NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Bank of South Carolina (the “Bank”) was organized on October 22, 1986 and opened for business as a state-chartered
financial institution on February 26, 1987, in Charleston, South Carolina. The Bank was reorganized into a wholly-owned subsidiary
of Bank of South Carolina Corporation (the “Company”), effective April 17, 1995. At the time of the reorganization,
each outstanding share of the Bank was exchanged for two shares of Bank of South Carolina Corporation Stock.
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Our
accounting and reporting policies conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”),
and to general practices within the banking industry. The following summarizes the more significant of these policies and practices.
Principles
of Consolidation
:
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank.
In consolidation, all significant intercompany balances and transactions have been eliminated.
References
to “we,” “us,” “our,” “the Bank,” or “the Company” refer to the parent
and its subsidiary that are consolidated for financial purposes.
Accounting
Estimates and Assumptions
:
The financial statements
are prepared in conformity with GAAP, which require 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 as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reported periods. Actual results could differ significantly from these estimates and assumptions. Material estimates
generally susceptible to significant change are related to the determination of the allowance for loan losses, impaired
loans, other real estate owned, deferred tax assets, the fair value of financial instruments and other-than-temporary
impairment of investment securities.
Reclassification:
Certain
amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation.
Such reclassifications have no effect on shareholders’ equity or the net income as previously reported.
Subsequent
Events:
Subsequent
events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized
subsequent events are events or transactions that provide additional evidence about conditions that existed as of the date of
the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent
events are events that provide evidence about conditions that did not exist as of the date of the balance sheet but arose after
that date. We have reviewed events occurring through the date the financial statements were available to be issued and no subsequent
events occurred requiring accrual or disclosure.
Cash
and Cash Equivalents
:
Cash
and cash equivalents include working cash funds, due from banks, interest-bearing deposits at the Federal Reserve, items in process
of collection and federal funds sold. All cash equivalents are readily convertible to cash and have maturities of less than 90
days.
Depository
institutions are required to maintain reserve and clearing balances at the Federal Reserve Bank. Vault cash satisfied our daily
reserve requirement for the years ended December 31, 2018 and 2017, respectively.
Interest-bearing
Deposits at the Federal Reserve
:
Interest-bearing
deposits at the Federal Reserve mature within one year and are carried at cost.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Investment
Securities
:
We
classify investments into three categories: (1) Held to Maturity - debt securities that we have the positive intent and ability
to hold to maturity, which are reported at amortized cost, adjusted for the amortization of any related premiums or the accretion
of any related discounts into interest income using a methodology which approximates a level yield of interest over the estimated
remaining period until maturity; (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 an
other than temporary decline in value has occurred.
Realized
gains or losses on the sale of investments are recognized on a specific identification, trade date basis. All securities were
classified as available for sale for 2018 and 2017.
Mortgage
Loans to be Sold
:
We
originate fixed and variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed
but not yet settled with an investor are carried in our loans held for sale portfolio. Virtually all of these
loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors
on the same day or shortly thereafter that the loan was locked in with our customers. Therefore, these loans present
very little market risk. We usually deliver to, and receive funding from, the investor within 30 to 60 days. Commitments
to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts”
basis. We are not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term
nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same
as the value of the loan amount at its origination
.
Mortgage
loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage
banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included
in mortgage banking income in the consolidated statements of income.
Loans
and Allowance for Loan Losses
:
Loans
are carried at principal amounts outstanding. Loan origination fees, net of certain direct origination costs, are deferred and
recognized over the weighted average life of the loan as an adjustment to yield. Interest income on all loans is recorded on an
accrual basis. The accrual of interest and the amortization of net loan fees are generally discontinued on loans that 1) are maintained
on a cash basis because of deterioration in the financial condition of the borrower; 2) the payment of full principal is not expected;
or 3) the principal or interest has been in default for a period of 90 days or more. We define past due loans based on contractual
payment and maturity dates.
The
accrual of interest is generally discontinued on loans that become 90 days past due as to principal or interest. The accrual of
interest on some loans may continue even though they are 90 days past due if the loans are well secured or in the process of collection
and management deems it appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of
six to nine months, they are reviewed individually by management to determine if they should be returned to accrual status.
When
the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied
to principal. 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. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first
to interest income and then to principal.
We
account for impaired loans by requiring that all loans (greater than $50,000) where it is estimated that we will be unable to
collect all amounts due according to the terms of the loan agreement be recorded at the loan’s fair value. Fair value may
be determined based upon the present value of expected future cash flows discounted at the loan’s effective interest rate,
or the fair value of the collateral less cost to sell, if the loan is collateral dependent.
Additional
accounting guidance allows us to use existing methods for recognizing interest income on an impaired loan. The guidance also requires
additional disclosures about how we estimate interest income related to our impaired loans.
A
loan is also considered impaired if its terms are modified in a troubled debt restructuring (“TDR”). For this type
of impaired loan, 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.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
allowance for loan losses (the “allowance”) is our estimate of credit losses inherent in the loan portfolio. The allowance
is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are
charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance. The allowance is evaluated on a regular basis and is based upon our periodic review of the collectability
of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect
the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information
becomes available.
We
believe that the allowance is adequate to absorb inherent losses in the loan portfolio; however, there can be no assurance that
loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not
be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions
and other relevant circumstances, will not require significant future additions to the allowance, thus adversely affecting our
operating results.
The
allowance is also subject to examination by regulatory agencies, which may consider factors such as the methodology used to determine
adequacy and the size of the allowance relative to that of peer institutions and other adequacy tests. In addition, such regulatory
agencies could require us to adjust our allowance based on information available at the time of the examination.
The
methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently
similar to the methodology used to determine the allowance adjusted for factors specific to binding commitments, including the
probability of funding and historical loss ratio.
Concentration
of Credit Risk
:
Our
primary market consists of the counties of Berkeley, Charleston and Dorchester, South Carolina. As of December 31, 2018, the majority
of the total loan portfolio, as well as a substantial portion of the commercial and real estate loan portfolios, were to borrowers
within this region. No other areas of significant concentration of credit risk have been identified.
Premises,
Equipment and Leasehold Improvements and Depreciation
:
Land
is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the
straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful
lives of the assets ranging from 40 years for buildings and 3 to 15 years for equipment. Leasehold improvements are amortized
over the shorter of the asset’s useful life or the remaining lease term, including renewal periods when reasonably assured.
The cost of maintenance and repairs is charged to operating expense as incurred.
Other
Real Estate Owned
:
Fair
value is based upon independent market prices, appraised values of the collateral, or our estimation of the value of the collateral.
