<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 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission file number: 0-27702
BANK OF SOUTH CAROLINA CORPORATION
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
South Carolina 57-1021355
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
256 Meeting Street, Charleston, SC 29401
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (843) 724-1500
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
- --------------------------------------------------------------------------------
(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: $12,208,042
Aggregate market value of the voting stock held by non-affiliates: $20,923,325
As of March 21, 2000, the Registrant has outstanding 2,580,597 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
Page
----
PART I
Item 1. Description of Business.............................................3
Item 2. Description of Property.............................................5
Item 3. Legal Proceedings...................................................5
Item 4. Submission of Matters to a 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 Officers and Directors.............................38
Item 11. Security Ownership of Certain Beneficial Owners and Management.....41
Item 12. Certain Relationships and Related Transactions.....................44
PART IV
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.............45
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Bank of South Carolina (the "Bank") is a FDIC insured, state-chartered
financial institution, 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
$10,000 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 Wachovia Securities Incorporated 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
50.
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, and, at it's October, 1999 Board meeting, to repurchase up to
25,000 shares of its' common stock on the open market from time to time. As of
this date, 102,000 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, 1999.
By year end 1999, the Bank employed 68 people, 4 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 13 commercial banks, of which
three are considered to have their headquarters in the Bank's service area. Of
the 13 commercial banks, two have a large share of the market. These two are
Wachovia Bank of North Carolina, N.A. and Bank of America. In addition, there is
a savings bank 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 was $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 is $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
$2,882 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, 1999.
5
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS
There were issued and outstanding 2,586,828 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, 1999. These outstanding shares were held by approximately 900
shareholders of record on December 31, 1999. The common stock of the Company is
traded in the "over-the-counter" (OTC) market by six market making investment
banking firms. These firms are The Robinson-Humphrey Company, Inc.,
Interstate/Johnson Lane, Wachovia, Sterne, Agee & Leach, Inc., Edgar M Norris &
Company, Inc., Nite Securities LP and Speer, Leeds & Kellogg. 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 1999, 1998 and 1997
has been as follows:
1999 1998 1997
HIGH LOW HIGH LOW HIGH LOW
First Quarter 17.00 14.00 22.73 16.36 12.50 7.95
Second Quarter 16.25 13.75 25.45 20.00 16.82 11.70
Third Quarter 15.12 13.00 18.12 13.75 16.14 14.54
Fourth Quarter 14.75 11.25 17.00 14.75 17.04 13.18
The Board of Directors of Bank of South Carolina Corporation declared quarterly
dividends in 1999 of $.07 per share to shareholders of record March 31, 1999,
payable April 30, 1999, $.09 per share to shareholders of record June 30, 1999,
payable July 30, 1999, $.09 per share to shareholders of record September 30,
1999, payable October 28, 1999, $.09 per share to shareholders of record
December, 31, 1999, payable January 31, 2000 and a special dividend of $.10 per
share to shareholders of record December 31, 1999, payable January 31, 2000.
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.
As of December 31, 1999, there were approximately 900 shareholders of record
with shares held by individuals and in street name, and on March 21, 2000, the
market price for the common stock of the Company was $12.50. 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. Certain regulatory
requirements restrict the amount of dividends which the Bank can pay to the
Company.
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 1999 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>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR DECEMBER 31:
- ----------------
Net Income $ 1,915,516 $ 1,660,149 $ 1,609,618 $ 1,388,808 $ 1,049,231
Selected Year End Balances
- - Total Assets 154,653,402 145,019,801 124,478,023 102,835,416 95,248,079
- - Total Loans 90,748,717 84,140,365 79,965,957 71,660,124 61,986,536
- - Investment Securities available for sale 35,873,009 33,759,333 19,483,167 19,231,905 12,505,634
- - Investment Securities held to maturity 600,208 -- -- -- --
- - Federal Funds Sold and Resale Agreements 16,255,000 15,450,000 15,600,000 4,675,000 15,025,000
- - Interest Bearing Deposits in Other Banks 6,919 6,666 6,421 6,185 5,957
- - Earning Assets 143,483,853 133,356,364 115,055,545 95,573,214 9,523,127
- - Deposits 125,280,450 123,973,308 104,469,073 84,830,237 78,990,344
- - Shareholders' Equity 16,865,304 16,677,533 15,521,347 14,893,813 14,515,232
Weighted Average Shares Outstanding (1) 2,604,620 2,599,212 2,573,775 2,573,914 2,588,219
FOR THE YEAR:
- -------------
Selected Average Balances
- - Total Assets 148,714,025 136,981,780 112,413,053 96,379,427 84,596,891
- - Total Loans 88,479,401 83,106,872 74,682,392 65,468,548 55,870,527
- - Investment Securities Available for Sale 35,806,229 21,399,194 19,517,222 17,614,422 14,564,163
- - Investment Securities Held to Maturity 445,242 -- -- -- --
- - Federal Funds Sold and Resale Agreements 12,138,096 21,761,014 10,824,383 7,622,131 8,653,014
- - Interest Bearing Deposits in Other Banks 6,813 6,561 6,309 6,092 5,868
- - Earning Assets 136,875,781 126,273,641 105,030,306 90,711,193 79,093,572
- - Deposits 123,559,722 115,225,489 93,055,877 79,671,917 68,974,795
- - Shareholders' Equity 17,049,863 16,203,404 15,005,232 14,656,129 13,852,365
PERFORMANCE RATIOS:
- -------------------
Return on Average Equity 11.23% 10.25% 10.73% 9.48% 7.57%
Return on Average Assets 1.29% 1.21% 1.43% 1.44% 1.24%
Average Equity to Average Assets 1.46% 11.83% 13.35% 15.21% 16.37%
Net Interest Margin 5.57% 5.43% 5.92% 6.09% 5.95%
Net Charge-offs to Average Loans .09% .03% .05% .09% .10%
Allowance for Loan Losses as a
Percentage of Total Loans 1.38% 1.47% 1.51% 1.45% 1.55%
PER SHARE: (1)
- --------------
Basic Earnings $ .74 $ .64 $ .63 $ .54 $ .41
Diluted Earnings .74 .64 .62 .53 .40
Year End Book Value 6.52 6.40 6.03 5.85 5.59
Cash Dividends Declared .44 .26 .43 .18 .13
Dividend Payout Ratio 59.46% 40.05% 69.83% 32.93% 30.59%
Full Time Employee Equivalents 68 60 55 47 39
</TABLE>
1) 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,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest and fee income $ 11,105,599 $ 10,593,431 $ 9,160,575 $ 7,899,225 $ 7,013,875
Interest expense 3,474,786 3,730,741 2,942,024 2,378,414 2,306,545
------------ ------------ ------------ ------------ ------------
Net interest income 7,630,813 6,862,690 6,218,551 5,520,811 4,707,330
Provision for loan losses 90,000 55,000 210,000 140,000 20,000
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 7,540,813 6,807,690 6,008,551 5,380,811 4,687,330
Other income 1,102,443 865,424 600,254 500,923 345,677
Other expense 5,682,044 5,095,231 4,093,687 3,658,787 3,366,776
------------ ------------ ------------ ------------ ------------
Income before income taxes 2,961,212 2,577,883 2,515,118 2,222,947 1,666,231
Income tax expense 1,045,696 917,734 905,500 834,139 617,000
------------ ------------ ------------ ------------ ------------
Net income 1,915,516 $ 1,660,149 $ 1,609,618 $ 1,388,808 $ 1,049,231
Basic earnings per share (1) $ .74 $ .64 $ .63 $ .54 $ .41
============ ============ ============ ============ ============
Diluted earnings per share (1) $ .74 $ .64 $ .62 $ .53 $ .40
============ ============ ============ ============ ============
Weighted average common shares-basic (1) 2,604,620 2,599,212 2,573,775 2,573,914 2,588,219
Weighted average common shares -
diluted (1) 2,604,620 2,599,212 2,596,209 2,600,550 2,605,132
Dividends per common share (1) $ .44 $ .26 $ .43 $ .18 $ .13
AS OF
DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Investment securities available for sale $ 35,873,009 $ 33,759,333 $ 19,483,167 $ 19,231,905 $ 12,505,634
Investment securities held to maturity 600,208 -- -- -- --
Total loans 90,748,717 84,140,365 79,965,957 71,660,124 61,986,536
Allowance for loan losses 1,250,138 1,239,968 1,210,528 1,041,216 960,103
Total assets 154,653,402 145,019,801 124,478,023 102,835,416 95,248,079
Total deposits 125,280,450 123,973,308 104,469,073 84,830,237 78,990,344
Shareholders' equity 16,865,304 16,677,533 15,521,347 14,893,813 14,515,232
</TABLE>
1) 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.
