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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
------------------
[ ] 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 small business 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
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(Address of principal executive offices)
(843) 724-1500
--------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of November 12, 1998, there were 2,605,597 Common Shares outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes No X
----- -----
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Table of Contents
BANK OF SOUTH CAROLINA CORPORATION
Report on Form 10-QSB
for three months ended
September 30, 1998
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997...........................................................3
Consolidated Statements of Operations - Three months
ended September 30, 1998 and 1997 ..............................................4
Consolidated Statements of Operations - Nine months
ended September 30, 1998 and 1997..............................................5
Consolidated Statements of Changes in Shareholders'
Equity - Nine months ended September 30, 1998 and 1997..........................6
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997 ..............................................7
Notes to Consolidated Financial Statements........................................8 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................9 - 12
Liquidity....................................................................12 - 13
Capital Resources............................................................13
Year 2000....................................................................13 - 14
Accounting and Reporting Changes.............................................14
Effect of Inflation and Changing Prices......................................14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................15
Item 2. Changes in Securities........................................................15
Item 3. Default Upon Senior Securities...............................................15
Item 4. Submission of Matters to a Vote of Security Holders..........................15
Item 5. Other Information............................................................15
Item 6. Exhibits and Reports on Form 8-K.............................................15
Signatures............................................................................16
</TABLE>
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PART I - ITEM 1 - FINANCIAL STATEMENTS
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
Assets: September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Cash and due from banks $ 9,046,268 $ 6,410,838
Interest bearing deposits in other banks 6,645 6,421
Federal funds sold and resale agreements 24,775,000 15,600,000
Investment securities available for sale 20,638,761 19,483,167
Loans 83,297,890 79,965,957
Allowance for loan losses (1,233,662) (1,210,528)
------------ ------------
Net loans 82,064,228 78,755,429
Premises, equipment, leasehold improvements
and construction costs, net 4,114,342 2,613,293
Other assets 1,083,204 1,608,875
------------ ------------
Total assets $141,728,448 $124,478,023
============ ============
Liabilities and shareholders' equity:
Deposits:
Non-interest bearing demand $ 29,365,219 $ 27,757,108
Interest bearing demand 22,797,407 20,336,818
Money market accounts 24,220,338 21,761,624
Certificates of deposit $100,000 and over 18,790,716 14,895,786
Other time deposits 19,710,102 15,663,178
Other savings deposits 5,711,088 4,054,559
------------ ------------
Total deposits 120,594,870 104,469,073
Short-term borrowings 3,746,187 3,787,996
Other liabilities 909,376 699,607
------------ ------------
Total liabilities 125,250,433 108,956,676
------------ ------------
Common Stock - No par value;
6,000,000 shares authorized;
Issued and outstanding 2,605,597 shares
at September 30, 1998, and 2,575,589 shares
at December 31, 1997 -- --
Additional paid in capital 12,330,882 12,206,882
Retained earnings 4,491,896 3,738,498
Accumulated other comprehensive
income, net of income taxes 205,923 126,653
Treasury stock; 77,000 shares at September
30, 1998, and December 31, 1997 (550,686) (550,686)
------------ ------------
Total shareholders' equity 16,478,015 15,521,347
------------ ------------
Total liabilities and shareholders' equity $141,728,448 $124,478,023
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Interest and fee income
Interest and fees on loans $2,049,120 $1,870,884
Interest and dividends on investment securities 311,563 317,500
Other interest income 429,565 176,877
---------- ----------
Total interest and fee income 2,790,248 2,365,261
---------- ----------
Interest expense
Interest on deposits 980,879 704,460
Interest on short-term borrowings 59,919 61,214
---------- ----------
Total interest expense 1,040,798 765,674
---------- ----------
Net interest income 1,749,450 1,599,587
Provision for loan losses 15,000 52,500
---------- ----------
Net interest income after provision for loan losses 1,734,450 1,547,087
---------- ----------
Other income
Service charges, fees and commissions 215,552 163,451
Other non-interest income 6,733 8,040
---------- ----------
Total other income 222,285 171,491
---------- ----------
Other expense
Salaries and employee benefits 631,503 556,851
Net occupancy expense of premises 271,475 219,385
Other operating expenses 370,418 260,937
---------- ----------
Total other expense 1,273,396 1,037,173
---------- ----------
Income before income tax expense 683,339 681,405
Income tax expense 239,012 253,000
---------- ----------
Net income $ 444,327 $ 428,405
========== ==========
Basic earnings per share $ .17 $ .17
========== ==========
Diluted earnings per share $ .17 $ .17
========== ==========
Dividends per common share $ .07 $ .05
========== ==========
Weighted average shares outstanding 2,605,597 2,341,514
</TABLE>
See accompanying notes to consolidated financial statements.
