<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999
-------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 0-27702
Bank of South Carolina Corporation
----------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 57-1021355
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
256 Meeting Street, Charleston, SC 29401
----------------------------------------
(Address of principal executive offices)
(803) 724-1500
--------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 5, 1999, there were 2,605,597 Common Shares outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
<PAGE> 2
Table of Contents
BANK OF SOUTH CAROLINA CORPORATION
Report on Form 10-QSB
for quarter ended
June 30, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations - Three months
ended June 30, 1999 and 1998 4
Consolidated Statements of Operations - Six months
ended June 30, 1999 and 1998 5
Consolidated Statements of Shareholders'
Equity and Comprehensive Income - Six months ended
June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows - Six months
ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Liquidity 12
Capital Resources 12
Year 2000 12
Accounting and Reporting Changes 15
Effect of Inflation and Changing Prices 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Default Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART I - ITEM 1 - FINANCIAL STATEMENTS
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
Assets: June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Cash and due from banks $ 8,117,717 $ 7,464,394
Interest bearing deposits in other banks 6,791 6,666
Federal funds sold 11,525,000 15,450,000
Investment securities available for sale 37,068,345 33,759,333
Investment securities held to maturity 600,521 --
Loans 88,116,294 84,140,365
Allowance for loan losses (1,270,503) (1,239,968)
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Net loans 86,845,791 82,900,397
Premises and equipment, net 3,921,910 4,056,891
Other assets 1,602,673 1,382,120
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Total assets $ 149,688,748 $ 145,019,801
============= =============
Liabilities and shareholders' equity:
Deposits:
Non-interest bearing demand $ 32,988,536 $ 32,327,281
Interest bearing demand 25,683,620 23,834,038
Money market accounts 23,488,860 22,881,876
Certificates of deposit $100,000 and over 17,177,403 19,884,534
Other time deposits 17,107,300 20,016,065
Other savings deposits 5,530,115 5,029,514
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Total deposits 121,975,834 123,973,308
Short-term borrowings 10,021,907 3,480,070
Other liabilities 802,758 888,890
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Total liabilities 132,800,499 128,342,268
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Common Stock - No par value;
6,000,000 shares authorized;
Issued 2,605,597 shares at June 30, 1999
and December 31, 1998 -- --
Additional paid in capital 16,456,624 16,456,624
Retained earnings 1,066,547 607,959
Accumulated other comprehensive income (loss),
net of income taxes (84,236) 163,636
Treasury stock - 77,000 shares at June 30, 1999
and December 31, 1998 (550,686) (550,686)
------------- -------------
Total shareholders' equity 16,888,249 16,677,533
------------- -------------
Total liabilities and shareholders' equity $ 149,688,748 $ 145,019,801
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Interest and fee income
Interest and fees on loans $ 2,103,060 $ 2,066,747
Interest and dividends on investment securities 474,997 299,954
Other interest income 154,611 226,199
-------------- --------------
Total interest and fee income 2,732,668 2,592,900
-------------- --------------
Interest expense
Interest on deposits 780,384 843,517
Interest on short-term borrowings 74,613 67,117
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Total interest expense 854,997 910,634
-------------- --------------
Net interest income 1,877,671 1,682,266
Provision for loan losses -- 15,000
-------------- --------------
Net interest income after provision for loan losses 1,877,671 1,667,266
-------------- --------------
Other income
Service charges, fees and commissions 243,229 220,449
Other non-interest income 4,712 4,596
-------------- --------------
Total other income 247,941 225,045
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Other expense
Salaries and employee benefits 761,421 675,238
Net occupancy expense 303,635 267,417
Other operating expenses 361,813 356,376
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Total other expense 1,426,869 1,299,031
-------------- --------------
Income before income tax expense 698,743 593,280
Income tax expense 250,200 213,000
-------------- --------------
Net income $ 448,543 $ 380,280
============== ==============