8
<PAGE> 9
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 1999 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.
DISCUSSION OF FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this annual report contain certain
"forward-looking statements" concerning the future operations of the Bank of
South Carolina Corporation. Management desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 and
is included in this statement for the express purpose of availing the Company of
protections of such safe harbor with respect to all "forward-looking statement"
contained in our Annual Report. We have used "forward-looking statements" to
describe future plans and strategies including our expectations of the Company's
future financial results. Management's ability to predict results or the effect
of future plans or strategies is inherently uncertain. Factors which could
affect actual results include interest rate trends, the general economic climate
in the Company's acquisitions into its operations, the ability of the Company to
successfully address Year 2000 (Y2K) issues, competitive products and pricing,
loan delinquency rates, and changes in federal and state regulation. These
factors should be considered in evaluating the "forward-looking statements" and
undue reliance should not be placed on such statements.
OVERVIEW
Earnings for the year were $1,915,516 or basic and diluted earnings per share of
$.74, an increase of 15.38% over 1998's earnings of $1,660,149 or basic and
diluted earnings per share of $.64. Earnings for the fourth quarter of 1999 were
$533,211 or basic and diluted earnings per share of $.20, a 25.63% increase from
fourth quarter 1998 earnings of $424,438 or basic and diluted earnings per share
of $.16. Per share data has 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 11.23% and 1.29%, respectively, compared to the 1998 return on
average equity and return on average assets of 10.25% and 1.21%, respectively.
Earnings for the year were 14.3% above our profit plan.
1999 was a relatively slow year for deposit growth with deposits only increasing
$1,307,142 or 1.05% from year-end 1998 to year-end 1999. At year end 1999, our
West Ashley office held $6,523,423 in deposits, our Mt. Pleasant office held
deposits of $16,030,617 and our Summerville office held deposits of $14,959,112.
Loan growth was modest during the year, with an increase of $6,608,352 or 7.85%
for year-end 1999 over 1998. Loan growth will be very important to how earnings
will perform in 2000, as loans are our highest yielding asset.
During 1999, the Company declared one regular quarterly cash dividend of $.07
per share, three regular quarterly cash dividends of $.09 per share and a
special cash dividend of $.10 per share thereby sharing a greater portion of its
profits with its owners compared to prior years.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO DECEMBER 31, 1998
Net income increased $255,367 from $1,660,149 for 1998, to $1,915,516 for 1999
or 15.38% increasing basic and diluted earnings per share to $.74 for 1999,
compared to basic and diluted earnings per share of $.64 for 1998. This increase
is primarily attributable to increases in net interest income and service
charges, fees and commissions.
Net interest income increased $768,123 from $6,862,690 for 1998 to $7,630,813
for 1999. 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 resulting in an increase in net interest spread.
Total interest and fee income increased 4.83% or $512,258 in 1999. This increase
is due to an increase in loans and an increase in fee income from mortgage
loans. The Mortgage Loan Department closed loans of approximately $46,000,000 in
1999 compared to approximately $39,000,000 for 1998. Total loans increased from
$84,140,365 at December 31, 1998, to $90,748,717 at December 31, 1999, an
increase of 7.85%.
9
<PAGE> 10
Total interest expense decreased 6.86% or $255,955 in 1999. This decrease is due
to the change in the mix of deposits. Deposits increased from $123,973,308 at
December 31, 1998, to $125,280,450 at December 31, 1999. Rates paid on
certificates of deposit are greater than rates paid on demand deposits.
Non-interest bearing demand deposits increased $3,632,349 or 11.24% from
December 31, 1998 to December 31, 1999 and interest bearing demand deposits
(NOW) increased $4,768,450 or 20.01% from December 31, 1998 to December 31, 1999
while certificates of deposit decreased $6,714,542 or 16.83%.
The provision for loan losses increased from $55,000 for 1998 to $90,000 for
1999. The increase in the provision is attributable to the growth in the loan
portfolio and a slight increase in net charge-offs during 1999. The allowance
for loan losses as a percentage of total loans decreased from 1.47% in 1998 to
1.38% in 1999. 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."
Total other income increased 27.39% from $865,424 for 1998, to $1,102,443 for
1999. This increase is attributable to an increase in service charges, fees and
service release premiums from mortgage loans. The company restructured its
service charges and fees in July, 1999.
Total other expense increased 11.52% or $586,813 from $5,095,231 for 1998 to
$5,682,044 for 1999. This increase is due in part to a 14.32% increase in
salaries and employee benefits as a result of the creation of new positions
within the Company, an annual merit increase for the Company's staff and
commissions paid to mortgage loan originators.
Occupancy expense increased $89,659 or 8.79% from $1,020,227 for 1998 to
$1,109,886 for 1999. This increase is primarily due to placing maintenance
contracts on new equipment purchased in 1998. During most of 1998, this
equipment was under warranty.
Other operating expense increased $118,488 or 8.28% from $1,430,409 for 1998 to
$1,548,897 for 1999. Contributing to the increase in other operating expense was
an increase in fees related to business manager services due to new business,
the renewal of a data processing contract with increased fees, and additional
courier service for deposit pick-up by third party contracts.
Income tax expense increased from $917,734 for 1998 to $1,045,696 for 1999. The
Company's effective tax rate was approximately 35% for both 1999 and 1998. The
increase in income tax expense is directly related to the increase in pretax
income.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998, TO DECEMBER 31, 1997
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 closed approximately $39,000,000 in loans in 1998
compared to approximately $19,000,000 in 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.
10
<PAGE> 11
The provision for loan losses decreased from $210,000 for 1997 to $55,000 for
1998. The decrease in the provision is largely attributable to a decline in net
charge-offs from. 05% of average loans in 1997 to .03% of average loans in 1998.
The allowance for loan losses as a percentage of total loans decreased from
1.51% in 1997 to 1.47% in 1998. 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's effective tax rate for 1998 and 1997 was approximately 35%. 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 1999, total assets were $154,653,402, an increase of 6.64% from the end
of the previous year and total deposits were $125,280,450, an increase of 1.05%
from the end of the previous year, while Short term borrowings were up
$7,959,263 consisting of Securities Sold Under Agreement to Repurchase and
Demand Notes Issued to the U.S. Treasury.
Approximately 93% of the Company's assets were earning assets composed of U.S.
Treasury and municipal securities in the amount of $36,473,217, Federal Funds
Sold and interest bearing deposits in other banks in the amount of $16,261,919
and loans in the amount of $90,748,717.
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 declines 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 the year ended December 31, 1997, to 5.43% for the year ended December
31, 1998. A leveling off of deposit growth to 1% coupled with an 8% increase in
loans in 1999 resulted in a better employment of funds in historically higher
yielding loans during the year. Additional funds were invested in U.S. Treasury
and Federal Agency Securities with a commensurate reduction in Federal Funds
Sold. The change in mix of earning assets and increases in interest rates during
the last half of the year resulted in significantly improved net interest income
and net interest margin.
11
<PAGE> 12
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 6 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 1999 increased to
4.56% from 4.36% for 1998 and the net interest margin for 1999 increased to
5.57% from 5.43% for 1998. 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. Short term borrowings funded 1999 loan
growth.
At December 31, 1999, the average maturity of the investment portfolio was less
than 12 months with an average yield of 5.54% compared to 16 months with an
average yield of 5.50% at December 31, 1998.