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1997
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<S> <C> <C>
Interest and fee income
Interest and fees on loans $6,151,237 $5,423,703
Interest and dividends on investment securities 937,970 949,492
Other interest income 821,500 332,792
---------- ----------
Total interest and fee income 7,910,707 6,705,987
---------- ----------
Interest expense
Interest on deposits 2,599,631 2,007,573
Interest on short-term borrowings 179,195 134,536
---------- ----------
Total interest expense 2,778,826 2,142,109
---------- ----------
Net interest income 5,131,881 4,563,878
Provision for loan losses 45,000 157,500
---------- ----------
Net interest income after provision for loan losses 5,086,881 4,406,378
---------- ----------
Other income
Service charges, fees and commissions 616,932 434,360
Loss on securities -- (16,544)
Other non-interest income 14,590 18,166
---------- ----------
Total other income 631,522 435,982
---------- ----------
Other expense
Salaries and employee benefits 1,941,215 1,620,386
Net occupancy expense of premises 766,894 651,508
Other operating expenses 1,092,349 725,208
---------- ----------
Total other expense 3,800,458 2,997,102
---------- ----------
Income before income tax expense 1,917,945 1,845,258
Income tax expense 682,234 688,000
---------- ----------
Net income $1,235,711 $1,157,258
========== ==========
Basic earnings per share $ .48 $ .45
========== ==========
Diluted earnings per share $ .48 $ .45
========== ==========
Dividends per common share $ .18 $ .37
========== ==========
Weighted average shares outstanding 2,597,061 2,573,138
</TABLE>
See accompanying notes to consolidated financial statements.
5
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated Other
Common Additional Retained Treasury Comprehensive
Stock Paid In Capital Earnings Stock Income Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 $ -- $12,082,882 $3,252,807 $(550,686) $108,810 14,893,813
Comprehensive income
Net income -- -- 1,157,258 -- -- 1,157,258
Net unrealized losses on securities
(net of tax effect of $5,938) -- -- -- -- 10,110 10,110
----------
Comprehensive income -- -- -- -- -- 1,167,368
----------
Shares issued for the
exercise of stock options -- 124,000 -- -- -- 124,000
Cash dividends -- -- (983,437) -- -- (983,437)
----- ----------- ---------- --------- -------- -----------
Balance,
September 30, 1997 $ -- $12,206,882 $3,426,628 $(550,686) $118,920 $15,201,744
===== =========== ========== ========= ======== ===========
Balance,
December 31, 1997 $ -- $12,206,882 $3,738,498 $(550,686) $126,653 $15,521,347
Comprehensive income
Net income -- -- 1,235,711 -- -- 1,235,711
Net unrealized losses on securities
(net of tax effect of $46,555) -- -- -- -- 79,270 79,270
-----------
Comprehensive income -- -- -- -- -- 1,314,981
-----------
Shares issued for the
exercise of stock options -- 124,000 -- -- -- 124,000
Cash dividends -- -- (482,313) -- -- (482,313)
----- ----------- ---------- --------- -------- -----------
Balance,
September 30, 1998 $ -- $12,330,882 $4,491,896 $(550,686) $205,923 $16,478,015
===== =========== ========== ========= ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,235,711 $ 1,157,258
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 253,088 158,918
Net accretion of unearned discounts on investments (11,305) (5,722)
Amortization of organizational costs 5,584 5,584
Loss on sale of investments -- 16,544
(Increase) decrease in receivables and other assets 473,531 (212,078)
Provision for loan losses 45,000 157,500
Increase (decrease) in other liabilities 209,769 54,520
------------ ------------
Net cash provided by operating activities 2,211,378 1,332,524
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of investments -- 1,981,875
Proceeds from the maturity of investments 3,193,881 2,013,881
Purchase of investment securities (4,212,344) (5,228,750)
Net increase in loans (3,353,799) (2,156,615)
Purchase of premises, equipment, leasehold
improvements and construction costs (1,754,137) (962,912)
------------ ------------
Net cash used in investing activities (6,126,399) (4,352,521)
------------ ------------
Cash flows from financing activities:
Net increase in deposit accounts 16,125,797 17,129,618
Net decrease in short-term borrowings (41,809) 3,310,626
Exercise of stock options 124,000 124,000
Dividends (482,313) (983,437)
------------ ------------
Net cash provided by financing activities 15,725,675 19,580,807
------------ ------------
Net increase in cash and cash equivalents 14,168,466 16,560,810
Cash and cash equivalents, beginning of period 22,017,259 10,661,529
------------ ------------
Cash and cash equivalents, end of period $ 33,827,913 $ 27,222,339
============ ============
Supplemental disclosure of cash flow data:
Cash paid during the year for:
Interest $ 28,452,888 $ 2,063,915
Income taxes 620,776 744,590
</TABLE>
See accompanying notes to consolidated financial statements.