Basic earnings per share $ .17 $ .15
============== ==============
Diluted earnings per share $ .17 $ .15
============== ==============
Dividends per common share $ .09 $ .06
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Interest and Fee Income
Interest and fees on loans $ 4,171,011 $ 4,102,117
Interest and dividends on investment securities 934,519 626,407
Other interest income 272,230 391,935
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Total interest and fee income 5,377,760 5,120,459
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Interest Expense
Interest on deposits 1,583,776 1,618,752
Interest on short-term borrowings 115,124 119,276
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Total interest expense 1,698,900 1,738,028
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Net Interest Income 3,678,860 3,382,431
Provision for loan losses 5,000 30,000
------------ ------------
Net interest income after provision for loan losses 3,673,860 3,352,431
------------ ------------
Other Income
Service charges, fees and commissions 511,461 401,380
Other non-interest income 8,707 7,857
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Total other income 520,168 409,237
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Other Expense
Salaries and employee benefits 1,489,101 1,309,712
Net occupancy expense of premises 576,102 495,420
Other operating expenses 763,133 721,930
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Total other expense 2,828,336 2,527,062
------------ ------------
Income before income tax expense 1,365,692 1,234,606
Income tax expense 490,200 443,222
------------ ------------
Net Income $ 875,492 $ 791,384
============ ============
Basic Earnings Per Share $ .34 $ .31
============ ============
Diluted Earnings Per Share $ .34 $ .31
============ ============
Dividends per common share $ .16 $ .11
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR SIX MONTHS JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated Other
Common Additional Retained Treasury Comprehensive
Stock Paid In Capital Earnings Stock Income (loss) Total
------ --------------- ----------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 $ -- $12,206,882 $ 3,738,498 $ (550,686) $ 126,653 $ 15,521,347
----------
Comprehensive income:
Net income -- -- 791,384 -- -- 791,384
Net unrealized losses on securities
(net of tax effect of $59,975) -- -- -- -- (24,534) (24,534)
------------
Total comprehensive income -- -- -- -- -- 766,850
------------
Shares issued for the exercise
of stock options -- 124,000 -- -- -- 124,000
Cash dividends -- -- (300,164) -- -- (300,164)
------ ----------- ----------- ---------- ---------- ------------
June 30, 1998 $ -- $12,330,882 $ 4,229,718 $ (550,686) $ 102,119 $ 16,112,033
====== =========== =========== ========== ========== ============
December 31, 1998 $ -- $16,456,624 $ 607,959 $ (550,686) $ 163,636 $ 16,677,533
Comprehensive income:
Net income -- -- 875,492 -- -- 875,492
Net unrealized losses on securities
(net of tax effect of $49,472) -- -- -- -- (247,872) (247,872)
------------
Total comprehensive income -- -- -- -- -- 627,620
------------
Cash dividends -- -- (416,904) -- -- (416,904)
------ ----------- ----------- ---------- ---------- ------------
June 30, 1999 $ -- $16,456,624 $ 1,066,547 $ (550,686) $ (84,236) $ 16,888,249
====== =========== =========== ========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
BANK OF SOUTH CAROLINA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 875,492 $ 791,384
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 239,153 147,020
Net accretion of unearned
discounts on investments (2,938) (6,888)
(Increase) decrease in other assets (74,978) 1,052,618
Provision for loan losses 5,000 30,000
Increase (decrease) in other liabilities (86,132) 56,333
------------- -------------
Net cash provided by operating activities 955,597 2,070,467
------------- -------------
Cash flows from investing activities:
Purchase of investment securities (4,300,042) (2,012,344)
Maturities of investment securities -- 1,193,881
Net increase in loans (3,950,394) (2,652,813)
Purchase of premises and equipment (104,172) (2,408,360)
------------- -------------
Net cash used in investing activities (8,354,608) (5,879,645)
------------- -------------
Cash flows from financing activities:
Net increase (decrease) in deposit accounts (1,997,474) 14,972,022
Net increase in short-term borrowings 6,541,837 3,181,786
Exercise of stock options -- 124,000
Dividends (416,904) (300,164)
------------- -------------
Net cash provided by financing activities 4,127,459 17,977,644
------------- -------------
Net increase (decrease) in cash and cash equivalents (3,271,552) 14,168,466
Cash and cash equivalents, beginning of period 22,921,060 22,017,259