Losses arising from an initial foreclosure are charged against the allowance for loan losses. Subsequent to foreclosure, other
real estate owned (“OREO”) is recorded at the lower of cost or fair value, adjusted for net selling costs. Gains and
losses on the sale of OREO and subsequent write-downs from periodic re-evaluation are charged to net other real estate owned expenses.
Income
Taxes
:
We
account for income taxes under the asset and liability method. 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. 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. Net
deferred tax assets are included in other assets in the consolidated balance sheet.
Accounting
standards require the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. These
standards also prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s
tax return. We believe that we had no uncertain tax positions for the years ended December 31, 2018 and 2017.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based
Compensation
:
Compensation
cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes
model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period,
generally defined as the vesting period (10 years).
Income
Per Common Share
:
Basic
income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income by the weighted-average number of common shares and potential common shares outstanding.
Potential common shares consist of dilutive stock options determined using the treasury stock method and the average market price
of common stock. Earnings per share are restated for all stock splits and stock dividends through the date of issuance of the
financial statements.
Segment
Information
:
The
Company operates and manages itself within one retail banking segment and therefore has not provided segment
disclosures.
Interest
Rate Lock Commitments and Forward Sale Contracts
:
Commitments
to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery
of these mortgage loans are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at
the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitments before
the loan is funded. In order to hedge the change in interest rates resulting from commitments to fund the loans, we enter into
forward commitments for the future delivery of mortgage loans when the interest rate is locked. Fair values of these mortgage
derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes
in the fair values of these derivatives are included in income when they occur. As a result of the short-term nature of mortgage
loans held for sale (derivative contract), our derivative instruments were considered to be immaterial as of December 31, 2018
and 2017.
We
had no embedded derivative instruments requiring hedge accounting treatment at December 31, 2018. We do not currently engage in
hedging activities.
Recent
Accounting Pronouncements
:
The
following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure of
financial information by the Company.
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09,
Revenue from Contracts with Customers, Topic 606.
The core principle of the new standard is that an entity should
recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity
receives or expects to receive. This guidance also includes expanded disclosure requirements that result in an entity providing
users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and
cash flows arising from the entity’s contracts with customers. The guidance became effective January 1, 2018. The amendment
does not apply to revenue associated with financial instruments, such as loans and investment securities available for sale, and
therefore had no material effect on our consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10); Recognition and
Measurement of Financial Instruments and Financial Liabilities.
This update addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. The amendments became effective on January 1, 2018 and
did not have a material effect on the financial statements. The Company measured the fair value of its loan portfolio as of
December 31, 2018 using an exit price notion and will continue to, prospectively.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which revises certain aspects of recognition, measurement,
presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. We have evaluated the effect that implementation of the new
standard will have on our results of operations and cash flows and found that it will have a material impact on our consolidated
balance sheets but did not have an impact on our consolidated statements of income. The most significant impact was the recognition
of right of use assets and lease liabilities for operating leases of approximately $7.3 million.
In
March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net),
to clarify the implementation guidance on principal versus agent
considerations and address how an entity should assess whether it is the principal or the agent in contracts that include
three or more parties. The guidance became effective January 1, 2018. The Company completed an assessment of revenue streams
and a review of related contracts potentially affected by the ASU and, based on this assessment, the Company concluded that
the ASU did not materially change the method in which the Company currently recognizes revenue for these revenue streams. As
such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
The Company derives most
of our income from interest on loans and investment securities that are not within the scope of Topic 606. The Company
evaluated its contracts with customers and determined that further disaggregation of revenue from contracts with customers
beyond what is reported in the Consolidated Statement of Income was not necessary. Performance obligations on its contracts
with customers are typically met as services are rendered and the transactions are charged on a periodic basis or based on
activity. The revenue streams affected by Topic 606 were service charges on deposits, interchange fees, and gains/losses on
sales of real estate. The performance obligation for service charges on deposits is recognized over the period of service
provided. Interchange fees are transaction based fees recognized when the transaction is processed. Gains/losses on sales of
real estate financed by the Bank were previously evaluated on the recognition of the buyer's initial investment. The primary
consideration will be evaluated based on various factors including the loan to value, credit quality of the borrower,
structure of the loan, and any other factors affecting the collectability of the loan financing the sale. Topic 606 will
affect sales of other real estate owned if a significant financing component is present but did not have an effect on the
sale of other real estate owned during the year ended December 31, 2018 or have a material effect on the
consolidated financial statements. The adoption of Topic 606 did not have an impact on the revenue recognition for these
services.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share
– Based Payment Accounting,
to simplify several aspects of the accounting for share-based payment award transactions
including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on
the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities
allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions
that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified
awards at fair value to measuring them at intrinsic value. The amendments became effective for the Company on January 1, 2017
and this amendment did not have a material effect on its financial statements.
In
April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing
, to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual
property. The amendment became effective for the Company January 1, 2018 and did not have a material effect on the financial statements.
In
May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow- Scope Improvements and Practical
Expedients
, to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition.
The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In
June 2016, the FASB issued ASU 2016-13,
Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments,
to change the accounting for credit losses and modify the impairment model for certain debt securities.
The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted
for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation
of the new standard will have on its financial position, results of operations, and cash flows.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments,
to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash
flows. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In
December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers
. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued
in 2014. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In
January 2017, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business
, which provided guidance to assist with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update is
intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many
transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The amendments became
effective on January 1, 2018 and did not have a material effect on the financial statements.
In
February 2017, the FASB issued ASU 2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial
Sales of Nonfinancial Assets
, to clarify the scope of established guidance on nonfinancial asset derecognition, issued as
part of ASU 2014-09,
Revenue from Contracts with Customers
, as well as accounting for partial sales of nonfinancial assets.
The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard.
The amendments became effective on January 1, 2018 and did not have a material effect on the financial statements.
In
March 2017, the FASB issued ASU 2017-08,
Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization of Purchased Callable Debt Securities,
which shortens the amortization period for the premium to the earliest
call date. The amendment will be effective for the Company for interim and annual periods beginning after December 15, 2018.
Early adoption is permitted. The Company does not expect this amendment to have a material effect on its financial statements.