7
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BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1: BASIS OF PRESENTATION
Bank of South Carolina Corporation (the Company) was organized as a South
Carolina Corporation on April 17, 1995, as a one-bank holding company. The
Company, through its bank subsidiary The Bank of South Carolina (the Bank),
provides a full range of banking services including the taking of demand and
time deposits and the making of commercial, consumer and mortgage loans. The
Bank currently has four locations, two in Charleston, South Carolina, one in
Summerville, South Carolina and one in Mt. Pleasant, South Carolina. The
financial statements in this report are unaudited. All adjustments consisting
of normal recurring accruals which are, in the opinion of management, necessary
for fair presentation of the interim consolidated financial statements have
been included and fairly and accurately present the financial position, results
of operations and cash flows as of those dates of the Company and the Bank,
respectively. The results of operations for the period ended September 30, 1998
are not necessarily indicative of the results which may be expected for the
entire year.
NOTE 2: ORGANIZATION AND DEVELOPMENT
The organization of The Bank of South Carolina (the Bank) began on April 24,
1986 and the Bank received approval on October 22, 1986, to organize and
operate as a state-chartered bank. Common stock was issued on October 23, 1986.
The Federal Deposit Insurance Corporation (FDIC) issued approval to insure all
deposits to the full amount permitted by the law upon commencement of
operations on February 26, 1987. On the effective date (12:01 a.m., April 17,
1995), shareholders of The Bank of South Carolina became shareholders of Bank
of South Carolina Corporation at which time one share of common stock in the
Bank was exchanged for two shares of common stock in the Company.
NOTE 3: INVESTMENT SECURITIES
Investment securities to be "Held to Maturity" are carried at cost, adjusted
for amortization of premiums and accretion of discounts, computed by the
interest method. Investment securities classified as "Available for Sale" are
marked to market with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity (net of estimated tax
effects). Realized gains or losses on the sale of investments are based on the
specific identification method. All the Company's securities are classified as
"Available for Sale".
The amortized cost of U.S. Treasury Securities held by the Company at September
30, 1998, and classified as "Available for Sale" is $20,311,900. The aggregate
fair value of securities "Available for Sale" on the basis of market quotations
as of September 30, 1998, is $20,638,761. The unrealized gain as of September
30, 1998, on such securities is $326,861.
The amortized cost of U.S. Treasury Securities held by the Company at December
31, 1997, and classified as "Available for Sale" was $19,282,130. The aggregate
fair value of securities "Available for Sale" on the basis of market quotations
as of December 31, 1997, was $19,483,167. The unrealized gain as of December
31, 1997, on such securities was $201,037.
NOTE 4: SHAREHOLDERS' EQUITY
The Board of Directors approved a ten percent (10%) common stock dividend to
shareholders of record April 30, 1998, effective May 15, 1998. All share and
per share data have been retroactively restated to reflect the 10% common stock
dividend. A regular quarterly cash dividend of $.06 per share (before the 10%
stock dividend) was approved for shareholders of record March 31, 1998, payable
April 30,
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1998, a regular quarterly cash dividend of $.06 per share was approved for
shareholders of record June 30, 1998, payable July 31, 1998 and a regular
quarterly cash dividend of $.07 per share was approved for shareholders of
record September 30, 1998, payable October 30, 1998.
