Form 10-Q BANK OF SOUTH CAROLINA For: Sep 30

 

 

United States
Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

☒

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

 

For the quarterly period ended September 30, 2019

 

☐

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

Yes  ☒   No  ☐ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

Yes  ☒   No  ☐ 

 

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

 

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

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock	BKSC	NASDAQ

 

As of October 15, 2019, there were 5,530,001 Common Shares outstanding.

 

 

 

Part I. Financial Information		Page
Item 1.	Financial Statements
Consolidated Balance Sheets – September 30, 2019 and December 31, 2018		3
Consolidated Statements of Income – Three months ended September 30, 2019 and 2018		4
Consolidated Statements of Income – Nine months ended September 30, 2019 and 2018		5
Consolidated Statements of Comprehensive Income – Nine months ended September 30, 2019 and 2018		6
Consolidated Statements of Shareholders’ Equity – Nine months ended September 30, 2019 and 2018		7
Consolidated Statements of Cash Flows – Nine months ended September 30, 2019 and 2018		8
Notes to Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Off-Balance Sheet Arrangements		30
Liquidity		30
Capital Resources		31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
Part II. Other Information
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosure	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
Signatures		35
Certifications		36

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

  BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

 CONSOLIDATED BALANCE SHEETS

		(Unaudited)				(Audited)
		September 30,				December 31,
		2019				2018
ASSETS
Cash and due from banks		$	7,165,177			$	6,325,457
Interest-bearing deposits at the Federal Reserve			51,250,282				25,506,784
Investment securities available for sale			98,297,968				119,668,874
Mortgage loans to be sold			4,935,431				1,199,438
Loans			275,527,284				274,664,267
Less: Allowance for loan losses			(4,141,415	)			(4,214,331	)
Net loans			271,385,869				270,449,936
Premises, equipment and leasehold improvements,  net			3,658,203				2,335,207
Right of use asset			13,325,792				—
Accrued interest receivable			1,351,401				1,561,915
Other assets			1,690,242				2,087,587
Total assets		$	453,060,365			$	429,135,198
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest bearing demand		$	127,564,403			$	130,940,138
Interest bearing demand			114,347,461				94,207,731
Money market accounts			87,925,624				87,300,433
Time deposits over $250,000			6,200,799				15,909,991
Other time deposits			17,412,508				18,558,734
Other savings deposits			33,753,552				35,461,361
Total deposits			387,204,347				382,378,388
Accrued interest payable and other liabilities			2,209,735				1,294,249
Lease liability			13,325,792				—
Total liabilities			402,739,874				383,672,637
Shareholders’ equity
Common stock - no par 12,000,000 shares authorized; Issued 5,799,637 shares at September 30, 2019 and 5,777,474 shares at December 31, 2018. Shares outstanding 5,530,001 and 5,510,917 at September 30, 2019 and December 31, 2018, respectively.			—				—
Additional paid in capital			47,110,889				46,857,734
Retained earnings			4,990,680				2,650,296
Treasury stock: 269,636 and 269,035 shares at September 30, 2019 and December 31, 2018, respectively.			(2,325,225	)			(2,268,264	)
Accumulated other comprehensive income (loss), net of income taxes			544,147				(1,777,205	)
Total shareholders’ equity			50,320,491				45,462,561
Total liabilities and shareholders’ equity		$	453,060,365			$	429,135,198

 

See accompanying notes to consolidated financial statements.

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

		Three Months Ended
		September 30,
		2019				2018
Interest and fee income
Loans, including fees		$	4,059,536			$	3,905,954
Taxable securities			369,803				465,180
Tax-exempt securities			129,986				171,916
Other			268,359				122,536
Total interest and fee income			4,827,684				4,665,586
Interest expense
Deposits			213,876				195,434
Total interest expense			213,876				195,434
Net interest income			4,613,808				4,470,152
Provision for loan losses			10,000				100,000
Net interest income after provision for loan losses			4,603,808				4,370,152
Other income
Service charges and fees			295,908				284,046
Mortgage banking income			291,082				168,004
Gain on sales of securities			—				—
Other non-interest income			9,080				6,643
Total other income			596,070				458,693
Other expense
Salaries and employee benefits			1,664,631				1,595,706
Net occupancy expense			419,465				389,973
Other operating expenses			497,727				797,319
Net other real estate owned expenses			—				33,476
Total other expense			2,581,823				2,816,474
Income before income tax expense			2,618,055				2,012,371
Income tax expense			603,264				234,218
Net income		$	2,014,791			$	1,778,153
Weighted average shares outstanding
Basic			5,526,233				5,506,649
Diluted			5,595,056				5,589,549
Basic income per common share		$	0.36			$	0.32
Diluted income per common share		$	0.36			$	0.32

 

See accompanying notes to consolidated financial statements.

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

		Nine Months Ended
		September 30,
		2019				2018
Interest and fee income
Loans, including fees		$	12,101,678			$	11,169,692
Taxable securities			1,256,468				1,406,094
Tax-exempt securities			428,822				575,657
Other			546,894				258,019
Total interest and fee income			14,333,862				13,409,462
Interest expense
Deposits			702,860				444,961
Total interest expense			702,860				444,961
Net interest income			13,631,002				12,964,501
Provision for loan losses			155,000				230,000
Net interest income after provision for loan losses			13,476,002				12,734,501
Other income
Service charges and fees			876,394				875,709
Mortgage banking income			671,123				558,473
Gain on sales of securities			28,897				4,735
Other non-interest income			21,178				22,817
Total other income			1,597,592				1,461,734
Other expense
Salaries and employee benefits			4,985,591				4,744,878
Net occupancy expense			1,233,844				1,195,364
Other operating expenses			1,656,531				2,111,968
Net other real estate owned expenses			—				57,613
Total other expense			7,875,966				8,109,823
Income before income tax expense			7,197,628				6,086,412
Income tax expense			1,652,726				969,672
Net income		$	5,544,902			$	5,116,740
Weighted average shares outstanding
Basic			5,519,337				5,496,346
Diluted			5,588,532				5,579,989
Basic income per common share		$	1.00			$	0.93
Diluted income per common share		$	0.99			$	0.92

 

See accompanying notes to consolidated financial statements.

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

		Three Months Ended
		September 30,
		2019				2018
Net income		$	2,014,791			$	1,778,153
Other comprehensive income (loss)
Unrealized gain (loss) on securities arising during the period			368,166				(547,867	)
Other comprehensive income (loss) before tax			368,166				(547,867	)
Income tax effect related to items of other comprehensive income (loss) before tax			(77,315	)			115,052
Other comprehensive income (loss) after tax			290,851				(432,815	)
Total comprehensive income		$	2,305,642			$	1,345,338

 

 

		Nine Months Ended
		September 30,
		2019				2018
Net income		$	5,544,902			$	5,116,740
Other comprehensive income (loss)
Unrealized gain (loss) on securities arising during the period			2,967,317				(2,362,691	)
Reclassification adjustment for securities gains realized in net income			(28,897	)			(4,735	)
Other comprehensive income (loss) before tax			2,938,420				(2,367,426	)
Income tax effect related to items of other comprehensive income (loss) before tax			(617,068	)			497,159
Other comprehensive income (loss) after tax			2,321,352				(1,870,267	)
Total comprehensive income		$	7,866,254			$	3,246,473

 

See accompanying notes to consolidated financial statements.

