<PAGE> 1
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, 1999
------------------
[ ] 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
(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 5, 1999, there were 2,605,597 Common Shares outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
<PAGE> 2
Table of Contents
BANK OF SOUTH CAROLINA CORPORATION
Report on Form 10-QSB
for three months ended
September 30, 1999
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 ................................................................. 3
Consolidated Statements of Operations - Three months
ended September 30, 1999 and 1998 ..................................................... 4
Consolidated Statements of Operations - Nine months
ended September 30, 1999 and 1998 ..................................................... 5
Consolidated Statements of Shareholders' Equity and
Comprehensive Income- Nine months ended September 30, 1999 and 1998 .................. 6
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1999 and 1998 ..................................................... 7
Notes to Consolidated Financial Statements ............................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................... 8 - 12
Liquidity............................................................................ 12
Capital Resources.................................................................... 12
Year 2000....................................................................... 12 - 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>
2
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PART I - ITEM 1 - FINANCIAL STATEMENTS
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
Assets: September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Cash and due from banks $ 9,516,428 $ 7,464,394
Interest bearing deposits in other banks 6,854 6,666
Federal funds sold 10,250,000 15,450,000
Investment securities available for sale 35,054,099 33,759,333
Investment securities held to maturity 600,364 -
Loans 90,987,147 84,140,365
Allowance for loan losses (1,276,685) (1,239,968)
-------------- --------------
Net loans 89,710,462 82,900,397
Premises and equipment, net 3,911,291 4,056,891
Accrued interest receivable and other assets 1,480,779 1,382,120
-------------- --------------
Total assets $ 150,530,277 $ 145,019,801
============== ==============
Liabilities and shareholders' equity:
Deposits:
Non-interest bearing demand $ 32,256,566 $ 32,327,281
Interest bearing demand 26,724,739 23,834,038
Money market accounts 23,747,861 22,881,876
Certificates of deposit $100,000 and over 17,212,269 19,884,534
Other time deposits 16,585,258 20,016,065
Other savings deposits 6,386,235 5,029,514
-------------- --------------
Total deposits 122,912,928 123,973,308
Short-term borrowings 9,536,785 3,480,070
Accrued interest payable and other liabilities 910,552 888,890
-------------- --------------
Total liabilities 133,360,265 128,342,268
-------------- --------------
Common Stock - No par value;
6,000,000 shares authorized;
Issued 2,605,597 shares at September 30, 1999
and December 31, 1998 - -
Additional paid in capital 16,456,624 16,456,624
Retained earnings 1,338,864 607,959
Accumulated other comprehensive
income (loss), net of income taxes (74,790) 163,636
Treasury stock; 77,000 shares at September 30, 1999
and December 31, 1998 (550,686) (550,686)
-------------- --------------
Total shareholders' equity 17,170,012 16,677,533
-------------- --------------
Total liabilities and shareholders' equity $ 150,530,277 $ 145,019,801
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Interest and fee income
Interest and fees on loans $ 2,161,526 $ 2,049,120
Interest and dividends on investment securities 489,799 311,563
Other interest income 171,503 429,565
------------ -------------
Total interest and fee income 2,822,828 2,790,248
------------ -------------
Interest expense
Interest on deposits 775,170 980,879
Interest on short-term borrowings 96,488 59,919
------------ -------------
Total interest expense 871,658 1,040,798
------------ -------------
Net interest income 1,951,170 1,749,450
Provision for loan losses 30,000 15,000
------------ -------------
Net interest income after provision for loan losses 1,921,170 1,734,450
------------ -------------
Other income
Service charges, fees and commissions 313,707 215,552
Other non-interest income 6,068 6,733
------------ -------------
Total other income 319,775 222,285