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, 1999:
<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 $ 76,898 $ 6,785 $ 1,813 $ 1,497 $ 3,681 $ 75 $ 90,749 $ 90,113
Investment securities -- 8,211 4,637 8,020 15,853 -- 36,721 36,472
Short term investments 7 -- -- -- -- -- 7 7
Federal funds sold 16,255 -- -- -- -- -- 16,255 16,255
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 93,160 $ 14,996 $ 6,450 $ 9,517 $ 19,534 $ 75 $143,732 $142,847
======== ======== ======== ======== ======== ======== ======== ========
INTEREST BEARING LIABILITIES
(IN 000'S)
CD's 100,000 and over $ -- $ 7,714 $ 7,041 $ 2,664 $ -- $ -- $ 17,419 $ 17,388
CD's under 100,000 and
other time deposits 225 7,808 4,626 2,817 291 -- 15,767 15,738
Money market and interest
bearing demand accounts 50,720 -- -- -- -- -- 50,720 50,720
Savings 5,415 -- -- -- -- -- 5,415 5,415
Short term borrowings 11,439 -- -- -- -- -- 11,439 11,439
-------- -------- -------- -------- -------- -------- -------- --------
$ 67,799 $ 15,522 $ 11,667 $ 5,481 $ 291 $ -- $100,760 $100,700
======== ======== ======== ======== ======== ======== ======== ========
Net $ 25,361 $ (526) $ (5,217) $ 4,036 $ 19,243 $ 75 $ 42,972 $ 42,147
Cumulative 24,835 19,618 23,654 42,897 42,972
</TABLE>
LIQUIDITY
The Company's assets and liabilities are monitored on a daily basis to ensure
funds are available to meet its liquidity requirements. All but $600,208 of
investment 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 loss on securities
available for sale, net of income taxes, was $156,099 at December 31, 1999, and
the unrealized gain, net of income taxes, was $163,636 at December 31, 1998. At
year-end 1999, the Bank's federal funds sold totaled $16,255,000.
12
<PAGE> 13
COMPOSITION OF AVERAGE ASSETS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Loans $ 88,479,401 $ 83,106,872 $ 74,682,392 $ 65,468,548 $ 55,870,527
Investment securities
available for sale 35,806,229 21,399,194 19,517,222 17,614,422 14,564,163
Investment securities
held to maturity 445,242 -- -- -- --
Federal funds sold and
other investments 12,144,909 21,767,575 10,830,692 7,628,223 8,658,882
Non-earning assets 11,838,244 10,708,139 7,382,747 5,668,234 5,503,319
------------ ------------ ------------ ------------ ------------
Total average assets $148,714,025 $136,981,780 $112,413,053 $ 96,379,427 $ 84,596,891
============ ============ ============ ============ ============
</TABLE>
Average earning assets increased by $10,602,140 from 1998 to 1999 while average
non-earning assets increased by $1,130,105. Average earning assets increased
primarily as a result of loan growth. Average non-earning assets increased
primarily as a result of costs associated with the new West Ashley office and
the Bank's computer system upgrade.
Average loans for 1999 were up by $5,372,529 or 6.46% from 1998. The majority of
the growth, or approximately $3,300,000, was in commercial loans, which are tied
to the Bank's prime rate while approximately $1,500,000 was related to
installment loans.
Bank borrowings and 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>
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
----------------------------------- ----------------------------------- ----------------------------------
Net Dollar Net Dollar Net Dollar
Volume Rate Change (1) Volume Rate Change (1) Volume Rate Change (1)
--------- --------- ---------- ---------- --------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $ 521,861 $(103,396) $ 418,465 $ 825,264 $ 17,111 $ 842,375 $ 895,095 $ 60,771 $ 955,866
Investment securities
available for
sale 782,323 (159,392) 622,931 120,896 (88,205) 32,691 122,557 (3,315) 119,242
Investment securities
held to maturity 20,746 -- 20,746 -- -- -- -- -- --
Federal funds sold
and other
investments (478,768) (71,206) (549,974) 596,798 (39,008) 557,790 169,920 16,322 186,242
--------- --------- --------- ---------- --------- ---------- ---------- -------- ----------
Interest Income $ 846,162 $(333,994) $ 512,168 $1,542,958 $(110,102) $1,432,856 $1,187,572 $ 73,778 $1,261,350
========= ========= ========= ========== ========= ========== ========== ======== ==========
Interest-bearing
transaction
accounts 99,935 (188,204) (88,269) $ 270,507 $ 71,350 $ 341,857 $ 50,706 $ 28,799 $ 79,505
Savings (31,253) 17,765 (13,488) 21,295 678 21,973 20,970 4,560 25,530
Certificates of
deposit 15,215 (271,757) (256,542) 376,576 6,273 382,849 337,671 2,105 339,776
Federal funds
purchased 673 -- 673 (55) -- (55) 55 -- 55
Securities sold
under agreements
to repurchase 109,797 (7,854) 101,943 55,141 (9,803) 45,338 98,701 1,249 99,950
Demand notes issued
to U.S. Treasury 3,279 (3,551) (272) (3,258) 13 (3,245) 15,745 3,049 18,794
--------- --------- --------- ---------- --------- ---------- ---------- -------- ----------
Interest expense $ 197,646 $(453,601) $(255,955) $ 720,206 $ 68,511 $ 788,717 $ 523,848 $ 39,762 $ 563,610
========= ========= ========= ========== ========= ========== ========== ======== ==========
Increase in net
interest income $ 768,123 $ 644,139 $ 697,740
</TABLE>
(1) VOLUME/RATE CHANGES HAVE BEEN ALLOCATED TO EACH CATEGORY BASED ON THE
PERCENTAGE OF THE ABSOLUTE VALUE OF EACH TO THE TOTAL CHANGE.
13
<PAGE> 14
YIELDS ON AVERAGE EARNING ASSETS AND RATES ON AVERAGE INTEREST-BEARING
LIABILITIES
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------
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 $ 88,479,401 $ 8,576,748 9.69% $ 83,106,872 $ 8,158,283 9.82% $ 74,682,392 $7,315,908 9.80%
Investment securities
available for sale 35,806,229 1,909,389 5.33% 21,399,194 1,286,458 6.01% 19,517,222 1,253,767 6.42%
Investment securities
held to maturity 445,242 20,746 4.66% -- -- -- -- -- --
Federal funds sold 12,138,096 598,462 4.93% 21,761,014 1,148,445 5.28% 10,824,383 590,664 5.46%
Other investments 6,813 254 3.73% 6,561 245 3.73% 6,309 236 3.74%
------------ ----------- ---- ------------ ----------- ---- ------------ ---------- ----
Total earning assets $136,875,781 $11,105,599 8.11% $126,273,641 $10,593,431 8.39% $105,030,306 $9,160,575 8.72%
============ =========== ==== ============ =========== ==== ============ ========== ====
INTEREST-BEARING
LIABILITIES:
Interest bearing
transaction
accounts $ 50,080,937 $ 1,326,593 2.65% $ 46,625,919 $ 1,414,863 3.03% $ 37,238,108 $1,073,006 2.88%
Savings 5,377,278 200,661 3.73% 6,241,787 214,149 3.43% 5,619,137 192,176 3.42%
Certificates of deposit 35,460,897 1,619,397 4.57% 35,173,392 1,875,938 5.33% 28,088,992 1,493,088 5.32%
Federal funds purchased 13,425 673 5.01% -- -- -- 1,027 56 5.45%
Securities sold under
agreement to
repurchase 5,858,173 271,996 4.64% 3,500,148 170,052 4.86% 2,427,057 124,714 5.14%
Demand notes issued
to U.S. Treasury 1,144,478 55,466 4.85% 1,079,005 55,739 5.17% 1,142,098 58,984 5.16%
------------ ----------- ---- ------------ ----------- ---- ------------ ---------- ----
Total interest bearing
liabilities $ 97,935,188 $ 3,474,786 3.55% $ 92,620,251 $ 3,730,741 4.03% $ 74,516,419 $2,942,024 3.95%
============ =========== ==== ============ =========== ==== ============ ========== ====
Net interest spread 4.56% 4.36% 4.77%
Net interest margin 5.57% 5.43% 5.92%
Net interest income $ 7,630,813 $ 6,862,690 $6,218,551
</TABLE>
14
<PAGE> 15
LOAN PORTFOLIO COMPOSITION
The following is a schedule of the Bank's loan portfolio as of December 31,
1999, as compared to December 31, 1998 and 1997:
<TABLE>
<CAPTION>
BOOK VALUE (IN 000'S)
TYPE 1999 1998 1997
- ---- ------- ------- -------
<S> <C> <C> <C>
Commercial and industrial loans $43,450 $40,384 $40,692
Real estate loans 40,122 36,103 32,807
Loans to individuals for household, family and other
personal expenditures 7,053 7,481 6,406
All other loans (including overdrafts) 124 172 61
------- ------- -------
Total loans (excluding unearned income) $90,749 $84,140 $79,966
======= ======= =======
</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
1997, 1998 or 1999.
