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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 March 31, 1999
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[] 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
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(Exact name of small business issuer as specified in its charter)
South Carolina 57-1021355
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(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)
(803) 724-1500
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(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
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As of May 12, 1999, 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 quarter ended
March 31, 1999
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998...........................................................3
Consolidated Statements of Operations - Three months
ended March 31, 1999 and 1998...................................................4
Consolidated Statements of Shareholders'
Equity and Comprehensive Income - Three months ended
March 31, 1999 and 1998..........................................................5
Consolidated Statements of Cash Flows - Three months
ended March 31, 1999 and 1998 ..................................................6
Notes to Consolidated Financial Statements........................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................8
Liquidity..................................................................10
Capital Resources..........................................................10
Year 2000..................................................................11
Accounting and Reporting Changes...........................................12
Effect of Inflation and Changing Prices....................................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................13
Item 2. Changes in Securities........................................................13
Item 3. Default Upon Senior Securities...............................................13
Item 4. Submission of Matters to a Vote of Security Holders..........................13
Item 5. Other Information............................................................13
Item 6. Exhibits and Reports on Form 8-K.............................................13
Signatures............................................................................14
</TABLE>
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PART I - ITEM 1 - FINANCIAL STATEMENTS
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
Assets: March 31, 1999 December 31, 1998
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<S> <C> <C>
Cash and due from banks $ 7,244,230 $ 7,464,394
Interest bearing deposits in other banks 6,729 6,666
Federal funds sold 10,975,000 15,450,000
Investment securities available for sale 33,560,608 33,759,333
Investment securities held to maturity 200,000 --
Loans 86,262,750 84,140,365
Allowance for loan losses (1,263,886) (1,239,968)
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Net loans 84,998,864 82,900,397
Premises and equipment, net 3,994,029 4,056,891
Other assets 1,256,230 1,382,120
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Total assets $ 142,235,690 $ 145,019,801
============= =============
Liabilities and shareholders' equity:
Deposits:
Non-interest bearing demand $ 30,061,530 $ 32,327,281
Interest bearing demand 23,910,642 23,834,038
Money market accounts 24,445,066 22,881,876
Certificates of deposit $100,000 and over 18,541,716 19,884,534
Other time deposits 17,829,377 20,016,065
Other savings deposits 4,668,253 5,029,514
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Total deposits 119,456,584 123,973,308
Short-term borrowings 4,782,504 3,480,070
Other liabilities 1,180,262 888,890
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Total liabilities 125,419,350 128,342,268
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Common Stock - No par value;
6,000,000 shares authorized;
Issued 2,605,673 shares at March 31, 1999
and December 31, 1998 -- --
Additional paid in capital 16,456,624 16,456,624
Retained earnings 852,515 607,959
Accumulated other comprehensive income 57,887 163,636
Treasury stock - 77,000 shares at March 31, 1999
and December 31, 1998 (550,686) (550,686)
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Total shareholders' equity 16,816,340 16,677,533
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Total liabilities and shareholders' equity $ 142,235,690 $ 145,019,801
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</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
March 31, 1999 March 31, 1998
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<S> <C> <C>
Interest and fee income
Interest and fees on loans $ 2,067,951 $ 2,035,369
Interest and dividends on investment securities 459,522 326,454
Other interest income 117,619 165,736
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Total interest and fee income 2,645,092 2,527,559
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Interest expense
Interest on deposits 803,392 775,235
Interest on short-term borrowings 40,511 52,159
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Total interest expense 843,903 827,394
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Net interest income 1,801,189 1,700,165
Provision for loan losses 5,000 15,000
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Net interest income after provision for loan losses 1,796,189 1,685,165
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Other income