------------ -------------
Other expense
Salaries and employee benefits 784,345 631,503
Net occupancy expense 233,084 271,475
Other operating expenses 441,703 370,418
------------ -------------
Total other expense 1,459,132 1,273,396
------------ -------------
Income before income tax expense 781,813 683,339
Income tax expense 275,000 239,012
------------ -------------
Net income $ 506,813 $ 444,327
============ =============
Basic earnings per share $ .19 $ .17
============ =============
Diluted earnings per share $ .19 $ .17
============ =============
Dividends per common share $ .09 $ .07
============ =============
Weighted average shares outstanding 2,605,597 2,605,597
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Interest and fee income
Interest and fees on loans $ 6,332,537 $ 6,151,237
Interest and dividends on investment securities 1,424,317 937,970
Other interest income 443,733 821,500
------------ -----------
Total interest and fee income 8,200,587 7,910,707
------------ -----------
Interest expense
Interest on deposits 2,358,946 2,599,631
Interest on short-term borrowings 211,612 179,195
------------ -----------
Total interest expense 2,570,558 2,778,826
------------ -----------
Net interest income 5,630,029 5,131,881
Provision for loan losses 35,000 45,000
------------ -----------
Net interest income after provision for loan losses 5,595,029 5,086,881
------------ -----------
Other income
Service charges, fees and commissions 825,168 616,932
Other non-interest income 14,775 14,590
------------ -----------
Total other income 839,943 631,522
------------ -----------
Other expense
Salaries and employee benefits 2,273,446 1,941,215
Net occupancy expense 809,187 766,894
Other operating expenses 1,204,835 1,092,349
------------ -----------
Total other expense 4,287,468 3,800,458
------------ -----------
Income before income tax expense 2,147,504 1,917,945
Income tax expense 765,200 682,234
------------ -----------
Net income $ 1,382,304 $ 1,235,711
============ ===========
Basic earnings per share $ .53 $ .48
============ ===========
Diluted earnings per share $ .53 $ .48
============ ===========
Dividends per common share $ .25 $ .18
============ ===========
Weighted average shares outstanding 2,605,597 2,597,061
</TABLE>
See accompanying notes to consolidated financial statements.
5
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated Other
Common Additional Retained Treasury Comprehensive
Stock Paid In Capital Earnings Stock Income Total
------------------------------------------------------------------------------------------------------
<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 - - 1,235,711 - - 1,235,711
Net unrealized gains
on securities(net of
tax effect of $46,555) - - - - 79,270 79,270
--------------
Total comprehensive income - - - - - 1,314,981
--------------
Shares issued for the
exercise of stock options - 124,000 - - - 124,000
Cash dividends - - (482,313) - - (482,313)
-------------- --------------- --------------- -------------- --------------- --------------
September 30, 1998 $ - $ 12,330,882 $ 4,491,896 $ (550,686) $ 205,923 $ 16,478,015
============== =============== =============== ============== =============== ==============
December 31, 1998 $ - $ 16,456,624 $ 607,959 $ (550,686) $ 163,636 $ 16,677,533
Comprehensive income
Net income - - 1,382,304 - - 1,382,304
Net unrealized losses
on securities
(net of tax effect
of $140,028) - - - - (238,426) (238,426)
--------------
Total comprehensive income - - - - - 1,143,878
--------------
Cash dividends - - (651,399) - - (651,399)
-------------- --------------- --------------- -------------- --------------- --------------
September 30, 1999 $ - $ 16,456,624 $ 1,338,864 $ (550,686) $ (74,790) $ 17,170,012
============== =============== =============== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,382,304 $ 1,235,711
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 301,996 253,088
Net accretion of unearned
discounts on investments (21,617) (11,305)
Decrease in accrued interest receivable
and other assets 41,369 479,115
Provision for loan losses 35,000 45,000
Increase in accrued interest payable
and other liabilities 21,662 209,769
------------ ------------
Net cash provided by operating activities 1,760,714 2,211,378
------------ ------------
Cash flows from investing activities:
Purchase of investment securities available for sale (5,651,342) (4,212,344)
Purchase of investment securities held to maturity (600,625) --