 

 

BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED) 

 

		Shares Outstanding				Additional Paid in Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total
December 31, 2018			5,510,917			$	46,857,734			$	2,650,296			$	(2,268,264	)		$	(1,777,205	)		$	45,462,561
Net income			—				—				1,689,264				—				—				1,689,264
Other comprehensive income			—				—				—				—				991,936				991,936
Exercise of stock options			5,808				51,265				—				—				—				51,265
Stock-based compensation expense			—				18,881				—				—				—				18,881
Cash dividends ($0.16 per common share)			—				—				(882,676	)			—				—				(882,676	)
March 31, 2019			5,516,725			$	46,927,880			$	3,456,884			$	(2,268,264	)		$	(785,269	)		$	47,331,231
Net income			—				—				1,840,847				—				—				1,840,847
Other comprehensive income			—				—				—				—				1,038,565				1,038,565
Exercise of stock options			8,553				94,977				—				(45,843	)			—				49,134
Stock-based compensation expense			—				18,882								—				—				18,882
Cash dividends ($0.16 per common share)			—				—				(884,044	)			—				—				(884,044	)
June 30, 2019			5,525,278			$	47,041,739			$	4,413,687			$	(2,314,107	)		$	253,296			$	49,394,615
Net income			—				—				2,014,791				—				—				2,014,791
Other comprehensive income			—				—				—				—				290,851				290,851
Exercise of stock options			4,723				49,005				—				(11,118	)			—				37,887
Stock-based compensation expense			—				20,145				—				—				—				20,145
Cash dividends ($0.26 per common share)			—				—				(1,437,798	)			—				—				(1,437,798	)
September 30, 2019			5,530,001			$	47,110,889			$	4,990,680			$	(2,325,225	)		$	544,147			$	50,320,491

 

 

		Shares Outstanding				Additional Paid in Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total
December 31, 2017			4,989,279			$	37,236,566			$	8,847,164			$	(2,247,415	)		$	(1,071,680	)		$	42,764,635
Net income			—				—				1,612,230				—				—				1,612,230
Other comprehensive loss			—				—				—				—				(1,047,998	)			(1,047,998	)
Exercise of stock options			1,600				18,768				—				—				—				18,768
Stock-based compensation expense			—				18,882				—				—				—				18,882
Cash dividends ($0.15 per common share)			—				—				(749,668	)			—				—				(749,668	)
Common stock dividend, 10%			499,088				9,334,342				(9,334,342	)			—				—				—
March 31, 2018			5,489,967			$	46,608,558			$	375,384			$	(2,247,415	)		$	(2,119,678	)		$	42,616,849
Net income			—				—				1,726,357				—				—				1,726,357
Other comprehensive loss			—				—				—				—				(389,454	)			(389,454	)
Exercise of stock options			10,649				104,528				—				(20,849	)			—				83,679
Stock-based compensation expense			—				18,881				—				—				—				18,881
Cash dividends ($0.15 per common share)			—				—				(831,578	)			—				—				(831,578	)
June 30, 2018			5,500,616			$	46,731,967			$	1,270,163			$	(2,268,264	)		$	(2,509,132	)		$	43,224,734
Net income			—				—				1,778,153				—				—				1,778,153
Other comprehensive loss			—				—				—				—				(432,815	)			(432,815	)
Exercise of stock options							91,122				—				—				—				91,122
Stock-based compensation expense			—				15,763				—				—				—				15,763
Cash dividends ($0.25 per common share)			—				—				(1,377,423	)			—				—				(1,377,423	)
September 30, 2018			5,500,616			$	46,838,852			$	1,670,893			$	(2,268,264	)		$	(2,941,947	)		$	43,299,534

 

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,
		2019				2018
Cash flows from operating activities:
Net income		$	5,544,902			$	5,116,740
Adjustments to reconcile net income net cash provided by operating activities:
Depreciation expense			170,690				144,158
Gain on sale of investment securities			(28,897	)			(4,735	)
Loss on sale of other real estate owned			—				33,476
Loss on disposal of premises, equipment, and leasehold improvements, net			—				428
Valuation and other adjustments to other real estate owned			—				23,637
Provision for loan losses			155,000				230,000
Stock-based compensation expense			57,908				53,526
Deferred income taxes			(29,329	)			(166,739	)
Net amortization of unearned discounts on investment securities available for sale			200,138				227,847
Origination of mortgage loans held for sale			(48,507,050	)			(43,444,865	)
Proceeds from sale of mortgage loans held for sale			44,771,057				42,677,361
Decrease in accrued interest receivable and other assets			20,120				64,902
Increase in accrued interest payable and other liabilities			304,326				486,474
Net cash provided by operating activities			2,658,865				5,442,210
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale			7,423,835				6,599,927
Proceeds from sale of investment securities available for sale			20,317,250				21,434,634
Purchase of investment securities available for sale			(3,603,000	)			(9,978,050	)
Proceeds from sale of other real estate owned			—				378,366
Net increase in loans			(1,090,933	)			(4,446,631	)
Purchase of premises, equipment, and leasehold improvements, net			(1,493,686	)			(214,065	)
Net cash provided by investing activities			21,553,466				13,774,181
Cash flows from financing activities:
Net increase (decrease) in deposit accounts			4,825,959				(19,847,042	)
Dividends paid			(2,593,358	)			(2,322,116	)
Stock options exercised			138,286				193,569
Net cash provided by (used in) financing activities			2,370,887				(21,975,589	)
Net increase (decrease) in cash and cash equivalents			26,583,218				(2,759,198	)
Cash and cash equivalents at the beginning of the period			31,832,241				32,520,219
Cash and cash equivalents at the end of the period		$	58,415,459			$	29,761,021
Supplemental disclosure of cash flow data:
Cash paid during the period for:
Interest		$	819,131			$	391,972
Income taxes		$	1,152,918			$	963,571
Supplemental disclosures for non-cash investing and financing activity:
Change in unrealized gain on securities available for sale, net of income taxes		$	(2,321,352	)		$	1,870,267
Change in dividends payable		$	611,160			$	636,553
Right of use assets obtained in exchange for lease obligations		$	13,519,027			$	—
Change in right of use assets and lease liabilties		$	(193,235	)		$	—

 

See accompanying notes to consolidated financial statements.

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1: Nature of Business and Basis of Presentation

 

Organization

 

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

 

Principles of Consolidation

 

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

 

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

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for the interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 4, 2019. In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

 

Accounting Estimates and Assumptions

 

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

 

Reclassification

 

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

 

Income per share

 

Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Dilutive income per share is computed by dividing net income by the weighted-average number of common shares and potential common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price of common stock. Retroactive recognition has been given for the effects of all stock dividends.

 

Subsequent Events

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. We have reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Recent Accounting Pronouncements

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which revises certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 – Leases. This update clarifies how to apply certain aspects of the new leases standard. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which gives entities another option for transition and to provide lessors with a practical expedient. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, providing narrow-scope improvements for lessors, that provides relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. The amendments became effective for January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The Bank has chosen to use the effective date, January 1, 2019, as its date of initial application; therefore, the financial information will not be provided for dates or periods prior to January 1, 2019. The Bank considered all relevant contractual provisions, including renewal and termination options, and determined the remaining lease terms of each respective lease. The Bank considered past practices, market area, and contract terms of all leases and assumed all renewal options will be exercised. The weighted average remaining lease term is 18.45 years. To determine the incremental borrowing rate, the Bank used the rate of interest it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment, which the Bank determined was 5.50% at the time of implementation. The Bank does not have any finance leases or material subleases or leasing arrangements in which it is the lessor of the property or equipment. The adoption of this standard did not materially affect the change in the Bank's recognition of lease expense in future periods. For the nine months ended September 30, 2019, the Bank had total lease expense of $478,778, of which $46,260 was for a short-term lease. The most significant impact was the recognition of right of use assets and lease liabilities for operating leases of approximately $7.3 million on January 1, 2019. The right of use asset and lease liability related to the North Charleston location of approximately $6.0 million was recognized during the quarter ended September 30, 2019, using an incremental borrowing rate of 3.00%.

 

In June 2016, the FASB issued ASU 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to change the accounting for credit losses and modify the impairment model for certain debt securities. In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. In October 2019, the FASB voted to extend the implementation date for smaller reporting companies, non-SEC public companies, and private companies. The amendment will be effective for the Company for periods beginning after December 15, 2022. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. It will be influenced by the quality, composition, and characteristics of our loan and investment portfolios, as well as the expected economic conditions and forecasts at the time of enactment and future reporting periods.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities, which shortens the amortization period for the premium to the earliest call date. The amendment became effective for the Company on January 1, 2019 and did not have a material effect on the financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles and Goodwill and Other-Internal Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract),which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments became effective for the Company January 1, 2019. The amendment did not have a material effect on the financial statements.

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does not expect these amendments to have a material effect on its financial statements. 