IMPAIRED AND RESTRUCTURED LOANS
The Bank had impaired loans totaling $84,273 as of December 31, 1999 compared to
$584,469 as of December 31, 1998, and one restructured loan with a balance of
$33,240 and $45,740 as of December 31, 1999 and 1998, respectively. The impaired
loans include non-accrual loans with balances of $59,814 and $569,162,
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 $59,814 in non-accrual loans as of December 31, 1999, compared to
$569,162 as of December 31, 1998. There were no loans over 90 days past due
still accruing interest as of December 31, 1999 and 1998.
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.
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 1999 was $90,000
compared to $55,000 for 1998. During 1999, loan losses of $121,643 and
recoveries of $41,813 were recorded to the allowance for loan losses resulting
in an allowance for loan losses of $1,250,138 or 1.38% of total loans at
December 31, 1999, compared to $1,239,968 or 1.47% of total loans at December
31, 1998.
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, 1999, of
$16,865,304. 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, 1999
for the Bank was 17.54% and at December 31, 1998 was 18.69%. 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, 1999, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
At December 31, 1999 and 1998, 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, 1999.
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, however, as of this
writing no Year 2000 event has had any negative impact on the Company.
Like many financial institutions, the Company relies on computers to conduct its
business and information systems processing. Industry experts were concerned
that on January 1, 2000, some computers might not be able to interpret the new
year properly, causing computer malfunctions. Some banking industry experts
remain concerned that some computers may not be able to interpret additional
dates in the year 2000 properly. The Company has operated and evaluated its
computer operating systems following January 1, 2000, and has not identified any
errors or experienced any computer system malfunctions. The Company's management
will continue to monitor its information systems to assess whether the systems
are at risk of misinterpreting any future dates and will develop appropriate
contingency plans to prevent any potential system malfunction or correct any
system failures. The Company has not been informed of any such problem
experienced by its vendors or its customers, nor by any of the municipal
agencies that provide services to the Company.
16
<PAGE> 17
Nevertheless, it is too soon to conclude that there will not be any problems
arising from the Year 200 problem, particularly at some of the Company's
vendors. The Company will continue to monitor its significant vendors of goods
and services with respect to Year 2000 problems they may encounter as those
issues may effect the Company's ability to continue operations, or might
adversely affect the Company's financial position, results of operations and
cash flows. The Company does not believe at this time that these potential
problems will materially impact the ability of the company to continue its
operations, however, no assurance can be given that this will be the case.
COSTS TO ADDRESS YEAR 2000 ISSUES
Since the Company's primary systems are Year 2000 compliant, estimated costs
directly related to Year 2000 issues did not have a material effect on the
performance of the Bank. Very little direct costs were expensed to the Bank.
There were indirect costs related to the significant amount of time spent by
existing personnel for the development of test plans, test scripts and for
actual testing. Most of this time was 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 were
expensed as incurred. The financial impact to the Company of Year 2000
compliance was not material to the Company's financial position or its results
of operations.
CONTINGENCY PLANS
The Company developed 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 1999 and made any needed changes to tailor it to
Year 2000 problems. None occurred.
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 Hedge Activities - Deferral
of the Effective Date of FASB Statement No. 133- and the amendment of FASB No.
133" delayed the effective date of this statement for one year. The Statement is
effective for all fiscal quarters of fiscal years beginnings 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.
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. Because of the uncertainty of the final terms and
likelihood of passage of the proposed legislation, the Company is unable to
assess the impact of any proposed 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 $228,000 to The Bank of South
Carolina Employee Stock Ownership Plan and Trust for the fiscal year ended
December 31, 1999. The contribution was made during 1999. 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 209,160 shares of common stock of Bank of South Carolina
Corporation.
17
<PAGE> 18
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, 1999
and 1998, 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, 1999. 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 Bank of South
Carolina Corporation and subsidiary at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Greenville, South Carolina
January 26, 2000
18
<PAGE> 19
BANK OF SOUTH CAROLINA CORPORATION CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks $ 6,955,256 $ 7,464,394
Interest bearing deposits in other banks 6,919 6,666
Federal funds sold 16,255,000 15,450,000
Investment securities available for sale (amortized cost of
$36,120,785 and $33,499,593 in 1999 and 1998, respectively) 35,873,009 33,759,333
Investment securities held to maturity (fair value of $598,968
at December 31, 1999) 600,208 --
Loans 90,748,717 84,140,365
Less: Allowance for loan losses (1,250,138) (1,239,968)
------------- -------------
Net loans 89,498,579 82,900,397
------------- -------------
Premises, equipment and leasehold improvements, net 3,818,406 4,056,891
Accrued interest receivable 1,136,668 1,062,398
Other assets 509,357 319,722
------------- -------------
Total assets $ 154,653,402 $ 145,019,801
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing demand $ 35,959,630 $ 32,327,281
Interest bearing demand 28,602,488 23,834,038
Money market accounts 22,117,510 22,881,876
Certificates of deposit $100,000 and over 17,418,882 19,884,534
Other time deposits 15,767,175 20,016,065
Other savings deposits 5,414,765 5,029,514
------------- -------------
Total deposits 125,280,450 123,973,308
Short-term borrowings 11,439,333 3,480,070
Accrued interest payable and other liabilities 1,068,315 888,890
------------- -------------
Total liabilities 137,788,098 128,342,268
------------- -------------
Shareholders' equity:
Common stock - No par, 6,000,000 shares authorized;
Issued 2,586,828 shares in 1999
and 2,605,597 shares in 1998 -- --
Additional paid in capital 16,456,624 16,456,624
Retained earnings 1,380,578 607,959
Treasury stock; 95,769 shares at December 31, 1999
and 77,000 shares at December 31,1998 (815,799) (550,686)
Accumulated other comprehensive income (loss),
net of income taxes (156,099) 163,636
------------- -------------
Total shareholders' equity 16,865,304 16,677,533
------------- -------------
Total liabilities and shareholders' equity $ 154,653,402 $ 145,019,801
============= =============
</TABLE>
Commitments and contingencies (note 7)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE> 20
BANK OF SOUTH CAROLINA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest and fees income
Interest and fee on loans $ 8,576,748 $ 8,158,283 $ 7,315,908
Interest and dividends
on investment securities 1,930,135 1,286,458 1,253,767
Other interest income 598,716 1,148,690 590,900
----------- ----------- -----------
Total interest and fee income 11,105,599 10,593,431 9,160,575
----------- ----------- -----------
Interest expense
Interest on deposits 3,146,651 3,504,950 2,758,270
Interest on short-term borrowings 328,135 225,791 183,754
----------- ----------- -----------
Total interest expense 3,474,786 3,730,741 2,942,024
----------- ----------- -----------
Net interest income 7,630,813 6,862,690 6,218,551
Provision for loan losses 90,000 55,000 210,000
----------- ----------- -----------
Net interest income after
provision for loan losses 7,540,813 6,807,690 6,008,551
----------- ----------- -----------
Other income:
Service charges, fees and commissions 1,082,630 844,070 594,036
Loss on sale of investment securities -- -- (16,544)
Other non-interest income 19,813 21,354 22,762
----------- ----------- -----------
Total other income 1,102,443 865,424 600,254
----------- ----------- -----------
Other expense:
Salaries and employee benefits 3,023,261 2,644,595 2,209,712
Net occupancy expense 1,109,886 1,020,227 861,143
Other operating expenses 1,548,897 1,430,409 1,022,832
----------- ----------- -----------
Total other expense 5,682,044 5,095,231 4,093,687
----------- ----------- -----------
Income before income tax expense 2,961,212 2,577,883 2,515,118
Income tax expense 1,045,696 917,734 905,500
----------- ----------- -----------