Proceeds from the sales/maturities of investment
securities available for sale 4,000,000 3,193,881
Net increase in loans (6,845,065) (3,353,799)
Purchase of premises and equipment, net (156,396) (1,754,137)
------------ ------------
Net cash used in investing activities (9,253,428) (6,126,399)
------------ ------------
Cash flows from financing activities:
Net (decrease) increase in deposit accounts (1,060,380) 16,125,797
Net increase (decrease) in short-term borrowings 6,056,715 (41,809)
Exercise of stock options -- 124,000
Dividends (651,399) (482,313)
------------ ------------
Net cash provided by financing activities 4,344,936 15,725,675
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,147,778) 11,810,654
Cash and cash equivalents, beginning of period 22,921,060 22,017,259
------------ ------------
Cash and cash equivalents, end of period $ 19,773,282 $ 33,827,913
============ ============
Supplemental disclosure of cash flow data:
Cash paid during the year for:
Interest $ 2,662,292 $ 2,845,288
Income taxes 775,081 620,776
Non-cash investing activities:
Transfer of assets from prepaid account to
fixed asset account -- 1,191,442
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
consolidated 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 nine months ended September 30, 1999 are not necessarily indicative of
the results which may be expected for the entire year.
NOTE 2: 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 carried at
fair value with unrealized gains and losses excluded from earnings and reported
as a separate component of shareholders' equity (net of estimated tax effects).
Realized gains or losses on the sale of investments are based on the specific
identification method. Of the Company's securities, $35,054,099 are classified
as "Available for Sale" and $600,364 are classified as "Held to Maturity" at
September 30, 1999.
The amortized cost of Securities held by the Company at September 30, 1999, and
classified as "Available for Sale" is $35,172,814. The aggregate fair value of
all securities "Available for Sale" on the basis of market quotations as of
September 30, 1999, is $35,054,099. The unrealized loss as of September 30,
1999, on such securities is $118,715.
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. All of the Company's securities were classified
"Available for Sale" on December 31, 1998.
NOTE 3: SHAREHOLDERS' EQUITY
The Board of Directors approved a dividend increase of $.02 per share at its
June 1999 Board meeting, increasing the regular quarterly dividend to $.09 per
share for shareholders of record at June 30, 1999, payable July 31, 1999. A
regular quarterly dividend of $.09 per share was approved for shareholders of
record September 30, 1999, payable October 28, 1999.
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 1999, the Company reported net income of $1,382,304
or basic and diluted earnings per share of $.53, an increase of $146,593 or
11.86% compared to net income for the first nine months of 1998 of $1,235,711 or
basic and diluted earnings per share of $.48. Total assets for the period
increased $5,510,476 or 3.80% from December 31, 1998 to September 30, 1999.
8
<PAGE> 9
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
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 $62,486 or 14.06% to $506,813 for the
three months ended September 30, 1999 from $444,327 for the three months ended
September 30, 1998.
NET INTEREST INCOME
Net interest income increased $201,720 or 11.53% to $1,951,170 for the three
months ended September 30, 1999 from $1,749,450 for the three months ended
September 30, 1998. Total interest and fee income increased $32,580 or 1.17% for
the three months ended September 30, 1999 to $2,822,828 from $2,790,248 for the
three months ended September 30, 1998. The increase in interest and fee income
is the result of an increase in average loans of approximately $6,400,000 for
the three months ended September 30, 1999 compared to the three months ended
September 30, 1998, and an increase in securities investments as opposed to
lower yielding federal funds sold.
Investment portfolio interest income increased $178,236 or 57.21% to $489,799
for the period ended September 30, 1999, as compared to $311,563 for the three
months ended September 30, 1998. Other interest income (Federal Funds Sold)
decreased $258,062 from $429,565 for the three months ended September 30, 1998
to $171,503 for the three months ended September 30, 1999.