 

In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for the reporting period beginning after December 15, 2019. The amendments related to hedging became effective January 1, 2019. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

 

In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

 

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

 

Note 2: Investment Securities

 

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

 

		September 30, 2019
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U.S. Treasury Notes		$	28,046,209			$	164,726			$	(1,992	)		$	28,208,943
Government-Sponsored Enterprises			45,189,029				417,696				(30,720	)			45,576,005
Municipal Securities			24,373,937				172,222				(33,139	)			24,513,020
Total		$	97,609,175			$	754,644			$	(65,851	)		$	98,297,968

 

		December 31, 2018
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U.S. Treasury Notes		$	32,965,693			$	—			$	(609,059	)		$	32,356,634
Government-Sponsored Enterprises			60,684,878				—				(1,315,598	)			59,369,280
Municipal Securities			28,267,930				112,971				(437,941	)			27,942,960
Total		$	121,918,501			$	112,971			$	(2,362,598	)		$	119,668,874

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2019 and December 31, 2018, by contractual maturity are in the following table.

 

		September 30, 2019								December 31, 2018
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Due in one year or less		$	6,916,533			$	6,921,489			$	4,246,325			$	4,249,570
Due in one year to five years			82,032,178				82,637,994				99,753,174				97,915,185
Due in five years to ten years			8,660,464				8,738,485				17,504,456				17,128,425
Due in ten years and over			—				—				414,546				375,694
Total		$	97,609,175			$	98,297,968			$	121,918,501			$	119,668,874

 

Securities pledged to secure deposits at both September 30, 2019 and December 31, 2018, had a fair value of $37.7 million and $41.5 million, respectively. 

 

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2019 and December 31, 2018. We believe that all unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

 

		Less Than 12 Months											12 Months or Longer											Total
September 30, 2019 Available for sale		#			Fair Value				Gross Unrealized Loss				#			Fair Value				Gross Unrealized Loss				#			Fair Value				Gross Unrealized Loss
U.S. Treasury Notes		1			$	2,998,008			$	(1,992	)		—			$	—			$	—			1			$	2,998,008			$	(1,992	)
Government-Sponsored Enterprises		—				—				—			1				5,094,065				(30,720	)		1				5,094,065				(30,720	)
Municipal Securities		19				7,027,097				(29,702	)		1				330,563				(3,437	)		20				7,357,660				(33,139	)
Total		20			$	10,025,105			$	(31,694	)		2			$	5,424,628			$	(34,157	)		22			$	15,449,733			$	(65,851	)

 

		Less Than 12 Months											12 Months or Longer											Total
December 31, 2018 Available for sale		#			Fair Value				Gross Unrealized Loss				#			Fair Value				Gross Unrealized Loss				#			Fair Value				Gross Unrealized Loss
U.S. Treasury Notes		—			$	—			$	—			7			$	32,356,634			$	(609,059	)		7			$	32,356,634			$	(609,059	)
Government-Sponsored Enterprises		2				9,967,000				(14,302	)		11				49,402,280				(1,301,296	)		13				59,369,280				(1,315,598	)
Municipal Securities		2				1,362,286				(7,547	)		31				11,840,912				(430,394	)		33				13,203,198				(437,941	)
Total		4			$	11,329,286			$	(21,849	)		49			$	93,599,826			$	(2,340,749	)		53			$	104,929,112			$	(2,362,598	)

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The tables below show the proceeds from sales of securities available for sale and gross realized gains and losses.

 

		Three Months Ended
		September 30,
		2019				2018
Gross proceeds		$	5,364,750			$	—
Gross realized gains			14				—
Gross realized losses			(14	)			—

 

		Nine Months Ended
		September 30,
		2019				2018
Gross proceeds		$	20,317,250			$	21,434,634
Gross realized gains			59,523				104,634
Gross realized losses			(30,626	)			(99,899	)

 

There was no tax provision related to gains for the three months ended September 30, 2019 and 2018. For the nine months ended September 30, 2019 and 2018, the tax provision related to these gains was $6,068 and $994, respectively.

 

Note 3: Loans and Allowance for Loan Losses

 

Major classifications of loans (net of deferred loan fees of $156,287 at September 30, 2019 and $156,309 at December 31, 2018) are as follows:

 

		September 30, 2019				December 31, 2018
Commercial		$	51,362,787			$	54,829,078
Commercial real estate:
Construction			11,058,317				7,304,300
Other			146,677,103				143,703,401
Consumer:
Real estate			61,031,686				63,787,411
Other			5,397,391				5,040,077
			275,527,284				274,664,267
Allowance for loan losses			(4,141,415	)			(4,214,331	)
Loans, net		$	271,385,869			$	270,449,936

 

We had $92.0 million and $101.9 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at September 30, 2019 and at December 31, 2018, respectively.

 

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

 

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

Substandard (6) The borrowing entity has a cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is possible. The borrowing entity has declining sales, rising costs, and may need to look for secondary source of repayment.

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

●

Doubtful (7) The borrowing entity has negative cash flow. Survival of the business is at risk, full repayment is unlikely, and there are frequent and unexplained overdrafts. The borrowing entity shows declining trends and no operating profits.

 

●

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

 

The following tables illustrate credit quality by class and internally assigned grades at September 30, 2019 and December 31, 2018. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

September 30, 2019
		Commercial				Commercial Real Estate Construction				Commercial Real Estate - Other				Consumer Real Estate				Consumer Other				Total
Pass		$	47,353,253			$	10,567,442			$	140,204,499			$	56,969,235			$	4,988,881			$	260,083,310
Watch			1,992,952				490,875				4,338,999				2,665,466				348,693				9,836,985
OAEM			467,044				—				655,956				517,232				4,645				1,644,877
Sub-standard			1,549,538				—				1,477,649				879,753				55,172				3,962,112
Doubtful			—				—				—				—				—				—
Loss			—				—				—				—				—				—
Total		$	51,362,787			$	11,058,317			$	146,677,103			$	61,031,686			$	5,397,391			$	275,527,284

 

 

		December 31, 2018
		Commercial				Commercial Real Estate - Construction				Commercial Real Estate - Other				Consumer Real Estate				Consumer Other				Total
Pass		$	50,663,356			$	7,304,300			$	136,804,420			$	60,480,317			$	4,726,494			$	259,978,887
Watch			1,973,675				—				4,938,711				2,077,341				226,117				9,215,844
OAEM			157,300				—				590,294				350,000				—				1,097,594
Sub-standard			2,034,747				—				1,369,976				879,753				87,466				4,371,942
Doubtful			—				—				—				—				—				—
Loss			—				—				—				—				—				—
Total		$	54,829,078			$	7,304,300			$	143,703,401			$	63,787,411			$	5,040,077			$	274,664,267

 

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

 

		September 30, 2019
		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days				Total Past Due				Current				Total Loans Receivable				Recorded Investment ≥ 90 Days and Accruing
Commercial		$	48,963			$	501,278			$	9,348			$	559,589			$	50,803,198			$	51,362,787			$	—
Commercial Real Estate - Construction			—				—				—				—				11,058,317				11,058,317				—
Commercial Real Estate - Other			273,190				349,842				582,419				1,205,451				145,471,652				146,677,103				—
Consumer Real Estate			416,967				—				779,998				1,196,965				59,834,721				61,031,686				149,999
Consumer Other			2,042				—				—				2,042				5,395,349				5,397,391				—
Total		$	741,162			$	851,120			$	1,371,765			$	2,964,047			$	272,563,237			$	275,527,284			$	149,999

  

		December 31, 2018
		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivable				Recorded Investment > 90 Days and Accruing
Commercial		$	266,567			$	17,492			$	229,395			$	513,454			$	54,315,624			$	54,829,078			$	—
Commercial Real Estate - Construction			—				—				—				—				7,304,300				7,304,300				—
Commercial Real Estate - Other			35,000				215,049				571,292				821,341				142,882,060				143,703,401				—
Consumer Real Estate			—				—				—				—				63,787,411				63,787,411				—
Consumer Other			24,621				—				—				24,621				5,015,456				5,040,077				—
Total		$	326,188			$	232,541			$	800,687			$	1,359,416			$	273,304,851			$	274,664,267			$	—

 

There was one loan over 90 days past due and still accruing as of September 30, 2019. The loan is in the process of being refinanced. There were no loans as of December 31, 2018 over 90 days past due and still accruing. 