Service charges, fees and commissions 268,231 180,931
Other non-interest income 3,995 3,262
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Total other income 272,226 184,193
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Other expense
Salaries and employee benefits 727,680 634,475
Net occupancy expense 272,467 228,003
Other operating expenses 401,320 365,554
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Total other expense 1,401,467 1,228,032
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Income before income tax expense 666,948 641,326
Income tax expense 240,000 230,222
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Net income $ 426,948 $ 411,104
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Basic earnings per share $ .16 $ .16
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Diluted earnings per share $ .16 $ .16
============= =============
Dividends per common share $ .07 $ .05
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED) FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated Other
Common Additional Retained Treasury Comprehensive
Stock Paid In Capital Earnings Stock Income Total
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<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 $ -- $12,206,882 $ 3,738,498 $(550,686) $ 126,653 $ 15,521,347
Comprehensive income
Net income -- -- 411,104 -- -- 411,104
Net unrealized losses on securities
(net of tax effect of $5,890) -- -- -- -- (10,029) (10,029)
------------
Comprehensive income -- -- -- -- -- 401,075
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Cash dividends -- -- (140,491) -- -- (140,491)
------ ----------- ----------- --------- --------- ------------
March 31, 1998 $ -- $12,206,882 $ 4,009,111 $(550,686) $ 116,624 $ 15,781,931
====== =========== =========== ========= ========= ============
December 31, 1998 $ -- $16,456,624 $ 607,959 $(550,686) $ 163,636 $ 16,677,533
Comprehensive income
Net income -- -- 426,948 -- -- 426,948
Net unrealized losses on securities
(net of tax effect of $62,106) -- -- -- -- (105,749) (105,749)
------------
Comprehensive income -- -- -- -- -- 321,199
------------
Cash dividends -- -- (182,392) -- -- (182,392)
------ ----------- ----------- --------- --------- ------------
March 31, 1999 $ -- $16,456,624 $ 852,515 $(550,686) $ 57,887 $ 16,816,340
====== =========== =========== ========= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 426,948 $ 411,104
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 99,454 56,220
Net amortization (accretion) of unearned
premiums/discounts on investments 30,870 (19,290)
Decrease (increase) in other assets 125,800 (879,978)
Provision for loan losses 5,000 15,000
Increase in other liabilities 353,568 290,278
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Net cash provided by (used in) operating activities 1,041,640 (126,666)
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Cash flows from investing activities:
Purchase of investment securities (2,200,000) (2,012,344)
Maturities of investment securities 2,000,000
Net increase in loans (2,103,467) (3,615,088)
(Purchase) disposal of premises and equipment (36,592) 174,835
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Net cash used in investing activities (2,340,059) (5,452,597)
------------ ------------
Cash flows from financing activities:
Net increase(decrease) in deposit accounts (4,516,724) 281,383
Net increase in short-term borrowings 1,302,434 2,065,422
Dividends (182,392) (140,491)
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Net cash provided by(used in) financing activities (3,396,682) 2,206,314
------------ ------------
Net decrease in cash and cash equivalents (4,695,101) (3,372,949)
Cash and cash equivalents, beginning of period 22,921,060 22,017,259
------------ ------------
Cash and cash equivalents, end of period $ 18,225,959 $ 18,644,310
============ ============
Supplemental disclosure of cash flow data:
Cash paid during the year for:
Interest $ 834,120 $ 893,222
Income taxes 36,735 22,498
</TABLE>
See accompanying notes to consolidated financial statements.
6
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BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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 of the Company. The results of operations for the
period ending March 31, 1999 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. All prior period
amounts have been retroactively restated to give the effect of the two-for-one
exchange.
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. Of the Company's securities, $33,560,608 are classified
as "Available for Sale" and $200,000 are classified as "Held to Maturity at
March 31, 1999."
The amortized cost of Securities held by the Company at March 31, 1999
classified as "Available for Sale" is $33,468,724. The aggregate fair value of
securities "Available for Sale" on the basis of market quotations as of March
31, 1999, is $33,560,608. The unrealized gain as of March 31, 1999, on such
securities is $91,884. The value of securities "Held to Maturity" as of March
31, 1999, is $200,000.
The amortized cost of all Securities held by the Company at December 31, 1998,
and classified as "Available for Sale" was $33,499,594. The aggregate fair value
of all securities "Available for Sale" on the basis of market quotations as of
December 31, 1998, was $33,759,333. The unrealized gain as of December 31, 1998,
on such securities was $259,739.
NOTE 4: SHAREHOLDERS' EQUITY
A regular quarterly cash dividend of $.07 per share was approved for
shareholders of record March 31, 1999, payable April 30, 1999.