In
February 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
which requires companies to
reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the tax rates
under the Tax Cuts and Jobs Act (the “2017 Tax Act”). The Company early adopted this pronouncement by
retrospective application to each period in which the effect of the change in the tax rate under the 2017 Tax Act is
recognized. The impact of the reclassification from other comprehensive income to retained earnings is included in the
Statement of Changes in Shareholders’ Equity for the year ended December 31, 2017.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
March 2018, the FASB issued ASU 2018-04
, Investments—Debt Securities (Topic 320) and Regulated Operations (Topic
980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273,
which
incorporate into the Accounting Standards Codification recent SEC guidance which was issued in order to make the relevant
interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations.
The amendments were effective upon issuance and did not have a material effect on the financial statements.
In
March 2018, the FASB issued ASU 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118
. The amendments incorporate into the Accounting Standards Codification recent SEC guidance
related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance.
The amendments were effective upon issuance and did not have a material effect on the financial statements.
In
May 2018, the FASB amended the Financial Services – Depository and Lending Topic of the ASC to remove outdated guidance
related to Circular 202. The amendments were effective upon issuance and did not have a material effect on the financial statements.
In
July 2018, the FASB issued ASU 2018-10,
Codification Improvements to Topic 842 – Leases
. This update clarifies how
to apply certain aspects of the new leases standard. The amendments are effective for reporting periods beginning after December
15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.
In
July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, which gives entities another option
for transition and to provide lessors with a practical expedient. The amendments are effective for reporting periods beginning
after December 15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement.
The amendments remove, modify, and add certain fair value disclosure requirements
based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial
Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures
upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect
these amendments to have a material effect on its financial statements.
In
August 2018, the FASB issued ASU 2018-15,
Intangibles and Goodwill and Other-Internal Use Software (Subtopic 350-40):Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract),
which aligns the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for
the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these
amendments to have a material effect on its financial statements.
In
October 2018, the FASB issued ASU 2018-16,
Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing
Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes,
which expands the
list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments will be effective for the
Company for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments
to have a material effect on its financial statements.
In
October 2018, the FASB issued ASU 2018-07,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable
Interest Entities,
determining whether a decision-making fee is a variable interest. The amendments require organizations
to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent
of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning after December
15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a full retrospective
approach in which financial statements for each individual prior period presented and the opening balances of the earliest period
presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does not expect these amendments
to have a material effect on its financial statements.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
December 2018, the FASB issued ASU 2018-20,
Leases (Topic 842): Narrow-Scope Improvements for Lessors,
providing narrow-scope
improvements for lessors, that provides relief in the accounting for sales, use and similar taxes, the accounting for other costs
paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. The amendments
will be effective for the Company for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company
does not expect these amendments to have a material effect on its financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have
a material impact on our financial position, results of operations or cash flows.
|
3.
|
INVESTMENT
SECURITIES AVAILABLE FOR SALE
|
The
amortized cost and fair value of investment securities available for sale are summarized as follows.
|
|
December
31, 2018
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
U.S. Treasury
Notes
|
|
$
|
32,965,693
|
|
|
$
|
—
|
|
|
$
|
(609,059
|
)
|
|
$
|
32,356,634
|
|
Government-Sponsored
Enterprises
|
|
|
60,684,878
|
|
|
|
—
|
|
|
|
(1,315,598
|
)
|
|
|
59,369,280
|
|
Municipal
Securities
|
|
|
28,267,930
|
|
|
|
112,971
|
|
|
|
(437,941
|
)
|
|
|
27,942,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,918,501
|
|
|
$
|
112,971
|
|
|
$
|
(2,362,598
|
)
|
|
$
|
119,668,874
|
|
|
|
December
31, 2017
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Notes
|
|
$
|
35,970,990
|
|
|
$
|
—
|
|
|
$
|
(411,145
|
)
|
|
$
|
35,559,845
|
|
Government-Sponsored
Enterprises
|
|
|
64,444,315
|
|
|
|
—
|
|
|
|
(887,811
|
)
|
|
|
63,556,504
|
|
Municipal
Securities
|
|
|
40,191,502
|
|
|
|
487,545
|
|
|
|
(545,146
|
)
|
|
|
40,133,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,606,807
|
|
|
$
|
487,545
|
|
|
$
|
(1,844,102
|
)
|
|
$
|
139,250,250
|
|
The
amortized cost and estimated fair value of investment securities available for sale at December 31, 2018 and December 31, 2017,
by contractual maturity are in the following table.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
4,246,325
|
|
|
$
|
4,249,570
|
|
|
$
|
11,554,040
|
|
|
$
|
11,546,968
|
|
Due
in one year to five years
|
|
|
99,753,174
|
|
|
|
97,915,185
|
|
|
|
72,622,056
|
|
|
|
72,124,395
|
|
Due
in five years to ten years
|
|
|
17,504,456
|
|
|
|
17,128,425
|
|
|
|
53,290,088
|
|
|
|
52,576,036
|
|
Due
in ten years and over
|
|
|
414,546
|
|
|
|
375,694
|
|
|
|
3,140,623
|
|
|
|
3,002,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,918,501
|
|
|
$
|
119,668,874
|
|
|
$
|
140,606,807
|
|
|
$
|
139,250,250
|
|
Securities
pledged to secure deposits and repurchase agreements at December 31, 2018 and 2017, had a carrying amount of $41,547,205 and $49,424,692,
respectively.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated
by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December
31, 2018 and 2017. We believe that all unrealized losses have resulted from temporary changes in the interest rate market and
not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of
the securities referenced in the table below before recovery of their amortized cost.