 

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

 

		Loans Receivable on Non-Accrual
		September 30, 2019				December 31, 2018
Commercial		$	188,324			$	251,219
Commercial Real Estate - Construction			—				—
Commercial Real Estate - Other			855,609				571,292
Consumer Real Estate			629,999				—
Consumer Other			—				1,023
Total		$	1,673,932			$	823,534

 

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by loan category for the three and nine months ended September 30, 2019 and 2018. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three Months Ended September 30, 2019
		Commercial				Commercial Real Estate - Construction				Commercial Real Estate - Other				Consumer Real Estate				Consumer Other				Total
Allowance for Loan Losses:
Beginning Balance		$	1,539,652			$	97,987			$	1,332,803			$	528,529			$	631,577			$	4,130,548
Charge-offs			—				—				—				—				—				—
Recoveries			—				—				—				—				867				867
Provisions			(494,762	)			(1,281	)			(39,630	)			(27,382	)			573,055				10,000
Ending Balance		$	1,044,890			$	96,706			$	1,293,173			$	501,147			$	1,205,499			$	4,141,415

 

Nine Months Ended September 30, 2019
		Commercial				Commercial Real Estate - Construction				Commercial Real Estate - Other				Consumer Real Estate				Consumer Other				Total
Allowance for Loan Losses:
Beginning Balance		$	1,665,413			$	63,876			$	1,292,346			$	386,585			$	806,111			$	4,214,331
Charge-offs			(229,395	)			—				—				—				(8,342	)			(237,737	)
Recoveries			6,000				—				—				—				3,821				9,821
Provisions			(397,128	)			32,830				827				114,562				403,909				155,000
Ending Balance		$	1,044,890			$	96,706			$	1,293,173			$	501,147			$	1,205,499			$	4,141,415

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		Three Months Ended September 30, 2018
		Commercial				Commercial Real Estate - Construction				Commercial Real Estate - Other				Consumer Real Estate				Consumer Other				Total
Allowance for Loan Losses:
Beginning Balance		$	1,343,760			$	29,091			$	972,038			$	589,051			$	1,073,524			$	4,007,464
Charge-offs			—				—				—				—				(12,794	)			(12,794	)
Recoveries			11,000				—				—				—				260				11,260
Provisions			146,752				4,404				10,334				(84,365	)			22,875				100,000
Ending Balance		$	1,501,512			$	33,495			$	982,372			$	504,686			$	1,083,865			$	4,105,930

 

		Nine Months Ended September 30, 2018
		Commercial				Commercial Real Estate - Construction				Commercial Real Estate - Other				Consumer Real Estate				Consumer Other				Total
Allowance for Loan Losses:
Beginning Balance		$	1,403,588			$	23,638			$	1,549,755			$	796,918			$	101,499			$	3,875,398
Charge-offs			(31,250	)			—				—				—				(84,637	)			(115,887	)
Recoveries			13,500				—				56,827				45,412				680				116,419
Provisions			115,674				9,857				(624,210	)			(337,644	)			1,066,323				230,000
Ending Balance		$	1,501,512			$	33,495			$	982,372			$	504,686			$	1,083,865			$	4,105,930

 

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

 

		September 30, 2019
		Commercial				Commercial Real Estate - Construction				Commercial Real Estate - Other				Consumer Real Estate				Consumer Other				Total
Allowance for Loan Losses
Individually evaluated for impairment		$	178,975			$	—			$	1,782			$	—			$	135			$	180,892
Collectively evaluated for impairment			865,915				96,706				1,291,391				501,147				1,205,364				3,960,523
Total Allowance for Loan Losses		$	1,044,890			$	96,706			$	1,293,173			$	501,147			$	1,205,499			$	4,141,415
Loans Receivable
Individually evaluated for impairment		$	1,638,910			$	—			$	1,385,118			$	879,753			$	55,172			$	3,958,953
Collectively evaluated for impairment			49,723,877				11,058,317				145,291,985				60,151,933				5,342,219				271,568,331
Total Loans Receivable		$	51,362,787			$	11,058,317			$	146,677,103			$	61,031,686			$	5,397,391			$	275,527,284

 

		December 31, 2018
		Commercial				Commercial Real Estate - Construction				Commercial Real Estate - Other				Consumer Real Estate				Consumer Other				Total
Allowance for Loan Losses
Individually evaluated for impairment		$	1,132,805			$	—			$	37,416			$	—			$	21,324			$	1,191,545
Collectively evaluated for impairment			532,608				63,876				1,254,930				386,585				784,787				3,022,786
Total Allowance for Loan Losses		$	1,665,413			$	63,876			$	1,292,346			$	386,585			$	806,111			$	4,214,331
Loans Receivable
Individually evaluated for impairment		$	1,996,579			$	—			$	1,280,890			$	879,753			$	21,324			$	4,178,546
Collectively evaluated for impairment			52,832,499				7,304,300				142,422,511				62,907,658				5,018,753				270,485,721
Total Loans Receivable		$	54,829,078			$	7,304,300			$	143,703,401			$	63,787,411			$	5,040,077			$	274,664,267

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2019 and December 31, 2018, loans individually evaluated and considered impaired are presented in the following table.

 

		Impaired Loans as of
		September 30, 2019												December 31, 2018
		Unpaid Principal Balance				Recorded Investment				Related Allowance				Unpaid Principal Balance				Recorded Investment				Related Allowance
With no related allowance recorded:
Commercial		$	1,459,935			$	1,459,935			$	—			$	115,983			$	115,983			$	—
Commercial Real Estate - Construction			—				—				—				—				—				—
Commercial Real Estate - Other			1,138,234				1,138,234				—				974,249				974,249				—
Consumer Real Estate			879,753				879,753				—				879,753				879,753				—
Consumer Other			—				—				—				—				—				—
Total			3,477,922				3,477,922				—				1,969,985				1,969,985				—
With an allowance recorded:
Commercial			178,975				178,975				178,975				1,880,596				1,880,596				1,132,805
Commercial Real Estate - Construction			—				—				—				—				—				—
Commercial Real Estate - Other			346,685				246,884				1,782				406,442				306,641				37,416
Consumer Real Estate			—				—				—				—				—				—
Consumer Other			55,172				55,172				135				21,324				21,324				21,324
Total			580,832				481,031				180,892				2,308,362				2,208,561				1,191,545
Total
Commercial			1,638,910				1,638,910				178,975				1,996,579				1,996,579				1,132,805
Commercial Real Estate - Construction			—				—				—				—				—				—
Commercial Real Estate - Other			1,484,919				1,385,118				1,782				1,380,691				1,280,890				37,416
Consumer Real Estate			879,753				879,753				—				879,753				879,753				—
Consumer Other			55,172				55,172				135				21,324				21,324				21,324
Total		$	4,058,754			$	3,958,953			$	180,892			$	4,278,347			$	4,178,546			$	1,191,545

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		Three Months Ended September 30,
		2019								2018
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial		$	1,475,751			$	23,707			$	128,953			$	2,178
Commercial Real Estate - Construction			—				—				—				—
Commercial Real Estate - Other			1,136,872				11,832				984,499				10,378
Consumer Real Estate			879,753				4,041				879,753				8,562
Consumer Other			—				—				—				—
			3,492,376				39,580				1,993,205				21,118
With an allowance recorded:
Commercial			178,975				—				1,702,976				26,195
Commercial Real Estate - Construction			—				—				—				—
Commercial Real Estate - Other			346,685				—				411,107				2,739
Consumer Real Estate			—				—				—				—
Consumer Other			57,540				898				24,518				329
			583,200				898				2,138,601				29,263
Total
Commercial			1,654,726				23,707				1,831,929				28,373
Commercial Real Estate - Construction			—				—				—				—
Commercial Real Estate - Other			1,483,557				11,832				1,395,606				13,117
Consumer Real Estate			879,753				4,041				879,753				8,562
Consumer Other			57,540				898				24,518				329
		$	4,075,576			$	40,478			$	4,131,806			$	50,381