NOTE 5: COMPREHENSIVE INCOME
Effective March 31, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Companies are required to classify items of "other
comprehensive income" by their nature in the financial statement and display
the balance of other accumulated comprehensive income separately in the equity
section of a statement of financial position. The Company adopted the Statement
of Changes in Equity approach to disclosing changes in accumulated
comprehensive income.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bank of South Carolina Corporation (the Company) is a financial institution
holding company headquartered in Charleston, South Carolina, with branch
operations in Summerville, South Carolina, Mt. Pleasant, South Carolina and the
West Ashley community of Charleston, South Carolina. It offers a broad range of
financial services through its wholly owned subsidiary, The Bank of South
Carolina (the Bank). The Bank is a state-chartered commercial bank which
operates principally in the counties of Charleston, Dorchester and Berkeley in
South Carolina.
For the first nine months of 1998, the Company reported net income of
$1,235,711 or basic and diluted earnings per share of $.48, an increase of
$78,453 or 6.78% compared to net income for the first nine months of 1997 of
$1,157,258 or basic and diluted earnings per share of $.45. Total assets for
the period increased $17,250,425 or 13.86% from December 31, 1997, to September
30, 1998.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998, TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's results of operations depends primarily on the level of its net
interest income, its non-interest income and its operating expenses. Net
interest income depends upon the volume of and rates associated with interest
earning assets and interest bearing liabilities which results in the net
interest spread. Net income increased $15,922 or 3.72% to $444,327 for the
three months ended September 30, 1998, from $428,405 for the three months ended
September 30, 1997.
NET INTEREST INCOME
Net interest income increased $149,863 or 9.37% to $1,749,450 for the three
months ended September 30, 1998, from $1,599,587 for the three months ended
September 30, 1997. Total interest and fee income increased $424,987 or 17.97%
for the three months ended September 30, 1998, to $2,790,248 from $2,365,261
for the three months ended September 30, 1997. The increase in interest and fee
income is the result of an increase in average loans of approximately
$8,000,000 for the three months ended September 30, 1998, compared to the three
months ended September 30, 1997, and an increase in federal funds sold of
$6,625,000 or 36.50% to $24,775,000 at September 30, 1998, as compared to
$18,150,000 at September 30, 1997.
Investment portfolio income decreased $5,937 or 1.87% to $311,563 for the
period ended September 30, 1998, as compared to $317,500 for the three months
ended September 30, 1997. This decrease in
9
<PAGE> 10
revenue is primarily a result of a declining yield in the investment portfolio.
Other interest income increased $252,688 or 142.86% to $429,565 for the three
months ended September 30, 1998, from $176,877 for the three months ended
September 30, 1997. This increase in revenue is attributed to the increase in
average federal funds sold to approximately $31,000,000 for the three months
ended September 30, 1998, from approximately $17,000,000 for the three months
ended September 30, 1997.
Total interest expense increased $275,124 or 35.93% to $1,040,798 for the three
months ended September 30, 1998, from $765,674 for three months ended September
30, 1997. The increase is primarily due to the increase in average interest
bearing deposits to approximately $95,890,000 for the three months ended
September 30, 1998, from approximately $74,500,000 for the three months ended
September 30, 1997. Interest on deposits for the three months ended September
30, 1998, was $980,879 compared to $704,460 for the three months ended
September 30, 1997, an increase of $276,419 or 39.24%. Interest on short-term
borrowings decreased $1,295 or 2.12% to $59,919 for the period ended September
30, 1998, from $61,214 for the three months ended September 30, 1997.
Short-term borrowings consist of demand notes to the U.S. Treasury and
securities sold under agreements to repurchase.
PROVISION FOR LOAN LOSSES
The provision to the allowance for loan losses is based on management's and the
Loan Committee's ongoing review and evaluation of the loan portfolio and
general economic conditions on a monthly basis and by the Board of Directors on
a quarterly basis. Management's review and evaluation of the allowance for loan
losses is based on an analysis of historical trends, significant problem loans,
current market value of real estate or collateral and certain economic and
other factors affecting loans and real estate or collateral securing these
loans. Loans are charged off when, in the opinion of management, they are
deemed uncollectible. Recognized losses are charged against the allowance and
subsequent recoveries are added to the allowance. While management uses the
best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment based upon information that is available to them at the
time of their examination.