|
|
Less
Than 12 Months
|
|
|
12
Months or Longer
|
|
|
Total
|
|
|
|
#
|
|
|
Fair
Value
|
|
|
Gross
Unrealized Loss
|
|
|
#
|
|
|
Fair
Value
|
|
|
Gross
Unrealized Loss
|
|
|
#
|
|
|
Fair
Value
|
|
|
Gross
Unrealized Loss
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Notes
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
7
|
|
|
$
|
32,356,634
|
|
|
$
|
(609,059
|
)
|
|
|
7
|
|
|
$
|
32,356,634
|
|
|
$
|
(609,059
|
)
|
Government-Sponsored
Enterprises
|
|
|
2
|
|
|
|
9,967,000
|
|
|
|
(14,302
|
)
|
|
|
11
|
|
|
|
49,402,280
|
|
|
|
(1,301,296
|
)
|
|
|
13
|
|
|
|
59,369,280
|
|
|
|
(1,315,598
|
)
|
Municipal
Securities
|
|
|
2
|
|
|
|
1,362,286
|
|
|
|
(7,547
|
)
|
|
|
31
|
|
|
|
11,840,912
|
|
|
|
(430,394
|
)
|
|
|
33
|
|
|
|
13,203,198
|
|
|
|
(437,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4
|
|
|
$
|
11,329,286
|
|
|
$
|
(21,849
|
)
|
|
|
49
|
|
|
$
|
93,599,826
|
|
|
$
|
(2,340,749
|
)
|
|
|
53
|
|
|
$
|
104,929,112
|
|
|
$
|
(2,362,598
|
)
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Notes
|
|
|
8
|
|
|
$
|
35,559,845
|
|
|
$
|
(411,145
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
8
|
|
|
$
|
35,559,845
|
|
|
$
|
(411,145
|
)
|
Government-Sponsored
Enterprises
|
|
|
12
|
|
|
|
53,275,064
|
|
|
|
(462,174
|
)
|
|
|
3
|
|
|
|
10,281,440
|
|
|
|
(425,637
|
)
|
|
|
15
|
|
|
|
63,556,504
|
|
|
|
(887,811
|
)
|
Municipal
Securities
|
|
|
20
|
|
|
|
7,815,221
|
|
|
|
(134,998
|
)
|
|
|
29
|
|
|
|
11,056,185
|
|
|
|
(410,148
|
)
|
|
|
49
|
|
|
|
18,871,406
|
|
|
|
(545,146
|
)
|
Total
|
|
|
40
|
|
|
$
|
96,650,130
|
|
|
$
|
(1,008,317
|
)
|
|
|
32
|
|
|
$
|
21,337,625
|
|
|
$
|
(835,785
|
)
|
|
|
72
|
|
|
$
|
117,987,755
|
|
|
$
|
(1,844,102
|
)
|
The
table below shows the proceeds received from sales of securities available for sale and gross realized gains and losses.
|
|
For
the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Gross proceeds
|
|
$
|
21,434,634
|
|
|
$
|
20,231,265
|
|
|
$
|
36,218,087
|
|
Gross realized gains
|
|
|
104,634
|
|
|
|
154,692
|
|
|
|
384,963
|
|
Gross realized losses
|
|
|
(99,899
|
)
|
|
|
(108,872
|
)
|
|
|
(4,059
|
)
|
The
tax provision related to these gains was $994 and $15,578 for the year ended December 31, 2018 and 2017, respectively.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
4.
|
LOANS
AND ALLOWANCE FOR LOAN LOSSES
|
Major
classifications of loans (net of deferred loan fees of $156,309 at December 31, 2018, and $152,047 at December 31, 2017)
are shown in the table below.
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Commercial
|
|
$
|
54,829,078
|
|
|
$
|
51,723,237
|
|
Commercial
real estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
7,304,300
|
|
|
|
2,317,857
|
|
Other
|
|
|
143,703,401
|
|
|
|
140,186,324
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Real
estate
|
|
|
63,787,411
|
|
|
|
70,797,973
|
|
Other
|
|
|
5,040,077
|
|
|
|
5,155,249
|
|
Total
loans
|
|
|
274,664,267
|
|
|
|
270,180,640
|
|
Allowance
for loan losses
|
|
|
(4,214,331
|
)
|
|
|
(3,875,398
|
)
|
Total
loans, net
|
|
$
|
270,449,936
|
|
|
$
|
266,305,242
|
|
We
had $101.9 million and $113.4 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”)
Discount Window at December 31, 2018 and 2017, respectively.
Our
portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements
as scheduled. Our internal credit risk grading system is based on experience with similarly graded loans, industry best practices,
and regulatory guidance. Our portfolio is graded in its entirety.
Our
internally assigned grades pursuant to the Board-approved lending policy are as follows:
|
●
|
Excellent
(1)
The borrowing entity has more than adequate cash flow, unquestionable strength, strong earnings and capital, and where applicable,
no overdrafts.
|
|
●
|
Good
(2)
The borrowing entity has dependable cash flow, better than average financial condition, good capital and usually no overdrafts.
|
|
●
|
Satisfactory
(3) The borrowing entity has adequate cash flow, satisfactory financial condition, and explainable overdrafts (if any).
|
|
●
|
Watch
(4)
The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical earnings, weak capital, loan to/from stockholders,
and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and growth.
|
|
●
|
OAEM
(5)
The borrowing entity has marginal cash flow, occasional past dues, and frequent and unexpected working capital needs.
|
|
●
|
Substandard
(6)
The borrowing entity has cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is
a possibility. The borrowing entity has declining sales, rising costs, and may need to look for secondary source of repayment.
|
|
●
|
Doubtful
(7)
The borrowing entity has negative cash flow. Survival of the business is at risk, full repayment is unlikely, and there are
frequent and unexplained overdrafts. The borrowing entity shows declining trends and no operating profits.
|
|
●
|
Loss
(8)
The borrowing entity has negative cash flow with no alternatives. Survival of the business is unlikely.
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables illustrate credit risks by category and internally assigned grades at December 31, 2018 and December 31, 2017.
“Pass” includes loans internally graded as excellent, good and satisfactory.
|
|
|
December 31, 2018
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
|
Consumer
Real Estate
|
|
|
Consumer
Other
|
|
|
Total
|
|
Pass
|
|
|
$
|
50,663,356
|
|
|
$
|
7,304,300
|
|
|
$
|
136,804,420
|
|
|
$
|
60,480,317
|
|
|
$
|
4,726,494
|
|
|
$
|
259,978,887
|
|
Watch
|
|
|
|
1,973,675
|
|
|
|
—
|
|
|
|
4,938,711
|
|
|
|
2,077,341
|
|
|
|
226,117
|
|
|
|
9,215,844
|
|
OAEM
|
|
|
|
157,300
|
|
|
|
—
|
|
|
|
590,294
|
|
|
|
350,000
|
|
|
|
—
|
|
|
|
1,097,594
|
|
Sub-Standard
|
|
|
|
2,034,747
|
|
|
|
—
|
|
|
|
1,369,976
|
|
|
|
879,753
|
|
|
|
87,466
|
|
|
|
4,371,942
|
|
Doubtful
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
$
|
54,829,078
|
|
|
$
|
7,304,300
|
|
|
$
|
143,703,401
|
|
|
$
|
63,787,411
|
|
|
$
|
5,040,077
|
|
|
$
|
274,664,267
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
|
Consumer
Real Estate
|
|
|
Consumer
Other
|
|
|
Total
|
|
Pass
|
|
|
$
|
47,456,205
|
|
|
$
|
1,936,335
|
|
|
$
|
134,401,977
|
|
|
$
|
68,570,298
|
|
|
$
|
4,933,696
|
|
|
$
|
257,298,511
|
|
Watch
|
|
|
|
2,403,978
|
|
|
|
381,522
|
|
|
|
3,605,621
|
|
|
|
1,934,802
|
|
|
|
185,746
|
|
|
|
8,511,669
|
|
OAEM
|
|
|
|
—
|
|
|
|
—
|
|
|
|
610,806
|
|
|
|
—
|
|
|
|
—
|
|
|
|
610,806
|
|
Sub-Standard
|
|
|
|
1,863,054
|
|
|
|
—
|
|
|
|
1,567,920
|
|
|
|
292,873
|
|
|
|
35,807
|
|
|
|
3,759,654
|
|
Doubtful
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
$
|
51,723,237
|
|
|
$
|
2,317,857
|
|
|
$
|
140,186,324
|
|
|
$
|
70,797,973
|
|
|
$
|
5,155,249
|
|
|
$
|
270,180,640
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables include an aging analysis of the recorded investment in loans segregated by class.
