<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-27702
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BANK OF SOUTH CAROLINA CORPORATION
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(Name of small business issuer 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) (Zip Code)
Issuer's telephone number: (803) 724-1500
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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained to be
best of the registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-KSB.
Not applicable
Issuer's revenues for its most recent fiscal year: $10,593,431
Aggregate market value of the voting stock held by non-affiliates: $25,237,088
As of March 16, 1999, the Registrant has outstanding 2,605,597 shares of common
stock.
Transitional Small Business Disclosure Format (check one): Yes No X
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BANK OF SOUTH CAROLINA CORPORATION
AND SUBSIDIARY
Table of Contents
<TABLE>
<CAPTION>
PART I Page
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<S> <C> <C>
Item 1. Description of Business.........................................................................3
Item 2. Description of Property.........................................................................5
Item 3. Legal Proceedings...............................................................................5
Item 4. Submission of Matters to Vote of Security Holders...............................................5
PART II
Item 5. Market for the Company's Common Stock and Related Matters.......................................6
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................................7
Item 7. Financial Statements and Supplementary Data....................................................19
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Matters..............................................................................37
PART III
Item 9. Directors and Executive Officers of the Registrant.............................................37
Item 10. Compensation of Directors and Executive Officers...............................................39
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................42
Item 12. Certain Relationships and Related Transactions.................................................45
PART IV
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.........................................46
</TABLE>
2
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Bank of South Carolina (the "Bank") is a state-chartered financial
institution with depository accounts insured by the FDIC which was organized on
October 22, 1986, and opened for business on February 26, 1987. The Bank is a
wholly-owned subsidiary of Bank of South Carolina Corporation (the "Company").
The reorganization of The Bank of South Carolina into a subsidiary of a one-bank
holding company became effective on April 17, 1995. Each issued and outstanding
share of the Bank was exchanged for two shares of Bank of South Carolina
Corporation stock. Since the primary asset of the Company is its wholly-owned
subsidiary, the majority of the following discussion relates to the Bank.
The Bank serves Berkeley, Charleston and Dorchester counties (the "Tri-County
Area") as an independent, community-oriented commercial bank concentrating on
individuals and small and medium-sized businesses desiring a high level of
personalized services.
The Bank offers a full range of deposit services. Checking account services
include regular non-interest bearing checking accounts as well as interest
bearing negotiable order of withdrawal ("NOW") accounts. Savings and certificate
of deposit accounts include accounts ranging from a daily maturity (regular
savings and also money market accounts) to longer term certificates as
authorized by regulation. The Bank offers two levels of interest to its
customers on both money market and NOW accounts. NOW accounts with balances of
$20,000 or greater and money market accounts with balances of $10,000 or greater
are paid a rate slightly higher than the general market for these types of
accounts. In addition, retirement accounts such as IRA (Individual Retirement
Accounts) are available. In the last quarter of 1988, the Bank introduced a
safekeeping and brokerage service through First Wachovia Brokerage Service
Corporation which allows dividends and interest to be credited to an account
maintained by the Bank. During the third quarter of 1991, the Bank introduced a
cash management service to certain high balance account customers. The service
maximizes the earnings for the customer while allowing the Bank to operate
within regulatory requirements. All deposit accounts are insured by the FDIC to
the full amount permitted by law. Deposit accounts are solicited from
individuals, businesses, professional organizations and governmental
authorities.
Lending services include a full range of commercial, personal and mortgage
loans. The Bank's primary focus is on business lending. The types of commercial
loans that are available include both secured and unsecured loans for working
capital (including inventory and receivables), business expansion (including
acquisition of real estate and improvements) and purchase of machinery and
equipment. The Bank does not emphasize real estate lending for land acquisition,
land development or open-end construction loans. The types of personal loans
that are available include secured and unsecured loans for such purposes as
financing automobiles, home improvements, education and personal investments. In
the fourth quarter of 1993, a residential mortgage lending department was opened
with mortgage loans being provided through correspondent relationships. The Bank
originates, processes and closes the loan and sells (each individually) to a
correspondent.
The Bank offers credit cards (through correspondent banking services) including
MasterCard (TM) and Visa (TM) along with a personal checking account related
line of credit. The line of credit is available for both protection against
unexpected overdrafts and also for the convenience of having a pre-arranged loan
that can be activated simply by a check drawn on a personal checking account.
Other services offered, but not limited to, include safe deposit boxes, letters
of credit, travelers checks, direct deposit of payroll, social security and
dividend payments and automatic payment of insurance premiums and mortgage
loans. The Bank does not have a proprietary automated teller machine but
participates in a national ATM network through the Visa Debit Card Program. This
service is called "Check Card" by the Bank and also offers purchases by the
cardholder where Visa cards are accepted worldwide using a direct charge to
their checking account. The Bank operates a courier service as part of its
deposit services for commercial customers and provides a safekeeping brokerage
service through one of its correspondent banks. All banking services are
available through four banking house locations, 256 Meeting Street, Charleston,
SC, 100 N. Main Street, Summerville, SC, 1337 Chuck Dawley Boulevard, Mt.
Pleasant, SC, and 2027 Sam Rittenberg Boulevard, Charleston, SC. A complete
listing of the Bank's services may be referenced in its Annual Report on page
48.
3
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The Bank has spent no appreciable amount in order to determine or develop the
services that the Bank offers. Research activities relating to development of
bank services were performed by the officers of the Bank during the organization
of the Bank and by those officers after the Bank opened for business.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "BCHA"), and as such, is under the
supervisory and regulatory authority of the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). As a bank holding company registered
under the laws of the South Carolina Bank Holding Company Act, the Company is
also subject to regulation by the South Carolina State Board of Financial
Institutions. Thus, the Company is required to file annual reports and other
information with the Federal Reserve and the South Carolina State Board of
Financial Institutions regarding its financial condition, results of operations,
management and intercompany relationships and transactions between the Company
and its subsidiaries.
The Company's subsidiary bank, The Bank of South Carolina, is a state chartered
financial institution, and as such, is subject to various statutory
requirements, supervision and regulation, of which regular bank examinations are
a part, promulgated and enforced primarily by the Federal Deposit Insurance
Corporation and the South Carolina State Board of Financial Institutions.
The Company was authorized by its Board of Directors at its December 1995, board
meeting to repurchase up to 77,000 shares of its common stock on the open market
from time to time. As of this date 77,000 shares have been repurchased by the
Company.
Compliance with federal, state and local provisions regulating the discharge of
materials into the environment had no material effect on the capital
expenditures, earnings and competitive position of the Bank in the fiscal year
ended December 31, 1998.
By year end 1998, the Bank employed 63 people, 5 of whom are part time
employees, none of whom are subject to a collective bargaining agreement.
Management believes its relationship with its employees is excellent.
The business of the Bank is not considered to be seasonal nor is the Bank's
business dependent on any one industry.
In the Bank's primary service area, there are 11 commercial banks, of which two
are considered to have their headquarters in the Bank's service area. Of the 11
commercial banks, two have a large share of the market. These two are Wachovia
Bank of North Carolina, N.A. and NationsBank. In addition, there are three
savings and loan associations and various credit unions with offices in the
Tri-County Area. The Bank encounters strong competition from these financial
institutions as well as consumer and commercial finance companies, insurance
companies, brokerage firms and other financial institutions, some of which are
not subject to the same degree of regulation and restrictions as the Bank. Many
of these competitors have substantially greater resources and lending limits
than the Bank has and offer certain services, such as trust and international
banking services, which the Bank is not providing. The Bank does, however,
provide a means for clearing international checks and drafts through a third
party or correspondent bank.
Since January 1, 1986, South Carolina law has permitted regional interstate
banking. Pursuant to such law, several of the banks in the Tri-County Area have
been acquired by banks with headquarters outside the State of South Carolina. In
addition, South Carolina laws permit statewide branching by banks and savings
and loan associations. Accordingly, the Bank could face increased competition
from other banks and savings and loan associations not currently located in the
Tri-County Area.
4
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ITEM 2. DESCRIPTION OF PROPERTY
The Bank leases its headquarters and office facilities at 256 Meeting Street in
downtown Charleston. The lease of these facilities provides for an initial term
of ten years beginning on March 1, 1987, with at least three ten year renewal
options upon the same terms as the original lease term with notice of exercise
of each option being given at least six months prior to the expiration of each
term. Base rent is payable in equal monthly installments of $26,432 in advance.
The base rent will increase at the end of each rental year period by the lesser
of (i) 8% of the base rent or (ii) the percentage increase in the Consumer Price
Index, Urban Index, For All Wage Earners, issued by the U.S. Department of
Labor.
On June 30, 1995, the Bank was successful in renegotiating its 256 Meeting
Street facilities lease for one hundred forty (140) months with two additional
ten year terms. Base rent will be $26,432 monthly payable in advance for the
first twenty (20) months and the remaining one hundred twenty (120) months of
the term (which began March 1, 1997) and any of the two (2) extensions of the
original term of $24,801 per month in advance and is adjustable by 4% of the
base rent every two years. In addition, the Bank leases adjacent parking
facilities at $1,982 per month.
In October of 1993, the Bank opened an office at 100 N. Main Street,
Summerville, SC and entered into a lease agreement on August 9, 1993, with an
original termination date of June 30, 1999, and two 5 year options to renew.
Rent is $2,261 a month with no increase for the duration of both the original
and renewal periods.
On November 1, 1995, the Bank entered into an agreement with an individual to
lease property for construction of a new banking facility at 1337 Chuck Dawley
Boulevard, Mt. Pleasant, SC. The original term of the lease is for fifteen (15)
years with six (6) additional terms of five (5) years each. The base rent for
the first ten (10) years will be $2,250 per month paid in advance. Rent for
years 11 through 15 and each six (6) option periods shall be adjusted to reflect
an annualized return determined by multiplying the average yield on five (5)
year U.S. Treasury Notes plus 150 basis points times an assumed raw land value
of $325,000. The monthly rent, however, shall never be less than the original
rent of $2,250 per month.
In the first quarter of 1997, the Bank purchased one acre of land for
approximately $838,000 in order to construct a full service banking office and
operations center in the West Ashley community of Charleston. In March, 1998,
the two-story, 12,000 square foot facility was completed at a cost of
approximately $1,334,000 representing construction costs and furnishings. At
this same time, the Bank spent approximately $839,000 to upgrade its computer
system and to install a new check processing and check imaging system.
The lessors of the Bank facilities are not affiliated with any of the officers
or directors of the Bank or the Company or any stockholders having more than
five percent (5%) beneficial ownership of the Common Stock of the Company.
All leased properties are in good order and condition.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, there are no legal proceedings pending other than
routine litigation incidental to its business. To the knowledge of management,
no proceedings have been instituted or are contemplated by or against any
governmental authority against or by the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
5
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED MATTERS
There were issued and outstanding 2,605,597 shares of the 6,000,000 authorized
shares of common stock of the Company at the close of the Company's fiscal year
ended December 31, 1998. These outstanding shares were held by approximately 900
shareholders of record on December 31, 1998. The common stock of the Company is
traded in the "over-the-counter" (OTC) market by three market making investment
banking firms. These firms are The Robinson-Humphrey Company, Inc.,
Interstate/Johnson Lane, and Sterne, Agee & Leach, Inc. The Company's common
stock trades on The Nasdaq Stock Market under the symbol BKSC. According to
information supplied by The Nasdaq Stock Market, the range of high and low bid
quotations for each quarterly period in the fiscal years 1998, 1997 and 1996 has
been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
HIGH LOW HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C> <C> <C>
First Quarter 22.73 16.36 12.50 7.95 6.71 5.78
Second Quarter 25.45 20.00 16.82 11.70 7.04 5.99
Third Quarter 18.12 13.75 16.14 14.54 7.39 6.93
Fourth Quarter 17.00 14.75 17.04 13.18 8.07 6.93
</TABLE>
The Board of Directors of Bank of South Carolina Corporation declared quarterly
dividends in 1998 of $.06 per share to shareholders of record March 31, 1998,
payable April 30, 1998, $.06 per share to shareholders of record June 30, 1998,
payable July 31, 1998, $.07 per share to shareholders of record September 30,
1998, payable October 30, 1998, and $.07 per share to shareholders of record
December 31, 1998, payable January 29, 1999.
The Board of Directors of the Company declared a special one-time dividend of
$.25 per share to shareholders of record January 31, 1997, payable February 27,
1997, and quarterly dividends in 1997 of $.05 per share to shareholders of
record March 31, 1997, payable May 15, 1997, $.06 per share to shareholders of
record June 30, 1997, payable August 15, 1997, $.06 per share to shareholders of
record September 30, 1997, payable October 31, 1997, and $.06 per share to
shareholders of record December 31, 1997, payable January 31, 1998.
The Board of Directors of the Company declared quarterly dividends in 1996 of
$.05 per share to shareholders of record March 29, 1996, payable May 15, 1996,
$.05 per share to shareholders of record June 28, 1996, payable August 15, 1996,
$.05 per share to shareholders of record September 30, 1996, payable November
15, 1996, and $.05 per share to shareholders of record December 31, 1996,
payable February 14, 1997.
As of December 31, 1998, there were approximately 900 shareholders of record and
shares held by individuals in street name and on March 16, 1999, the market
price for the common stock of the Company was $14.75. It is the intent of the
Company to continue paying dividends in the future.
Cash dividends, when declared, are paid by the Bank to the Corporation for
distribution to shareholders of record of the Corporation.
6
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
Management's discussion and analysis is included to provide the shareholders
with an expanded narrative of the Company's results of operations, changes in
financial condition, liquidity and capital adequacy. This narrative should be
reviewed in conjunction with the audited consolidated financial statements and
notes included in this report and the Company's 1998 Annual Report. Since the
primary asset of the Company is its wholly-owned subsidiary, most of the
discussion and analysis relates to the Bank.