Total interest expense decreased $169,140 or 16.25% to $871,658 for the three
months ended September 30, 1999 from $1,040,798 for three months ended September
30, 1998. The decrease is primarily due to the decrease in average interest
bearing deposits to approximately $91,210,000 for the three months ended
September 30, 1999, from approximately $95,890,000 for the three months ended
September 30, 1998. Interest on deposits for the three months ended September
30, 1999, was $775,170 compared to $980,879 for the three months ended September
30, 1998, a decrease of $205,709 or 20.97%. Interest on short-term borrowing
increased $36,569 or 61.03% to $96,488 for the three months ended September 30,
1999 from $59,919 for the three months ended September 30, 1998. 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, 1999, $30,000 was charged to the
provision for loan losses compared to $15,000 for the quarter ended September
30, 1998. The allowance for loan losses was $1,276,685 or 1.40% of total loans
at September 30, 1999. This compares to an allowance of $1,233,662 or 1.47% of
total loans at September 30, 1998. During the quarter ended September 30, 1999,
the Bank incurred net charge-offs totaling $23,818 as compared to net
charge-offs totaling $8,607 for the same period ended September 30, 1998. There
were four loans on non-accrual status at September 30, 1999 totaling $95,811 as
compared to six loans on non-accrual status totaling $464,457 at September 30,
1998. Loans past due over 30 days totaled $220,886 or .24% of total loans at
September 30, 1999, compared to $1,502,984 or 1.8% of total loans at September
30, 1998. Loans past due 90 days or more, which were not already placed on
non-accrual status, totaled $16,314 at September 30, 1999, compared to zero
loans at September 30, 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 September 30, 1999,
in management's opinion, is adequate for probable losses inherent in the loan
portfolio.
9
<PAGE> 10
OTHER INCOME
Other income for the three months ended September 30, 1999 increased $97,490 or
43.86% to $319,775 from $222,285 for the three months ended September 30, 1998.
Service charges, fees and commissions were $313,707 for the three months ended
September 30, 1999 compared to $215,552 for the three months ended September 30,
1998, an increase of $98,155 or 45.54%. The increase is primarily the result of
an increase in service charge and fees charged by the bank and additional income
generated by the mortgage department due to higher volume.
GENERAL AND ADMINISTRATIVE EXPENSES
Bank overhead increased $185,736 or 14.59% to $1,459,132 for the three months
ended September 30, 1999 from $1,273,396 for the three months ended September
30, 1998. Salaries and employee benefits increased $152,842 or 24.20% to
$784,345 for the period ended September 30, 1999 from $631,503 for the three
month period ended September 30, 1998. This increase is primarily attributed to
annual merit raises given to the employees and the addition of five new
employees. Employee benefits (ESOP) was funded $60,000 during the 3 months ended
September 30, 1999, where as only $24,000 for the three months ended September
30, 1998, a $36,000 difference for the periods. Net occupancy expense decreased
$38,391 or 14.14% to $233,084 for the three months ended September 30, 1999,
from $271,475 for the three months ended September 30, 1998. Other operating
expenses increased $71,285 or 19.24% to $441,703 for the period ending September
30, 1999, from $370,418 for the period ending September 30, 1998. This increase
is in part the result of increased mortgage loan volume, which resulted in an
increase in loan costs and the write down to market of a mortgage loan held for
sale.
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<PAGE> 11
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net income increased $146,593 or 11.86% to $1,382,304 for the nine months ended
September 30, 1999 from $1,235,711 for the nine months ended September 30, 1998.
The increase is primarily due to a higher volume of earning assets during the
comparable periods.
NET INTEREST INCOME
Net interest income increased $498,148 or 9.71% to $5,630,029 for the nine
months ended September 30, 1999 from $5,131,881 for the nine months ended
September 30, 1998. Total interest and fee income increased $289,880 or 3.66%
for the nine months ended September 30, 1999 to $8,200,587 from $7,910,707 for
the nine months ended September 30, 1998. The increase in interest and fee
income is the result of loan growth for the comparable periods and the shift
from investment in overnight Federal Funds Sold to better-yielding longer-term
securities.