7
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NOTE 5: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June of 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes, for the
first time, comprehensive accounting and reporting standards for derivative
instruments and hedging activities. For accounting purposes, SFAS 133
comprehensively defines a derivative instrument. SFAS 133 requires that all
derivative instruments be recorded in the statement of financial position at
fair value. The accounting for the gain or loss due to change in fair value of
the derivative instrument depends on whether the derivative instrument qualifies
as a hedge. If the derivative does not qualify as a hedge, the gains or losses
are reported in earnings when they occur. However, if the derivative instrument
qualifies as a hedge, the accounting varies based on the type of risk being
hedged.
SFAS 133 applies to all entities and is effective as of the beginning of the
first quarter of the fiscal year beginning after June 15, 1999. The Company does
not expect the adoption of SFAS 133 to have a materially adverse impact on the
consolidated financial position or results of operations of the Company.
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 and Mt. Pleasant, 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 three months of 1999, the Company reported net income of $426,948
or basic and diluted earnings per share of $.16, an increase of $15,844 compared
to the net income for the first three months of 1998 of $411,104 or basic and
diluted earnings per share of $.16. Total assets for the period decreased
$2,784,111 or 1.92% from December 31, 1998, to March 31, 1999.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998, TO THREE MONTHS ENDED MARCH 31,
1999
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 $15,844 or 3.85% to $426,948 for the three
months ended March 31, 1999, from $411,104 for the three months ended March 31,
1998. The increase is primarily due to an increase in average earning assets and
higher loan volume in the mortgage area due to continually favorable rates and
refinancing activity.
NET INTEREST INCOME
Net interest income increased $101,024 or 5.94% to $1,801,189 for the three
months ended March 31, 1999, from $1,700,165 for the three months ended March
31, 1998. Total interest and fee income increased $117,533 or 4.65% for the
three months ended March 31, 1999, to $2,645,092 from $2,527,559 for the three
months ended March 31, 1998. This increase in interest and fee income is
primarily a result of average total loans for the three months ended March 31,
1999, of approximately $86,230,000 compared to average total loans of
approximately $82,392,000 for the three months ended March 31, 1998. The loan
portfolio produces the highest yield of all earning assets. Investment portfolio
income increased $133,068 or 40.76% to $459,522 for the period ended March 31,
1999, as compared to $326,454 for the three months ended March 31, 1998, due to
the shifting of investments from federal funds sold to U. S. Treasury
obligations with a fixed rate. This was implemented to protect the banks
interest rate spread in a declining rate market.
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Total interest expense increased $16,509 or 2.00% to $843,903 for the three
months ended March 31, 1999, from $827,394 for three months ended March 31,
1998. The increase is due to an increase in average interest bearing deposits.
Interest paid on deposits of $803,392 reflected an increase of 3.63% for the
three months ended March 31, 1999, compared to $775,235 of interest paid on
deposits for the three months ended March 31, 1998. Total interest bearing
deposits averaged approximately $78,861,000 for the three months ended March 31,
1998, as compared to approximately $91,012,000 for the three months ended March
31, 1999. The average cost of interest bearing liabilities for the three months
ended March 31, 1998, was approximately 4.07% as compared to the average cost of
interest bearing liabilities of approximately 3.66% for the three months ended
March 31, 1999. Interest on short-term borrowings decreased $11,648 to $40,511
for the period ended March 31, 1999, from $52,159 for the three months ended
March 31, 1998. Short-term borrowings consisted of demand notes to the U.S.
Treasury and securities sold under agreements to repurchase for the three months
ended March 31, 1998 and for the three months ended March 31, 1999.
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 to be
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 March 31, 1999, $5,000 was charged to the provision for
loan losses compared to $15,000 for the quarter ended March 31, 1998. At March
31, 1999, the allowance for loan losses was $1,263,886 or 1.47% of total loans.
This compares to an allowance of $1,210,313 or 1.45% as of March 31, 1998.