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
FOR DECEMBER 31:
<S> <C> <C> <C> <C> <C>
Net Income $ 1,660,149 $ 1,609,618 $ 1,388,808 $ 1,049,231 $ 705,323
Selected Year End Balances
- - Total Assets 145,019,801 124,478,023 102,835,416 95,248,079 77,176,341
- - Total Loans 84,140,365 79,965,957 71,660,124 61,986,536 54,471,114
- - Investment Securities 33,759,333 19,483,167 19,231,905 12,505,634 15,955,605
- - Federal Funds Sold and Resale Agreements 15,450,000 15,600,000 4,675,000 15,025,000 725,000
- - Interest Bearing Deposits in Other Banks 6,666 6,421 6,185 5,957 5,742
- - Earning Assets 133,356,364 115,055,545 95,573,214 89,523,127 71,157,461
- - Deposits 123,973,308 104,469,073 84,830,237 78,990,344 62,465,429
- - Shareholders' Equity 16,677,533 15,521,347 14,893,813 14,515,232 13,287,736
Weighted Average Shares Outstanding (1) 2,599,212 2,573,775 2,573,914 2,588,219 2,565,200
FOR THE YEAR:
Selected Average Balances
- - Total Assets 136,981,780 112,413,053 96,379,427 84,596,891 78,107,336
- - Total Loans 83,106,872 74,682,392 65,468,548 55,870,527 52,079,826
- - Investment Securities 21,399,194 19,517,222 17,614,422 14,564,163 16,742,283
- - Federal Funds Sold and Resale Agreements 21,761,014 10,824,383 7,622,131 8,653,014 4,358,411
- - Interest Bearing Deposits in Other Banks 6,561 6,309 6,092 5,868 5,668
- - Earning Assets 126,273,641 105,030,306 90,711,193 79,093,572 73,186,188
- - Deposits 115,225,489 93,055,877 79,671,917 68,974,795 63,427,727
- - Shareholders' Equity 16,203,404 15,005,232 14,656,129 13,852,365 13,169,210
PERFORMANCE RATIOS:
Return on Average Equity 10.25% 10.73% 9.48% 7.57% 5.36%
Return on Average Assets 1.21% 1.43% 1.44% 1.24% .90%
Average Equity to Average Assets 11.83% 13.35% 15.21% 16.37% 16.86%
Net Interest Margin 5.43% 5.92% 6.09% 5.95% 5.39%
Net Charge-offs to Average Loans .03% .05% .09% .10% .29%
Allowance for Loan Losses as a
Percentage of Total Loans 1.47% 1.51% 1.45% 1.55% 1.83%
PER SHARE: (1)
Basic Earnings $ .64 $ .63 $ .54 $ .41 $ .27
Diluted Earnings .64 .62 .53 .40 .27
Year End Book Value 6.40 6.03 5.85 5.59 5.18
Cash Dividends Declared .26 .43 .18 .13 .09
Dividend Payout Ratio 40.05% 69.83% 32.93% 30.59% 33.06%
Full Time Employee Equivalents 60 55 47 39 37
</TABLE>
1) On April 17, 1995, The Bank of South Carolina reorganized into Bank of
South Carolina Corporation, a one-bank holding company. Each share of
common stock of the Bank was exchanged for two shares of common stock
of the Corporation. On May 15, 1996, the Company issued a 10% stock
dividend. On May 15, 1997, the Company issued a 2 for 1 stock split. On
May 15, 1998, the Company issued a 10% stock dividend. All share and
per share data have been retroactively restated to reflect these stock
splits and stock dividends.
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The following tables, as well as the previously presented consolidated financial
highlights, set forth certain selected financial information concerning the
Company and its wholly-owned subsidiary. The information was derived from
audited consolidated financial statements. The information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows and the audited consolidated financial
statements and notes which are presented elsewhere in this report.
<TABLE>
<CAPTION>
FOR YEARS ENDED
DECEMBER 31,
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Operating Data:
Interest and fee income $10,593,431 $9,160,575 $7,899,225 $7,013,875 $5,513,791
Interest expense 3,730,741 2,942,024 2,378,414 2,306,545 1,572,987
----------- ---------- ---------- ---------- ----------
Net interest income 6,862,690 6,218,551 5,520,811 4,707,330 3,940,804
Provision for loan losses 55,000 210,000 140,000 20,000 105,000
----------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 6,807,690 6,008,551 5,380,811 4,687,330 3,835,804
Other income 865,424 600,254 500,923 345,677 191,829
Other expense 5,095,231 4,093,687 3,658,787 3,366,776 2,915,310
----------- ---------- ---------- ---------- ----------
Income before income taxes 2,577,883 2,515,118 2,222,947 1,666,231 1,112,323
Income tax expense 917,734 905,500 834,139 617,000 407,000
----------- ---------- ---------- ---------- ----------
Net income $ 1,660,149 $1,609,618 $1,388,808 $1,049,231 $ 705,323
=========== ========== ========== ========== ==========
Basic earnings per share (1) $ .64 $ .63 $ .54 $ .41 $ .27
=========== ========== ========== ========== ==========
Diluted earnings per share (1) $ .64 $ .62 $ .53 $ .40 $ .27
=========== ========== ========== ========== ==========
Weighted average common shares-basic (1) 2,599,212 2,573,775 2,573,914 2,588,219 2,565,200
Dividends per common share (1) $ .26 $ .43 $ .18 $ .13 $ .09
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investment securities $ 33,759,333 $ 19,483,167 $ 19,231,905 $12,505,634 $15,955,605
Total loans 84,140,365 79,965,957 71,660,124 61,986,536 54,471,114
Allowance for loan losses 1,239,968 1,210,528 1,041,216 960,103 996,386
Total assets 145,019,801 124,478,023 102,835,416 95,248,079 77,176,341
Total deposits 123,973,308 104,469,073 84,830,237 78,990,344 62,465,429
Shareholders' equity 16,677,533 15,521,347 14,893,813 14,515,232 13,287,736
</TABLE>
1) On April 17, 1995, The Bank of South Carolina reorganized into Bank of
South Carolina Corporation, a one-bank holding company. Each share of
common stock of the Bank was exchanged for two shares of common stock
of the Corporation. On May 15, 1996, the Company issued a 10% stock
dividend. On May 15, 1997, the Company issued a 2 for 1 stock split. On
May 15, 1998, the Company issued a 10% stock dividend. All share and
per share data have been retroactively restated to reflect these stock
splits and stock dividends.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis is included to provide the shareholders
with an expanded narrative of the Company's results of operations, changes in
financial condition, liquidity and capital adequacy. This narrative should be
reviewed in conjunction with the audited consolidated financial statements and
notes included in this annual report and the Company's 1998 Annual Report on
Form 10-KSB. Since the primary asset of the Company is its wholly-owned
subsidiary, most of the discussion and analysis relates to the Bank.
OVERVIEW
Earnings for the year were $1,660,149 or basic and diluted earnings per share of
$.64, an increase of 3.14% over 1997's earnings of $1,609,618 or basic and
diluted earnings per share of $.63 and $.62, respectively. Earnings for the
fourth quarter of 1998 were $424,438 or basic and diluted earnings per share of
$.16, a 6.17% decrease from fourth quarter 1997 earnings of $452,360 or basic
and diluted earnings per share of $.18. Earnings have been restated to reflect
the 10% stock dividend paid in the second quarter of 1998. Our return on average
equity and average assets for the year were 10.25% and 1.21%, respectively, and
compare to the 1997 return on average equity and return on average assets of
10.73% and 1.43%, respectively. Earnings for the year reflect the start up
losses of our West Ashley office, increased depreciation expenses for our new
building and new equipment and the loss of earnings on the funds invested.
Earnings for the year were 9.95% above our profit plan.
Again, 1998 was a strong year for deposit growth with total deposits increasing
18.67% from year end 1997 to year end 1998. At year end 1998, our West Ashley
office held $4,722,820 in deposits, our Mt. Pleasant office held deposits of
$14,177,734 and our Summerville office held deposits of $15,902,681. Loan growth
was modest during the year, and loan growth will be very important to how
earnings will perform in 1999, as loans are our highest yielding asset. We added
to our bond portfolio in the fourth quarter as insurance for further declines in
interest rates due to the bank's liquidity and our asset sensitive interest rate
gap.
During 1998, the Company declared two regular quarterly cash dividends of $.06
per share and two regular quarterly cash dividends of $.07 per share thereby
sharing a greater portion of its profits with its owners compared to prior
years.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997, TO DECEMBER 31, 1998
Net income increased $50,531 from $1,609,618 for 1997 to $1,660,149 for 1998 or
3.14% increasing basic and diluted earnings per share to $.64 for 1998 compared
to basic earnings per share of $.63 and diluted earnings per share of $.62 for
1997. This increase is primarily attributable to increases in net interest
income and other income and a reduction in the provision for loan losses.
Net interest income increased $644,139 from $6,218,551 for 1997 to $6,862,690
for 1998. This increase is due to the Company's volume of interest earning
assets increasing at a sufficiently fast rate relative to the increase in
interest bearing liabilities to offset the decrease in net interest spread.
Total interest and fee income increased 15.64% or $1,432,856 in 1998. This
increase is due to an increase in loans and fee income from mortgage loans. The
Mortgage Loan Department's closed loans increased to approximately $39,000,000
in 1998 compared to closed loans of approximately $19,000,000 for 1997. Total
loans increased from $79,965,957 at December 31, 1997, to $84,140,365 at
December 31, 1998, an increase of 5.22%. The average yield on loans increased
from 9.80% to 9.82% for the same periods.
Total interest expense increased 26.81% or $788,717 in 1998. This increase is
due to an increase in deposits as well as an increase in interest paid on
deposits. Deposits increased from $104,469,073 at December 31, 1997, to
$123,973,308 at December 31, 1998. The average rate on interest bearing
liabilities increased from 3.95% to 4.03% for the same periods.
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The provision for loan losses decreased from $210,000 for 1997 to $55,000 for
1998. The decrease in the provision is a result of management's belief that loan
loss reserves during 1997 were adequately funded for potential loan losses
during 1997 and that the composition of the 1998 portfolio warranted a reduction
in loan loss reserves. The allowance for loan losses as a percentage of total
loans decreased from 1.51% to 1.47% for the same period. Management believes the
allowance for loan losses is adequate to absorb inherent losses in the loan
portfolio. For further discussion, see "Non-accrual and Past Due Loans" and
"Allowance for Loan Losses."
Other income increased 44.18% from $600,254 for 1997, to $865,424 for 1998. This
increase is attributable to an increase in service charges, fees and service
release premiums from mortgage loans.
Other expense increased 24.47% or $1,001,544 from $4,093,687 for 1997 to
$5,095,231 for 1998. This increase is due in part to a 19.68% increase in
salaries and employee benefits as a result of the creation of nine new positions
within the Company, an annual merit increase for the Company's staff and
commissions paid to mortgage loan originators.
Occupancy expense increased $159,084 or 18.47% from $861,143 for 1997 to
$1,020,227 for 1998. This increase is primarily due to the costs for the new
West Ashley office and the upgrade of the Bank's computer system.
Other operating expense increased $407,577 or 39.85% from $1,022,832 for 1997 to
$1,430,409 for 1998. Contributing to the increase in other operating expense
were an increase in discount fees paid due to mortgage loan volume more than
doubling from 1997 to 1998; promotional fees for the opening of a new office
during 1998; a new contract with our data processing company, FiServ, resulting
in a significant increase with costs moving from approximately $8,000 to
approximately $16,000 per month; stationery, supplies and printing costs
associated with the opening of a new office adding a significant increase in
expenses; and unexpected sundry losses representing a $45,000 increase.
Income tax expense increased from $905,500 for 1997 to $917,734 for 1998. The
Company provides for income taxes at approximately 36% of pretax income. The
increase in income tax expense is directly related to the increase in pretax
income.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996, TO DECEMBER 31, 1997
Net income increased $220,810 from $1,388,808 for 1996 to $1,609,618 for 1997 or
16% increasing basic earnings per share from $.54 to $.63 and diluted earnings
per share from $.53 to $.62 for the same periods. This increase is primarily
attributable to increases in net interest income and other income.
Net interest income increased $697,740 from $5,520,811 for 1996 to $6,218,551
for 1997. This increase is due to the Company's volume of interest earning
assets increasing at a sufficiently fast rate relative to the increase in
interest bearing liabilities to offset the decrease in net interest spread.
Total interest and fee income increased 16% or $1,261,350. This increase is due
to an increase in loans. Total loans increased from $71,660,124 at December 31,
1996, to $79,965,957 at December 31, 1997, an increase of 11.59%. The average
yield on loans increased from 9.71% to 9.80% for the same periods.
Total interest expense increased 24% or $563,610. This increase is due to an
increase in deposits as well as an increase in interest paid on deposits.
Deposits increased from $84,830,237 at December 31, 1996, to $104,469,073 at
December 31, 1997. The average rate on interest bearing liabilities increased
from 3.75% to 3.95% for the same periods.
The provision for loan losses increased from $140,000 for 1996 to $210,000 for
1997. The increase in the provision is a result of management's decision to
maintain the loan loss reserve as a percentage of average loans at or close to
1.5% by year end 1997. The allowance for loan losses as a percentage of total
loans increased from 1.45% to 1.51% for the same period. Management believes the
allowance for loan losses is adequate to absorb inherent losses in the loan
portfolio. For further discussion, see "Non-accrual and Past Due Loans" and
"Allowance for Loan Losses."
10
<PAGE> 11
Other income increased 19.83% from $500,923 at December 31, 1996, to $600,254 at
December 31, 1997, or $99,331. This increase is attributable to an increase in
service charges, fees and service release premiums from mortgage loans.
Other expense increased 11.89% or $434,900 from $3,658,787 for 1996 to
$4,093,687 for 1997. This increase is due in part to a 16.49% increase in
salaries and employee benefits as a result of the creation of five new positions
within the Company and an annual merit increase for the Company's staff.
Occupancy expense increased $73,792 or 9.37% from $787,351 for 1996 to $861,143
for 1997. This increase is primarily due to a full year's occupancy expense for
the Mt. Pleasant office which opened in May 1996.
Other operating expense increased $107,826 or 11.78% from $915,006 for 1996 to
$1,022,832 for 1997. The increase is a result of an increase in the cost of
printed forms due to a long-term contract expiring, an increase in stationery
and supplies due to a new office and that new office's business development
efforts in buying customer's check orders, while sundry losses and the FDIC
assessment were $6,000 and $8,000 higher, respectively, from the previous year.