------------- -------------
Cash and cash equivalents, end of period $ 19,649,508 $ 36,185,725
============= =============
Supplemental disclosure of cash flow data: Cash paid during the year for:
Interest $ 1,820,302 $ 1,737,128
Income taxes 490,200 463,010
Non-cash investing activities:
Transfer of assets from prepaid account to
fixed asset account -- 1,191,442
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1: BASIS OF PRESENTATION
Bank of South Carolina Corporation (the Company) was organized as a South
Carolina Corporation on April 17, 1995, as a one-bank holding company. The
Company, through its bank subsidiary The Bank of South Carolina (the Bank),
provides a full range of banking services including the taking of demand and
time deposits and the making of commercial, consumer and mortgage loans. The
Bank currently has four locations, two in Charleston, South Carolina, one in
Summerville, South Carolina and one in Mt. Pleasant, South Carolina. The
financial statements in this report are unaudited. All adjustments consisting
of normal recurring accruals which are, in the opinion of management, necessary
for fair presentation of the interim consolidated financial statements have
been included and fairly and accurately present the financial position, results
of operations and cash flows of the Company. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of the results,
which may be expected for the entire year.
NOTE 2: INVESTMENT SECURITIES
Investment securities to be "Held to Maturity" are carried at cost, adjusted
for amortization of premiums and accretion of discounts, computed by the
interest method. Investment securities classified as "Available for Sale" are
carried at fair value with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity (net of estimated
tax effects). Realized gains or losses on the sale of investments are based on
the specific identification method. Of the Company's securities, $37,068,345
are classified as "Available for Sale" and $600,521 are classified as "Held to
Maturity" at June 30, 1999.
The amortized cost of Securities held by the Company at June 30, 1999, and
classified as "Available for Sale" is $37,202,053. The aggregate fair value of
all securities "Available for Sale" on the basis of market quotations as of
June 30, 1999, is $37,068,345. The unrealized loss as of June 30, 1999, on such
securities is $133,708.
The amortized cost of all Securities held by the Company at December 31, 1998,
and classified as "Available for Sale" was $33,499,594. The aggregate fair
value of all securities "Available for Sale" on the basis of market quotations
as of December 31, 1998, was $33,759,333. The unrealized gain as of December
31, 1998, on such securities was $259,739. All of the Company's securities were
classified "Available for Sale" on December 31, 1998.
NOTE 3: SHAREHOLDERS' EQUITY
The Board of Directors approved a dividend increase of $.02 per share at its
June 1999 Board meeting, increasing the regular quarterly dividend to $.09 per
share for shareholders of record at June 30, 1999, payable July 31, 1999.
8
<PAGE> 9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bank of South Carolina Corporation (the Company) is a financial institution
holding company headquartered in Charleston, South Carolina, with branch
operations in Summerville, South Carolina and Mt. Pleasant, South Carolina. It
offers a broad range of financial services through its wholly owned subsidiary,
The Bank of South Carolina (the Bank). The Bank is a state-chartered commercial
bank which operates principally in the counties of Charleston, Dorchester and
Berkeley in South Carolina.
For the first six months of 1999, the Company reported net income of $875,492
or basic and diluted earnings per share of $.34, an increase of $84,108 or
10.63% compared to the net income for the first six months of 1998 of $791,384
or basic and diluted earnings per share of $.31. Total assets for the period
increased $4,668,947 or 3.22% from December 31, 1998, to June 30, 1999.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THREE MONTHS ENDED JUNE 30,
1998
The Company's results of operations depends primarily on the level of its net
interest income, its non-interest income and it's operating expenses. Net
interest income depends upon the volume of and rates associated with interest
earning assets and interest bearing liabilities which results in the net
interest spread. Net income increased $68,263 or 17.95% to $448,543 for the
three months ended June 30, 1999, from $380,280 for the three months ended June
30, 1998. The three months ended June 30, 1998, represents the period in which
the bank capitalized a new branch and operations center, and approximately
$750,000 in new check processing equipment.