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		Nine Months Ended September 30,
		2019								2018
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial		$	1,519,222			$	73,276			$	137,445			$	6,551
Commercial Real Estate - Construction			—				—				—				—
Commercial Real Estate - Other			1,239,519				40,709				983,516				29,724
Consumer Real Estate			879,753				26,676				879,753				37,847
Consumer Other			—				—				—				—
			3,638,494				140,661				2,000,714				74,122
With an allowance recorded:
Commercial			178,976				5,779				1,742,743				81,553
Commercial Real Estate - Construction			—				—				—				—
Commercial Real Estate - Other			246,884				—				419,231				8,209
Consumer Real Estate			—				—				—				—
Consumer Other			61,089				2,644				27,469				1,084
			486,949				8,423				2,189,443				90,846
Total
Commercial			1,698,198				79,055				1,880,188				88,104
Commercial Real Estate - Construction			—				—				—				—
Commercial Real Estate - Other			1,486,403				40,709				1,402,747				37,933
Consumer Real Estate			879,753				26,676				879,753				37,847
Consumer Other			61,089				2,644				27,469				1,084
		$	4,125,443			$	149,084			$	4,190,157			$	164,968

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In general, the modification or restructuring of a loan is considered a troubled debt restructuring (“TDR”) if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. There was one TDR of $43,095 as of September 30, 2019 and none as of December 31, 2018. The monthly payments on this TDR were reduced. As of March 31, 2019, there was one TDR with a balance of $2,185. During the quarter ended June 30, 2019, a loan in the amount of $2,008 was charged-off and the Bank received a recovery of $439. No other TDRs defaulted during the nine months ended September 30, 2019 and 2018, which were modified within the previous twelve months.

 

Note 4: Disclosure Regarding Fair Value of Financial Statements

 

Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would use in pricing an asset or liability.

 

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

 

●

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

 

●

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

 

●

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

 

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

 

The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.

 

Investment Securities Available for Sale

 

Investment securities are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. 

 

Derivative Instruments

 

Derivative instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on the change in the value of the underlying loan between the commitment date and the end of the period. We classify these instruments as Level 3.

 

We had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments consisting of fixed rate conforming loan commitments as interest rate locks and commitments to sell fixed rate conforming loans on a best efforts basis. We do not currently engage in hedging activities. Based on short term fair value of the mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as of September 30, 2019 and December 31, 2018.

  

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018 are as follows:

 

		September 30, 2019
		Level 1				Level 2				Level 3				Total
U.S. Treasury Notes		$	28,208,943			$	—			$	—			$	28,208,943
Government-Sponsored Enterprises			—				45,576,005				—				45,576,005
Municipal Securities			—				16,433,843				8,079,177				24,513,020
Total		$	28,208,943			$	62,009,848			$	8,079,177			$	98,297,968

 

		December 31, 2018
		Level 1				Level 2				Level 3				Total
U.S. Treasury Notes		$	32,356,634			$	—			$	—			$	32,356,634
Government-Sponsored Enterprises			—				59,369,280				—				59,369,280
Municipal Securities			—				21,701,005				6,241,955				27,942,960
Total		$	32,356,634			$	81,070,285			$	6,241,955			$	119,668,874

 

There were no liabilities recorded at fair value on a recurring basis as of September 30, 2019 or December 31, 2018.

 

The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2019 and 2018:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Beginning balance		$	4,534,517			$	7,096,356			$	6,241,955			$	11,458,889
Total gains or (losses) (realized/unrealized)
Included in earnings			—				—				—				—
Included in other comprehensive income			11,660				52,254				113,057				119,721
Purchases, issuances, and settlements net of maturities			3,533,000				(604,927	)			1,724,165				(5,034,927	)
Transfers in and/or out of level 3			—				—				—				—
Ending balance		$	8,079,177			$	6,543,683			$	8,079,177			$	6,543,683

 

There were no transfers between fair value levels during the nine months ended September 30, 2019 or 2018.

 

The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis.

 

Other Real Estate Owned (“OREO”)

 

Loans secured by real estate are adjusted to the lower of the recorded investment in the loan or the fair value of the real estate upon transfer to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, or our estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraisal, we record the asset as nonrecurring Level 2. When an appraised value is not available or we determine the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the asset as nonrecurring Level 3.

 

Impaired Loans

 

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, we review the most recent appraisal and if it is over 12 to 18 months old we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired. However, as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These valuations are reviewed and updated on a quarterly basis.

 

In accordance with ASC 820, Fair Value Measurement, impaired loans, where an allowance is established based on the fair value of collateral, require classification in the fair value hierarchy. These impaired loans are classified as Level 3. Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value. 

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Mortgage Loans to be Sold

 

Mortgage loans to be sold are carried at the lower of cost or market value. The fair values of mortgage loans to be sold are based on current market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates fair value. These loans are classified as Level 2.

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

The following table presents information about certain assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018:

 

		September 30, 2019
		Level 1				Level 2				Level 3				Total
Impaired loans		$	—			$	—			$	2,362,890			$	2,362,890
Other real estate owned			—				—				—				—
Loans held for sale			—				4,935,431				—				4,935,431
Total		$	—			$	4,935,431			$	2,362,890			$	7,298,321

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		December 31, 2018
		Level 1				Level 2				Level 3				Total
Impaired loans		$	—			$	—			$	2,223,028			$	2,223,028
Other real estate owned			—				—				—				—
Loans held for sale			—				1,199,438				—				1,199,438
Total		$	—			$	1,199,438			$	2,223,028			$	3,422,466

 

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2019 or December 31, 2018.

 

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2019 and December 31, 2018:

 

				Inputs
		Valuation Technique		Unobservable Input		General Range of Inputs
Impaired Loans		Appraisal Value/ Comparison Sales/Other Estimates		Appraisals and/or Sales of Comparable Properties		Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs
Other Real Estate Owned		Appraisal Value/ Comparison Sales/Other Estimates		Appraisals and/or Sales of Comparable Properties		Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs

 

Accounting standards require disclosure of fair value information for all of our assets and liabilities that are considered financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate fair value.

 

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

 

The following paragraphs describe the methods and assumptions we use in estimating the fair values of financial instruments:

 

a. Cash and due from banks, interest-bearing deposits at the Federal Reserve

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

 

b. Investment securities available for sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

 

c. Loans, net

The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. Additionally, in accordance with ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, this consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio.

 

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated based on the fair value of the underlying collateral. Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value.

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

d. Deposits

The estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is estimated by discounting contractual cash flows, using interest rates currently being offered on the deposit products. The fair value estimates for deposits do not include the benefit that results from the low cost funding provided by the deposit liabilities as compared to the cost of alternative forms of funding (deposit base intangibles).

 

e. Accrued interest receivable and payable

Since these financial instruments will typically be received or paid within six months, the carrying amounts of such instruments are deemed to be a reasonable estimate of fair value.

 

f.  Loan commitments

Estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

 

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of September 30, 2019 and December 31, 2018.

 

Fair Value Measurements at September 30, 2019
		Carrying Amount				Estimated Fair Value				Level 1				Level 2				Level 3
Financial Assets:
Cash and due from banks		$	7,165,177			$	7,165,177			$	7,165,177			$	—			$	—
Interest-bearing deposits at the Federal Reserve			51,250,282				51,250,282				51,250,282				—				—
Investment securities available for sale			98,297,968				98,297,968				28,208,943				62,009,848				8,079,177
Mortgage loans to be sold			4,935,431				4,935,431				—				4,935,431				—
Loans, net			271,385,869				265,538,907				—				—				265,538,907
Accrued interest receivable			1,351,401				1,351,401				—				1,351,401				—
Financial Liabilities:
Demand deposits			363,591,040				363,591,040				—				363,591,040				—
Time deposits			23,613,307				30,292,232				—				30,292,232				—
Accrued interest payable			47,605				47,605				—				47,605				—

 

 

Fair Value Measurements at December 31, 2018
		Carrying Amount				Estimated Fair Value				Level 1				Level 2				Level 3
Financial Assets:
Cash and due from banks		$	6,325,457			$	6,325,457			$	6,325,457			$	—			$	—
Interest-bearing deposits at the Federal Reserve			25,506,784				25,506,784				25,506,784				—				—
Investment securities available for sale			119,668,874				119,668,874				32,356,634				81,070,285				6,241,955
Mortgage loans to be sold			1,199,438				1,199,438				—				1,199,438				—
Loans, net			270,449,936				263,780,751				—				—				263,780,751
Accrued interest receivable			1,561,915				1,561,915				—				1,561,915				—
Financial Liabilities:
Demand deposits			347,909,663				347,909,663				—				347,909,663				—
Time deposits			34,468,725				38,747,898				—				38,747,898				—
Accrued interest payable			163,876				163,876				—				163,876				—