Income tax expense increased from $834,139 for 1996 to $905,500 for 1997. The
Company provides for income taxes at approximately 36% of pretax income. The
increase in income tax expense is directly related to the increase in pretax
income.
ASSET AND LIABILITY MANAGEMENT
The assets and liabilities of the Company are managed to provide a consistent
level of liquidity to accommodate normal fluctuations in loans and deposits. At
year end 1998, total assets were $145,019,801, an increase of 16% from the end
of the previous year, and total deposits were $123,973,308, an increase of 19%
from the end of the previous year, primarily as a result of an increase in all
types of deposits.
Approximately 92% of the Bank's assets were earning assets composed of U.S.
Treasury and municipal securities in the amount of $33,759,333, Federal Funds
Sold and interest bearing deposits in other banks in the amount of $15,456,666
and loans in the amount of $84,140,365.
The yield on a majority of the Company's earning assets adjusts simultaneously
with changes in the general level of interest rates. Some of the Company's
liabilities are issued with fixed terms and can be repriced only at maturity.
During periods of falling interest rates, as experienced from 1991 through 1993,
the yield on the Company's assets declined faster than the rates paid on
supporting liabilities. This causes a decline in the net interest margin because
the difference between what the Company earns on its assets and what it pays on
its liabilities becomes narrower. After interest rates have stabilized, there is
a period of time until the rates paid on interest-bearing liabilities declines
enough to restore the net interest margin. As demonstrated by the improving net
interest margin in 1994 and 1995, the opposite effect of increasing net interest
income is realized in a rising rate environment given the Company's 1996 balance
sheet structure. In the stable rate environment which existed in 1997, the
Bank's net interest margin was impacted by a change in mix of earning assets
with the deposit growth of the Bank being invested in federal funds sold during
the year. Basically, the same situation existed in 1998 with relatively stable
interest rates until the end of November, 1998. During 1998, deposits increased
19% while loans increased 5%. The excess funds from the extraordinary deposit
growth were invested in federal funds sold. Deposit growth outstripping loan
growth resulted in a lower percentage of earning assets invested in the
historically higher yielding loans and a commensurate decrease in margin from
5.92% for December 31, 1997, to 5.43% for December 31, 1998.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
For the Company, this risk is constituted primarily of interest rate risk in its
lending and investing activities as they relate to their funding by deposit and
borrowing activities.
The Bank's policy is to minimize interest rate risk between interest bearing
assets and liabilities at various maturities and to attempt to maintain an asset
positive position over a 12 month period. In adhering to this policy, it is
anticipated that the Bank's net interest margins will not be materially affected
by changes in interest rates. The net interest rate spread for 1998
11
<PAGE> 12
decreased to 4.36% from 4.77% for 1997 and the net interest margin for 1998
decreased to 5.43% from 5.92% for 1997. Management will continue to monitor its
asset sensitive position in times of lower interest rates which might adversely
affect its net interest margin.
Since the rates on most of the Bank's interest bearing liabilities can vary on a
daily basis, management continues to maintain a loan portfolio priced
predominately on a variable rate basis. The Bank seeks stable, long-term deposit
relationships to fund its loan portfolio. The extraordinary increase in deposits
funded the increase in loans during 1998.
At December 31, 1998, the average maturity of the investment portfolio was 16
months with an average yield of 5.50% compared to 18 months with an average
yield of 6.50% at December 31, 1997.
The Bank does not own nor has it ever purchased derivative securities. The
Company does not take foreign exchange or commodity risks.
The following table summarizes the Bank's interest sensitivity position as of
December 31, 1998:
<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS 1 YEAR
LESS TO LESS TO LESS TO LESS FAIR
EARNING ASSETS THAN 3 THAN 6 THAN 1 THAN 5 5 YEARS MARKET
(IN 000'S) 1 DAY MONTHS MONTHS YEAR YEARS OR MORE TOTAL VALUE
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $69,301 $ 7,533 $ 2,086 $ 1,848 $ 3,334 $ 38 $ 84,140 $ 82,442
Investment securities -- 1,998 2,216 5,006 24,280 -- 33,500 33,759
Short term investments 7 -- -- -- -- -- 7 7
Federal funds sold 15,450 -- -- -- -- -- 15,450 15,450
------- -------- -------- ------- ------- ------ -------- --------
Total $84,758 $ 9,531 $ 4,302 $ 6,854 $27,614 $ 38 $133,097 $131,658
======= ======== ======== ======= ======= ====== ======== ========
INTEREST BEARING LIABILITIES
(IN 000'S)
CD's 100,000 and over $ -- $ 10,278 $ 7,414 $ 2,083 $ 110 $ -- $ 19,885 $ 19,898
Other time deposits 233 9,615 5,615 4,089 464 -- 20,016 20,032
Money market and interest
bearing demand accounts 46,716 -- -- -- -- -- 46,716 46,716
Savings 5,029 -- -- -- -- -- 5,029 5,029
Borrowed money 3,480 -- -- -- -- -- 3,480 3,480
------- -------- -------- ------- ------- ------- -------- --------
Total $55,458 $ 19,893 $ 13,029 $ 6,172 $ 574 $ -- $ 95,126 $ 95,155
======= ======== ======== ======= ======= ======= ======== ========
Net $29,300 $(10,362) $ (8,727) $ 682 $27,040 $ 38 $ 37,971
Cumulative 18,938 10,211 10,893 37,933 37,971
</TABLE>
LIQUIDITY
The Company's assets and liabilities are monitored on a daily basis to insure
funds are available to meet its liquidity requirements. All securities owned by
the Company are classified as available for sale and, as a result, are carried
at market value with changes in market value, net of tax, adjusted through
shareholders' equity. The unrealized gain on securities available for sale, net
of income taxes, was $163,636 at December 31, 1998, and the unrealized gain, net
of income taxes, was $126,653 at December 31, 1997. At year end 1998, the Bank's
federal funds sold totaled $15,450,000.
12
<PAGE> 13
COMPOSITION OF AVERAGE ASSETS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans $ 83,106,872 $ 74,682,392 $65,468,548 $55,870,527 $52,079,826
Investments 21,399,194 19,517,222 17,614,422 14,564,163 16,742,283
Federal funds sold and
other investments 21,767,575 10,830,692 7,628,223 8,658,882 4,364,079
Non-earning assets 10,708,139 7,382,747 5,668,234 5,503,319 4,921,148
------------ ------------ ----------- ----------- -----------
Total average assets $136,981,780 $112,413,053 $96,379,427 $84,596,891 $78,107,336
============ ============ =========== =========== ===========
</TABLE>
Average earning assets increased by $21,243,335 from 1997 to 1998 while average
non-earning assets increased by $3,325,392. Average earning assets increased
primarily as a result of loan growth and an increase in federal funds sold.
Average non-earning assets increased primarily as a result of the costs
associated with the new West Ashley office and the Bank's computer system
upgrade.
Average loans for 1998 were up by $8,424,480 or 11% from 1997. The majority of
the growth, or approximately $5,700,000, was in commercial loans which are tied
to the Bank's prime rate while approximately $1,800,000 was related to
installment loans.
Deposit growth was used to fund the increase in the loan and investment
portfolios.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table shows changes in interest income and expense based upon
changes in volume and changes in rates:
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
--------------------------------------------- -----------------------------------------
Net Dollar Net Dollar
Volume Rate Change (1) Volume Rate Change (1)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 825,264 $ 17,111 $ 842,375 $ 895,095 $ 60,771 $ 955,866
Investments 120,896 (88,205) 32,691 122,557 (3,315) 119,242
Federal funds sold
and other
investments 596,798 (39,008) 557,790 169,920 16,322 186,242
----------- --------- ----------- ---------- -------- ----------
Interest income $ 1,542,958 $(110,102) $ 1,432,856 $1,187,572 $ 73,778 $1,261,350
=========== ========= =========== ========== ======== ==========
Interest-bearing
transaction
accounts $ 270,507 $ 71,350 $ 341,857 $ 50,706 $ 28,799 $ 79,505
Savings 21,295 678 21,973 20,970 4,560 25,530
Certificates of
deposit 376,576 6,273 382,849 337,671 2,105 339,776
Federal funds
purchased (55) -- (55) -- 55 55
Securities sold
under agreements
to repurchase 55,141 (9,803) 45,338 98,701 1,249 99,950
Demand notes issued
to U.S. Treasury (3,258) 13 (3,245) 15,745 3,049 18,794
----------- --------- ----------- ---------- -------- ----------
Interest expense $ 720,206 $ 68,511 $ 788,717 $ 523,793 $ 39,817 $ 563,610
=========== ========= =========== ========== ======== ==========
Increase in net
interest income $ 644,139 $ 697,740
</TABLE>
<TABLE>
<CAPTION>
1996 vs. 1995
--------------------------------------------
Net Dollar
Volume Rate Change (1)
------ ---- ----------
<S> <C> <C> <C>
Loans $ 963,265 $(210,433) $ 752,832
Investments 190,899 32,134 223,033
Federal funds sold
and other
investments (58,959) (31,556) (90,515)
----------- --------- ---------
Interest income $ 1,095,205 $(209,855) $ 885,350
=========== ========= =========
Interest-bearing
transaction
accounts $ 80,485 $(198,389) $(117,904)
Savings 7,628 (5,017) 2,611
Certificates of
deposit 247,991 (55,354) 192,637
Federal funds
purchased (5,023) -- (5,023)
Securities sold
under agreements
to repurchase 6,876 (727) 6,149
Demand notes issued
to U.S. Treasury (308) (6,293) (6,601)
----------- --------- ---------
Interest expense $ 337,649 $(265,780) $ 71,869
=========== ========= =========
Increase in net
interest income $ 813,481
</TABLE>
(1) VOLUME/RATE CHANGES HAVE BEEN ALLOCATED TO EACH CATEGORY BASED ON THE
PERCENTAGE OF EACH TO THE TOTAL CHANGE.
13
<PAGE> 14
YIELDS ON AVERAGE EARNING ASSETS AND RATES ON AVERAGE INTEREST-BEARING
LIABILITIES
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Paid/ Yield/ Average Paid/ Yield/ Average Paid/ Yield/
Balance Earned Rate Balance Earned Rate Balance Earned Rate
------- ------ ---- ------- ------ ---- ------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS:
Loans $ 83,106,872 $ 8,158,283 9.82% $ 74,682,392 $7,315,908 9.80% $65,468,548 $6,360,042 9.71%
Investment
securities 21,399,194 1,286,458 6.01% 19,517,222 1,253,767 6.42% 17,614,422 1,134,525 6.44%
Federal funds
sold 21,761,014 1,148,445 5.28% 10,824,383 590,664 5.46% 7,622,131 404,430 5.31%
Other
investments 6,561 245 3.73% 6,309 236 3.74% 6,092 228 3.74%
------------ ----------- ---- ------------ ---------- ---- ----------- ---------- ----
Total earning
assets $126,273,641 $10,593,431 8.39% $105,030,306 $9,160,575 8.72% $90,711,193 $7,899,225 8.71%
============ =========== ==== ============ ========== ==== =========== ========== ====
INTEREST-BEARING
LIABILITIES:
Interest bearing
transaction
accounts $ 46,625,919 $ 1,414,863 3.03% $ 37,238,108 $1,073,006 2.88% $35,429,864 $ 993,501 2.80%
Savings 6,241,787 214,149 3.43% 5,619,137 192,176 3.42% 4,991,111 166,647 3.34%
Certificates of
deposit 35,173,392 1,875,938 5.33% 28,088,992 1,493,089 5.32% 21,727,528 1,153,312 5.31%
Federal funds
purchased -- -- -- 1,027 55 5.36% -- -- --
Securities sold
under agreements
to repurchase 3,500,148 170,052 4.86% 2,427,057 124,714 5.14% 486,793 24,764 5.09%
Demand notes
issued to U.S.
Treasury 1,079,005 55,739 5.17% 1,142,098 58,984 5.16% 820,617 40,190 4.90%
------------ ----------- ---- ------------ ---------- ---- ----------- ---------- ----
Total interest
bearing
liabilities $ 92,620,251 $ 3,730,741 4.03% $ 74,516,419 $2,942,024 3.95% $63,455,913 $2,378,414 3.75%
============ =========== ==== ============ ========== ==== =========== ========== ====
Net interest spread 4.36% 4.77% 4.96%
Net interest margin 5.43% 5.92% 6.09%
Net interest income $ 6,862,690 $6,218,551 $5,520,811
</TABLE>
14
<PAGE> 15
LOAN PORTFOLIO COMPOSITION
The following is a schedule of the Bank's loan portfolio as of December 31,
1998, as compared to December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
BOOK VALUE (IN 000'S)
TYPE 1998 1997 1996
- ---- ---- ---- ----
<S> <C> <C> <C>
Commercial and industrial loans $40,384 $40,692 $34,552
Real estate loans 36,103 32,807 31,605
Loans to individuals for household, family and other
personal expenditures 7,481 6,406 5,434
All other loans (including overdrafts) 172 61 69
------- ------- -------
Total loans (excluding unearned income) $84,140 $79,966 $71,660
======= ======= =======
</TABLE>
As a Bank whose mission is to serve its community, there is a geographic
concentration of loans in Charleston, Dorchester and Berkeley counties.
The Bank had no foreign loans or loans to fund leveraged buyouts (LBO's) during
1996, 1997 or 1998.
IMPAIRED AND RESTRUCTURED LOANS
The Bank had impaired loans totaling $584,469 as of December 31, 1998 compared
to $646,736 as of December 31, 1997, and one restructured loan with a balance of
$45,740 and $57,292 as of December 31, 1998 and 1997, respectively. The impaired
loans include non-accrual loans with balances of $569,162 and $629,429,
respectively. Management does not know of any loans which will not meet their
contractual obligations that are not otherwise discussed herein.
NON-ACCRUAL AND PAST DUE LOANS
The Bank had $569,162 in non-accrual loans as of December 31, 1998, compared to
$629,429 as of December 31, 1997. There were no loans over 90 days past due
still accruing interest as of December 31, 1998, compared to loans in the amount
of $40,239 as of December 31, 1997.