Net income $ 1,915,516 $ 1,660,149 $ 1,609,618
=========== =========== ===========
Basic earnings per common share $ .74 $ .64 $ .63
=========== =========== ===========
Diluted earnings per common share $ .74 $ .64 $ .62
=========== =========== ===========
Cash dividends per common share $ .44 $ .26 $ .43
=========== =========== ===========
Weighted average shares outstanding
Basic 2,604,620 2,599,212 2,573,775
=========== =========== ===========
Diluted 2,604,620 2,599,212 2,596,209
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
BANK OF SOUTH CAROLINA CORPORATION CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive
Stock Capital Earnings Stock Income(Loss) Total
------------ ----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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) -- -- -- -- 7,090 --
Plus reclassification
adjustment for losses
included in net income -- -- -- -- 10,753 --
Net unrealized gains on
securities -- -- -- -- 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
Comprehensive income:
Net income -- -- 1,915,516 -- -- 1,915,516
Net unrealized gains on
securities (net of tax
effect of $187,781) -- -- -- -- (319,735) (319,735)
------------
Total comprehensive income -- -- -- -- -- 1,595,781
------------
Cash dividends -- -- (1,142,897) -- -- (1,142,897)
Purchase of Treasury Stock -- -- -- (265,113) -- (265,113)
============ =========== =========== ========= ========= ============
DECEMBER 31, 1999 $ -- $16,456,624 $ 1,380,578 $(815,799) $(156,099) $ 16,865,304
============ =========== =========== ========= ========= ============
</TABLE>
21
<PAGE> 22
BANK OF SOUTH CAROLINA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Cash flows form operating activities:
Net income $ 1,915,516 $ 1,660,149 $ 1,609,618
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 322,502 357,001 210,315
Provision for loan losses 90,000 55,000 210,000
Deferred income taxes 16,000 (7,000) (40,000)
Loss on sale of investment securities -- -- 16,544
Net (accretion) amortization of unearned
(discounts)premiums on investment securities 122,530 (4,313) (8,989)
Decrease (increase) in accrued interest
receivable and other assets (92,124) 212,035 (406,275)
Increase (decrease) in accrued interest
payable and other liabilities (129,680) 147,383 (44,131)
------------ ------------ ------------
Net cash provided by operating activities 2,244,744 2,420,255 1,547,082
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales/maturities of
investment securities available for sale 9,213,881 6,193,881 5,995,756
Purchase of investment securities available for
sale (11,957,186) (20,407,031) (6,226,250)
Purchase of investment securities held to maturity (600,625) -- --
Net increase in loans (6,688,182) (4,199,968) (8,346,521)
Purchase of premises, equipment and leasehold
improvements, net (84,017) (1,800,599) (1,673,614)
------------ ------------ ------------
Net cash used by investing activities (10,116,129) (20,213,717) (10,250,629)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposit accounts 1,307,142 19,504,235 19,638,836
Net increase (decrease) in short-term borrowings 7,959,263 (307,926) 1,395,588
Dividends (833,792) (623,046) (1,099,147)
Treasury stock (265,113) -- --
Stock options exercised -- 124,000 124,000
------------ ------------ ------------
Net cash provided by financing activities 8,167,500 18,697,263 20,059,277
------------ ------------ ------------
Net increase in cash and cash equivalents 296,115 903,801 11,355,730
Cash and cash equivalents at beginning of year 22,921,060 22,017,259 10,661,529
------------ ------------ ------------
Cash and cash equivalents at end of year $ 23,217,175 $ 22,921,060 $ 22,017,259
============ ============ ============
Supplemental disclosure of cash flow data:
Cash paid during the year for:
Interest $ 3,605,038 $ 3,665,389 $ 2,833,817
Income taxes 1,045,696 866,276 1,043,090
Supplemental disclosure for non-cash investing and
financing activity:
Change in unrealized gain on securities available
for sale, net of income taxes (319,735) 36,983 17,843
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
BANK OF SOUTH CAROLINA CORPORATION 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 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. Each issued and outstanding share 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.
23
<PAGE> 24
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 accordance with the terms of the restructured
loan agreement. Interest income is recognized on these loans using the
accrual method of accounting, provided they are performing in
accordance with their restructured terms.
Management believes that the allowance is adequate to absorb inherent
losses in the loan portfolio. 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 - 40 years for buildings
and 3 to 15 years for equipment. 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: Basic earnings per share are computed by
dividing net income applicable to common shareholders by the weighted
average number of common shares outstanding. Diluted earnings per
share are 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 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.
24
<PAGE> 25
SEGMENT INFORMATION: The Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". This
statement requires selected segment information of 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 include 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 $1,886,000 and $1,241,000 for
the reserve periods ended December 31, 1999 and 1998, respectively.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified
to conform to the 1999 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, 1999
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations $26,046,131 $ 12,414 $(146,977) $25,911,568
Federal Agency Securities 9,176,892 -- (106,516) 9,070,376
Municipal Securities 897,762 -- (6,697) 891,065
----------- -------- --------- -----------
Total $36,120,785 $ 12,414 $(260,190) $35,873,009
=========== ======== ========= ===========
DECEMBER 31, 1998
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------------------
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 1,111,642 11,218 -- 1,122,860
----------- -------- --------- -----------
Total $33,499,593 $261,991 $ (2,251) $33,759,333
=========== ======== ========= ===========
</TABLE>
INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and market values of investment securities held to maturity
are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations (due in
less than 1 year) $600,208 - $(1,240) $598,968
</TABLE>
25
<PAGE> 26
The amortized cost and market value of investment securities at December 31,
1999, by contractual maturity are as follows:
AMORTIZED MARKET
COST VALUE
----------- -----------
Due in one year or less $20,267,648 $20,206,054
Due in one year to five years 15,853,137 15,666,955
----------- -----------
Total $36,120,785 $35,873,009
=========== ===========
The Company had no sales of investment securities during the years
ended December 31, 1999 or 1998, compared to proceeds of $1,981,876
from the sale of investment securities which resulted in realized
losses of $16,544 for the year ended December 31, 1997.
The carrying value of investment securities pledged to secure deposits
and other balances was $19,477,702 and $17,457,982 at December 31,
1999 and 1998, respectively.
3. LOANS
Major classifications of loans are as follows:
DECEMBER 31,
1999 1998
------------ ------------
Commercial loans $ 69,399,682 $ 62,891,571
Residential mortgage 10,746,376 10,574,482
Consumer loans 6,640,903 7,063,912
Personal bank lines 3,837,851 3,446,280
Other 123,905 164,120
------------ ------------
90,748,717 84,140,365
Allowance for loan losses (1,250,138) (1,239,968)
------------ ------------
Loans, net $ 89,498,579 $ 82,900,397
============ ============
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,239,968 $ 1,210,528 $ 1,041,216
Provision for loan losses 90,000 55,000 210,000
Charge offs (121,643) (35,030) (46,630)
Recoveries 41,813 9,470 5,942
----------- ----------- -----------
Balance at end of year $ 1,250,138 $ 1,239,968 $ 1,210,528
=========== =========== ===========
</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, 1999 and 1998, the Company had loans on non-accrual
totaling $59,814 and $569,162, respectively. The additional amount of
gross income that would have been recorded during 1999 and 1998 if
these loans had performed as agreed would have been $16,437 and
$52,304, respectively.
26
<PAGE> 27
At December 31, 1999 and 1998 impaired loans amounted to $84,273 and
$584,469, respectively. There is no reserve related to the above
impaired loans included in the allowance for loan losses at December
31, 1999 and 1998. For the years ended December 31, 1999 and 1998, the
average recorded investment in impaired loans was $96,062 and $586,185,
respectively, and $5,425 in 1999 and $13,852 in 1998 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, 1999 and 1998, there was a troubled debt restructuring
which was modified prior to the adoption of SFAS No. 114 with
outstanding balances of $33,240 and $45,740, respectively, and which
was performing in accordance with its modified terms.
4. PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements are summarized as
follows:
DECEMBER 31,
1999 1998
----------- -----------
Bank buildings $ 1,797,577 $ 1,787,725
Land 838,075 838,075
Lease purchase 30,000 30,000
Leasehold improvements 253,077 252,969
Equipment 2,045,465 2,461,995
----------- -----------
4,964,194 5,370,764
Accumulated depreciation (1,145,788) (1,313,873)
----------- -----------
Total $ 3,818,406 $ 4,056,891
=========== ===========
5. SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
DECEMBER 31,
1999 1998
----------- ----------
Securities sold under agreements to repurchase $ 8,639,332 $2,511,577
U.S. Treasury, Tax and Loan deposit notes 2,800,000 968,493
----------- ----------
Total $11,439,332 $3,480,070
=========== ==========
Securities sold under agreements to repurchase with customers mature on
demand. These borrowings were collateralized by U.S. Treasury Notes
with carrying values of $9,028,961 and $5,728,501 and market values of
$8,924,742 and $5,773,142 at December 31, 1999 and 1998, respectively.
The agreements to repurchase had weighted average interest rates of
4.58% and 4.72% at December 31, 1999 and 1998, respectively. The
maximum amount outstanding at any month end was $8,639,333 and
$4,906,092 for the years ended December 31, 1999 and 1998,
respectively. The average amount of outstanding agreements to
repurchase was $6,337,924 and $3,500,148 during the periods ended
December 31, 1999 and 1998, 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.
27
<PAGE> 28
6. INCOME TAXES
Income tax expense (benefit) consists of:
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- --------- ---------
Current:
Federal $ 943,696 $ 849,734 $ 874,500
State 86,000 75,000 71,000
----------- --------- ---------
1,029,696 924,734 945,500
----------- --------- ---------
Deferred:
Federal 16,000 (7,000) (40,000)
State -- -- --
----------- --------- ---------
16,000 (7,000) (40,000)
----------- --------- ---------
Total $ 1,045,696 $ 917,734 $ 905,500
=========== ========= =========
A reconciliation from expected federal tax expense to consolidated
effective income tax expense for the period indicated follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- --------- --------
<S> <C> <C> <C>
Provision for tax at statutory federal income
tax rate $ 1,006,812 $ 876,480 $855,140
State income taxes, net of federal tax benefit 56,760 49,500 46,860
Other, net (17,876) (8,246) 3,500
----------- --------- --------
Provision for income tax $ 1,045,696 $ 917,734 $905,500
=========== ========= ========
</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, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $400,000 $386,000
Unrealized loss on securities available for sale 91,677 --
-------- --------
Total gross deferred tax assets 491,677 386,000
-------- --------
Deferred tax liabilities:
Unrealized gain on securities available for sale -- 96,104
Fixed assets, principally due to differences in depreciation 96,000 51,000
Other 12,000 27,000
-------- --------
Total gross deferred tax liabilities 108,000 174,104
-------- --------
Net deferred tax asset $383,677 $211,896
======== ========
</TABLE>
There was no valuation allowance for deferred tax assets at either
December 31, 1999 or December 31, 1998. 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 benefit of $187,781 has been
recorded directly to shareholders' equity in 1999. The balance of the
change in the net deferred tax asset results from the current period
deferred tax expense of $16,000.
28
<PAGE> 29
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, 1999, are as follows:
2000 $ 391,698
2001 403,402
2002 406,038
2003 418,214
2004 420,954
2005 and thereafter 1,041,878
------------
Total $ 3,082,184
============
Total rental expense was $391,288, $398,867 and $397,041 in 1999, 1998
and 1997, 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 $24,861,969 and
$21,618,939 at December 31, 1999 and 1998, 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 $553,417 and $749,857 at
December 31, 1999 and 1998, 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, 1999 and 1998. Related party loans are summarized as follows:
DECEMBER 31,
1999 1998
----------- -----------
Balance at beginning of year $ 996,757 $ 1,477,702
New loans or advances 1,342,510 1,207,251
Repayments (1,460,702) (1,688,196)
----------- -----------
Balance at end of year $ 878,565 $ 996,757
=========== ===========
29
<PAGE> 30
9. OTHER EXPENSE
A summary of the components of other operating expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Advertising and business development $ 43,583 $ 48,726 $ 29,355
Supplies 180,856 215,067 150,900
Telephone and postage 189,270 139,780 109,243
Insurance 41,237 31,406 32,465
Professional fees 173,690 165,992 133,865
Data processing services 210,928 167,740 106,168
State and FDIC insurance and fees 31,292 27,944 23,822
Other 678,041 633,754 437,014
---------- ---------- ----------
Total $1,548,897 $1,430,409 $1,022,832
========== ========== ==========
</TABLE>
10. STOCK DIVIDEND AND STOCK SPLIT
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 were subsequently 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 1999, 1998 and 1997. Options for 27,280
shares at $4.55 were exercised during 1998 and 1997. 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 131,450 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
12,650 shares have now terminated.
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 $228,000, $186,000 and $165,048 for the
years ended December 31, 1999, 1998 and 1997, respectively.
30
<PAGE> 31
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 option plan. Had compensation
cost for the Company's incentive stock option plan been determined
based on the fair value at the grant date for awards 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 1999 and 1997.
<TABLE>
<CAPTION>
(DOLLARS, EXCEPT PER SHARE, IN THOUSANDS) 1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net earnings - as reported $ 1,916 $ 1,660 $ 1,610
Net earnings - proforma 1,745 1,489 1,610
Diluted earnings per share - as reported .74 .64 .62
Diluted earnings per share - proforma .67 .57 .62
</TABLE>
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, 1999
-------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- ---------------- ----------
<S> <C> <C> <C>
Net income $ 1,915,516
===============
BASIC EPS
Income available to common shareholders $ 1,915,516 2,604,620 $ .74
=============== =============== =========
EFFECT OF DILUTIVE SECURITIES*
DILUTED EPS
Income available to common shareholders $ 1,915,516 2,604,620 $ .74
=============== =============== ========
</TABLE>
*ALL OUTSTANDING OPTIONS ARE ANTI-DILUTIVE.
<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*
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>
31
<PAGE> 32
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, 1999, that
the Company and the Bank meet all capital adequacy requirements to
which they are subject.
At December 31, 1999 and 1998, 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>
As of December 31, 1999:
Total capital to risk-weighted assets:
Company $18,270 18.26% $8,003 8.00% $ N/A N/A
Bank 17,528 17.54% 7,993 8.00% 9,992 10.00%
Tier 1 capital to risk-weighted assets:
Company $17,021 17.01% $4,002 4.00% $ N/A N/A
Bank 16,279 16.29% 3,997 4.00% 5,995 6.00%
Tier 1 capital to average assets:
Company $17,021 11.18% $6,088 4.00% $ N/A N/A
Bank 16,279 10.76% 6,053 4.00% 7,566 5.00%
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------
As of December 31, 1998:
Total capital to risk-weighted assets:
Company $17,652 19.40% $7,278 8.00% $N/A N/A
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 N/A
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 N/A
Bank 15,859 10.85% 5,849 4.00% 7,311 5.00%
</TABLE>
32
<PAGE> 33
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 due from banks, 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 and held to maturity 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 1998, 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.
33
<PAGE> 34
The estimated fair values of the Company's financial instruments at
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
----
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 6,955,256 $ 6,955,256
Interest bearing deposits in other banks 6,919 6,919
Federal funds sold 16,255,000 16,255,000
Investments available for sale 35,873,009 35,873,009
Investments held to maturity 600,208 600,208
Loans (net) 89,498,579 88,863,395
Deposits 125,280,450 125,220,871
Short-term borrowings 11,439,333 11,439,333
1998
----
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
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>
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. At December 31, 1999, the Bank had
available retained earnings of approximately $495,000 for payment of
dividends.