NET INTEREST INCOME
Net interest income increased $195,405 or 11.62% to $1,877,671 for the three
months ended June 30, 1999, from $1,682,266 for the three months ended June 30,
1998. Total interest and fee income increased $139,768 or 5.39% for the three
months ended June 30, 1999, to $2,732,668 from $2,592,900 for the three months
ended June 30, 1998.
Investment portfolio income increased $175,043 or 58.36% to $474,997 for the
three months ended June 30, 1999, as compared to $299,954 for the three months
ended June 30, 1998. This increase in revenue is primarily a result of
increasing the average investment portfolio from approximately $20,400,000 for
the three months ended June 30, 1998 to approximately $37,000,000 for the three
months ended June 30, 1999. The source of funding for the Investment Securities
is from funds previously invested in federal funds sold. Other interest income
decreased $71,588 or 31.65% to $154,611 for the three months ended June 30,
1999, from $226,199 for the three months ended June 30, 1998. The decrease in
revenue from federal funds sold is a result of Management investing in
longer-term securities to protect the Company's net interest spread.
Total interest expense decreased $55,637 or 6.11% to $854,997 for the three
months ended June 30, 1999, from $910,634 for three months ended June 30, 1998.
The decrease in interest expense is primarily due to the decrease in the
average cost of interest bearing liabilities for the period ended June 30, 1999
of 3.50% and 4.14% for the period ended June 30, 1998. Interest on deposits for
the three months ended June 30, 1999, was $780,384 compared to $843,517 for the
three months ended June 30, 1998, a decrease of $63,133 or 7.48%. Interest on
short-term borrowings increased $7,496 or 11.17% to $74,613 for the period
ended June 30, 1999, from $67,117 for the three months ended June 30, 1998.
Short-term borrowings consist of demand notes to the U. S. Treasury and
securities sold under agreement to repurchase.
9
<PAGE> 10
PROVISION FOR LOAN LOSSES
The provision 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
uncollectable. Recognized losses are charged against the allowance and
subsequent recoveries are added to the allowance. While management uses the
best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment based upon information that is available to them at the
time of their examination.
During the quarter ended June 30, 1999, no charges to the provision for loan
losses were made, compared to $15,000 for the quarter ended June 30, 1998 due
to improved asset quality. The allowance for loan losses was $1,270,503 or
1.43% of total loans at June 30, 1999. This compares to an allowance of
$1,227,269 or 1.49% of total loans at June 30, 1998. During the quarter ended
June 30, 1999, the Bank incurred two charge-offs totaling $2,883 as compared to
two charge-offs totaling $6,321 for the same period ended June 30, 1998. There
were five loans on non-accrual status at June 30, 1999, for $69,109 as compared
to nine loans on non-accrual status totaling $465,576 at June 30, 1998. Loans
past due over 30 days totaled $349,178 or .40% of total loans at June 30, 1999,
compared to $707,380 or .86% of total loans at June 30, 1998, and one loan for
$2,842 past due 90 days or more and still accruing at June 30, 1999, compared
to no loans past due 90 days or more and still accruing at June 30, 1998. Four
recoveries totaling $9,500 occurred during the three months ended June 30, 1999
as compared to six recoveries totaling $8,277 for the three months ended June
30, 1998. Generally, loans are placed on non-accrual status at the earlier of
when they are 90 days past due or when the collection of interest becomes
doubtful.
OTHER INCOME
Other income for the three months ended June 30, 1999, increased $22,896 or
10.17% to $247,941 from $225,045 for the three months ended June 30, 1998. The
increase is due largely to an increase in overdraft fees charged. Service
charges, fees and commissions were $243,229 for the three months ended June 30,
1999, compared to $220,449 for the three months ended June 30, 1998, an
increase of $22,780 or 10.33%.