A loan is generally placed on non-accrual status when principal or interest is
over 90 days past due or there is doubt about the collectibility of the loan.
ALLOWANCE 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.
The total provision to the allowance for loan losses for 1998 was $55,000
compared to $210,000 for 1997. During 1998, loan losses of $35,030 and
recoveries of $9,470 were recorded to the allowance for loan losses resulting in
an allowance for loan losses of $1,239,968 or 1.47% of total loans at December
31, 1998, compared to $1,210,528 or 1.51% of total loans at December 31, 1997.
15
<PAGE> 16
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars
without consideration of changes in the relative purchasing power over time due
to inflation.
Unlike most other industries, virtually all of 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 does the effect of inflation.
CAPITAL RESOURCES
The capital needs of the Company have been met to date through the $10,600,000
in capital raised in the Bank's initial offering and the retention of earnings
less dividends paid and the exercising of stock options of $124,000 in 1995,
1996, 1997 and 1998 for a total shareholders' equity at December 31, 1998, of
$16,677,533. The rate of asset growth from the Bank's inception has not
negatively impacted 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 December 31, 1998,
for the Bank was 18.69% and at December 31, 1997, was 18.63%. The Company's
management does not know of any trends, events or uncertainties that may result
in the Company's capital resources materially increasing or decreasing.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a material
effect on the financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
Company's and the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital to risk-weighted assets and to total assets. Management
believes, as of December 31, 1998, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
At December 31, 1998 and 1997, the Company and the Bank are categorized as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized" the Company and the Bank must maintain minimum
total risk based, Tier 1 risk based and Tier 1 leverage ratios of 10%, 6% and 5%
and to be categorized as "adequately capitalized," the Company and the Bank must
maintain minimum total risk based, Tier 1 risk based and Tier 1 leverage ratios
of 8%, 4% and 4%, respectively. There are no current conditions or events that
management believes would change the Company's or the Bank's category.
Please see "Notes to Consolidated Financial Statements" for the Company's and
the Bank's various capital ratios at December 31, 1998.
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
16
<PAGE> 17
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. 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.
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.
17
<PAGE> 18
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.
INDUSTRY DEVELOPMENTS
Certain recently enacted and proposed legislation could have an effect on both
the costs of doing business and the competitive factors facing the financial
institution's industry. Among the recently enacted bills is legislation to
assess Bank Insurance Fund (BIF) members with one-fifth of the assessment rate
imposed upon thrifts to cover the annual $780,000,000 Financing Corporation
(FICO) bond obligation. This assessment amounts to 1.256 basis points per $100
in deposits for banks in the years 1997 through 1999. Starting in the year 2000
until the FICO bonds are retired, banks and thrifts will pay the assessment on a
pro rata basis (estimated to run about 2.5 basis points per $100 in deposits for
banks). The Company is unable to assess the impact of other legislation on its
financial condition or operations at this time.
THE BANK OF SOUTH CAROLINA EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
During 1989, the Board of Directors of the Bank adopted an Employee Stock
Ownership Plan and Trust Agreement to provide retirement benefits to eligible
employees of the Bank for long and faithful service. The Board of Directors of
the Bank approved the cash contribution of $186,000 to The Bank of South
Carolina Employee Stock Ownership Plan and Trust for the fiscal year ended
December 31, 1998. The contribution was made during 1998. T. Dean Harton, Sheryl
G. Sharry and Nathaniel I. Ball, III, currently serve as Plan Administrator.
Nathaniel I. Ball, III, currently serves as Trustee for the Plan. The Plan
currently owns 196,857 shares of common stock of Bank of South Carolina
Corporation.
18
<PAGE> 19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Bank of South Carolina Corporation and subsidiary
Charleston, South Carolina
We have audited the accompanying consolidated balance sheets of Bank of South
Carolina Corporation and subsidiary (the "Corporation") as of December 31, 1998
and 1997, and the related consolidated statements of operations, shareholders'
equity and comprehensive income, and cash flows for each of the years in the
three year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
January 15, 1999
19
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash and due from banks $ 7,464,394 $ 6,410,838
Interest bearing deposits in other banks 6,666 6,421
Federal funds sold 15,450,000 15,600,000
Investment securities available for sale 33,759,333 19,483,167
Loans 84,140,365 79,965,957
Less: Allowance for loan losses (1,239,968) (1,210,528)
------------- -------------
Net loans 82,900,397 78,755,429
------------- -------------
Premises, equipment and leasehold improvements, net 4,056,891 2,613,293
Accrued interest receivable 1,062,398 815,935
Other assets 319,722 792,940
------------- -------------
Total assets $ 145,019,801 $ 124,478,023
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing demand $ 32,327,281 $ 27,757,108
Interest bearing demand 23,834,038 20,336,818
Money market accounts 22,881,876 21,761,624
Certificates of deposit $100,000 and over 19,884,534 14,895,786
Other time deposits 20,016,065 15,663,178
Other savings deposits 5,029,514 4,054,559
------------- -------------
Total deposits 123,973,308 104,469,073
Short-term borrowings 3,480,070 3,787,996
Accrued interest payable and other liabilities 888,890 699,607
------------- -------------
Total liabilities 128,342,268 108,956,676
------------- -------------
Commitments and contingencies (note 7)
Shareholders' equity:
Common stock - No par, 6,000,000 shares authorized;
Issued 2,605,597 shares in 1998
and 2,575,589 shares in 1997 -- --
Additional paid in capital 16,456,624 12,206,882
Retained earnings 607,959 3,738,498
Treasury stock; 77,000 shares at
December 31, 1998 and 1997 (550,686) (550,686)
Accumulated other comprehensive income,
net of income taxes 163,636 126,653
------------- -------------
Total shareholders' equity 16,677,533 15,521,347
------------- -------------
Total liabilities and shareholders' equity $ 145,019,801 $ 124,478,023
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and fee income
Interest and fees on loans $ 8,158,283 $ 7,315,908 $ 6,360,042
Interest and dividends
on investment securities 1,286,458 1,253,767 1,134,525
Other interest income 1,148,690 590,900 404,658
----------- ----------- -----------
Total interest and fee income 10,593,431 9,160,575 7,899,225
----------- ----------- -----------
Interest expense
Interest on deposits 3,504,950 2,758,270 2,313,460
Interest on short-term borrowings 225,791 183,754 64,954
----------- ----------- -----------
Total interest expense 3,730,741 2,942,024 2,378,414
----------- ----------- -----------
Net interest income 6,862,690 6,218,551 5,520,811
Provision for loan losses 55,000 210,000 140,000
----------- ----------- -----------
Net interest income after
provision for loan losses 6,807,690 6,008,551 5,380,811
----------- ----------- -----------
Other income
Service charges, fees and commissions 844,070 594,036 488,794
Loss on sale of investment securities -- (16,544) (2,569)
Other non-interest income 21,354 22,762 14,698
----------- ----------- -----------
Total other income 865,424 600,254 500,923
----------- ----------- -----------
Other expense
Salaries and employee benefits 2,644,595 2,209,712 1,896,964
Net occupancy expense 1,020,227 861,143 787,351
Net cost of other real estate owned -- -- 1,088
Loss on other real estate owned -- -- 58,378
Other operating expenses 1,430,409 1,022,832 915,006
----------- ----------- -----------
Total other expense 5,095,231 4,093,687 3,658,787
----------- ----------- -----------
Income before income tax expense 2,577,883 2,515,118 2,222,947
Income tax expense 917,734 905,500 834,139
----------- ----------- -----------
Net income $ 1,660,149 $ 1,609,618 $ 1,388,808
=========== =========== ===========
Basic earnings per common share $ .64 $ .63 $ .54
=========== =========== ===========
Diluted earnings per common share $ .64 $ .62 $ .53
=========== =========== ===========
Cash dividends per common share $ .26 $ .43 $ .18
=========== =========== ===========
Weighted average shares outstanding
Basic 2,599,212 2,573,775 2,573,914
=========== =========== ===========
Diluted 2,599,212 2,596,209 2,600,550
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<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, 1995 $ -- $10,724,000 $ 3,556,267 $ -- $ 234,965 $ 14,515,232
Comprehensive income:
Net income -- -- 1,388,808 -- -- 1,388,808
Net unrealized losses on
securities (net of tax
effect of $75,693) -- -- -- -- (126,155) (126,155)
------------
Total comprehensive income -- -- -- -- -- 1,262,653
------------
Shares issued for the
exercise of stock options -- 124,000 -- -- -- 124,000
Purchase of
treasury stock -- -- -- (550,686) -- (550,686)
Common stock distribution -- 1,234,882 (1,234,882) -- -- --
Cash dividends -- -- (457,386) -- -- (457,386)
------ ----------- ----------- --------- --------- ------------
December 31, 1996 $ -- $12,082,882 $ 3,252,807 $(550,686) $ 108,810 $ 14,893,813
Comprehensive income:
Net income -- -- 1,609,618 -- -- 1,609,618
Net unrealized gains on
securities (net of tax
effect of $10,037) -- -- -- -- 17,843 17,843
------------
Total comprehensive income -- -- -- -- -- 1,627,461
------------
Shares issued for the
exercise of stock options -- 124,000 -- -- -- 124,000
Cash dividends -- -- (1,123,927) -- -- (1,123,927)
------ ----------- ----------- --------- --------- ------------
December 31, 1997 $ -- $12,206,882 $ 3,738,498 $(550,686) $ 126,653 $ 15,521,347
Comprehensive income:
Net income -- -- 1,660,149 -- -- 1,660,149
Net unrealized gains on
securities (net of tax
effect of $21,720) -- -- -- -- 36,983 36,983
------------
Total comprehensive income -- -- -- -- -- 1,697,132
------------
Shares issued for the
exercise of stock options -- 124,000 -- -- -- 124,000
Common stock distribution -- 4,125,742 (4,125,742) -- -- --
Cash dividends -- -- (664,946) -- -- (664,946)
------ ----------- ----------- --------- --------- ------------
December 31, 1998 $ -- $16,456,624 $ 607,959 $(550,686) $ 163,636 $ 16,677,533
====== =========== =========== ========= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,660,149 $ 1,609,618 $ 1,388,808
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 357,001 210,315 157,223
Amortization of organizational costs 7,446 7,446 7,446
Provision for loan losses 55,000 210,000 140,000
Deferred income taxes (7,000) (40,000) 71,000
Loss on other real estate owned -- -- 58,378
Loss on sale of investment securities -- 16,544 2,569
Net (accretion) amortization of unearned
discounts/premiums on investment securities (4,313) (8,989) 4,841
Decrease (increase) in accrued interest receivable
and other assets 204,589 (413,721) (192,429)
Increase (decrease) in accrued interest payable and
other liabilities 189,283 (19,351) 55,024
------------ ------------ ------------
Net cash provided by operating activities 2,462,155 1,571,862 1,692,860
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales/maturities of investment securities
available for sale 6,193,881 5,995,756 5,036,383
Purchase of investment securities available for sale (20,407,031) (6,226,250) (11,970,311)
Net increase in loans (4,199,968) (8,346,521) (9,732,475)
Proceeds from the sale of other real estate owned -- -- 858,922
Purchase of premises, equipment and
leasehold improvements, net (1,800,599) (1,673,614) (763,891)
------------ ------------ ------------
Net cash used by investing activities (20,213,717) (10,250,629) (16,571,372)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposit accounts 19,504,235 19,638,836 5,839,893
Net increase (decrease) in short-term borrowings (307,926) 1,395,588 1,313,839
Dividends (664,946) (1,123,927) (457,386)
Treasury stock -- -- (550,686)
Stock options exercised 124,000 124,000 124,000
------------ ------------ ------------
Net cash provided by financing activities 18,655,363 20,034,497 6,269,660
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 903,801 11,355,730 (8,608,852)
Cash and cash equivalents at beginning of year 22,017,259 10,661,529 19,270,381
------------ ------------ ------------
Cash and cash equivalents at end of year $ 22,921,060 $ 22,017,259 $ 10,661,529
============ ============ ============
Supplemental disclosure of cash flow data:
Cash paid during the year for:
Interest $ 3,665,389 $ 2,833,817 $ 2,417,733
Income taxes 866,276 1,043,090 766,382
Supplemental disclosure for non-cash investing and financing activity:
Change in unrealized gain on securities available for sale,
net of income taxes 36,983 17,843 (126,155)
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the more significant accounting policies
used in preparation and presentation of the accompanying consolidated
financial statements. The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements. In addition, they affect the reported amounts of
income and expense during the reporting period. Actual results could
differ from these estimates and assumptions.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of Bank of South Carolina Corporation
(the "Company") and its wholly-owned subsidiary, The Bank of South
Carolina (the "Bank"). In consolidation, all significant intercompany
balances and transactions have been eliminated. Bank of South Carolina
Corporation is a one-bank holding company organized under the laws of
the State of South Carolina. The Bank provides a broad range of
consumer and commercial banking services, concentrating on individuals
and small and medium-sized businesses desiring a high level of
personalized services.
The reorganization of the Bank into a one-bank holding company became
effective on April 17, 1995. All issued and outstanding shares of the
Bank's stock were converted into two shares of the Company's stock.
INVESTMENT SECURITIES: The Company accounts for its investment
securities in accordance with the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Investments are classified into three categories as follows: (1) Held
to Maturity - debt securities that the Company has the positive intent
and ability to hold to maturity, which are reported at amortized cost;
(2) Trading - debt and equity securities that are bought and held
principally for the purpose of selling them in the near term, which are
reported at fair value, with unrealized gains and losses included in
earnings; and (3) Available for Sale - debt and equity securities that
may be sold under certain conditions, which are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as
a separate component of shareholders' equity, net of income taxes.
Unrealized losses on securities due to fluctuations in fair value are
recognized when it is determined that other than temporary decline in
value has occurred.
LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans are carried at principal
amounts outstanding. Interest income on all loans is recorded on an
accrual basis. The accrual of interest is generally discontinued on
loans which become 90 days past due as to principal or interest. The
accrual of interest on some loans, however, may continue even though
they are 90 days past due if the loans are well secured, in the process
of collection and management deems it appropriate. If non-accrual loans
decrease their past due status to 60 days or less, they are reviewed
individually by management to determine if they should be returned to
accrual status. The Company accounts for impaired loans in accordance
with SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
This statement requires that all creditors value loans for which it is
probable that the creditor will be unable to collect all amounts due
according to the terms of the loan agreement at the loan's fair value.