During the quarter ended September 30, 1998, $15,000 was charged to the
provision for loan losses compared to $52,500 for the quarter ended September
30, 1997. The allowance for loan losses was $1,233,662 or 1.49% of total
average loans for the three months ended September 30, 1998. This compares to
an allowance of $1,161,830 or 1.57% of total average loans for the three months
ended September 30, 1997. During the quarter ended September 30, 1998, the Bank
incurred one charge off totaling $9,200 as compared to two charge offs totaling
$4,185 for the same period ended September 30, 1997. There were six loans on
non-accrual status at September 30, 1998, for $464,457 as compared to seven
loans on non-accrual status totaling $682,655 at September 30, 1997. Loans past
due over 30 days totaled $1,502,984 or 1.8% of total loans at September 30,
1998, compared to $561,112 or .8% of total loans at September 30, 1997, and no
loans past due 90 days or more at September 30, 1998, which were not already
placed on non-accrual status compared to four loans for $285,020 or .4% of
total loans at September 30, 1997. Four recoveries totaling $593 occurred
during the three months ended September 30, 1998, as compared to no recoveries
for the three months ended September 30, 1997. Generally, loans are placed on
non-accrual status at the earlier of when they are 90 days past due or when the
collection of interest becomes doubtful. The allowance for loan losses at
September 30, 1998, in management's opinion, is adequate for future losses that
may occur in the loan portfolio.
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OTHER INCOME
Other income for the three months ended September 30, 1998, increased $50,794
or 29.62% to $222,285 from $171,491 for the three months ended September 30,
1997. Service charges, fees and commissions was $215,552 for the three months
ended September 30, 1998, compared to $163,451 for the three months ended
September 30, 1997, an increase of $52,101 or 31.88%. The increase is primarily
the result of an increase in total deposits resulting in additional service
charges and fees and additional income generated by the mortgage department.
GENERAL AND ADMINISTRATIVE EXPENSES
Bank overhead increased $236,223 or 22.78% to $1,273,396 for the three months
ended September 30, 1998, from $1,037,173 for the three months ended September
30, 1997. Salaries and employee benefits increased $74,652 or 13.41% to
$631,503 for the period ended September 30, 1998, from $556,851 for the three
month period ended September 30, 1997. This increase is primarily attributed to
annual merit raises given to the employees and the addition of employees to
staff the new West Ashley office. Net occupancy expense increased $52,090 or
23.74% to $271,475 for the three months ended September 30, 1998, from $219,385
for the three months ended September 30, 1997. This increase is primarily due
to the addition of a branch bank and operations center in the West Ashley
community which opened during the first quarter of 1998 and increased
depreciation expense due to the new imaging equipment and the upgrade of the
bank's check processing and information systems. Other operating expenses
increased $109,481 or 41.96% to $370,418 for the period ending September 30,
1998, from $260,937 for the period ending September 30, 1997. This increase is
in part the result of increased mortgage loan volume, which resulted in an
increase in discount fees paid and additional costs associated with a new
office.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998, TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net income increased $78,453 or 6.78% to $1,235,711 for the nine months ended
September 30, 1998, from $1,157,258 for the nine months ended September 30,
1997. The increase is primarily due to a higher volume of earning assets during
the comparable periods.
NET INTEREST INCOME
Net interest income increased $568,003 or 12.45% to $5,131,881 for the nine
months ended September 30, 1998, from $4,563,878 for the nine months ended
September 30, 1997. Total interest and fee income increased $1,204,720 or
17.96% for the nine months ended September 30, 1998, to $7,910,707 from
$6,705,987 for the nine months ended September 30, 1997. The increase in
interest and fee income is the result of loan growth for the comparable periods
and an increase in average federal funds sold of approximately $11,800,000 for
the nine months ended September 30, 1998, the nine months ended September 30,
1997.