GENERAL AND ADMINISTRATIVE EXPENSES
Bank overhead increased $127,838 or 9.84% to $1,426,869 for the three months
ended June 30, 1999, from $1,299,031 for the three months ended June 30, 1998.
Salaries and employee benefits increased $86,183 or 12.76% to $761,421 for the
three months ended June 30, 1999, from $675,238 for the three month period
ended June 30, 1998. This increase is primarily attributed to annual merit
raises given to the employees and the addition of five new employees. Net
occupancy expense increased $36,218 or 13.54% to $303,635 for the three months
ended June 30, 1999, from $267,417 for the three months ended June 30, 1998.
This increase is primarily due to the addition of new equipment and software
maintenance in the Bank's technology upgrade. Other operating expenses
increased $5,437 or 1.53% to $361,813 for the three months ended June 30, 1999,
from $356,376 for the three months ended June 30, 1998.
10
<PAGE> 11
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED JUNE 30, 1998
Net income increased $84,108 or 10.63% to $875,492 for the six month ended June
30, 1999, from $791,384 for the six months ended June 30, 1998. The increase is
primarily due to a higher volume of earning assets during the 1999 six months
period.
NET INTEREST INCOME
Net interest income increased $296,429 or 8.76% to $3,678,860 for the six
months ended June 30, 1999, from $3,382,431 for the six months ended June 30,
1998. Total interest and fee income increased $257,301 or 5.02% for the six
months ended June 30, 1999, to $5,377,760 from $5,120,459 for the six months
ended June 30, 1998. This increase in interest and fee income is the result of
loan growth for the comparable periods and the employment of funds in the
securities market as opposed to federal funds sold. Interest and dividends on
investments increased $308,112 or 49.19% to $934,519 for the six months ended
June 30, 1999, from $626,407 for the six months ended June 30, 1998. Federal
funds sold (other interest income) decreased $119,705 or 30.54% to $272,230 for
the six months ended June 30, 1999 from $391,935 for the six months ended June
30, 1998. This change in investments was made by management to stabilize the
Company's net interest spread.
Total interest expense decreased $39,128 or 2.25% to $1,698,900 for the six
months ended June 30, 1999 from $1,738,028 for six months ended June 30, 1998.
The decrease is primarily due to a decrease in the average cost of interest
bearing liabilities to 3.58% for the six months ended June 30, 1999 from 4.10%
for the six months ended June 30, 1998. Interest on deposits for the six months
ended June 30, 1999, was $1,583,776 compared to $1,618,752 for the six months
ended June 30, 1998, a decrease of $34,976 or 2.16%. Interest on short-term
borrowings decreased $4,152 or 3.48% to $115,124 for the six months ended June
30, 1999, from $119,276 for the six months ended June 30, 1998. Short-term
borrowings consist of demand notes to the U.S. Treasury and securities sold
under agreements to repurchase.
PROVISION FOR LOAN LOSSES
During the six months ended June 30, 1999, $5,000 was charged to the provision
for loan losses compared to $30,000 for the six months ended June 30, 1998. At
June 30, 1999 the allowance for loan losses was $1,270,503, or 1.43% of total
loans. This compares to an allowance of $1,227,269 or 1.49% of total loans at
June 30, 1998. During the six months ended June 30, 1999, the Bank incurred
four charge-offs totaling $14,366 as compared to five charge-offs totaling
$21,836 for the same period ended June 30, 1998. Eight recoveries totaling
$39,900 occurred during the six months ended June 30, 1999, as compared to nine
recoveries totaling $8,577 for the six months ended June 30, 1998.