Fair value may be determined based upon the present value of expected
cash flows, market price of the loan, if available, or value of the
underlying collateral. Expected cash flows are required to be
discounted at the loan's effective interest rate.
SFAS No. 114 was amended by SFAS No. 118 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan
and by requiring additional disclosures about how a creditor recognizes
interest income related to impaired loans.
When the ultimate collectibility of an impaired loan's principal is in
doubt, wholly or partially, all cash receipts are applied to principal.
When this doubt does not exist, cash receipts are applied under the
contractual terms of the loan agreement first to principal and then to
interest income. Once the recorded principal balance has been reduced
to zero, future cash receipts are applied to interest income, to the
extent that any interest has been foregone. Further cash receipts are
recorded as recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a
troubled debt restructuring after January 1, 1995. For these accruing
impaired loans, cash receipts are typically applied to principal and
interest receivable in
24
<PAGE> 25
accordance with the terms of the restructured loan agreement. Interest
income is recognized on these loans using the accrual method of
accounting.
The allowance for loan losses is based on management's evaluation of
the loan portfolio under current economic conditions. The evaluation
includes a review of delinquencies and an estimate of the probability
of loss based on the risk characteristics of the portfolio. The reserve
is maintained at a level considered adequate by management to provide
for known and inherent loan losses. 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 evaluations. The allowance for
loan losses is subject to periodic evaluations by various regulatory
authorities and may be subject to adjustment based upon information
that is available to them at the time of their examination.
PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS AND DEPRECIATION:
Buildings and equipment are carried at cost less accumulated
depreciation, calculated on the straight-line method over the estimated
useful life of the related assets ranging from 40 years for buildings
and 3 to 15 years for equipment for financial reporting purposes and an
accelerated method for income tax purposes. Amortization of leasehold
improvements is recorded using the straight-line method over the lesser
of the estimated useful life of the asset or the term of the lease.
Maintenance and repairs are charged to operating expenses as incurred.
OTHER REAL ESTATE OWNED: Other real estate owned is recorded at the
lower of fair value minus estimated selling costs or cost. Gains and
losses on the sale of other real estate owned and subsequent
write-downs from periodic reevaluation are charged to other operating
expenses.
INCOME TAXES: The Company accounts for income taxes in accordance with
SFAS No. 109. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages but does not require companies to record
compensation cost for stock-based compensation plans at fair value. The
Company has chosen to adopt the disclosure-only provisions of SFAS No.
123 and continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
EARNINGS PER COMMON SHARE: The Company adopted the provisions of SFAS
No. 128, "Earnings Per Share" ("EPS"), for the year ended December 31,
1997. The presentation of primary and fully diluted EPS has been
replaced with basic and diluted EPS. Basic earnings per share is
computed by dividing net income applicable to common shareholders by
the weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents.
Common stock equivalents consist of stock warrants and options and are
computed using the treasury stock method. Weighted average share and
per share data have been restated to reflect the May 15, 1996, 10%
stock dividend, the April 8, 1997, two for one stock split and the May
15, 1998, 10% stock dividend.
COMPREHENSIVE INCOME: 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 statements and display the balance of accumulated other
comprehensive income separately in the equity section of a statement of
financial position. The Company adopted the statement of shareholders'
equity approach to disclosing comprehensive income.
25
<PAGE> 26
SEGMENT INFORMATION: The Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". This
statement requires selected segment information on operating segments
based on a management approach. An operating segment is defined as any
component of a company that engages in business activities from which
it may earn revenues and incur expenses. The management approach is
based on the way that management organizes the segments within the
company for making operating decisions and assessing performance. The
Company operates as one business segment.
CASH FLOWS: Cash and cash equivalents includes working cash funds, due
from banks, items in process of collection and federal funds sold. To
comply with Federal Reserve regulations, the Bank is required to
maintain certain average cash reserve balances. The daily average
reserve requirement was approximately $1,241,000 and $743,000 for the
reserve periods ended December 31, 1998, and 1997, respectively.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the 1998 presentation. Such reclassifications had no impact
on net income or retained earnings as previously reported.
2. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and market values of investment securities available
for sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations $31,187,951 $237,273 $(2,251) $31,422,973
Federal Agency Securities 1,200,000 13,500 -- 1,213,500
Municipal Securities 1,111,643 11,217 -- 1,122,860
----------- -------- ------- -----------
Total $33,499,594 $261,990 $(2,251) $33,759,333
=========== ======== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations $17,976,606 $203,269 $(2,232) $18,177,643
Municipal Securities 1,305,524 -- -- 1,305,524
----------- -------- ------- -----------
Total $19,282,130 $203,269 $(2,232) $19,483,167
=========== ======== ======= ===========
</TABLE>
The amortized cost and market value of investment securities at
December 31, 1998, by contractual maturity are as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C>
Due in one year or less $ 9,222,343 9,314,113
Due in one year to five years 24,277,251 24,445,220
----------- -----------
Total $33,499,594 $33,759,333
=========== ===========
</TABLE>
The Company had no sales of investment securities during the year ended
December 31, 1998, compared to proceeds of $1,981,876 and $2,997,500
from the sale of investment securities which resulted in realized
losses of $16,544 and $2,569 for the years ended December 31, 1997 and
1996, respectively.
26
<PAGE> 27
The carrying value of investment securities pledged to secure deposits
and other balances was $17,457,982 and $11,463,270 at December 31, 1998
and 1997, respectively.
3. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Commercial loans $ 62,891,571 $ 60,783,536
Residential mortgage 10,574,482 9,081,225
Consumer loans 7,063,912 5,951,634
Personal bank lines 3,446,280 4,088,349
Other 164,120 61,213
------------ ------------
84,140,365 79,965,957
Allowance for loan losses (1,239,968) (1,210,528)
------------ ------------
Loans, net $ 82,900,397 $ 78,755,429
============ ============
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,210,528 $ 1,041,216 $ 960,103
Provision for loan losses 55,000 210,000 140,000
Charge offs (35,030) (46,630) (63,853)
Recoveries 9,470 5,942 4,966
----------- ----------- -----------
Balance at end of year $ 1,239,968 $ 1,210,528 $ 1,041,216
=========== =========== ===========
</TABLE>
The Company grants short to intermediate term commercial and consumer
loans to customers throughout its primary market area of Charleston,
Berkeley and Dorchester Counties, South Carolina. The Company's primary
market area is heavily dependent on tourism and medical services.
Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent
upon the stability of the economic environment in their primary market
including the tourism and military industries. Except for the fact that
the majority of the loan portfolio is located in the Bank's immediate
market area, there were no concentrations of loans in any type of
industry, in any type of property or to any one borrower.
As of December 31, 1998 and 1997, the Company had loans on non-accrual
totaling $569,162 and $629,429, respectively. The additional amount of
gross income that would have been recorded during 1998 and 1997 if
these loans had performed as agreed would have been $52,304 and
$18,316, respectively.
At December 31, 1998 and 1997, impaired loans amounted to $584,469 and
$646,736, respectively. There is no reserve related to the above
impaired loans included in the allowance for loan losses at December
31, 1998 and 1997. For the years ended December 31, 1998 and 1997, the
average recorded investment in impaired loans was $586,185 and
$685,394, respectively, and $13,852 in 1998 and $48,445 in 1997 of
interest income was recognized on loans while they were impaired. All
of this income was recognized using the accrual method of accounting.
At December 31, 1998 and 1997, there was a troubled debt restructuring
which was modified prior to the adoption of SFAS No. 114 totaling
$45,740 and $57,292, respectively, and which was performing in
accordance with its modified terms.
27
<PAGE> 28
4. PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Bank buildings $ 1,787,725 $ 583,959
Land 838,075 838,075
Lease purchase 30,000 30,000
Leasehold improvements 252,969 229,099
Equipment 2,461,995 1,204,474
Construction cost of new office -- 684,558
----------- -----------
5,370,764 3,570,165
Accumulated depreciation (1,313,873) (956,872)
----------- -----------
Total $ 4,056,891 $ 2,613,293
=========== ===========
</TABLE>
5. SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Securities sold under agreements to repurchase $2,511,577 $ 987,996
U.S. Treasury, Tax and Loan deposit notes 968,493 2,800,000
---------- ----------
Total $3,480,070 $3,787,996
========== ==========
</TABLE>
Securities sold under agreements to repurchase with customers mature on
demand. These borrowings were collateralized by U.S. Treasury Notes
with carrying values of $5,728,501 and $961,856 and market values of
$5,773,142 and $1,017,394 at December 31, 1998 and 1997, respectively.
The agreements to repurchase had weighted average interest rates of
4.72% and 5.85% at December 31, 1998 and 1997, respectively. The
maximum amount outstanding at any month end was $4,906,092 and
$4,204,118 for the years ended December 31, 1998 and 1997,
respectively. The average amount of outstanding agreements to
repurchase was $3,500,148 and $2,427,057 during the periods ended
December 31, 1998 and 1997, respectively. The securities underlying the
repurchase agreements were held in safekeeping by an authorized broker.
At the maturity dates of these transactions, the securities are
returned to the account of the Bank.
6. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Current:
Federal $ 849,734 $ 874,500 $686,825
State 75,000 71,000 76,314
--------- --------- --------
924,734 945,500 763,139
--------- --------- --------
Deferred:
Federal (7,000) (40,000) 71,000
State -- -- --
--------- --------- --------
(7,000) (40,000) 71,000
--------- --------- --------
Total $ 917,734 $ 905,500 $834,139
========= ========= ========
</TABLE>
The Company's effective income tax rate differs from the statutory
Federal income tax rate of 34% as follows:
28
<PAGE> 29
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Provision for tax at statutory federal income
tax rate $ 876,480 $855,140 $755,802
State income taxes, net of federal tax benefit 49,500 46,860 50,367
Other, net (8,246) 3,500 27,970
--------- -------- --------
Provision for income tax $ 917,734 $905,500 $834,139
========= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997, are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $386,000 $361,000
-------- --------
Total gross deferred tax assets 386,000 361,000
-------- --------
Deferred tax liabilities:
Unrealized gain on securities available for sale 96,104 74,384
Fixed assets, principally due to differences
in depreciation 51,000 32,500
Other 27,000 27,500
-------- --------
Total gross deferred tax liabilities 174,104 134,384
-------- --------
Net deferred tax asset $211,896 $226,616
======== ========
</TABLE>
There was no valuation allowance for deferred tax assets at either
December 31, 1998 or December 31, 1997. No valuation allowance has been
established as it is management's belief that realization of the
deferred tax asset is more likely than not. The net deferred tax asset
is included in other assets on the consolidated balance sheets.
A portion of the change in the net deferred tax asset relates to the
unrealized gains and losses on securities available for sale. The
related current period deferred tax expense of $21,720 has been
recorded directly to shareholders' equity in 1998. The balance of the
change in the net deferred tax asset results from the current period
deferred tax benefit of $7,000.
7. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to lease equipment and its
office facilities under noncancellable operating lease agreements
expiring on various dates through 2010. The Company may, at its option,
extend the lease of its office facility at 256 Meeting Street in
Charleston, South Carolina, for two additional ten year periods, extend
the lease of its office facility at 100 N. Main Street, Summerville,
South Carolina, for two additional five year periods and extend the
land lease where the Mt. Pleasant office is constructed for six
additional five year periods. Minimum rental commitments for these
leases as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 402,732
2000 391,698
2001 403,402
2002 406,038
2003 418,214
2004 and thereafter 1,462,832
----------
Total $3,484,916
==========
</TABLE>
29
<PAGE> 30
Total rental expense was $378,867, $359,041 and $380,637 in 1998, 1997
and 1996, respectively.
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the financial statements. The Company's
exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The amount of collateral obtained if deemed necessary by
the Company upon extension of credit is based on management's credit
evaluation of the counterparty. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties. Commitments to extend credit,
including unused lines of credit, amounted to $21,618,939 and
$18,838,319 at December 31, 1998 and 1997, respectively.
Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. Commitments
under standby letters of credit amounted to $749,857 and $1,374,263 at
December 31, 1998 and 1997, respectively.
8. RELATED PARTY TRANSACTIONS
In the opinion of management, loans to officers and directors of the
Company are made on substantially the same terms as those prevailing at
the time for comparable transactions with unaffiliated persons and do
not involve more than the normal risk of collectibility. There were no
outstanding loans to executive officers of the Company as of December
31, 1998 and 1997. Related party loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $ 1,477,702 2,590,948
New loans or advances 1,207,251 1,012,421
Repayments (1,688,196) (2,125,667)
----------- -----------
Balance at end of year $ 996,757 $ 1,477,702
=========== ===========
</TABLE>
9. OTHER EXPENSE
A summary of the components of other operating expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Advertising and business development $ 48,726 $ 29,355 $ 85,966
Supplies 215,067 150,900 110,396
Telephone and postage 139,780 109,243 106,379
Insurance 31,406 32,465 34,469
Professional fees 165,992 133,865 110,358
Data processing services 167,740 106,168 89,998
State and FDIC insurance and fees 27,944 23,822 14,927
Other 633,754 437,014 362,513
---------- ---------- --------
Total $1,430,409 $1,022,832 $915,006
========== ========== ========
</TABLE>
30
<PAGE> 31
10. STOCK DIVIDEND AND STOCK SPLIT
The Board of Directors approved a 10% stock dividend on April 9, 1996,
for shareholders of record April 30, 1996, effective May 15, 1996. All
share and per share data have been retroactively restated to reflect
the 10% stock dividend.
The Board of Directors approved a two for one stock split on April 8,
1997, for shareholders of record April 30, 1997, effective May 15,
1997. All share and per share data have been retroactively restated to
reflect the two for one stock split.
The Board of Directors approved a 10% stock dividend on April 14, 1998,
for shareholders of record April 30, 1998, effective May 15 1998. All
share and per share data have been retroactively restated to reflect
the 10% stock dividend.