Loans averaged for the nine months ended September 30, 1998, approximately
$82,790,000 compared to average loans of approximately $74,600,000 for the nine
months ended September 30, 1997, producing interest and fee income of
$6,151,237 for the nine months ended September 30, 1998, compared to $5,423,703
for the nine months ended September 30, 1997, an increase of $727,534 or
13.41%. Investment portfolio income was $937,970 for the nine months ended
September 30, 1998, compared to $949,492, a decrease of $11,522 or 1.21%. This
decrease in revenue is primarily the result of a decline in the investment
portfolio yield. Other interest income increased $488,708 or 146.85% to
$821,500 for the nine months ended September 30, 1998, compared to $332,792 for
the nine months ended September 30, 1997. This increase in revenue is
attributed to the increase in average federal funds sold.
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Total interest expense increased $636,717 or 29.72% to $2,778,826 for the nine
months ended September 30, 1998, from $2,142,109 for nine months ended
September 30, 1997. The increase is primarily due to the increase in average
interest bearing deposits to approximately $86,222,000 for the nine months
ended September 30, 1998, from approximately $69,500,000 for the nine months
ended September 30, 1997. Interest on deposits for the nine months ended
September 30, 1998, was $2,599,631 compared to $2,007,573 for the nine months
ended September 30, 1997, an increase of $592,058 or 29.49%. Interest on
short-term borrowings increased $44,659 or 33.19% to $179,195 for the nine
months ended September 30, 1998, from $134,536 for the nine months ended
September 30, 1997. Short-term borrowings consist of demand notes to the U.S.
Treasury and securities sold under agreements to repurchase.
PROVISION FOR LOAN LOSSES
During the nine months ended September 30, 1998, $45,000 was charged to the
provision for loan losses compared to $157,500 for the nine months ended
September 30, 1997. During the nine months ended September 30, 1998, the Bank
incurred six charge offs totaling $31,036 as compared to six charge offs
totaling $39,630 for the same period ended September 30, 1997. Thirteen
recoveries totaling $9,170 occurred during the nine months ended September 30,
1998, as compared to five recoveries totaling $2,743 for the nine months ended
September 30, 1997.
OTHER INCOME
Other income for the nine months ended September 30, 1998, increased $195,540
or 44.85% to $631,522 from $135,982 for the nine months ended September 30,
1997. Service charges, fees and commissions was $616,932 for the nine months
ended September 30, 1998, compared to $434,360 for the nine months ended
September 30, 1997, an increase of $182,572 or 42.03%. The increase is
primarily the result of the increase in total deposits resulting in additional
service charges and fees and additional income generated by the mortgage
department. Other non-interest income reflects a $3,576 decrease for the nine
months ended September 30, 1998, to $14,590 from $18,166.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $803,356 or 26.80% to $3,800,458
for the nine months ended September 30, 1998, from $2,997,102 for the nine
months ended September 30, 1997. Salaries and employee benefits increased
$320,829 or 19.80% to $1,941,215 for the period ended September 30, 1998, from
$1,620,386 for the nine months ended September 30, 1997. This increase is
primarily attributed to annual merit raises given to the employees and the
addition of employees to staff the new West Ashley office. Net occupancy
expense increased $115,386 or 17.71% to $766,894 for the nine months ended
September 30, 1998, from $651,508 for the nine months ended September 30, 1997.
This increase is primarily due to the addition of a branch bank and operations
center in the West Ashley community which opened during the first quarter of
1998 and increased depreciation expense due to the new imaging equipment and
the upgrade of the bank's check processing and information systems. Other
operating expenses increased $367,141 or 50.63% to $1,092,349 for the nine
months ended September 30, 1998, from $725,208 for the period ending September
30, 1997. This is the result of an increase in mortgage loans made by the Bank
during the comparable reporting periods, which subsequently increased discount
fees paid on mortgage loans. Advertising and customer relations increased due
to the opening of a new bank office and operations center during 1998, and
supplies and printed forms cost also increased due to supplying the new
offices.
LIQUIDITY
The Company must maintain an adequate liquidity position in order to respond to
the short-term demand for funds caused by the withdrawals from deposit
accounts, maturities of repurchase
12
<PAGE> 13
agreements, extensions of credit and for the payment of operating expenses.