OTHER INCOME
Other income for the six months ended June 30, 1999, increased $110,931 or
27.11% to $520,168 from $409,237 for the six months ended June 30, 1998. This
increase is due in part to continued growth in the mortgage loan area. Service
release premiums increased approximately $33,000 from the six months ended June
30, 1999, and June 30, 1998, overdraft fees charged increased approximately
$39,000 and credit card fees increased approximately $22,000 due to a change in
the service provider and a restructuring of the fees.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $301,274 or 11.92% to $2,828,336
for the six months ended June 30, 1999, from $2,527,062 for the six months
ended June 30, 1998. Salaries and employee benefits increased $179,389 or
13.70% to $1,489,101 for the six months ended June 30, 1999, from $1,309,712
for the six months ended June 30, 1998. This increase is primarily attributed
to annual merit raises given to the employees and the addition of
11
<PAGE> 12
five new employees. Net occupancy expense increased $80,682 or 16.29% to
$576,102 for the six months ended June 30, 1999, from $495,420 for the six
months ended June 30, 1998. This increase is primarily due to increased
depreciation expense due to the new imaging equipment and the upgrade of the
bank's hardware and software, and increased maintenance contracts for the
hardware and software. Other operating expenses increased $41,203 or 5.71% to
$763,133 for the six months ended June 30, 1999, from $721,930 for the six
months ending June 30, 1998. This increase is due to a renewal in the data
processing contract, which resulted in an increase in the fees.
LIQUIDITY
The Company must maintain an adequate liquidity position in order to respond to
the short-term demand for funds caused by the withdrawals from deposit
accounts, maturities of repurchase agreements, extensions of credit and for the
payment of operating expenses. Maintaining this position of adequate liquidity
is accomplished through the management of a combination of liquid assets; those
which can be converted into cash and access to additional sources of funds.
Primary liquid assets of the Company are cash and due from banks, federal funds
sold, investments available for sale and other short-term investments.
Company's primary liquid assets accounted for 38.99% and 40.43% of average
assets at June 30, 1999, and 1998, respectively. Additional sources of funds
available through the Bank for additional liquidity needs include borrowing on
a short-term basis from the Federal Reserve System, the purchasing of federal
funds from other financial institutions and increasing deposits by raising
rates paid. The Company's core deposits consist of non-interest bearing
accounts, NOW accounts, money market accounts, time deposits and savings.
Although such core deposits are becoming increasingly more costly and interest
sensitive for both the Company and the industry as a whole, such core deposits
continue to provide the Company with a large and stable source of funds. The
Company closely monitors its reliance on certificates of deposit greater than
$100,000. The Company plans to meet its future needs through maturities of
investments and loans and through the generation of deposits. The Company's
management believes its liquidity sources are adequate to meet its operating
needs and does not know of any trends, events or uncertainties that may result
in a significant adverse effect on the Company's liquidity position. At June
30, 1999 and 1998, the Bank's liquidity ratio was 33.17% and 36.95%,
respectively.
CAPITAL RESOURCES
The capital needs of the Company have been met to date through the $10,600,000
in capital raised at its initial offering, the retention of earnings less
dividends paid and the exercising of stock options for a total shareholders'
equity at June 30, 1999, of $16,888,249. The rate of asset growth from the
Bank's inception does not negatively impact this capital base. Effective
December 31, 1990, regulatory authorities adopted risk based capital guidelines
for financial institutions. These risk-based guidelines are designed to
highlight differences in risk profiles among financial institutions and to
account for off balance sheet risk. The guidelines established require a risk
based capital ratio of 8% for bank holding companies and banks. The risk based
capital ratio at June 30, 1999, for the Bank is 18.25% and at June 30, 1998,
was 18.04%. The Company's management does not know of any trends, events or
uncertainties that may result in the Company's capital resources materially
increasing or decreasing.
YEAR 2000
The following disclosure contains forward-looking statements, which involve
risks and uncertainties. The actual impact of the Year 2000 issue on the Bank
could materially differ from that which is anticipated in these forward-looking
statements because of certain factors identified below.
12
<PAGE> 13
THE COMPANY'S STATE OF READINESS
The Company's management and Board of Directors are aware of the issues
presented by the Year 2000-century change and the serious consequences it could
have on the Company and its customers. The problem lies in the fact that some
computer systems store dates in two-digit format (98) instead of four-digit
format (1998). On January 1, 2000, it is possible that some computer systems
will be unable to distinguish between the year 1900 and the year 2000. If not
corrected, this could cause system failure, miscalculations and disruption of
normal business operations, such as the temporary inability to process
transactions, send bank statements or engage in every day business activities.
