of the Company have been met to date through the $10,600,000 in
capital raised in the Bank’s initial offering, the retention of earnings less
dividends paid and the exercise of stock options for total shareholders' equity
at September 30, 2009 of $27,552,726. The rate of asset growth since
the Bank's inception has not negatively impacted this capital base. The
risk-based capital guidelines for financial institutions are designed to
highlight differences in risk profiles among financial institutions and to
account for off balance sheet risk. The guidelines established
require a risk based capital ratio of 8% for bank holding companies and
banks. The risk based capital ratio at September 30, 2009, for the
Bank is 11.92% and at September 30, 2008 was 13.37 %. The Company's
management does not know of any trends, events or uncertainties that may result
in the Company's capital resources materially increasing or
decreasing.
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory – and possibly additional
discretionary – actions by regulators that, if undertaken, could have a material
effect on the financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
Company’s and the Bank’s assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Company’s and the
Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and to average assets. Management
believes, as of September 30, 2009, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
At
September 30, 2009 and 2008, the Company and the Bank were categorized as “well
capitalized” under the regulatory framework for prompt corrective action. To be
categorized as “well capitalized” the Company and the Bank must maintain minimum
total risk based, Tier 1 risk based and Tier 1 leverage ratios of 10%, 6% and
5%, respectively, and to be categorized as “adequately capitalized,” the Company
and the Bank must maintain minimum total risk based, Tier 1 risk based and Tier
1 leverage ratios of 8%, 4% and 4%, respectively. There are no current
conditions or events that management believes would change the Company’s or the
Bank’s category.
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 was carried out under the supervision and with the participation of
Bank of South Carolina Corporation’s management, including its Principal
Executive Officer and the Executive Vice President and Treasurer, of the
effectiveness of Bank of South Carolina Corporation’s disclosure controls and
procedures as of September 30, 2009. Based on that evaluation, Bank
of South Carolina Corporation’s management, including the Chief Executive
Officer and Executive Vice President and Treasurer, has concluded that Bank of
South Carolina Corporation’s disclosure controls and procedures are
effective. During the period ending September 30, 2009, there was no
change in Bank of South Carolina Corporation’s internal control over financial
reporting that has materially affected or is reasonably likely to materially
affect, Bank of South Carolina Corporation’s internal control over financial
reporting.
The
Company established a Disclosure Committee on December 20, 2002. The committee
is made up of the President and Chief Executive Officer, Executive Vice
President and Treasurer, Executive Vice President, Senior Vice President
(Operations), Vice President (Audit Compliance Officer), Vice President
(Accounting) and Assistant Vice President (Credit Department). This Committee
meets quarterly to review the 10Q and or the 10K, to assure that the financial
statements, Securities and Exchange Commission filings and all public releases
are free of any material misstatements and correctly reflect the financial
position, results of operations and cash flows of the Company. This
Committee also assures that the Company is in compliance with the Sarbanes-Oxley
Act.
The
Disclosure Committee establishes a calendar each year to assure that all filings
are reviewed and filed in a proper manner. The calendar includes the
dates of the Disclosure Committee meetings, the dates that the 10Q and or the
10K are sent to its independent accountants and to its independent counsel for
review as well as the date for the Audit Committee of the Board of Directors to
review the reports.
PART II
OTHER INFORMATION
Item 1. Legal
Proceedings
The
Company and its subsidiary from time to time are involved as plaintiff or
defendant in various legal actions incident to its business. These
actions are not believed to be material either individually or collectively to
the consolidated financial condition of the Company or its
subsidiary.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item 3. Defaults
Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item 5. Other
Information
None.
Item
6. Exhibits
1.
|
The
Consolidated Financial Statements are included in this Form 10-Q and
listed on pages as indicated.
|
|
|
Page
|
|
|
|
|
|
|
(1)
|
Consolidated
Balance Sheets
|
3
|
|
(2)
|
Consolidated
Statements of Operations for the three months ended September 30, 2009 and
2008
|
4
|
|
(3)
|
Consolidated
Statements of Operations for the nine months ended September 30, 2009 and
2008
|
5
|
|
(4)
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive
Income
|
6
|
|
(4)
|
Consolidated
Statements of Cash Flows
|
7
|
|
(5)
|
Notes
to Consolidated Financial Statements
|
8-16
|
2.
|
Exhibits
|
|
|
|
|
|
|
|
2.0
|
Plan
of Reorganization (Filed with 1995 10-KSB)
|
|
|
3.0
|
Articles
of Incorporation of the Registrant (Filed with 1995
10-KSB)
|
|
|
3.1
|
By-laws
of the Registrant (Filed with 1995 10-KSB)
|
|
|
4.0
|
2008
Proxy Statement (Filed with 2008 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)
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to 15 U.S.C. 78m(a) or 78 o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
|
|
|
31.2
|
Certification
of Principal Financial Officer Pursuant to 15 U.S.C. 78m(a) or 78 o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. 1350 (Section 906 of
the Sarbanes-Oxley Act of 2002)
|
|
|
32.2
|
Certification
of the Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906
of the Sarbanes-Oxley Act of 2002)
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
BANK
OF SOUTH CAROLINA CORPORATION
|
|
|
October
28, 2009
|
|
|
BY:
/s/Hugh C. Lane, Jr.
|
|
Hugh
C. Lane, Jr.
|
|
President
and Chief Executive Officer
|
|
|
|
BY:
/s/William L. Hiott, Jr.
|
|
William
L. Hiott, Jr.
|
|
Executive
Vice President &
Treasurer
|