11. INCENTIVE STOCK OPTION PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company has an incentive stock option plan for the benefit of
eligible officers and employees. A total of 220,000 shares were
reserved and 198,000 shares have subsequently been granted under the
plan. Options for 55,880 shares with an exercise price of $4.55 and
33,000 shares with an exercise price of $4.72 have expired. No options
were granted under this plan during 1998, 1997 and 1996. Options for
27,280 shares at $4.55 were exercised during 1998, 1997 and 1996. There
are no options outstanding under this plan.
On April 14, 1998, the shareholders of the Company approved an
incentive stock option plan for the benefit of eligible officers and
employees. A total of 180,000 shares were reserved and on April 16,
1998, 146,000 shares were granted under the plan. Adjusted for a ten
percent (10%) stock dividend on May 15, 1998, options for 16,500 shares
with an exercise price of $25.31 and options for 141,900 shares with an
exercise price of $23.01 remain outstanding, none of which are
exercisable. These options vest over a five year period. Options for
2,000 shares have expired.
In the event of a prospective reorganization, consolidation or sale of
substantially all of the assets or any other form of corporate
reorganization in which the Bank would not be the surviving entity or
in the event of the acquisition, directly or indirectly, of the
beneficial ownership of twenty four percent (24%) of the common stock
of the Company or the making, orally or in writing, of a tender offer
for, or any request or invitation for tender of, or any advertisement
making or inviting tenders of the Bank stock by any person, all options
in effect at that time would accelerate so that all options would
become immediately exercisable and could be exercised within one year
immediately following the date of acceleration but not thereafter.
The Company established an Employee Stock Ownership Plan (ESOP)
effective January 1, 1989. Each employee who has attained age
twenty-one and has completed at least 1,000 hours of service in a Plan
year is eligible to participate in the Plan. Contributions are
determined annually by the Board of Directors and amounts allocable to
individual participants may be limited pursuant to the provisions of
Internal Revenue Code section 415. The Company recognizes expense when
the contribution is approved by the Board. The total expenses charged
by the Company amounted to $186,000, $165,048 and $146,184 for the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock plan. Had compensation cost for
the Company's incentive stock option plan been determined based on the
fair value at the grant date for swards in 1998 consistent with the
provisions of SFAS No. 123, the Company's net earnings and diluted
earnings per share would have been reduced to the proforma amounts as
follows. There were no grants during 1997 and 1996.
<TABLE>
<CAPTION>
(DOLLARS, EXCEPT PER SHARE, IN THOUSANDS) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings - as reported $ 1,660 $ 1,610 $ 1,389
Net earnings - proforma l,489 1,610 1,389
Diluted earnings per share - as reported $ .64 $ .62 $ .53
Diluted earnings per share - proforma $ .57 $ .62 $ .53
</TABLE>
31
<PAGE> 32
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants: dividend yield of 1.36%, expected
volatility of 33%, risk-free interest rate of 5.13% and expected lives
of 5 years. The weighted average fair value of options granted in 1998
was $8.39.
12. INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
For the year ended December 31, 1998
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net income $1,660,149
BASIC EPS
Income available to common shareholders 1,660,149 2,599,212 $ .64
EFFECT OF DILUTIVE SECURITIES
Options ** --
---------
DILUTED EPS
Income available to common shareholders $1,660,149 2,599,212 $ .64
========== ========= =======
</TABLE>
**ALL OUTSTANDING OPTIONS ARE ANTI-DILUTIVE.
<TABLE>
<CAPTION>
For the year ended December 31, 1997
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net income $1,609,618
BASIC EPS
Income available to common shareholders 1,609,618 2,573,775 $ .63
EFFECT OF DILUTIVE SECURITIES
Options 22,434
---------
DILUTED EPS
Income available to common shareholders $1,609,618 2,596,209 $ .62
========== ========= =======
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1996
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net income $1,388,808
BASIC EPS
Income available to common shareholders 1,388,808 2,573,914 $ .54
EFFECT OF DILUTIVE SECURITIES
Options 26,636
---------
DILUTED EPS
Income available to common shareholders $1,388,808 2,600,550 $ .53
========== ========= =======
</TABLE>
32
<PAGE> 33
13. REGULATORY CAPITAL REQUIREMENTS
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulation) to risk-weighted assets (as defined) and
to average assets. Management believes, as of December 31, 1998, that
the Company and the Bank meet all capital adequacy requirements to
which they are subject.
At December 31, 1998 and 1997, the Company and the Bank are categorized
as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Company
and the Bank must maintain minimum total risk based, Tier 1 risk based
and Tier 1 leverage ratios of 10%, 6% and 5% and to be categorized as
"adequately capitalized," the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table below. There are no current conditions or
events that management believes would change the Company's or the
Bank's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital to risk-weighted assets:
Company $17,652 19.40% $7,278 8.00% $ N/A 10.00%
Bank 16,997 18.69% 7,277 8.00% 9,096 10.00%
Tier 1 capital to risk-weighted assets:
Company $16,514 18.15% $3,639 4.00% $ N/A 6.00%
Bank 15,859 17.44% 3,638 4.00% 5,457 6.00%
Tier 1 capital to average assets:
Company $16,514 11.29% $5,849 4.00% $ N/A 5.00%
Bank 15,859 10.85% 5,849 4.00% 7,311 5.00%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital to risk-weighted assets:
Company $16,478 19.02% $6,932 8.00% $ N/A 10.00%
Bank 16,139 18.63% 6,930 8.00% 8,663 10.00%
Tier 1 capital to risk-weighted assets:
Company $15,394 17.77% $3,466 4.00% $ N/A 6.00%
Bank 15,055 17.38% 3,465 4.00% 5,198 6.00%
Tier 1 capital to average assets:
Company $15,394 12.69% $4,854 4.00% $ N/A 5.00%
Bank 15,055 12.41% 4,853 4.00% 6,066 5.00%
</TABLE>
33
<PAGE> 34
14. DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial
instruments whether or not recognized on the balance sheet, for which
it is practicable to estimate fair value. Fair value estimates are made
as of a specific point in time based on the characteristics of the
financial instruments and the relevant market information. Where
available, quoted market prices are used. In other cases, fair values
are based on estimates using present value or other valuation
techniques. These techniques involve uncertainties and are
significantly affected by the assumptions used and the judgements made
regarding risk characteristics of various financial instruments,
discount rates, prepayments, estimates of future cash flows, future
expected loss experience and other factors. Changes in assumptions
could significantly affect these estimates. Derived fair value
estimates cannot be substantiated by comparison to independent markets
and, in many cases, may or may not be realized in an immediate sale of
the instrument.
Under SFAS No. 107, fair value estimates are based on existing
financial instruments without attempting to estimate the value of
anticipated future business and the value of the assets and liabilities
that are not financial instruments. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Company.
The following describes the methods and assumptions used by the Company
in estimating the fair values of financial instruments:
a. Cash and cash equivalents, interest bearing deposits in other
banks, federal funds sold and securities under resale
agreements or similar arrangements The carrying value
approximates fair value.
b. Investment securities available for sale The fair value of
investment securities is derived from quoted market prices.
c. Loans
The current value of variable rate consumer and commercial
loans and consumer and commercial loans with remaining
maturities of three months or less approximates fair value.
The fair value of fixed rate consumer and commercial loans
with maturities greater than three months are valued using a
discounted cash flow analysis and assumes the rate being
offered on these types of loans by the Company at December 31,
1998 and 1997, approximates market.
For lines of credit, the carrying value approximates fair
value. No value has been placed on the underlying credit card
relationship rights.
Unused loan commitments are at adjustable rates, which
fluctuate with the prime rate or are funded within ninety
days. Current amounts are considered to be their fair value.
d. Deposits
Under SFAS No. 107, the estimated fair value of deposits with
no stated maturity is equal to the carrying amount. The fair
value of time deposits is estimated by discounting contractual
cash flows, by applying interest rates currently being offered
on the deposit products. Under SFAS No. 107, the fair value
estimates for deposits do not include the benefit that results
from the low cost funding provided by the deposit liabilities
as compared to the cost of alternative forms of funding
(deposit base intangibles).
e. Short-term borrowings
The carrying amount approximates fair value due to the
short-term nature of these instruments.
34
<PAGE> 35
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
----
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Cash and cash equivalents $ 7,464,394 $ 7,464,394
Interest bearing deposits in other banks 6,666 6,666
Federal funds sold 15,450,000 15,450,000
Investments available for sale 33,759,333 33,759,333
Loans 82,900,397 82,442,318
Deposits 123,973,308 124,001,991
Short-term borrowings 3,480,070 3,480,070
</TABLE>
<TABLE>
<CAPTION>
1997
----
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Cash and cash equivalents $ 6,410,838 $ 6,410,838
Interest bearing deposits in other banks 6,421 6,421
Federal funds sold 15,600,000 15,600,000
Investments available for sale 19,483,167 19,483,167
Loans 78,755,429 78,322,471
Deposits 104,469,073 104,672,281
Short-term borrowings 3,787,996 3,787,996
</TABLE>
15. BANK OF SOUTH CAROLINA CORPORATION - PARENT COMPANY
The Company's principal source of income is dividends from the Bank.
Certain regulatory requirements restrict the amount of dividends which
the Bank can pay to the Company. Each dividend payment from the Bank to
the Corporation is approved by the Commissioner of Banking of the South
Carolina State Board of Financial Institutions prior to its payment.
The Company's principal asset is its investment in its bank subsidiary.
The Company's condensed statements of financial condition data as of
December 31, 1998, and 1997, and the related condensed statements of
operations data and cash flow data for the periods ended December 31,
1998, 1997 and 1996, are as follows:
FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
Cash $ 826,627 $ 459,014
Investment in wholly-owned bank subsidiary 16,022,540 15,182,116
Capitalized organizational costs 9,924 17,370
Other assets 834 3,338
----------- -----------
Total assets $16,859,925 $15,661,838
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 182,392 $ 140,491
----------- -----------
Total liabilities 182,392 140,491
Shareholders' equity 16,677,533 15,521,347
----------- -----------
Total liabilities and shareholders' equity $16,859,925 $15,661,838
=========== ===========
</TABLE>
35
<PAGE> 36
OPERATIONS DATA
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income $ 24,977 $ 14,578 $ 13,723
Net operating expenses (40,268) (35,973) (44,212)
Dividends received from bank 872,000 1,147,000 470,000
Equity in undistributed earnings of subsidiary 803,440 484,013 949,297
----------- ----------- -----------
Net income $ 1,660,149 $ 1,609,618 $ 1,388,808
=========== =========== ===========
</TABLE>
CASH FLOW DATA
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,660,149 $ 1,609,618 $ 1,388,808
Equity in undistributed earnings of subsidiary (803,440) (484,013) (949,297)
Decrease (increase) in other assets 2,504 (2,335) (1,003)
Amortization of organizational costs 7,446 7,446 7,446
----------- ----------- -----------
Net cash provided by operating activities 866,659 1,130,716 445,954
Cash flows from financing activities:
Dividends paid (623,046) (1,099,147) (427,466)
Treasury stock purchased -- -- (550,686)
Stock options exercised 124,000 124,000 124,000
----------- ----------- -----------
Net cash used by financing activities (499,046) (975,147) (854,152)
Net increase (decrease) in cash 367,613 155,569 (408,198)
Cash at beginning of year 459,014 303,445 711,643
----------- ----------- -----------
Cash at end of year $ 826,627 $ 459,014 $ 303,445
=========== =========== ===========
</TABLE>
36
<PAGE> 37
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below represent the quarterly results of operations for the
years ending December 31, 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Fourth Third Second First
----------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,682,724 $2,790,248 $2,592,900 $2,527,559
Total interest expense 951,915 1,040,798 910,634 827,394
---------- ---------- ---------- ----------
Net interest income 1,730,809 1,749,450 1,682,266 1,700,165
Provision for loan losses 10,000 15,000 15,000 15,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,720,809 1,734,450 1,667,266 1,685,165
Other income 233,901 222,285 225,045 184,193
Other expense 1,294,772 1,273,396 1,299,031 1,228,032
---------- ---------- ---------- ----------
Income before taxes 659,938 683,339 593,280 641,326
Income tax expense 235,500 239,012 213,000 230,222
---------- ---------- ---------- ----------
Net income $ 424,438 $ 444,327 $ 380,280 $ 411,104
========== ========== ========== ==========
Basic earnings per share $ .16 $ .17 $ .15 $ .16
========== ========== ========== ==========
Diluted earnings per share $ .16 $ .17 $ .15 $ .16
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Fourth Third Second First
----------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,454,588 $2,365,261 $2,241,162 $2,099,563
Total interest expense 799,915 765,674 712,726 663,708
---------- ---------- ---------- ----------
Net interest income 1,654,673 1,599,587 1,528,436 1,435,855
Provision for loan losses 52,500 52,500 52,500 52,500
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,602,173 1,547,087 1,475,936 1,383,355
Other income 164,272 171,491 115,911 148,580
Other expense 1,096,585 1,037,173 996,803 963,126
---------- ---------- ---------- ----------
Income before taxes 669,860 681,405 595,044 568,809
Income tax expense 217,500 253,000 223,000 212,000
---------- ---------- ---------- ----------
Net income $ 452,360 $ 428,405 $ 372,044 $ 356,809
========== ========== ========== ==========
Basic earnings per share $ .18 $ .17 $ .14 $ .14
========== ========== ========== ==========
Diluted earnings per share $ .18 $ .16 $ .14 $ .14
========== ========== ========== ==========
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ELECTION OF DIRECTORS
Sixteen (16) Directors, constituting the entire Board of Directors, will be
elected at the Annual Meeting, each to hold office for one year and until a
successor shall have been duly elected or appointed and shall have qualified. In
the absence of instructions to the contrary, shares of Common stock represented
by properly executed proxies will be voted for the sixteen (16) Nominees listed
on pages 6 and 7, all of whom are recommended by management and have consented
to be named and to serve if elected.
37
<PAGE> 38
The Company does not presently know of anything that would preclude any Nominee
from serving; however, should any Nominee for any reason become unable or
unwilling to serve as a Director, the number of Directors to be elected will be
reduced accordingly.