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, 1999 and 1998, and the related condensed statements of
operations data and cash flow data for the periods ended December 31,
1999, 1998 and 1997, are as follows:
FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Cash $ 625,678 $ 826,627
Investment in wholly-owned bank subsidiary 16,122,530 16,022,540
Investment securities held to maturity 600,208 --
Other assets 8,385 10,758
----------- -----------
Total assets $17,356,801 $16,859,925
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 491,497 $ 182,392
----------- -----------
Total liabilities 491,497 182,392
Shareholders' equity 16,865,304 16,677,533
----------- -----------
Total liabilities and shareholders' equity $17,356,801 $16,859,925
=========== ===========
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
OPERATIONS DATA
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 35,471 $ 24,977 $ 14,578
Net operating expenses (37,680) (40,268) (35,973)
Dividends received from bank 1,498,000 872,000 1,147,000
Equity in undistributed earnings of subsidiary 419,725 803,440 484,013
----------- ----------- -----------
Net income $ 1,915,516 $ 1,660,149 $ 1,609,618
=========== =========== ===========
CASH FLOW DATA
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 1,915,516 $ 1,660,149 $ 1,609,618
Amortization of premiums on investment
securities 417 -- --
Equity in undistributed earnings of subsidiary (419,725) (803,440) (484,013)
Decrease in other assets 2,373 9,950 5,111
----------- ----------- -----------
Net cash provided by operating activities $ 1,498,581 $ 866,659 $ 1,130,716
----------- ----------- -----------
Cash flows from investing activities:
Purchase of investment securities
held to maturity (600,625) -- --
----------- ----------- -----------
Net cash used in investing activities (600,625) -- --
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid (833,792) (623,046) (1,099,147)
Treasury stock purchased (265,113) -- --
Stock options exercised -- 124,000 124,000
----------- ----------- -----------
Net cash used by financing activities (1,098,905) (499,046) (975,147)
----------- ----------- -----------
Net increase (decrease) in cash (200,949) 367,613 155,569
Cash at beginning of year 826,627 459,014 303,445
----------- ----------- -----------
Cash at end of year $ 625,678 $ 826,627 $ 459,014
=========== =========== ===========
</TABLE>
35
<PAGE> 36
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below represent the quarterly results of operations for the
years ending December 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Fourth Third Second First
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total interest income $2,905,010 $2,822,828 $2,732,668 $2,645,093
Total interest expense 904,225 871,658 854,997 843,906
---------- ---------- ---------- ----------
Net interest income 2,000,785 1,951,170 1,877,671 1,801,187
Provision for loan losses 55,000 30,000 -- 5,000
Net interest income after provision
for loan losses 1,945,785 1,921,170 1,877,671 1,796,187
Other income 262,500 319,775 247,941 272,227
Other expense 1,394,578 1,459,132 1,426,869 1,401,465
---------- ---------- ---------- ----------
Income before taxes 813,707 781,813 698,743 666,949
Income tax expense 280,496 275,000 250,200 240,000
---------- ---------- ---------- ----------
Net income $ 533,211 $ 506,813 $ 448,543 $ 426,949
========== ========== ========== ==========
Basic earnings per share $ .20 $ .19 $ .17 $ .16
========== ========== ========== ==========
Diluted earnings per share $ .20 $ .19 $ .17 $ .16
========== ========== ========== ==========
1998
----------------------------------------------------------
Fourth Third Second First
---------- ---------- ---------- ----------
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>
36
<PAGE> 37
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 7 and 8 of the proxy, all of whom are recommended by management and
have consented to be named and to serve if elected.
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. Twelve (12) 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 13, 1999, the date of the last Annual
Meeting of shareholders. Alan I. Nussbaum, M.D. and Edmund Rhett, Jr., M.D. were
first elected as directors of the company during 1999.
<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 58 Executive None The Bank of South Carolina (banking)
Vice President, 1986-2000
Secretary,
Director
William T. Cooper 70 Director None President, Southeastern Galleries, Inc. (retail
furniture and decorating) 1983-2000
C. Ronald Coward 64 Director None President - Coward-Hund Construction
Company, Inc. (construction) 1976-2000
Leonard C. Fulghum 70 Director None Chairman - Ferguson Fulghum, Inc. (painting
contractors) 1972-2000
T. Dean Harton 54 Director None President, Hawthorne Corporation
(aviation) 1986-2000
William L. Hiott, Jr. 55 Executive None The Bank of South Carolina
Vice President, (banking) 1986-2000
Treasurer,
Director
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES HELD BUSINESS EXPERIENCE
WITH FAMILY 1987-1999 AND
NAME AGE CORPORATION RELATIONSHIP OTHER DIRECTORSHIPS
- ---- --- ------------- ------------ -------------------
<S> <C> <C> <C> <C>
Katherine M. Huger 58 Director None Assistant Professor of Economics - Charleston
Southern University (education) 1972-2000
John E. Huguley 72 Director None Retired (1996) Chairman - John Huguley Company,
Inc. (retail office products) 1980-2000
Charles G. Lane 45 Director Brother of Member - Holcombe, Fair & Lane,
Hugh C. LLC (real estate) 1996-2000;
Lane, Jr.; Associate-Holcombe & Fair Realtors
brother-in- 1987-2000
law of
Fleetwood S.
Hassell, Sr.
Vice-President
Hugh C. Lane, Jr. 52 President, Brother of The Bank of South Carolina (banking)
Chief Exec- Charles G. 1986-2000
utive Officer, Lane
Director
J. Maybank 60 Director None Active in community programs
Thomas W. Myers 65 Director None President - Myers & Associates (estate
and business insurance planning) 1963-2000
Alan I Nussbaum, M.D. 48 Director None Physician - Rheumatology Associates, PA
Edmund Rhett Jr., M.D. 52 Director None Physician in private obstetrical practice
with Low Country OB/GYN
Thomas C. Stervenson, III 48 Director None President - Fabtech, Inc.
(metal fabrication) 1991-2000;
Private Investor 1990-91; Chairman of the
Board - Stevenson Hagerty, Inc.
(diversified holding company) 1984-90
John M. Tupper 58 Director None President - Tupperway Tire and Service, Inc.
(retail tires and service) 1980-2000
</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, 1999, 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 ($100,000.00) Dollars for
their services in all capacities. Such Officers receive no compensation from the
Company as Officers or as Directors or in any other capacity.
38
<PAGE> 39
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
-----------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
OTHER SECURITIES
ANNUAL RESTRICTED UNDER- ALL OTHER
NAME AND COMPEN- STOCK LYING LTIP COMPEN-
PRINCIPAL SATION(1)(2) AWARD(S) OPTIONS/ PAYOUTS SATION(1)(2)
POSITION YEAR SALARY($) BONUS($) ($) ($) SARS($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hugh C. Lane, 1999 $142,500.00 --- $18,996.83 $18,996.83
Jr. - CEO 1998 $130,601.45 --- $19,961.21 $19,961.21
& President 1997 $130,601.45 $10,000.00 $16,978.72 $16,978.72
Nathaniel I. 1999 $126,000.00 --- $16,752.09 $16,752.09
Ball, III - 1998 $116,101.37 --- $17,775.76 $17,577.76
Executive Vice 1996 $116,101.37 $10,000.00 $14,729.98 $14,729.98
President &
Secretary
William L. 1999 $126,000.00 --- $17,318.45 $17,318.45
Hiott, Jr. - 1998 $116,101.37 --- $18,330.88 $18,330.88
Executive Vice 1996 $116,101.37 $10,000.00 $14,729.98 $14,729.98
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 Two Hundred
Twenty Eight Thousand and No/100 ($228,000.00) Dollars to the ESOP for the
fiscal year ended December 31, 1999. The contribution was made during 1999. 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 Two Hundred Twelve Thousand Seven Hundred Sixty
(212,760) shares or 8.24% of the Company's Common Stock.
39
<PAGE> 40
During the fiscal year ended December 31, 1999, 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 thirty five thousand three hundred (135,300)
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 1999.
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.
40
<PAGE> 41
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,
2000, 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:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------- -------------------- ----------
Hugh C. Lane, Jr. 396,368.108 (1) (2) 15.36%
30 Church Street
Charleston, SC 29401
Charles G. Lane 136,294 (3) 5.28%
10 Gillon Street
Charleston, S.C. 29401
The Bank of South Carolina 212,760 (4) 8.24%
Employee Stock Ownership
Plan and Trust ("ESOP")
256 Meeting Street
Charleston, SC 29401
- --------------------------------------------------------------------------------
(1) To the extent known to the Board of Directors, Hugh C. Lane and his
children, individually and collectively, have beneficial ownership of
681,232 shares or 26.40% 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
172,800 shares; as trustee for 8 trust accounts holding an aggregate of
58,122 shares, he has sole voting and investment power with respect to
such shares; as co-trustee for one trust account holding 6,840 shares,
he has joint voting and investment power with respect to such shares;
as trustee for the Mills Bee Lane Memorial Foundation, he has shared
voting and investment with respect to 6,500 shares; he is indirectly
beneficial owner of 8,168 shares owned by his wife and an aggregate of
115,518 shares held by his wife as custodian for three minor children
and 28,420.108 shares owned by the Employee Stock Ownership Plan and
Trust ("ESOP") in which he has a vested interest. All of the
396,368.108 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.