During the quarter ended March 31, 1999, the Bank incurred two charge offs
totaling $11,482 as compared to three charge off totaling $15,515 for the same
period ended March 31, 1998. There were six loans on non-accrual status at March
31, 1999, totaling $236,947 and six loans on non-accrual at March 31, 1998,
totaling $436,498. Loans past due over 30 days totaled $382,417 or .44% of total
loans at March 31, 1999, compared to $1,055,538 or 1.26% of total loans at March
31, 1998. 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 March 31, 1999, in management's
opinion, is adequate for future losses that may occur in the loan portfolio.
OTHER INCOME
Other income for the three months ended March 31, 1999, increased $88,033 or
47.79% to $272,226 from $184,193 for the three months ended March 31, 1998. The
increase is due to an increase in service charges and fees on a larger volume of
deposits for the period ended March 31, 1999, as compared to the same period
ended March 31, 1998 and a larger volume of mortgage loans creating more service
release income for the Bank.
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OTHER EXPENSE
Bank overhead increased $173,435 or 14.12% to $1,401,467 for the three months
ended March 31, 1999, from $1,228,032 for the three months ended March 31, 1998.
Salaries and employee benefits increased $93,205 or 14.69% to $727,680 for the
period ended March 31, 1999, from $634,475 for the three month period ended
March 31, 1998. This increase is primarily attributed to annual merit raises
given to the employees and the addition of six staff and the increase in
commissions paid to mortgage loan officers. Other operating expenses increased
$35,766 or 9.78% to $401,320 for the period ending March 31, 1999, from $365,554
for the period ending March 31, 1998. This increase is the result of a new
telephone system and the implementation of a training department.
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 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 36.41% and 31.71% of total assets
at March 31, 1999, and 1998, 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 Bank's core deposits consist of IPCs, NOW accounts, money market
accounts, time deposits and savings. Although such core deposits are becoming
increasingly more costly and interest sensitive for both the Bank and the
industry as a whole, such core deposits continue to provide the Company with a
large and stable source of funds. Core deposits averaged 84.55% of earning
assets during the first three months of 1999 as compared to 89.90% of earning
assets for the first three months of 1998. 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 March 31, 1999 and 1998, the Bank's
liquidity ratio was 36.09% and 30.48%, 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 for a total shareholders'
equity at March 31, 1999, of $16,816,340. 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 total risk
based capital ratio at March 31, 1999, for the Bank is 18.52% and at March 31,
1998, was 18.42%. 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 does not plan for any significant capital
expenditures during 1999.
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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 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 all mission critical systems were 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. 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
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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.
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 is in the process of developing contingency plans specifically for
problems arising due to the Year 2000 utilizing its existing disaster recovery
plans. The disaster recovery plan gives step-by-step details on how to function
if normal resources were not available. The Year 2000 Team reviewed the disaster
recovery plan during the fourth quarter of 1998 and are now in the process of
making any needed changes to tailor it to Year 2000 problems.
ACCOUNTING AND REPORTING CHANGES
In June of 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes, for the
first time, comprehensive accounting and reporting standards for derivative
instruments and hedging activities. For accounting purposes, SFAS 133
comprehensively defines a derivative instrument. SFAS 133 requires that all
derivative instruments be recorded in the statement of financial position at
fair value. The accounting for the gain or loss due to change in fair value of
the derivative instrument depends on whether the derivative instrument qualifies
as a hedge. If the derivative does not qualify as a hedge, the gains or losses
are reported in earnings when they occur. However, if the derivative instrument
qualifies as a hedge, the accounting varies based on the type of risk being
hedged.
SFAS 133 applies to all entities and is effective as of the beginning of the
first quarter of the fiscal year beginning after June 15, 1999. The Company does
not expect the adoption of SFAS 133 to have a materially adverse impact on the
consolidated financial position or results of operations of the Company.
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.
12
<PAGE> 13
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
(a) Exhibits
27 Financial Data Schedule for the three months ended
March 31, 1999 (for SEC use only).
(b) Reports on Form 8-K
None.
13
<PAGE> 14
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
May 12, 1999
BY: /s/ Hugh C. Lane, Jr.
----------------------------------------
Hugh C. Lane, Jr.
President
BY: /s/ William L. Hiott, Jr.
---------------------------------------
William L. Hiott, Jr.
Executive Vice President & Treasurer
14
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