The name of each Nominee designated by the Board of Directors of the Company for
election as Director of the Company and certain information provided by such
Nominee to the Company is set forth in the table below. Fourteen (14) of the
current nominees served as initial directors of the Bank from October 22, 1986,
when the Bank's charter was issued until the first annual meeting of
Shareholders on April 14, 1987, and were elected to serve a one-year term at
such annual meeting. John M. Tupper and Thomas W. Myers were first elected as
Directors of the Bank during 1993. They were all re-elected to serve one-year
terms at subsequent annual meetings. All of the current Nominees served as
Directors of the Company from April 14, 1998, the date of the last Annual
Meeting of shareholders.
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES HELD BUSINESS EXPERIENCE
WITH FAMILY 1987-1999 AND
NAME AGE CORPORATION RELATIONSHIP OTHER DIRECTORSHIPS
- ---- --- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Nathaniel I. Ball, III 57 Executive None The Bank of South Carolina (banking)
Vice President, 1986-99
Secretary,
Director
William T. Cooper 69 Director None President, Southeastern Galleries, Inc. (retail furniture
and decorating) 1983-99
C. Ronald Coward 63 Director None President - Coward-Hund Construction
Company, Inc. (construction) 1976-99
Louis Y. Dawson, III 70 Director Father-in-law Retired (1993) President-Dawson Eng-
of Charles G. ineering, Inc. (general contracting)
Lane and of a 1954-93
bank officer,
F.S. Hassell
Leonard C. Fulghum 69 Director None Chairman - Ferguson Fulghum, Inc. (painting contractors)
1972-99
T. Dean Harton 53 Director None President, Hawthorne Corporation (aviation) 1986-99
William L. Hiott, Jr. 54 Executive None The Bank of South Carolina
Vice President, (banking) 1986-99
Treasurer,
Director
James H. Holcombe 74 Director None Member - Holcombe, Fair & Lane,
LLC (real estate) 1996-99; General and Limited
Partner - Holcombe & Fair Realtors 1970-95
Katherine M. Huger 57 Director None Assistant Professor of Economics - Charleston Southern
University (education) 1972-99
John E. Huguley 71 Director None Retired (1996) Chairman - John Huguley Company, Inc. (retail
office products) 1980-96
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES HELD BUSINESS EXPERIENCE
WITH FAMILY 1987-1999 AND
NAME AGE CORPORATION RELATIONSHIP OTHER DIRECTORSHIPS
- ---- --- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Charles G. Lane 44 Director Son-in-law Member - Holcombe, Fair & Lane,
of Louis Y. LLC (real estate) 1996-99;
Dawson, III; Associate-Holcombe & Fair Realtors
brother of 1987-96
Hugh C.
Lane, Jr.
Hugh C. Lane, Jr. 51 President, Brother of The Bank of South Carolina (banking)
Chief Exec- Charles G. 1986-99
utive Officer, Lane
Director
Louise J. Maybank 59 Director None Active in community programs
Thomas W. Myers 64 Director None President - Myers & Associates
(estate and business insurance planning) 1963-99
Thomas C. Stevenson, III 47 Director None President - Fabtech, Inc. (metal
fabrication) 1991-99; Private Investor 1990-91;
Chairman of the Board - Stevenson Hagerty, Inc. (diversified
holding company) 1984-90
John M. Tupper 57 Director None President - Tupperway Tire and Service, Inc. (retail tires
and service) 1980-99
</TABLE>
ITEM 10. COMPENSATION OF OFFICERS AND DIRECTORS
The following table sets forth all remuneration (including remuneration under
any contract, authorization or arrangement, whether or not set forth in a formal
document) paid during the year ended December 31, 1998, by the Bank to the three
(3) Executive Officers of the Company and the Bank whose total remuneration from
the Bank exceeded One Hundred Thousand and No/100 ($100,000.00) Dollars for
their services in all capacities. Such Officers receive no compensation from the
Company as Officers or as Directors or in any other capacity.
39
<PAGE> 40
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER SECURITIES
ANNUAL RESTRICTED UNDER- ALL OTHER
NAME AND COMPEN- STOCK LYING LTIP COMPEN-
PRINCIPAL SATION(1)(2) AWARD(S) OPTIONS/ PAYOUTS SATION(1)(2)
POSITION YEAR SALARY($) BONUS($) ($) ($) SARS($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hugh C. Lane, 1998 $140,601.45 --- $19,961.21 $19,961.21
Jr. - CEO 1997 $130,601.45 $10,000.00 $16,978.72 $16,978.72
& President 1996 $123,101.45 --- $17,682.79 $17,682.79
Nathaniel I. 1998 $126,101.37 --- $17,775.76 $17,775.76
Ball, III - 1997 $116,101.37 $10,000.00 $14,729.98 $14,729.98
Executive Vice 1996 $108,601.37 --- $16,135.32 $16,135.32
President &
Secretary
William L. 1998 $126,101.37 --- $18,330.88 $18,330.88
Hiott, Jr. - 1997 $116,101.37 $10,000.00 $14,729.98 $14,729.98
Executive Vice 1996 $108,601.37 --- $16,135.32 $16,135.32
President &
Treasurer
</TABLE>
- ----------------------------------
(1) Includes same life, disability and health insurance benefits as all
other employees of the Bank who work at least thirty (30) hours a week.
(2) Includes Bank contribution to the ESOP.
- ---------------------------------
Non-officer Directors of the Company received One Hundred and No/100 ($100.00)
Dollars for each meeting of the Board of Directors attended and non-officer
Directors of the Bank received Two Hundred and No/100 ($200.00) Dollars for each
meeting of the Board of Directors attended and One Hundred and No/100 ($100.00)
Dollars for each Board Committee meeting attended.
On November 2, 1989, the Bank adopted an Employee Stock Ownership Plan and Trust
Agreement, to provide retirement benefits to eligible employees for long and
faithful service.
An employee of the Bank is eligible to become a participant in the ESOP upon
reaching twenty-one (21) years of age and upon completion of one thousand
(1,000) hours of service in a plan year. No contributions by employees are
permitted. The amount and time of contributions are at the sole discretion of
the Board of Directors of the Bank. The contribution for all participants is
based solely on each participant's respective regular or base salary and wages
paid by the Bank including commissions, bonuses and overtime, if any.
A participant becomes vested in the Plan upon completion of five (5) years of
service. There is no vesting prior to the completion of five (5) years of
service.
The Plan became effective as of January 1, 1989.
The Board of Directors of the Bank approved the contribution of One Hundred
Eighty Six Thousand and No/100 ($186,000.00) Dollars to the ESOP for the fiscal
year ended December 31, 1998. The contribution was made during 1998. T. Dean
Harton, Sheryl G. Sharry and Nathaniel I. Ball, III, currently serve as Plan
Administrators. Nathaniel I. Ball, III, currently serves as Trustee for the
Plan. The Plan currently owns One Hundred Ninety Six Thousand Eight Hundred
Fifty Seven (196,857) shares or 7.56% of the Company's Common Stock.
40
<PAGE> 41
During the fiscal year ended December 31, 1998, the Company had no plans or
arrangements pursuant to which any Officer, Director or principal Shareholder
received contingent remuneration or personal benefits other than the contingent
remuneration and life, disability and health insurance benefits referred to in
the footnotes to the preceding table.
On April 14, 1998, the shareholders of the Company approved an Incentive Stock
Option Plan for the benefit of eligible Officers and employees of the Bank. A
total of one hundred eighty thousand (180,000) shares were reserved and on April
16, 1998, the Bank granted options to purchase Common Stock in the aggregate
amount of one hundred forty six thousand (146,000) shares to fifty two (52)
employees of the Bank (including officers, such Directors as are also employees
and other employees) pursuant to the Incentive Stock Option Plan. These grants
include those to Hugh C. Lane, Jr., Nathaniel I. Ball, III, and William L.
Hiott, Jr., Executive Officers and Directors, as more specifically set forth
below. Options for one hundred forty one thousand nine hundred (141,900) shares
with an exercise price of $23.01 and for sixteen thousand five hundred (16,500)
shares with an exercise price of $25.31 remain outstanding. No options were
exercised in 1998.
Hugh C. Lane, Jr., President and Chief Executive Officer, was granted the option
to purchase fifteen thousand (15,000) shares of common stock of the Company
pursuant to the Incentive Stock Option Plan at a price of $27.84. Nathaniel I.
Ball, III, Executive Vice President and Secretary, and William L. Hiott, Jr.,
Executive Vice President and Treasurer, were each granted the option to purchase
twelve thousand five hundred (12,500) shares of Common Stock of the Company
pursuant to the Incentive Stock Option Plan at a price of $25.3125. The above
options are all exercisable in five (5) twenty (20%) percent increments
beginning on and for one year following April 16, 2003, with an additional
twenty (20%) percent to be exercisable on and for one year following each
successive anniversary. The right to exercise each such twenty (20%) percent of
each option is cumulative and will not expire until the tenth anniversary of the
date of the grant. Adjusted for a ten (10%) percent stock dividend on May 15,
1998, Hugh C. Lane, Jr., has the option to purchase 16,500 shares of common
stock of the Company at a price of $25.31 per share and Nathaniel I. Ball, III
and William L. Hiott, Jr., each have the option to purchase 13,750 shares of
common stock of the Company at a price of $23.01.
In the event of a prospective reorganization, consolidation or sale of
substantially all of the assets or any other form of corporate reorganization in
which the Company would not be the surviving entity or in the event of the
acquisition, directly or indirectly, of the beneficial ownership of twenty-four
(24%) percent of the Common Stock of the Company or the making, orally or in
writing, of a tender offer for, or any request or invitation for tender of, or
any advertisement making or inviting tenders of the Company stock by any person,
all options in effect at that time would accelerate so that all options would
become immediately exercisable and could be exercised within one year
immediately following the date of acceleration but not thereafter.
In the case of termination of an option holder other than involuntary
termination without just cause, retirement, death or legal disability, the
Option holder may exercise the option only with respect to those shares of
Company common stock as which he or she has become vested. The option holder may
exercise the option with respect to such shares no more than thirty (30) days
after the date of termination of employment (but in any event prior to the
expiration date).
In the event that the option holder's employment is terminated without just
cause, the option shall become fully vested and fully exercisable as of the date
of his or her termination without regard to the five (5) year initial vesting
and exercisability or to the twenty percent (20%) annual increments thereafter.
The option holder may exercise the option following an involuntary termination
without just cause until the expiration date of the option.
In the event the option holder remains in the continuous employ of the Company
or any subsidiary from the date of the grant until the option holder's
retirement, the option shall become fully vested and fully exercisable as of the
date of his or her retirement without regard to the five (5) year initial
vesting and exercisability or to the twenty percent (20%) annual increments
thereafter. The option holder may exercise the option following his or her
retirement until the expiration date. In the event the option holder remains in
the continuous employ of the Company or a subsidiary from the date of the grant
until his or her death, the option shall become fully vested and fully
exercisable as of the date of death without regard to the five (5) year initial
vesting and exercisability or the twenty percent (20%) annual increments
thereafter. The person or persons entitled to exercise the option following the
option holder's death may exercise the option until the expiration date.
41
<PAGE> 42
In the event the option holder remains in the continuous employ of the Company
or any subsidiary from the date of the grant until the date of his or her legal
disability, the option shall become fully vested and fully exercisable as of the
date of his or her termination of employment on account of his or her legal
disability without regard to the five (5) year initial vesting and
exercisability or to the twenty percent (20%) annual increments thereafter. The
option holder may exercise the option following such termination of employment
until the expiration date.
The Stock Incentive Plan would provide for adjustment in the number of shares of
common stock authorized under the Plan or granted to an optionee to protect
against dilution in the event of changes in the Bank's capitalization, including
stock splits and dividends.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the extent known to the Board of Directors of the Company, as of February 23,
1999, the only Shareholders of the Company having beneficial ownership of more
than five (5%) percent of the shares of Common Stock of the Company are as set
forth below:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
<S> <C> <C>
Hugh C. Lane, Jr. 386,521.774 (1) (2) 14.83%
30 Church Street
Charleston, SC 29401
BankAmerica Corporation (3) 150,040 (3) 5.76%
100 North Tryon Street
Charlotte, NC 28255
N.B. Holdings Corp. (3) 150,040 (4) 5.76%
100 North Tryon Street
Charlotte, NC 28255
NationsBank, N.A. (3) 150,040 (5) 5.76%
100 South Tryon Street
Charlotte, NC 28255
The Bank of South Carolina 196,857 (6) 7.56%
Employee Stock Ownership
Plan and Trust ("ESOP")
256 Meeting Street
Charleston, SC 29401
</TABLE>
- ------------------------------
(1) To the extent known to the Board of Directors, Hugh C. Lane and his
children, individually and collectively, have beneficial ownership of
706,656.774 shares or 27.12% of the outstanding shares. As more fully
described in the following footnote, Hugh C. Lane, Jr. is the only one
of the above who has a beneficial ownership interest in more than five
(5%) percent of the Company's common stock. Hugh C. Lane, Jr. disclaims
any beneficial interest in those shares in which other members of his
family have a beneficial interest other than those shares his wife owns
directly and those for which he serves as trustee or she serves as
custodian (as more fully described in the following footnote).
(2) To the extent known to the Board of Directors, Hugh C. Lane, Jr.
directly owns and has sole voting and investment power with respect to
170,900 shares; as trustee for 10 trust accounts holding an aggregate
of 63,236 shares, he has sole voting and investment power with respect
to such shares; as co-trustee for one trust account holding 4,840
shares, he has joint voting and investment power with respect to such
shares; he is indirectly beneficial owner of 7,568 shares owned by his
wife and an aggregate of 114,118 shares held by his wife as custodian
for three minor
42
<PAGE> 43
children and 25,859.774 shares owned by the Employee Stock Ownership
Plan and Trust ("ESOP") in which he has a vested interest. All of the
386,521.774 shares beneficially owned by Hugh C. Lane, Jr. are
currently owned. Hugh C. Lane, Jr. has had beneficial ownership of more
than five (5%) percent of the Bank's Common Stock since October 23,
1986, and more than ten (10%) percent since November 16, 1988.
(3) To the extent known to the Board of Directors, BankAmerica Corporation
is the parent holding company of N.B. Holdings Corporation. N.B.