|
|
December
31, 2018
|
|
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
Greater
Than
90 Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans Receivable
|
|
|
Recorded
Investment ≥
90 Days and
Accruing
|
|
Commercial
|
|
$
|
266,567
|
|
|
$
|
17,492
|
|
|
$
|
229,395
|
|
|
$
|
513,454
|
|
|
$
|
54,315,624
|
|
|
$
|
54,829,078
|
|
|
$
|
—
|
|
Commercial
Real Estate Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,304,300
|
|
|
|
7,304,300
|
|
|
|
—
|
|
Commercial
Real Estate Other
|
|
|
35,000
|
|
|
|
215,049
|
|
|
|
571,292
|
|
|
|
821,341
|
|
|
|
142,882,060
|
|
|
|
143,703,401
|
|
|
|
—
|
|
Consumer
Real Estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63,787,411
|
|
|
|
63,787,411
|
|
|
|
—
|
|
Consumer
Other
|
|
|
24,621
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,621
|
|
|
|
5,015,456
|
|
|
|
5,040,077
|
|
|
|
—
|
|
Total
|
|
$
|
326,188
|
|
|
$
|
232,541
|
|
|
$
|
800,687
|
|
|
$
|
1,359,416
|
|
|
$
|
273,304,851
|
|
|
$
|
274,664,267
|
|
|
$
|
—
|
|
|
|
December
31, 2017
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater
Than
90 Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans Receivable
|
|
|
Recorded
Investment ≥
90 Days and
Accruing
|
|
Commercial
|
|
$
|
3,531
|
|
|
$
|
192,846
|
|
|
$
|
—
|
|
|
$
|
196,377
|
|
|
$
|
51,526,860
|
|
|
$
|
51,723,237
|
|
|
$
|
—
|
|
Commercial
Real Estate
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,317,857
|
|
|
|
2,317,857
|
|
|
|
—
|
|
Commercial
Real Estate
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
651,578
|
|
|
|
651,578
|
|
|
|
139,534,746
|
|
|
|
140,186,324
|
|
|
|
—
|
|
Consumer
Real Estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,797,973
|
|
|
|
70,797,973
|
|
|
|
—
|
|
Consumer
Other
|
|
|
10,302
|
|
|
|
—
|
|
|
|
34,107
|
|
|
|
44,409
|
|
|
|
5,110,840
|
|
|
|
5,155,249
|
|
|
|
34,107
|
|
Total
|
|
$
|
13,833
|
|
|
$
|
192,846
|
|
|
$
|
685,685
|
|
|
$
|
892,364
|
|
|
$
|
269,288,276
|
|
|
$
|
270,180,640
|
|
|
$
|
34,107
|
|
There
were no loans 90 days or more past due and still accruing interest at December 31, 2018. There were two loans 90 days or more
past due and still accruing interest at December 31, 2017.
The
following table summarizes the balances of non-accrual loans.
|
|
Loans Receivable on Non-Accrual
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Commercial
|
|
$
|
251,219
|
|
|
$
|
41,651
|
|
Commercial
Real Estate Construction
|
|
|
—
|
|
|
|
—
|
|
Commercial Real Estate
Other
|
|
|
571,292
|
|
|
|
790,208
|
|
Consumer Real Estate
|
|
|
—
|
|
|
|
—
|
|
Consumer
Other
|
|
|
1,023
|
|
|
|
—
|
|
Total
|
|
$
|
823,534
|
|
|
$
|
831,859
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables set forth the changes in the allowance and an allocation of the allowance by class at December 31, 2018,
2017, and 2016. The allowance consists of specific and general components. The specific component relates
to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical
loss experience adjusted for current economic factors.
|
|
December
31, 2018
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
|
Consumer
Real Estate
|
|
|
Consumer
Other
|
|
|
Total
|
|
Allowance
for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
1,403,588
|
|
|
$
|
23,638
|
|
|
$
|
1,549,755
|
|
|
$
|
796,918
|
|
|
$
|
101,499
|
|
|
$
|
3,875,398
|
|
Charge-offs
|
|
|
(31,250
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(84,637
|
)
|
|
|
(115,887
|
)
|
Recoveries
|
|
|
14,000
|
|
|
|
—
|
|
|
|
56,827
|
|
|
|
45,412
|
|
|
|
13,581
|
|
|
|
129,820
|
|
Provisions
|
|
|
279,075
|
|
|
|
40,238
|
|
|
|
(314,236
|
)
|
|
|
(455,745
|
)
|
|
|
775,668
|
|
|
|
325,000
|
|
Ending
Balance
|
|
$
|
1,665,413
|
|
|
$
|
63,876
|
|
|
$
|
1,292,346
|
|
|
$
|
386,585
|
|
|
$
|
806,111
|
|
|
$
|
4,214,331
|
|
|
|
December
31, 2017
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real
Estate
Other
|
|
|
Consumer
Real
Estate
|
|
|
Consumer
Other
|
|
|
Total
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
1,545,188
|
|
|
$
|
51,469
|
|
|
$
|
1,374,706
|
|
|
$
|
726,391
|
|
|
$
|
153,863
|
|
|
$
|
3,851,617
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
(180,587
|
)
|
|
|
—
|
|
|
|
(4,862
|
)
|
|
|
(185,449
|
)
|
Recoveries
|
|
|
6,000
|
|
|
|
—
|
|
|
|
87,030
|
|
|
|
60,000
|
|
|
|
1,200
|
|
|
|
154,230
|
|
Provisions
|
|
|
(147,600
|
)
|
|
|
(27,831
|
)
|
|
|
268,606
|
|
|
|
10,527
|
|
|
|
(48,702
|
)
|
|
|
55,000
|
|
Ending
Balance
|
|
$
|
1,403,588
|
|
|
$
|
23,638
|
|
|
$
|
1,549,755
|
|
|
$
|
796,918
|
|
|
$
|
101,499
|
|
|
$
|
3,875,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real
Estate Other
|
|
|
Consumer
Real Estate
|
|
|
Consumer
Other
|
|
|
Total
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
896,854
|
|
|
$
|
59,861
|
|
|
$
|
1,345,094
|
|
|
$
|
941,470
|
|
|
$
|
174,548
|
|
|
$
|
3,417,827
|
|
Charge-offs
|
|
|
(33,046
|
)
|
|
|
—
|
|
|
|
(78,300
|
)
|
|
|
(82,015
|
)
|
|
|
(14,934
|
)
|
|
|
(208,295
|
)
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
65,000
|
|
|
|
—
|
|
|
|
7,085
|
|
|
|
72,085
|
|
Provisions
|
|
|
681,380
|
|
|
|
(8,392
|
)
|
|
|
42,912
|
|
|
|
(133,064
|
)
|
|
|
(12,836
|
)
|
|
|
570,000
|
|
Ending
Balance
|
|
$
|
1,545,188
|
|
|
$
|
51,469
|
|
|
$
|
1,374,706
|
|
|
$
|
726,391
|
|
|
$
|
153,863
|
|
|
$
|
3,851,617
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment
in loans.