 

 

BANK OF SOUTH CAROLINA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5: Income Per Common Share

 

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

 

The following table is a summary of the reconciliation of weighted average shares outstanding for the three months ended September 30:

 

		2019				2018
Net income		$	2,014,791			$	1,778,153
Weighted average shares outstanding			5,526,233				5,506,649
Effect of dilutive shares			68,823				82,900
Weighted average shares outstanding - diluted			5,595,056				5,589,549
Earnings per share - basic		$	0.36			$	0.32
Earnings per share - diluted		$	0.36			$	0.32

 

The following table is a summary of the reconciliation of weighted average shares outstanding for the nine months ended September 30:

 

		2019				2018
Net income		$	5,544,902			$	5,116,740
Weighted average shares outstanding			5,519,337				5,496,346
Effect of dilutive shares			69,195				83,643
Weighted average shares outstanding - diluted			5,588,532				5,579,989
Earnings per share - basic		$	1.00			$	0.93
Earnings per share - diluted		$	0.99			$	0.92

 

 

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

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including information included or incorporated by reference in this document, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1934. We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1996 and are including this statement for the express purpose of availing the Company of protections of such safe harbor with respect to all “forward-looking statements” contained in this Form 10-Q. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors that are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitations, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC and the following:

 

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

Technological changes

●

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
	●	Reputational risk

 

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

 

Overview

Bank of South Carolina Corporation (the “Company”) is a financial institution holding company headquartered in Charleston, South Carolina, with $453.1 million in assets as of September 30, 2019 and net income of $5.5 million for the nine months ended September 30, 2019. The Company offers a broad range of financial services through its wholly-owned subsidiary, The Bank of South Carolina (the “Bank”). The Bank is a state-chartered commercial bank which operates primarily in the Charleston, Dorchester and Berkeley counties of South Carolina. The Bank’s original and current concept is to be a full service financial institution specializing in personal service, responsiveness, and attention to detail to foster long standing relationships.

 

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

 

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

 

 

In addition to earning interest on loans and investments, we earn income through fees and other expenses we charge to the customer. The various components of non-interest income as well as non-interest expense are described in the following discussion. The discussion and analysis also identify significant factors that have affected our financial position and operating results as of and for the periods ending September 30, 2019 and December 31, 2018, and should be read in conjunction with the financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion.

 

Critical Accounting Policies

Our critical accounting policies, which involve significant judgements and assumptions that have a material impact on the carrying value of certain assets and liabilities, and used in the preparation of the Consolidated Financial Statements as of September 30, 2019, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Balance Sheet

Cash and Cash Equivalents 

Total cash and cash equivalents increased 83.51% or $26.6 million to $58.4 million as of September 30, 2019, from $31.8 million at December 31, 2018. The increase in total cash and cash equivalents is due to the sales proceeds and proceeds related to maturities and calls of lower yielding investments placed at the Federal Reserve. Funds are placed in interest bearing deposits at the Federal Reserve until opportunities arise for investment in higher yielding assets.

 

Investment Securities Available for Sale

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

 

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

 

As of September 30, 2019, our available for sale investment portfolio included U. S. Treasury Notes, Government-Sponsored Enterprises and Municipal Securities with a fair market value of $98.3 million and an amortized cost of $97.6 million for a net unrealized gain of approximately $0.7 million. As of September 30, 2019 and December 31, 2018, our investment securities portfolio represented approximately 21.70% and 27.89% of our total assets, respectively. The average yield on our investment securities was 2.03% and 2.08% at September 30, 2019 and December 31, 2018, respectively.

 

During the first quarter of 2019, five Municipal Securities totaling $3.0 million matured and one Municipal Security in the amount of $0.5 million were called. During the second quarter of 2019, six Municipal Securities totaling $1.4 million were called, two Municipal Securities totaling $0.9 million matured, two Government-Sponsored Enterprise securities were sold for $10.0 million, and one U.S. Treasury Note in the amount of $5.0 million was sold. During the third quarter of 2019, four Municipal Securities totaling $1.6 were called, one Municipal Security in the amount of $70,000 matured, two Government-Sponsored Enterprise securities were sold for $5.0 million, and one Municipal Security was purchased in the amount of $3.6 million.

 

Loans

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

 

Net loans increased $1.0 million, or 0.34%, to $271.4 million as of September 30, 2019 from $270.4 million as of December 31, 2018. The increase in loans is related to improved loan demand due to growth in the local economy.  The following table is a summary of our loan portfolio composition (net of deferred fees of $156,287 at September 30, 2019 and $156,309 at December 31, 2018) and the corresponding percentage of total loans as of the dates indicated.

 

		September 30, 2019								December 31, 2018
		Amount				Percent				Amount				Percent
Commercial		$	51,362,787				18.64	%		$	54,829,078				19.96	%
Commercial Real Estate - Construction			11,058,317				4.01	%			7,304,300				2.66	%
Commercial Real Estate - Other			146,677,103				53.24	%			143,703,401				52.32	%
Consumer Real Estate			61,031,686				22.15	%			63,787,411				23.23	%
Consumer Other			5,397,391				1.96	%			5,040,077				1.83	%
Total loans			275,527,284				100.00	%			274,664,267				100.00	%
Allowance for loan losses			(4,141,415	)							(4,214,331	)
Total loans, net		$	271,385,869							$	270,449,936

 

Nonperforming Assets

Nonperforming Assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure, loans on nonaccrual status and TDRs. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. As of September 30, 2019, there was one loan 90 days past due still accruing interest that is in the process of being refinanced.

 

We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges. As of September 30, 2019 there was one TDR where monthly payments were reduced; however, there were none as of December 31, 2018.

 

 

The following table is a summary of our Nonperforming Assets:

 

		September 30, 2019				December 31, 2018
Commercial		$	188,324			$	251,219
Commercial Real Estate - Other			855,609				571,292
Consumer Real Estate			629,999				—
Consumer Other			—				1,023
Total nonaccruing loans			1,673,932				823,534
Troubled Debt Restructuring			43,095				—
Other real estate owned			—				—
Total nonperforming assets		$	1,717,027			$	823,534

 

Allowance for Loan Losses

The allowance for loan losses was $4.1 million as of September 30, 2019 and $4.2 million as of December 31, 2018, or 1.50% and 1.53% of outstanding loans for each respective period. At September 30, 2019 and December 31, 2018, the allowance for loan losses represented 247.41% and 511.74% of the total amount of nonperforming loans, respectively. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses at September 30, 2019 is adequate.

 

At September 30, 2019, impaired loans totaled $4.1 million, for which $0.5 million of these loans had a reserve of approximately $0.2 million allocated in the allowance for loan losses. Comparatively, impaired loans totaled $4.2 million at December 31, 2018, and $2.2 million of these loans had a reserve of approximately $1.2 million allocated in the allowance for loan losses.

 

During the nine months ended September 30, 2019, we recorded $237,737 of charge-offs and $9,821 of recoveries on loans previously charged-off, for net charge-offs of $227,916. Comparatively, we recorded $115,887 of charge-offs and $116,419 of recoveries on loans previously charged-off, for net recoveries of $532 for the nine months ended September 30, 2018.

 

Deposits

Deposits remain our primary source of funding for loans and investments. Average interest bearing deposits provided funding for 58.93% of average earning assets for the nine months ended September 30, 2019, and 60.26% for the nine months ended September 30, 2018. 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, 2019								December 31, 2018
		Amount				Percent				Amount				Percent
Deposits
Non-interest bearing demand		$	127,564,403				32.94	%		$	130,940,138				34.24	%
Interest bearing demand			114,347,461				29.53	%			94,207,731				24.64	%
Money market accounts			87,925,624				22.71	%			87,300,433				22.83	%
Time deposits over $250,000			6,200,799				1.60	%			15,909,991				4.16	%
Other time deposits			17,412,508				4.50	%			18,558,734				4.85	%
Other savings deposits			33,753,552				8.72	%			35,461,361				9.28	%
Total deposits		$	387,204,347				100.00	%		$	382,378,388				100.00	%

 

Deposits increased 1.26% or $4.8 million from December 31, 2018 to September 30, 2019 primarily due to seasonal fluctuations.