Maintaining this position of adequate liquidity is accomplished through the
management of a combination of liquid assets; those which can be converted into
cash and access to additional sources of funds. Primary liquid assets of the
Company are cash and due from banks, federal funds sold, investments available
for sale and other short-term investments. The Company's primary liquid assets
accounted for 37.59% and 39.98% of average assets at September 30, 1998 and
1997, respectively. Additional sources of funds available through the Bank for
additional liquidity needs include borrowing on a short-term basis from the
Federal Reserve System, the purchasing of federal funds from other financial
institutions and increasing deposits by raising rates paid. The Company's core
deposits consist of non-interest bearing accounts, NOW accounts, money market
accounts, time deposits and savings. Although such core deposits are becoming
increasingly more costly and interest sensitive for both the Company and the
industry as a whole, such core deposits continue to provide the Company with a
large and stable source of funds. The Company's core deposits accounted for
90.16% and 90.71% of average earning assets at September 30, 1998 and 1997,
respectively. The Company closely monitors its reliance on certificates of
deposit greater than $100,000. The Company plans to meet its future needs
through maturities of investments and loans and through the generation of
deposits. The Company's management believes its liquidity sources are adequate
to meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse effect on the Company's
liquidity position. At September 30, 1998 and 1997, the Bank's liquidity ratio
was 34.53% and 36.12%, respectively.
CAPITAL RESOURCES
The capital needs of the Company have been met to date through the $10,600,000
in capital raised at its initial offering, the retention of earnings less
dividends paid and the exercising of stock options in April of 1995, of
$124,000, the exercising of stock options in March of 1996, of $124,000, the
exercising of stock options in January of 1997 of $124,000 and the exercising
of stock options in March of 1998 of $124,000 for a total shareholders' equity
at September 30, 1998, of $16,478,015. The rate of asset growth from the Bank's
inception does not negatively impact this capital base. Effective December 31,
1990, regulatory authorities adopted risk based capital guidelines for
financial institutions. These risk-based guidelines are designed to highlight
differences in risk profiles among financial institutions and to account for
off balance sheet risk. The guidelines established require a risk based capital
ratio of 8% for bank holding companies and banks. The risk based capital ratio
at September 30, 1998 and 1997 was 16.89% and 18.24%, respectively. The
Company's management does not know of any trends, events or uncertainties that
may result in the Company's capital resources materially increasing or
decreasing. The Bank had capital expenditures during the second quarter of 1998
of approximately $1,334,000 representing the construction cost and furnishings
of its new West Ashley office and approximately $839,000 representing the cost
of upgrading personal computers and a new check processing and check imaging
system.
YEAR 2000
The following disclosure contains forward-looking statements which involve
risks and uncertainties. The actual impact of the Year 2000 issue on the Bank
could materially differ from that which is anticipated in these forward-looking
statements because of certain factors identified below.
THE COMPANY'S STATE OF READINESS
The Company's management and Board of Directors are aware of the issues
presented by the Year 2000 century change and the serious consequences it could
have on the Company and its customers. The problem lies in the fact that some
computer systems store dates in two-digit format (98) instead of four-digit
format (1998). On January 1, 2000, it is possible that some computer systems
will be unable
13
<PAGE> 14
to distinguish between the year 1900 and the year 2000. If not corrected, this
could cause system failure, miscalculations and disruption of normal business
operations, such as the temporary inability to process transactions, send bank
statements or engage in every day business activities.
The Company has developed a Year 2000 Management Plan following the five phases
recommended by the Federal Financial Institutions Examination Council (FFIEC)
which are awareness, assessment, renovation, validation and implementation. A
Year 2000 Team has been formed to implement the Management Plan with the full
support of management and the Board of Directors.
In the first and second quarters of 1998, the Company made a substantial
investment in technology, replacing all computers and processing systems,
hardware and software. The Company's processing firm, FiServ Atlanta, recently
completed the first phase of Year 2000 testing which included proxy bank
testing of the ITI application software (which is the software used by the
Bank) for ten of its clients. Our Bank was chosen as one of the ten to
participate in the test. The results of the test were conclusive that the ITI
application software and the Item Processing Software are Year 2000 compliant.
We have inventoried all hardware, software, third party vendors and
environmental systems. All mission critical systems, vendors and customers have
been identified. We are in the process of developing contingency plans in the
event that any of these parties are not ready in time. For our internal
systems, we have completed the assessment phase and have upgraded where needed.