|
|
December
31, 2018
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
|
Consumer
Real Estate
|
|
|
Consumer
Other
|
|
|
Total
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
1,132,805
|
|
|
$
|
—
|
|
|
$
|
37,416
|
|
|
$
|
—
|
|
|
$
|
21,324
|
|
|
$
|
1,191,545
|
|
Collectively
evaluated for impairment
|
|
|
532,608
|
|
|
|
63,876
|
|
|
|
1,254,930
|
|
|
|
386,585
|
|
|
|
784,787
|
|
|
|
3,022,786
|
|
Total
Allowance for Loan Losses
|
|
$
|
1,665,413
|
|
|
$
|
63,876
|
|
|
$
|
1,292,346
|
|
|
$
|
386,585
|
|
|
$
|
806,111
|
|
|
$
|
4,214,331
|
|
Loans
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
1,996,579
|
|
|
$
|
—
|
|
|
$
|
1,280,890
|
|
|
$
|
879,753
|
|
|
$
|
21,324
|
|
|
$
|
4,178,546
|
|
Collectively
evaluated for impairment
|
|
|
52,832,499
|
|
|
|
7,304,300
|
|
|
|
142,422,511
|
|
|
|
62,907,658
|
|
|
|
5,018,753
|
|
|
|
270,485,721
|
|
Total
Loans Receivable
|
|
$
|
54,829,078
|
|
|
$
|
7,304,300
|
|
|
$
|
143,703,401
|
|
|
$
|
63,787,411
|
|
|
$
|
5,040,077
|
|
|
$
|
274,664,267
|
|
|
|
December
31, 2017
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real
Estate
Other
|
|
|
Consumer
Real Estate
|
|
|
Consumer
Other
|
|
|
Total
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
832,571
|
|
|
$
|
—
|
|
|
$
|
99,523
|
|
|
$
|
43,042
|
|
|
$
|
34,107
|
|
|
$
|
1,009,243
|
|
Collectively
evaluated for impairment
|
|
|
571,017
|
|
|
|
23,638
|
|
|
|
1,450,232
|
|
|
|
753,876
|
|
|
|
67,392
|
|
|
|
2,866,155
|
|
Total
Allowance for Losses
|
|
$
|
1,403,588
|
|
|
$
|
23,638
|
|
|
$
|
1,549,755
|
|
|
$
|
796,918
|
|
|
$
|
101,499
|
|
|
$
|
3,875,398
|
|
Loans
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
1,812,461
|
|
|
$
|
—
|
|
|
$
|
1,584,821
|
|
|
$
|
292,873
|
|
|
$
|
34,107
|
|
|
$
|
3,724,262
|
|
Collectively
evaluated for impairment
|
|
|
49,910,776
|
|
|
|
2,317,857
|
|
|
|
138,601,503
|
|
|
|
70,505,100
|
|
|
|
5,121,142
|
|
|
|
266,456,378
|
|
Total
Loans Receivable
|
|
$
|
51,723,237
|
|
|
$
|
2,317,857
|
|
|
$
|
140,186,324
|
|
|
$
|
70,797,973
|
|
|
$
|
5,155,249
|
|
|
$
|
270,180,640
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2018 and 2017, loans individually evaluated for impairment and the corresponding allowance for loan losses are
presented in the following table.
|
|
Impaired
and Restructured Loans as of the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Related
Allowance
|
|
With
no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
115,983
|
|
|
$
|
115,983
|
|
|
$
|
—
|
|
|
$
|
152,490
|
|
|
$
|
152,490
|
|
|
$
|
—
|
|
Commercial
Real Estate Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
Real Estate Other
|
|
|
974,249
|
|
|
|
974,249
|
|
|
|
—
|
|
|
|
1,058,601
|
|
|
|
1,058,601
|
|
|
|
—
|
|
Consumer
Real Estate
|
|
|
879,753
|
|
|
|
879,753
|
|
|
|
—
|
|
|
|
249,754
|
|
|
|
249,754
|
|
|
|
—
|
|
Consumer
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,969,985
|
|
|
$
|
1,969,985
|
|
|
$
|
—
|
|
|
$
|
1,460,845
|
|
|
$
|
1,460,845
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,880,596
|
|
|
$
|
1,880,596
|
|
|
$
|
1,132,805
|
|
|
$
|
1,659,971
|
|
|
$
|
1,659,971
|
|
|
$
|
832,571
|
|
Commercial
Real Estate Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
Real Estate Other
|
|
|
406,442
|
|
|
|
306,641
|
|
|
|
37,416
|
|
|
|
626,021
|
|
|
|
526,220
|
|
|
|
99,523
|
|
Consumer
Real Estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,119
|
|
|
|
43,119
|
|
|
|
43,042
|
|
Consumer
Other
|
|
|
21,324
|
|
|
|
21,324
|
|
|
|
21,324
|
|
|
|
34,107
|
|
|
|
34,107
|
|
|
|
34,107
|
|
Total
|
|
$
|
2,308,362
|
|
|
$
|
2,208,561
|
|
|
$
|
1,191,545
|
|
|
$
|
2,363,218
|
|
|
$
|
2,263,417
|
|
|
$
|
1,009,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,996,579
|
|
|
$
|
1,996,579
|
|
|
$
|
1,132,805
|
|
|
$
|
1,812,461
|
|
|
$
|
1,812,461
|
|
|
$
|
832,571
|
|
Commercial
Real Estate Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
Real Estate Other
|
|
|
1,380,691
|
|
|
|
1,280,890
|
|
|
|
37,416
|
|
|
|
1,684,622
|
|
|
|
1,584,821
|
|
|
|
99,523
|
|
Consumer
Real Estate
|
|
|
879,753
|
|
|
|
879,753
|
|
|
|
—
|
|
|
|
292,873
|
|
|
|
292,873
|
|
|
|
43,042
|
|
Consumer
Other
|
|
|
21,324
|
|
|
|
21,324
|
|
|
|
21,324
|
|
|
|
34,107
|
|
|
|
34,107
|
|
|
|
34,107
|
|
Total
|
|
$
|
4,278,347
|
|
|
$
|
4,178,546
|
|
|
$
|
1,191,545
|
|
|
$
|
3,824,063
|
|
|
$
|
3,724,262
|
|
|
$
|
1,009,243
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for
the periods indicated.