 

At September 30, 2019 and December 31, 2018, deposits with an aggregate deficit balance of $29,672 and $43,118, respectively, were re-classified as other loans.

 

Comparison of Three Months Ended September 30, 2019 to Three Months Ended September 30, 2018

Net income increased $236,638 or 13.31% to $2.0 million, or basic and diluted earnings per share of $0.36, for the three months ended September 30, 2019, from $1.8 million, or basic and diluted earnings per share of $0.32, for the three months ended September 30, 2018. Our annualized return on average assets and average equity for the three months ended September 30, 2019 were 1.84% and 16.49%, respectively, compared with 1.63% and 16.19%, respectively, for the three months ended September 30, 2018.

 

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is a measure of the difference between interest income on earning assets and interest paid on interest bearing liabilities relative to the amount of interest bearing assets. Net interest income increased $143,656 or 3.21% to $4.6 million for the three months ended September 30, 2019 from $4.5 million for the three months ended September 30, 2018. This increase was primarily due to interest and fee income received on loans tied to changes in variable interest rates. Average loans increased $2.8 million or 1.00% to $283.9 million for the three months ended September 30, 2019, compared to $281.1 million for the three months ended September 30, 2018. The yield on average loans (including fees) was 6.10% and 5.83% for the three months ended September 30, 2019 and September 30, 2018, respectively. Interest income on loans increased $153,582 for the three months ended September 30, 2019 to $4.1 million from $3.9 million for the three months ended September 30, 2018.

 

 

The average balance of interest bearing deposits at the Federal Reserve increased $25.8 million or 109.65% to $49.4 million for the three months ended September 30, 2019, with a yield of 2.18% as compared to $23.6 million for the three months ended September 30, 2018, with a yield of 2.09%. The increase in the average balance of interest bearing deposits is due to the sales proceeds and proceeds related to maturities and calls of lower yielding investments placed at the Federal Reserve.

 

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of our allowance for loan losses. For the three months ended September 30, 2019, we had a provision of $10,000 of loan losses compared to a provision of $100,000 for the same period in the prior year. The decrease in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses.

 

Non-Interest Income

Other income increased $137,377 or 29.95% to $596,070 for the three months ended September 30, 2019, from $458,693 for the three months ended September 30, 2018. This increase was primarily due to improved mortgage banking activity. Accordingly, mortgage banking income increased $123,078 or 73.26% from $168,004 for the three months ended September 30, 2018 to $291,082 for the three months ended September 30, 2019.

 

Non-Interest Expense

Non-interest expense decreased $234,651 or 8.33% to $2.6 million for the three months ended September 30, 2019 from $2.8 million for the three months ended September 30, 2018. This decrease was primarily due to a reduction in other operating expenses related to the amortization of the 2018 Federal Historic Renovation Tax Credit during the three months ended September 30, 2018 that was not incurred during the three months ended September 30, 2019.

 

Income Tax Expense

We incurred income tax expense of $603,264 for the three months ended September 30, 2019 as compared to $234,218 during the same period in 2018. Our effective tax rate was 23.04% and 11.64% for the three months ended September 30, 2019 and 2018, respectively. The increase in the effective tax rate during the 2019 period is a result of the utilized historic tax credits during 2018.

 

Comparison of Nine Months Ended September 30, 2019 to Nine Months Ended September 30, 2018 

Net income increased $428,162 or 8.37% to $5.5 million, or basic and diluted earnings per share of $1.00 and $0.99, respectively, for the nine months ended September 30, 2019, from $5.1 million, or basic and diluted earnings per share of $0.93 and $0.92, respectively, for the nine months ended September 30, 2018. Our annualized returns on average assets and average equity for the nine months ended September 30, 2019 were 1.69% and 15.26%, respectively, compared with 1.59% and 15.72%, respectively, for the nine months ended September 30, 2018.

 

Net Interest Income 

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is a measure of the difference between interest income on earning assets and interest paid on interest bearing liabilities relative to the amount of interest bearing assets. Net interest income increased $666,501 or 5.14% to $13.6 million for the nine months ended September 30, 2019 from $13.0 million for the nine months ended September 30, 2018. This increase was primarily due to interest and fee income received on loans tied to changes in variable interest rates. Average loans increased $4.6 million or 1.68% to $281.1 million for the nine months ended September 30, 2019, compared to $276.5 million for the nine months ended September 30, 2018. The yield on average loans (including fees) was 6.07% and 5.66% for the nine months ended September 30, 2019 and 2018, respectively. Interest income on loans increased $0.9 million for the nine months ended September 30, 2019 to $12.1 million from $11.2 million for the nine months ended September 30, 2018.

 

The average balance of interest bearing deposits at the Federal Reserve increased $13.3 million or 71.09% to $31.9 million for the nine months ended September 30, 2019, with a yield of 2.29% as compared to $18.7 million for the nine months ended September 30, 2018, with a yield of 1.35%. The increase in the average balance of interest bearing deposits is due to the sales proceeds and proceeds related to maturities and calls of lower yielding investments placed at the Federal Reserve.

 

Provision for Loan Losses 

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio of loan losses and the adequacy of our allowance for loan losses. For the nine months ended September 30, 2019, we had a provision of $155,000 compared to a provision of $230,000 for the same period in the prior year. The decrease in the provision for loan losses was based on our analysis of the adequacy of the allowance for loan losses.

 

 

Non-Interest Income

Other income increased $135,858 or 9.29% to $1.6 million for the nine months ended September 30, 2019, from $1.5 million for the nine months ended September 30, 2018. This increase was primarily due to improved mortgage banking income. Accordingly, mortgage banking income increased $112,650 or 20.17% from $558,473 for the nine months ended September 30, 2018 to $671,123 for the nine months ended September 30, 2019.

 

Non-Interest Expense 

Non-interest expense decreased $233,857 or 2.88% to $7.9 million for the nine months ended September 30, 2019 from $8.1 million for the nine months ended September 30, 2018. This decrease was primarily due to a reduction in other operating expenses related to the amortization of the 2018 Federal Historic Renovation Tax Credit during the nine months ended September 30, 2018 that was not incurred during the nine months ended September 30, 2019.

 

Income Tax Expense 

We incurred income tax expense of $1.7 million for the nine months ended September 30, 2019 as compared to $1.0 during the same period in 2018. Our effective tax rate was 22.96% and 15.93% for the nine months ended September 30, 2019 and 2018, respectively. The increase in the effective tax rate during the 2019 period is a result of the utilized historic tax credits during 2018.

 

Off-Balance Sheet Arrangements 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on our credit evaluation of the borrower. Collateral held varies but may include accounts receivable, negotiable instruments, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to $96.7 million and $96.1 million at September 30, 2019 and December 31, 2018, respectively.

 

Standby letters of credit represent our obligation to a third party contingent upon the failure of our customer to perform under the terms of an underlying contract with the third party or obligates us to guarantee or stand as surety for the benefit of the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be drawn only when the underlying event fails to occur as intended. We can seek recovery of the amounts paid from the borrower. The majority of these standby letters of credit are unsecured. Commitments under standby letters of credit are usually for one year or less. The maximum potential amount of undiscounted future payments related to standby letters of credit at September 30, 2019 and December 31, 2018 was $1.0 million and $1.2 million, respectively.

 

We originate certain fixed rate residential loans and commit these loans for sale. The commitments to originate fixed rate residential loans and the sales commitments are freestanding derivative instruments. We had forward sales commitments on mortgage loans held for sale totaling $4.9 million and $1.2 million at September 30, 2019 and December 31, 2018, respectively. The fair value of these commitments was not significant at September 30, 2019 or December 31, 2018. We had no embedded derivative instruments requiring separate accounting treatment.

 

Once we sell certain fixed rate residential loans, the loans are no longer reportable on our balance sheet. With most of these sales, we have an obligation to repurchase the loan in the event of a default of principal or interest on the loan. This recourse period ranges from three to nine months. Misrepresentation or fraud carries unlimited time for recourse. The unpaid principal balance of loans sold with recourse was $2.1 million at September 30, 2019 and $0.7 million at December 31, 2018. For the nine months ended September 30, 2019 and September 30, 2018, there were no loans repurchased.