Holdings Corporation is the parent holding company of NationsBank, N.A.
The shares referred to in notes (4) and (5) are a duplication of the
shares referred to in this note (3).
(4) To the extent known to the Board of Directors, N.B. Holdings
Corporation has shared voting power for 79,860 shares, and shared
investment power for 150,040 shares (including 70,180 shares held as
trustee under the will of Mills B. Lane for the benefit of Hugh C.
Lane). N.B. Holdings Corporation disclaims beneficial ownership for the
shares referred to in this note (4).
(5) To the extent known to the Board of Directors, NationsBank N.A. has
sole voting power for 79,860 shares, sole investment power for 4,840
shares and shared investment power for 145,200 shares (including 70,180
shares held as trustee under the will of Mills B. Lane for the benefit
of Hugh C. Lane). NationsBank, N.A., disclaims beneficial ownership for
the shares referred to in this note (5).
(6) The Trustee of the ESOP, Nathaniel I. Ball, III, an executive Officer
and Director of the Bank and the Company, disclaims beneficial
ownership of 196,857 shares owned by the ESOP which have been allocated
to members of the plan, each of whom under the terms of the plan has
the right to direct the Trustee as to the manner in which voting rights
are to be exercised.
BENEFICIAL OWNERSHIP OF COMMON STOCK OF THE COMPANY
The table below sets forth the number of shares of Common Stock (the only class
of outstanding equity securities of the Company) known by the Company to be
beneficially owned by each Nominee for election as Director and by the Officers
and Directors of the Company as a group as of February 23, 1999. Except as
otherwise indicated in the footnotes to the table, the persons named possess
sole voting power and investment power with respect to the shares shown opposite
their names. As of February 23, 1999, no Officer, Director or Nominee
beneficially owned more than ten (10%) percent of the outstanding shares of the
Company other than Hugh C. Lane, Jr. As of February 23, 1999, the Officers,
Directors and Nominees beneficially owned 894,608.42 shares, representing
approximately 34.33% of the outstanding shares.
As of February 23, 1999, the beneficial ownership of Common Stock of the Company
by all current Directors and each Nominee for Director was as set forth in the
following table:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
---------------- -------------------- -----
<S> <C> <C>
Nathaniel I. Ball, III 53,945.311(1) 2.07%
1302 Cove Avenue
Sullivans Island, SC 29482
William T. Cooper 5,324(1) .20%
21 Jamestown Road
Charleston, SC 29407
C. Ronald Coward 33,836(1) 1.30%
537 Planters Loop
Mt. Pleasant, SC 29464
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
---------------- -------------------- -----
<S> <C> <C>
Louis Y. Dawson, III 12,584(1) .48%
33 Church Street
Charleston, SC 29401
Leonard C. Fulghum 35,175(1) 1.35%
311 Middle Street
Mt. Pleasant, SC 29464
T. Dean Harton 7,704(1) .30%
4620 Lazy Creek Lane
Wadmalaw, SC 29487
William L. Hiott, Jr 84,621.335(1) 3.25%
1831 Capri Drive
Charleston, SC 29407
James H. Holcombe 107,175(1) 4.11%
16 Church Street
Charleston, SC 29401
Katherine M. Huger 5,324(1) .20%
72 Murray Boulevard
Charleston, SC 29401
John E. Huguley 16,456(1) .63%
22 Murray Boulevard
Charleston, SC 29401
Charles G. Lane 125,594(1) 4.82%
10 Gillon Street
Charleston, SC 29401
Hugh C. Lane, Jr 386,521.774(1) 14.83%
30 Church Street
Charleston, SC 29401
Louise J. Maybank 12,100(1) .46%
8 Meeting Street
Charleston, SC 29401
Thomas W. Myers 6,400 .25%
90 Gaillard Lane
Summerville, SC 29483
Thomas C. Stevenson, III 484 .02%
173 Tradd Street
Charleston, SC 29401
John M. Tupper 1,364 .05%
113 Linwood Drive
Summerville, SC 29483
</TABLE>
44
<PAGE> 45
(1) To the extent known to the Board of Directors, each of the following
Directors and Nominees for election as Directors (each of whom directly
owns and has sole voting and investment power of all shares
beneficially owned by him or her except as set forth in this footnote)
indirectly owns the following number of shares: Nathaniel I. Ball, III
- an aggregate of 5,502 shares directly owned by his wife and
22,977.311 shares owned by the ESOP, in which he has a vested interest;
William T. Cooper - an aggregate of 4,480 shares held by a pension
plan; C. Ronald Coward - an aggregate of 1,100 shares owned by a
company of which he is president and director; Louis Y. Dawson, III -
an aggregate of 484 shares owned by his wife; Leonard C. Fulghum - an
aggregate of 3,555 shares owned by his wife; T. Dean Harton - an
aggregate of 2,134 shares owned by his wife and held by his wife as
custodian for his step-son; William L. Hiott, Jr. - an aggregate of
5,323 shares directly owned by his wife and held by him as custodian
for two children and 22,977.335 shares owned by the ESOP, in which he
has a vested interest; James H. Holcombe - an aggregate of 55,387
shares owned by the Marjorie G. Detyens Irrevocable Trust for which he
serves as co-trustee; Katherine M. Huger - 484 shares owned by her
husband; John E. Huguley - 8,954 shares owned by his wife; Charles G.
Lane - an aggregate of 58,237 shares owned by his wife, held by her as
custodian for children, held by him as co-trustee with Hugh C. Lane,
Jr., for a sister's children and held by him as a co-trustee for the
children of Hugh C. Lane, Jr.; and Hugh C. Lane, Jr. - an aggregate of
189,762 shares owned by his wife, held by his wife as custodian for
each of three children, held by him as co-trustee with Charles G. Lane
for a sister's children and held by him as trustee for his and his
brother's and sisters' children (as more fully described in the
footnote to the preceding table) and 25,859.774 shares owned by the
ESOP, in which he has a vested interest. All such indirectly owned
shares are included in the totals of the number of shares set forth in
the above table and beneficially owned by the Directors and Nominees.
- ------------------------------
As a group, all Directors and Executive Officers (including Hugh C. Lane, Jr.,
President and Chief Executive Officer; Nathaniel I. Ball, III, Executive Vice
President and Secretary; and William L. Hiott, Jr., Executive Vice President and
Treasurer) are sixteen (16) in number and beneficially own an aggregate of
894,608.42 shares, representing 34.33% of the issued and outstanding Common
Stock of the Company. All of these shares beneficially owned by the Directors,
Nominees and Executive Officers are currently owned. Three executive officers,
Hugh C. Lane, Jr., President and Chief Executive Officer, has a future right to
acquire sixteen thousand five hundred (16,500) shares. The other two executive
officers, Nathaniel I. Ball, III, Executive Vice President and Secretary; and
William L. Hiott, Jr., Executive Vice President and Treasurer, each have a
future right to acquire thirteen thousand seven hundred fifty (13,750) shares of
Common Stock of the Company pursuant to the Bank's Incentive Stock Option Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company does not have any existing continuing contractual relationships with
any Director, Nominee for election as Director or principal Officer of the
Company or the Bank, or any Shareholder owning, directly or indirectly, more
than five (5%) percent of the shares of Common Stock of the Company, or any
associate of the foregoing persons. Directors, Principal Officers, nominees for
election as Directors, and members of the immediate family of any of the
foregoing have had in the past, have at present, and will have in the future,
customer relationships with the Bank. Such transactions have been and will
continue to be made in the ordinary course of business, made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons, and such transactions
did not and will not involve more than the normal risk of collectability or
present other unfavorable features.
C. Ronald Coward, Leonard C. Fulghum and Thomas W. Myers each failed to file one
Statement of Changes in Beneficial Ownership on Form 4 in a timely manner.
Nathaniel I. Ball, III, filed one incorrect Statement of Beneficial Interest on
Form 4.
45
<PAGE> 46
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
1. The Consolidated Financial Statements and Report of Independent
Auditors are included in this Form 10-KSB and listed on pages as
indicated.
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(1) Report of Independent Auditors.........................................................................19
(2) Consolidated Balance Sheets............................................................................20
(3) Consolidated Statements of Operations..................................................................21
(4) Consolidated Statements of Shareholders' Equity and Comprehensive Income...............................22
(5) Consolidated Statements of Cash Flows..................................................................23
(6) Notes to Consolidated Financial Statements.............................................................24 - 37
</TABLE>
2. Exhibits
1.1 Articles of Incorporation of the Registrant (Filed with 1995
10-KSB)
1.2 By-laws of the Registrant (Filed with 1995 10-KSB)
1.5 Lease Agreement for 256 Meeting Street (Filed with 1995
10-KSB)
1.6 Sublease Agreement for Parking Facilities at 256 Meeting
Street (Filed with 1995 10-KSB)
1.7 Lease Agreement for 100 N. Main Street, Summerville, SC (Filed
with 1995 10-KSB)
1.8 Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC
(Filed with 1995 10-KSB)
1.9 List of Subsidiaries of the Registrant (Filed with 1995
10-KSB) The Registrant's only subsidiary is The Bank of South
Carolina (Filed with 1995 10-KSB)
1.10 Plan of Reorganization (Filed with 1995 10-KSB)
27 Financial Data Schedule (for SEC use only)
27.1 Revised Financial Data Schedule (for SEC use only)
3. Reports on Form 8-K: No
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 18, 1999 BANK OF SOUTH CAROLINA CORPORATION
By: /s/ William L. Hiott, Jr.
-----------------------------------------
William L. Hiott, Jr.
Executive Vice President and Treasurer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons in the
capacities indicated:
March 18, 1999 /s/ Nathaniel I. Ball, III
--------------------------------------------
Nathaniel I. Ball, III, Executive Vice
President, Secretary and Director
March 18, 1999 /s/ William T. Cooper
--------------------------------------------
William T. Cooper, Director
46
<PAGE> 47
March 18, 1999 /s/ C. Ronald Coward
--------------------------------------------
C. Ronald Coward, Director
March 18, 1999 /s/ Louis Y. Dawson, III
--------------------------------------------
Louis Y. Dawson, III, Director
March 18, 1999 /s/ Leonard C. Fulghum
--------------------------------------------
Leonard C. Fulghum, Director
March 18, 1999 /s/ T. Dean Harton
--------------------------------------------
T. Dean Harton, Director
March 18, 1999 /s/ William L. Hiott, Jr.
--------------------------------------------
William L. Hiott, Jr., Executive Vice
President, Treasurer & Director
March 18, 1999 /s/ James H. Holcombe
--------------------------------------------
James H. Holcombe, Director
March 18, 1999 /s/ Katherine M. Huger
--------------------------------------------
Katherine M. Huger, Director
March 18, 1999 /s/ John E. Huguley
--------------------------------------------
John E. Huguley, Director
March 18, 1999 /s/ Charles G. Lane
--------------------------------------------
Charles G. Lane, Director
March 18, 1999 /s/ Hugh C. Lane, Jr.
--------------------------------------------
Hugh C. Lane, Jr., President,
Chief Executive Officer & Director
March 18, 1999 /s/ Louise J. Maybank
--------------------------------------------
Louise J. Maybank, Director
March 18, 1999 /s/ Thomas W. Myers
--------------------------------------------
Thomas W. Myers, Director
March 18, 1999 /s/ Thomas C. Stevenson, III
--------------------------------------------
Thomas C. Stevenson, III, Director
March 18, 1999 /s/ John M. Tupper
--------------------------------------------
John M. Tupper, Director
47
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BANK OF SOUTH CAROLNA CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,464
<INT-BEARING-DEPOSITS> 7
<FED-FUNDS-SOLD> 15,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,759
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 84,140
<ALLOWANCE> 1,240
<TOTAL-ASSETS> 145,020
<DEPOSITS> 123,973
<SHORT-TERM> 3,480
<LIABILITIES-OTHER> 889
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 16,678
<TOTAL-LIABILITIES-AND-EQUITY> 145,020
<INTEREST-LOAN> 8,158
<INTEREST-INVEST> 1,286
<INTEREST-OTHER> 1,149
<INTEREST-TOTAL> 10,593
<INTEREST-DEPOSIT> 3,505
<INTEREST-EXPENSE> 3,731
<INTEREST-INCOME-NET> 6,862
<LOAN-LOSSES> 55
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,095
<INCOME-PRETAX> 2,578
<INCOME-PRE-EXTRAORDINARY> 2,578
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,660
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
<YIELD-ACTUAL> 0
<LOANS-NON> 569
<LOANS-PAST> 0
<LOANS-TROUBLED> 46
<LOANS-PROBLEM> 584
<ALLOWANCE-OPEN> 1,211
<CHARGE-OFFS> 35
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,240
<ALLOWANCE-DOMESTIC> 1,240
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANK OF
SOUTH CAROLINA CORPORATION FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,411
<INT-BEARING-DEPOSITS> 6
<FED-FUNDS-SOLD> 15,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,483
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 79,966
<ALLOWANCE> 1,211
<TOTAL-ASSETS> 124,478
<DEPOSITS> 104,469
<SHORT-TERM> 3,788
<LIABILITIES-OTHER> 700
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 15,521
<TOTAL-LIABILITIES-AND-EQUITY> 124,478
<INTEREST-LOAN> 7,316
<INTEREST-INVEST> 1,254
<INTEREST-OTHER> 591
<INTEREST-TOTAL> 9,161
<INTEREST-DEPOSIT> 2,758
<INTEREST-EXPENSE> 2,942
<INTEREST-INCOME-NET> 6,219
<LOAN-LOSSES> 210
<SECURITIES-GAINS> (16)
<EXPENSE-OTHER> 4,094
<INCOME-PRETAX> 2,515
<INCOME-PRE-EXTRAORDINARY> 2,515
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,610
<EPS-PRIMARY> .63
<EPS-DILUTED> .62
<YIELD-ACTUAL> 0
<LOANS-NON> 629
<LOANS-PAST> 40
<LOANS-TROUBLED> 57
<LOANS-PROBLEM> 647
<ALLOWANCE-OPEN> 1,041
<CHARGE-OFFS> 46
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,211
<ALLOWANCE-DOMESTIC> 1,211
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