We have communicated with all third party vendors that the Bank relies on to
assess their progress and we are monitoring their efforts. We have developed a
Year 2000 Testing Plan and Strategy and intend to have all mission critical
systems tested and validated by December 31, 1998. We plan to have all other
testing completed by June 30, 1999.
RISKS OF YEAR 2000 ISSUES
All borrowers with credit of $250,000 or more have been contacted in order for
the Bank to assess their Year 2000 readiness. Evaluations have been completed
on all loans of $250,000 or more which could pose the greatest risk to the
Bank. To date, we have not identified any material credit risk. Going forward,
lenders will discuss Year 2000 issues with borrowers as new credit is extended
or when maturing notes are renewed. Our largest deposit customers have also
been contacted to determine their state of readiness. We have determined that
all our largest deposit customers are ready for Year 2000 and pose no liquidity
risk to the Bank. Additional evaluations will be performed on an ongoing basis.
Reasonable worst-case Year 2000 scenarios could include the failure of a vendor
or third party provider, which is beyond the Bank's control, the inability of
the Bank to provide consistent daily processing of information for our
customers or the failure of any of the Bank's loan customers.
Possible impacts on the Bank could include a substantial loss of customers and
the loss of the related revenue on these relationships, as well as possible
loan losses resulting from customers being unable to repay their loans on a
timely basis.
COSTS TO ADDRESS YEAR 2000 ISSUES
Since the Company's primary systems are Year 2000 compliant, estimated costs
directly related to Year 2000 issues will not have a material effect on the
performance of the Bank. No direct costs have been expensed as of this date.
There are indirect costs related to the significant amount of time being spent
by existing personnel for the development of test plans, test scripts and for
actual testing. Most of this time is spent as part of these employees' normal
job responsibilities with no additional direct costs incurred.
14
<PAGE> 15
Costs incurred which are related to planning, testing and validation will be
expensed as incurred. The financial impact to the Company of Year 2000
compliance has not been and is not anticipated to be material to the Company's
financial position or its results of operations; however, there can be no
guarantee that actual results will not differ materially from today's plan.
CONTINGENCY PLANS
The Company has not yet developed contingency plans specifically for problems
arising due to the Year 2000; however, the Company has in place a comprehensive
set of disaster recovery plans which includes every department of the Bank.
This plan gives step-by-step details on how to function if normal resources
were not available. The Year 2000 Team will review the disaster recovery plan
during the fourth quarter of 1998 and make changes as needed.
ACCOUNTING AND REPORTING CHANGES
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Companies are required to classify items of "other comprehensive income" by
their nature in the financial statement and display the balance of other
comprehensive income separately in the equity section of a statement of
financial position. Statement 130 is effective for both interim and annual
periods beginning after December 15, 1997. Earlier application is permitted.
Comparative financial statements provided for earlier periods are required to
be reclassified to reflect the provisions of this statement. The Company
adopted Statement 130 effective March 31, 1998, and has provided the required
disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". Statement 131 establishes standards for
the way companies are to report information about operating segments in annual
financial statements and requires those companies to report selected
information about operating segments in interim financial reports issued to
shareholders. Statement 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. Earlier application is encouraged. In
the initial year of application, comparative information for earlier years is
to be restated, unless it is impracticable to do so. Statement 131 need not be
applied to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application shall be reported in financial statements for interim periods in
the second year of application. It is not anticipated that this standard will
materially effect the Company's current method of financial reporting.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles (GAAP) which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in relative purchasing power of money over time due to
inflation. The primary impact of inflation on operations of the Bank is
reflected in increased operating costs. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
15
<PAGE> 16
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiary from time to time are involved as plaintiff or
defendant in various legal actions incident to its business. These actions are
not believed to be material either individually or collectively to the
consolidated financial condition of the Company or its subsidiary.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27-1 Financial Data Schedule for September 30, 1998
Exhibit 27-2 Financial Data Schedule for September 30, 1997 (restated)
16
<PAGE> 17
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 12, 1998
BY: /s/ Hugh C. Lane, Jr.
President
BY: /s/ William L. Hiott, Jr.
Executive Vice President & Cashier
17
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