 

Liquidity 

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

 

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

 

Proper liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our primary liquid assets are cash and due from banks, interest-bearing deposits in other banks, federal funds sold, investments available for sale, other short-term investments and mortgage loans held for sale. Our primary liquid assets accounted for 35.68% and 35.58% of total assets at September 30, 2019 and December 31, 2018, respectively. Securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates and liquidity needs. All of the securities presently owned are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity. At September 30, 2019, we had unused short-term lines of credit totaling approximately $23.0 million (which can be withdrawn at the lender’s option). Additional sources of funds available to us for additional liquidity needs include borrowing on a short-term basis from the Federal Reserve System, increasing deposits by raising interest rates paid and sale of mortgage loans held for sale. We established a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits us to retain possession of assets pledged as collateral to secure advances from the Federal Reserve Discount Window. At September 30, 2019, we could borrow up to $69.5 million. There have been no borrowings under this arrangement.

 

 

Our core deposits consist of non-interest bearing accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our level of certificates of deposit greater than $250,000 and other large deposits. We maintain a Contingency Funding Plan (“CFP’) that identifies liquidity needs and weighs alternate courses of action designed to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. At September 30, 2019 and December 31, 2018, our liquidity ratio was 36.82% and 34.27%, respectively.

 

Capital Resources 

Our capital needs have been met to date through the $10.6 million in capital raised in our initial offering, the retention of earnings less dividends paid and the exercise of stock options to purchase stock. Total shareholders’ equity as of September 30, 2019 was $50.3 million. The rate of asset growth since our inception has not negatively impacted this capital base.

 

On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for US banks (“Basel III”). Following the actions by the Federal Reserve, the FDIC also approved regulatory capital requirements on July 9, 2013. The FDIC’s rule is identical in substance to the final rules issued by the Federal Reserve Bank.

 

Basel III became effective on January 1, 2015. The purpose is to improve the quality and increase the quantity of capital for all banking organizations. The minimum requirements for the quantity and quality of capital were increased. The rule includes a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and requires a minimum leverage ratio of 4%. In addition, the rule also implements strict eligibility criteria for regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Full compliance with all of the final rule requirements has been phased in over a multi-year schedule. The Bank’s total risk-based capital ratio at September 30, 2019 and December 31, 2018 was 16.39% and 16.69%, respectively.

 

At September 30, 2019, the Company and the Bank were categorized as “well capitalized” under Basel III. To be categorized as “well capitalized” the Company and the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage ratios of 10%, 8.0%, 6.5% and 5%, respectively, and to be categorized as “adequately capitalized,” the Company and the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital, and Tier 1 leverage ratios of 8%, 6%, 4.5%, and 4.0%, respectively.

 

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

 

We intend to open a branch in North Charleston in November 2019. The Bank of South Carolina will be the anchor tenant of a two-story building located at 9403 Highway 78, occupying the entire first floor. At this time, we estimate the capital expenditures associated with building the branch to be approximately $2.0 million.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

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

 

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934 as amended (the “Act”) was carried out as of June 30, 2019 under the supervision and with the participation of the Bank of South Carolina Corporation’s management, including its President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President and several other members of the Company’s senior management. Based upon that evaluation, Bank of South Carolina Corporation’s management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President concluded that, as of September 30, 2019, the Company’s disclosure controls and procedures were effective in ensuring that the information the Company is required to disclose in the reports filed or submitted under the Act has been (i) accumulated and communicated to management (including the President/Chief Executive Officer and Chief Financial Officer/Executive Vice President) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

 

The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

 

Under the supervision and with the participation of management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of September 30, 2019, based on the 2013 framework established in a report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

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

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2019. Based on this assessment, management believes that as of September 30, 2019, the Company’s internal control over financial reporting was effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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

 

 

Part II. Other Information

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors 

Not required.

 

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

None.

 

Item 3. Defaults Upon Senior Securities 

None.

 

Item 4. Mine Safety Disclosure

None.

 

Item 5. Other Information 

None.

 

Item 6. Exhibits

 

1.	The Consolidated Financial Statements are included in this Form 10-Q and listed on pages as indicated.
			Page
	(1)	Consolidated Balance Sheets	3
	(2)	Consolidated Statements of Income	4-5
	(3)	Consolidated Statements of Comprehensive Income	6
	(4)	Consolidated Statements of Shareholders’ Equity	7
	(5)	Consolidated Statements of Cash Flows	8
	(6)	Notes to Consolidated Financial Statements	9-25

 

Exhibits
	2.0	Plan of Reorganization (Filed with 1995 10-KSB)
	3.0	Articles of Incorporation of the Registrant (Filed with 1995 10-KSB)
	3.1	By-laws of the Registrant (Filed with 1995 10-KSB)
	3.2	Amendments to the Articles of Incorporation of the Registrant (Filed with Form S on June 23, 2011)
	4.0	2019 Proxy Statement (Filed with 2018 10-K)
	10.0	Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB)
	10.1	Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB)
	10.2	Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB)
	10.3	Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB)
	10.4	Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with 2010 10-K)
		Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with June 30, 2013 10-Q)
	10.5	1998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A)
	10.6	Employee Stock Ownership Plan (Filed with 2008 10-K/A)
		Employee Stock Ownership Plan, Restated (Filed with 2011 Proxy Statement)
		Employee Stock Ownership Plan, Restated (Filed with 2016 10-K)
	10.7	2010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement)
	10.8	Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K)
	10.9	Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
	10.10	First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
	10.11	Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K)
	10.12	Extension to Lease Agreement for 256 Meeting Street (Filed with September 30, 2017 10-Q)
	10.13	North Charleston Lease Agreement (Filed with June 30, 2017 10-Q)
	10.14	Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed with September 30, 2017 10-Q)

 

 

	14.0	Code of Ethics (Filed with 2004 10-KSB)
	21.0	List of Subsidiaries of the Registrant (Filed with 1995 10-KSB)
		The Registrant’s only subsidiary is The Bank of South Carolina (Filed with 1995 10-KSB)
	31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer
	31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer
	32.1	Certification pursuant to Section 1350
	32.2	Certification pursuant to Section 1350
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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
November 4, 2019
	By:	/s/ Fleetwood S. Hassell
		Fleetwood S. Hassell
		President/Chief Executive Officer
	By:	/s/ Eugene H. Walpole, IV
		Eugene H. Walpole, IV
		Chief Financial Officer/Executive Vice President

 

 

Bank of South Carolina Corporation 10-Q

Exhibit 31.1

 

Certification Pursuant to 13a-14(a)/15d-14(a) by the Chief Executive Officer

 

I, Fleetwood S. Hassell, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of the Bank of South Carolina Corporation;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report.

 

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within the entity, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 4, 2019
/s/ Fleetwood S. Hassell
Fleetwood S. Hassell
President/Chief Executive Officer

 

 

Bank of South Carolina Corporation 10-Q

Exhibit 31.2

 

Certification Pursuant to 13a-14(a)/15d-14(a) by the Chief Financial Officer

 

I, Eugene H. Walpole, IV, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of the Bank of South Carolina Corporation;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report.

 

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within the entity, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 4, 2019
/s/ Eugene H. Walpole, IV
Eugene H. Walpole, IV
Chief Financial Officer/
Executive Vice President

 

 

Bank of South Carolina Corporation 10-Q

Exhibit 32.1

 

Certification of the Chief Executive Officer Pursuant to 18 USC 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

 

I, Fleetwood S. Hassell, President/Chief Executive Officer of Bank of South Carolina Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

 

1.

the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (U.S.C. 78m or 78o(d)); and

 

2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 4, 2019
	By:	/s/ Fleetwood S. Hassell
		Fleetwood S. Hassell
		President/Chief Executive Officer

 

 

Bank of South Carolina Corporation 10-Q

Exhibit 32.2

 

Certification of the Chief Financial Officer Pursuant to 18 USC 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

 

I, Eugene H. Walpole, IV, Chief Financial Officer/Executive Vice President of Bank of South Carolina Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

 

1.

the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (U.S.C. 78m or 78o(d)); and

 

2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 4, 2019
	By:	/s/ Eugene H. Walpole, IV
		Eugene H. Walpole, IV
		Chief Financial Officer/
		Executive Vice President