The Company has developed a Year 2000 Management Plan following the five phases
recommended by the Federal Financial Institutions Examination Council (FFIEC)
which are awareness, assessment, renovation, validation and implementation. A
Year 2000 Team has been formed to implement the Management Plan with the full
support of management and the Board of Directors.
In the first and second quarters of 1998, the Company made a substantial
investment in technology, replacing all computers and processing systems,
hardware and software. The Company's processing firm, FiServ Atlanta, recently
completed the first phase of Year 2000 testing which included proxy bank
testing of the ITI application software (which is the software used by the
Bank) for ten of its clients. Our Bank was chosen as one of the ten to
participate in the test. The results of the test were conclusive that the ITI
application software and the Item Processing Software are Year 2000 compliant.
We have inventoried all hardware, software, third party vendors and
environmental systems. All mission critical systems, vendors and customers have
been identified. We are in the process of developing contingency plans in the
event that any of these parties are not ready in time. For our internal
systems, we have completed the assessment phase and have upgraded where needed.
We have communicated with all third party vendors that the Bank relies on to
assess their progress and we are monitoring their efforts. We have developed a
Year 2000 Testing Plan and Strategy and all mission critical systems were
tested and validated by December 31, 1998. We tested and validated all other
systems as of June 30, 1999.
RISKS OF YEAR 2000 ISSUES
All borrowers with credit of $250,000 or more have been contacted in order for
the Bank to assess their Year 2000 readiness. Evaluations have been completed
on all loans of $250,000 or more which could pose the greatest risk to the
Bank. To date, we have not identified any material credit risk. Going forward,
lenders will discuss Year 2000 issues with borrowers as new credit is extended
or when maturing notes are renewed. Our largest deposit customers have also
been contacted to determine their state of readiness. Additional evaluations
will be performed on an ongoing basis.
Reasonable worst-case Year 2000 scenarios could include the failure of a vendor
or third party provider, which is beyond the Bank's control, the inability of
the Bank to provide consistent daily processing of information for our
customers or the failure of any of the Bank's loan customers.
Possible impacts on the Bank could include a substantial loss of customers and
the loss of the related revenue on these relationships, as well as possible
loan losses resulting from customers being unable to repay their loans on a
timely basis.
COSTS TO ADDRESS YEAR 2000 ISSUES
Since the Company's primary systems are Year 2000 compliant, estimated costs
directly related to Year 2000 issues will not have a material effect on the
performance of the Bank. No direct costs have been expensed as of this date.
There are indirect costs related to the significant amount of time being spent
by existing personnel for the development of test plans, test scripts and for
actual
13
<PAGE> 14
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.
14
<PAGE> 15
CONTINGENCY PLANS
The Company developed a contingency plan 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. On September 25, 1999, the Company will test its
contingency plans for Year 2000 at all four of it's locations.
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 137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of SFAS
133" delayed the effective date of this statement for one year. SFAS 133
applies to all entities and is effective as of the beginning of the first
quarter of the fiscal year beginning after June 15, 2000. The Company does not
expect the adoption of SFAS 133 to have a materially adverse impact on the
consolidated financial position or results of operations of the Company.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles (GAAP) which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in relative purchasing power of money over time due to
inflation. The primary impact of inflation on operations of the Bank is
reflected in increased operating costs. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
15
<PAGE> 16
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiary from time to time are involved as plaintiff or
defendant in various legal actions incident to its business. These actions are
not believed to be material either individually or collectively to the
consolidated financial condition of the Company or its subsidiary.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27.1 Financial Data Schedule (for SEC use only).
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK OF SOUTH CAROLINA CORPORATION
August 11, 1999
BY: /s/ Hugh C. Lane, Jr.
---------------------------------------
Hugh C. Lane, Jr.
President
BY: /s/ William L. Hiott, Jr.
---------------------------------------
William L. Hiott, Jr.
Executive Vice President & Treasurer
17
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