|
|
For
the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Average
Recorded Investment
|
|
|
Interest
Income Recognized
|
|
|
Average
Recorded Investment
|
|
|
Interest
Income Recognized
|
|
|
Average
Recorded Investment
|
|
|
Interest
Income Recognized
|
|
With
no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
133,413
|
|
|
$
|
8,637
|
|
|
$
|
173,964
|
|
|
$
|
7,416
|
|
|
$
|
267,747
|
|
|
$
|
12,282
|
|
Commercial
Real Estate Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
Real Estate Other
|
|
|
982,078
|
|
|
|
40,174
|
|
|
|
1,275,402
|
|
|
|
23,084
|
|
|
|
2,267,288
|
|
|
|
81,582
|
|
Consumer
Real Estate
|
|
|
879,753
|
|
|
|
51,520
|
|
|
|
451,025
|
|
|
|
16,938
|
|
|
|
1,242,515
|
|
|
|
22,111
|
|
Consumer
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,995,244
|
|
|
$
|
100,331
|
|
|
$
|
1,900,391
|
|
|
$
|
47,438
|
|
|
$
|
3,777,550
|
|
|
$
|
115,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,915,139
|
|
|
$
|
100,395
|
|
|
$
|
1,711,259
|
|
|
$
|
76,544
|
|
|
$
|
1,087,559
|
|
|
$
|
49,985
|
|
Commercial
Real Estate Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
Real Estate Other
|
|
|
416,569
|
|
|
|
10,999
|
|
|
|
930,420
|
|
|
|
5,367
|
|
|
|
1,047,685
|
|
|
|
16,138
|
|
Consumer
Real Estate
|
|
|
—
|
|
|
|
—
|
|
|
|
43,119
|
|
|
|
1,296
|
|
|
|
43,155
|
|
|
|
1,514
|
|
Consumer
Other
|
|
|
26,314
|
|
|
|
1,382
|
|
|
|
36,056
|
|
|
|
1,419
|
|
|
|
94,945
|
|
|
|
5,533
|
|
Total
|
|
$
|
2,358,022
|
|
|
$
|
112,776
|
|
|
$
|
2,720,854
|
|
|
$
|
84,626
|
|
|
$
|
2,273,344
|
|
|
$
|
73,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,048,552
|
|
|
$
|
109,032
|
|
|
$
|
1,885,223
|
|
|
$
|
83,960
|
|
|
$
|
1,355,306
|
|
|
$
|
62,267
|
|
Commercial
Real Estate Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
Real Estate Other
|
|
|
1,398,647
|
|
|
|
51,173
|
|
|
|
2,205,822
|
|
|
|
28,451
|
|
|
|
3,314,973
|
|
|
|
97,720
|
|
Consumer
Real Estate
|
|
|
879,753
|
|
|
|
51,520
|
|
|
|
494,144
|
|
|
|
18,234
|
|
|
|
1,285,670
|
|
|
|
23,625
|
|
Consumer
Other
|
|
|
26,314
|
|
|
|
1,382
|
|
|
|
36,056
|
|
|
|
1,419
|
|
|
|
94,945
|
|
|
|
5,533
|
|
Total
|
|
$
|
4,353,266
|
|
|
$
|
213,107
|
|
|
$
|
4,621,245
|
|
|
$
|
132,064
|
|
|
$
|
6,050,894
|
|
|
$
|
189,145
|
|
In
general, the modification or restructuring of a debt is considered a troubled debt restructuring (“TDR”) if we, for
economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would
not otherwise consider. As of December 31, 2018, there were no TDRs compared to one TDR with a balance of $33,300 as of December
31, 2017 and two TDRs with a total balance of $378,392 as of December 31, 2016. These TDRs were granted extended payment terms
with no principal reduction. All TDRs were performing as agreed as of December 31, 2017. No TDRs that were modified within the
previous twelve months defaulted during the following year for the years ended December 31, 2018, 2017, and 2016.
|
5.
|
CONCENTRATIONS
OF CREDIT RISK
|
We
grant short to intermediate term commercial and consumer loans to customers throughout our primary market area of Charleston,
Berkeley and Dorchester counties of South Carolina. Our primary market area is heavily dependent on tourism and medical and legal
services. Although we have a diversified loan portfolio, a substantial portion of our debtors’ ability to honor their contracts
is dependent upon the stability of the economic environment in their primary market. The majority of the loan portfolio is located
in our immediate market area with a concentration in real estate related activities and offices, medical offices, and attorneys’
offices.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Our
loans were concentrated in the following categories.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Commercial
|
|
|
19.96
|
%
|
|
|
19.14
|
%
|
Commercial Real Estate
Construction
|
|
|
2.67
|
%
|
|
|
0.86
|
%
|
Commercial Real Estate
Other
|
|
|
52.32
|
%
|
|
|
51.89
|
%
|
Consumer Real Estate
|
|
|
23.22
|
%
|
|
|
26.20
|
%
|
Consumer
Other
|
|
|
1.83
|
%
|
|
|
1.91
|
%
|
Total Loans
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
6.
|
Premises,
Equipment and Leasehold Improvements
|
Premises,
equipment and leasehold improvements are summarized in the table below.