Total interest expense decreased $208,268 or 7.47% to $2,570,558 for the nine
months ended September 30, 1999 from $2,778,826 for nine months ended September
30, 1998. The decrease is primarily due to the decrease in the average cost of
interest bearing liabilities of 4.11% for the nine months ending September 30,
1998 as compared to 3.55% for the nine months ending September 30, 1999.
Interest on deposits for the nine months ended September 30, 1999, was
$2,358,946 compared to $2,599,631 for the nine months ended September 30, 1998,
a decrease of $240,685 or 9.26%. Interest on short-term borrowings increased
$32,417 or 18.09% to $211,612 for the nine months ended September 30, 1999 from
$179,195 for the nine months ended September 30, 1998. 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, 1999, $35,000 was charged to the
provision for loan losses compared to $45,000 for the nine months ended
September 30, 1998. During the nine months ended September 30, 1999, the Bank
incurred net recoveries totaling $1,717 as compared to net charge-offs totaling
$21,866 for the same period ended September 30, 1998.
OTHER INCOME
Other income for the nine months ended September 30, 1999 increased $208,421 or
33.00% to $839,943 from $631,522 for the nine months ended September 30, 1998.
Service charges, fees and commissions was $825,168 for the nine months ended
September 30, 1999 compared to $616,932 for the nine months ended September 30,
1998 an increase of $208,236 or 33.75%. The increase is primarily the result of
the bank increasing its' fee structure for service charges and fees on
depository accounts and an increase in mortgage loan volume generating more fees
through service release premiums.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $487,010 or 12.81% to $4,287,468
for the nine months ended September 30, 1999 from $3,800,458 for the nine months
ended September 30, 1998. Salaries and employee benefits increased $332,231 or
17.11% to $2,273,446 for the period ended September 30, 1999, from $1,941,215
for the nine months ended September 30, 1998. This increase is primarily
attributed to annual merit raises given to the employees and the addition of
five new staff positions. Occupancy expense increased $42,293 or 5.51% to
$809,187 for the nine months ended September 30, 1999 from $766,894 for the nine
months ended September 30, 1998. This increase is primarily due to the
additional depreciation expense and additional maintenance contracts due to the
new imaging equipment and the upgrade of the bank's check processing and
information systems. Other operating expenses increased $112,486 or 10.30% to
$1,204,835 for the nine months ended September 30, 1999 from $1,092,349 for the
period ending September 30, 1998. This increase is a result of increased loan
cost due to higher mortgage loan volume and business manager accounts receivable
activity, the write down to market of $27,778 of a mortgage loan held for sale
and an increase in fees associated with the banks data processing contract.
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
11
<PAGE> 12
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 37.68% and 37.59%
of average assets at September 30, 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 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 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, 1999 and 1998, the Bank's liquidity ratio
was 31.96% and 34.53%, 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 September 30, 1999, of $17,170,012. 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, 1999 for the Bank is 16.79% and at September 30,
1998, was 16.89%. 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.
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.
12
<PAGE> 13
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 tested and validated all other systems as of
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 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 developed a contingency plan specifically for problems arising due
to the Year 2000
13
<PAGE> 14
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.
On Saturday, September 25, 1999 all bank employees reported to work and tested
the bank's Y2K contingency plan successfully, simulating power outages and no
on-line information availability.
ACCOUNTING AND REPORTING CHANGES
In June 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 137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of SFAS
133" delayed the effective date of this statement for one year. 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, 2000. 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.
14
<PAGE> 15
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, 1999 (for SEC use only)
There were no reports on Form 8-K filed during the quarter ended September 30,
1999
15
<PAGE> 16
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, 1999
BY: /s/ Hugh C. Lane, Jr.
President
BY: /s/ William L. Hiott, Jr.
Executive Vice President & Cashier
16
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