41
<PAGE> 42
(3) To the extent known to the Board of Directors, Charles G. Lane
directly owns and has sole voting and investment power with respect to
69,557 shares; as co-trustee for 2 trust accounts holding 8,553
shares, he has joint voting and investment powers with respect to such
shares; as trustee for the Mills Bee Lane Memorial Foundation, he has
shared voting and investment power with respect to 6,500 shares; he is
indirectly beneficial owner of 2, 662 shares owned by his wife and an
aggregate of 49,022 share held by his wife as custodian for three
minor children. All of the share beneficially owned by Charles G, Lane
are currently owned. Charles G. Lane has had beneficial ownership of
more than five (5%) percent of the Bank's Common Stock since July 19,
1999.
(4) Thee Trustee of the ESOP Nathaniel I. Ball, III, and executive Officer
and Director of the Bank and the Company, disclaims beneficial
ownership of 209,160 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 and claims beneficial ownership of
3,600 shares owned by the ESOP which have not yet been allocated to
members of the plan.
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 25, 2000. 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 25, 2000, 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 25, 2000, the Officers,
Directors and Nominees beneficially owned 912,962.327 shares, representing
approximately 35.38% of the outstanding shares.
As of February 25, 2000, 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:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------- -------------------- ----------
Nathaniel I. Ball, III 59,564.968 (1) 2.31%
1302 Cove Avenue
Sullivans Island, SC 29482
William T. Cooper 5,324 (1) .21%
21 Jamestown Road
Charleston, SC 29407
C. Ronald Coward 33,936 (1) 1.32%
537 Planters Loop
Mt. Pleasant, SC 29464
Leonard C. Fulghum 35,175 (1) 1.36%
311 Middle Street
Mt. Pleasant, SC 29464
T. Dean Harton 8,704 (1) .34%
4620 Lazy Creek Lane
Wadmalaw, SC 29487
William L. Hiott, Jr. 86,893.251 (1) 3.37%
1831 Capri Drive
Charleston, SC 29407
42
<PAGE> 43
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------- -------------------- ----------
James H. Holcombe 107,175 (1) 4.15%
16 Church Street
Charleston, SC 29401
Katherine M. Huger 5,324 (1) .21%
72 Murray Boulevard
Charleston, SC 29401
John E. Huguley 16,456 (1) .64%
22 Murray Boulevard
Charleston, SC 29401
Charles G. Lane 136,294 (1) 5.28%
10 Gillon Street
Charleston, SC 29401
Hugh C. Lane, Jr. 396,368.108 (1) 15.36%
30 Church Street
Charleston, SC 29401
Louise J. Maybank 12,100 (1) .47%
8 Meeting Street
Charleston, SC 29401
Thomas W. Myers 7,000 .27%
500 Central Avenue
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
Alan I. Nussbaum, M.D. 300 .01%
37 Rebellion Road
Charleston, S. C. 29407
Edmund Rhett, Jr., M.D. 500 (1) .02%
(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 5,802 shares directly owned by his wife; 19,402.968
shares owned by the ESOP, in which he has a vested interest and 3,600
shares owned by the ESOP which have not been allocated to members of
the plan; William T. Cooper - an aggregate of 4,840 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; 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 4,532 held by him as
custodian for two children and 25,249.251 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;
43
<PAGE> 44
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
66,737 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 held by him as a trustee of Mills Bee Lane Memorial
Foundation; Hugh C. Lane, Jr. - an aggregate of 195,148 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), held by him as a trustee of Mills Bee Lane Memorial Foundation
and 28,420.108 shares owned by the ESOP, in which he has a vested
interest; and Edmund Rhett, Jr., 100 shares owned by his wife. 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 (17) in number and beneficially own an aggregate of
912,962.327 shares, representing 35.38% 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. 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 collectibility or
present other unfavorable features.
Nathaniel I. Ball, III failed to file one Statement of Changes in Beneficial
Ownership on Form 4 in a timely manner. Nathaniel I. Ball, III, filed two
incorrect Statement of Beneficial Interest on Form 4.
44
<PAGE> 45
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...............................................18
(2) Consolidated Balance Sheets..................................................19
(3) Consolidated Statements of Operations........................................20
(4) Consolidated Statements of Shareholders' Equity and Comprehensive Income.....21
(5) Consolidated Statements of Cash Flows........................................22
(6) Notes to Consolidated Financial Statements...................................23 - 36
</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)
1.3 1999 Annual Report to Shareholders (Incorporated herein)
1.4 1999 Proxy Statement (Incorporated herein)
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 (Incorporated herein)
3. Reports on Form 8-K: None
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 28, 2000 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 28, 2000 /s/ Nathaniel I. Ball, III
------------------------------------------
Nathaniel I. Ball, III,
Executive Vice President,
Secretary and Director
March 28, 2000 /s/ William T. Cooper
------------------------------------------
William T. Cooper, Director
45
<PAGE> 46
March 28, 2000 /s/ C. Ronald Coward
------------------------------------------
C. Ronald Coward, Director
March 28, 2000 /s/ Leonard C. Fulghum
------------------------------------------
Leonard C. Fulghum, Director
March 28, 2000 /s/ T. Dean Harton
------------------------------------------
T. Dean Harton, Director
March 28, 2000 /s/ William L. Hiott, Jr.
------------------------------------------
William L. Hiott, Jr.,
Executive Vice President,
Treasurer & Director
March 28, 2000 /s/ James H. Holcombe
------------------------------------------
James H. Holcombe, Director
March 28, 2000 /s/ Katherine M. Huger
------------------------------------------
Katherine M. Huger, Director
March 28, 2000 /s/ John E. Huguley
------------------------------------------
John E. Huguley, Director
March 28, 2000 /s/ Charles G. Lane
------------------------------------------
Charles G. Lane, Director
March 28, 2000 /s/ Hugh C. Lane, Jr.
------------------------------------------
Hugh C. Lane, Jr., President,
Chief Executive Officer & Director
March 28, 2000 /s/ Louise J. Maybank
------------------------------------------
Louise J. Maybank, Director
March 28, 2000 /s/ Thomas W. Myers
------------------------------------------
Thomas W. Myers, Director
March 28, 2000 /s/ Alan I. Nussbaum, M.D.
------------------------------------------
Alan I. Nussbaum, M.D.
March 28, 2000 /s/ Edmund Rhett, Jr., M.D.
------------------------------------------
Edmund Rhett, Jr. ,M.D.
March 28, 2000 /s/ Thomas C. Stevenson, III
------------------------------------------
Thomas C. Stevenson, III, Director
March 28, 2000 /s/ John M. Tupper
------------------------------------------
John M. Tupper, Director
46
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,955
<INT-BEARING-DEPOSITS> 7
<FED-FUNDS-SOLD> 16,255
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,873
<INVESTMENTS-CARRYING> 600
<INVESTMENTS-MARKET> 599
<LOANS> 90,749
<ALLOWANCE> 1,250
<TOTAL-ASSETS> 154,653
<DEPOSITS> 125,280
<SHORT-TERM> 11,439
<LIABILITIES-OTHER> 1,068
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 16,865
<TOTAL-LIABILITIES-AND-EQUITY> 154,653
<INTEREST-LOAN> 8,577
<INTEREST-INVEST> 1,930
<INTEREST-OTHER> 599
<INTEREST-TOTAL> 11,106
<INTEREST-DEPOSIT> 3,147
<INTEREST-EXPENSE> 3,475
<INTEREST-INCOME-NET> 7,631
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,682
<INCOME-PRETAX> 2,961
<INCOME-PRE-EXTRAORDINARY> 2,961
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,916
<EPS-BASIC> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 4.56
<LOANS-NON> 60
<LOANS-PAST> 0
<LOANS-TROUBLED> 33
<LOANS-PROBLEM> 84
<ALLOWANCE-OPEN> 1,240
<CHARGE-OFFS> 122
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 1,250
<ALLOWANCE-DOMESTIC> 1,250
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>