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Bank buildings
|
|
$
|
1,861,237
|
|
|
$
|
1,824,613
|
|
Land
|
|
|
838,075
|
|
|
|
838,075
|
|
Leasehold purchases
|
|
|
30,000
|
|
|
|
30,000
|
|
Leasehold improvements
|
|
|
709,520
|
|
|
|
690,212
|
|
Construction in progress
|
|
|
120,849
|
|
|
|
11,754
|
|
Equipment
|
|
|
3,526,404
|
|
|
|
3,405,686
|
|
|
|
|
7,086,085
|
|
|
|
6,800,340
|
|
Accumulated
depreciation
|
|
|
(4,750,878
|
)
|
|
|
(4,555,815
|
)
|
Total
|
|
$
|
2,335,207
|
|
|
$
|
2,244,525
|
|
Depreciation
and amortization on our bank premises and equipment charged to operating expense totaled $195,063 in 2018, $193,298 in 2017, and
$189,188 in 2016.
We
entered into agreements to lease parking and office facilities under non-cancellable operating lease agreements expiring
on various dates through 2039. We may, at our option, extend the lease of our Summerville office at 100 North Main Street
for two additional ten-year periods; as well as extend the land lease where our Mt. Pleasant office is located for five
additional five-year periods.
We
rent office space at 1071 Morrison Drive, Charleston, South Carolina, from a related party, to house our Mortgage Department.
Rent expense for this lease was $60,840, $54,720, and $51,690 for the years ended December 31, 2018, 2017, and 2016, respectively.
This lease expires June 30, 2019.
We
own the land and improvements at our West Ashley office located at 2027 Sam Rittenberg Boulevard, Charleston, South Carolina.
Management
intends to exercise its option on all lease agreements. Lease payments below include the lease renewals. Minimum rental
commitments for these leases as of December 31, 2018 are presented in the table below.
|
|
|
|
|
2019
|
|
|
$
|
619,492
|
|
2020
|
|
|
|
589,492
|
|
2021
|
|
|
|
589,492
|
|
2022
|
|
|
|
589,492
|
|
2023 and thereafter
|
|
|
|
8,603,721
|
|
Total
|
|
|
$
|
10,991,689
|
|
Total
rental expense was $622,396, $612,717, and $594,567 in 2018, 2017 and 2016, respectively.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
January 28, 2014, we signed a lease to open a banking office located on Highway 78, North Charleston, South Carolina (copy
of the lease incorporated as Exhibit 10.8 in the 2013 10-K and copy of the Assignment and Assumption of Lease incorporated as
Exhibit 10.9, First Amendment to the Lease incorporated as Exhibit 10.10 and Second Amendment to the Lease incorporated as
Exhibit 10.11 in the 2015 10-K). The original lease agreement was terminated and a new lease agreement was executed on July
31, 2017 for the same location (copy of lease incorporated as Exhibit 10.13 in the June 30, 2017 10Q). The building is
expected to be completed in the second half of 2019. Rental payments do not commence until we take control of our space. As
of December 31, 2018, we have spent $120,849 towards the construction of this office.
|
7.
|
OTHER
REAL ESTATE OWNED
|
The
following table summarizes the activity in other real estate owned at December 31, 2018 and December 31, 2017.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Balance,
beginning of the year
|
|
$
|
435,479
|
|
|
$
|
521,943
|
|
Additions - foreclosure
|
|
|
—
|
|
|
|
90,832
|
|
Sales
|
|
|
(411,842
|
)
|
|
|
(90,832
|
)
|
Write-downs
|
|
|
(23,637
|
)
|
|
|
(86,464
|
)
|
Balance,
end of the year
|
|
$
|
—
|
|
|
$
|
435,479
|
|
As
of December 31, 2018, there were no properties classified as OREO. One property valued at $411,842 was
sold at a loss of $33,476 during 2018. As of December 31, 2017, we had one property with a balance of $435,479 classified as OREO.
Another property valued at $90,832 and classified as OREO during 2017 was sold at a loss of $1,477.
As
of December 31, 2018 and 2017, certificates of deposit of $250,000 or more totaled approximately $15,909,991 and $18,624,924,
respectively.
The scheduled maturities of certificates of deposit as of December 31, 2018 are presented in the table below:
2019
|
|
|
$
|
32,319,817
|
|
2020
|
|
|
|
675,338
|
|
2021
|
|
|
|
579,684
|
|
2022
|
|
|
|
402,255
|
|
2023 and thereafter
|
|
|
|
491,631
|
|
|
|
|
$
|
34,468,725
|
|
As
of December 31, 2018, deposits with a deficit balance of $43,118 were re-classified as other loans.
Securities
sold under agreements to repurchase with customers mature on demand. At December 31, 2018 and 2017, there were no securities sold
under agreements to repurchase. There was no amount outstanding at any month-end during 2018 and 2017.
At
December 31, 2018 and 2017, we had no outstanding federal funds purchased. We have a Borrower-In-Custody arrangement with the
Federal Reserve. This arrangement permits the Company to retain possession of loans pledged as collateral to secure advances from
the Federal Reserve Discount Window. Under this agreement, we may borrow up to $79.3 million. We established this arrangement
as an additional source of liquidity. There have been no borrowings under this arrangement.
At
December 31, 2018 and 2017, the Bank had unused short-term lines of credit totaling approximately $23.0 million (which are
withdrawable at the lender’s option).
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
December 22, 2017, the President of the United States signed into law the 2017 Tax Act. The 2017 Tax Act includes a number of
changes to the existing U.S. tax laws that impact the Company, most notably a reduction in the U.S. corporate income tax rate
from 34 percent to 21 percent for tax years beginning after December 31, 2017.
The
Company recognized the income tax effects of the 2017 Tax Act in its 2017 consolidated financial statements in accordance with
Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740,
Income Taxes,
in
the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the
income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could
be determined. The Company did not identify items for which the income tax effects of the 2017 Tax Act have not been completed
and a reasonable estimate could not be determined as of December 31, 2017.
Total
income taxes for the years ended December 31, 2018, 2017 and 2016 are presented in the table below.
|
|
For
the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income
tax expense
|
|
$
|
1,108,982
|
|
|
$
|
2,814,634
|
|
|
$
|
1,688,433
|
|
Unrealized
gains (losses) on securities available for sale presented in accumulated other comprehensive income (loss)
|
|
|
(192,
280)
|
|
|
|
(116,007
|
)
|
|
|
(939,482
|
)
|
Total
|
|
$
|
916,702
|
|
|
$
|
2,698,627
|
|
|
$
|
748,951
|
|
Income
tax expense was as follows:
|
|
For
the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,326,619
|
|
|
$
|
2,538,272
|
|
|
$
|
2,438,687
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
current tax expense
|
|
|
1,326,619
|
|
|
|
2,538,272
|
|
|
|
2,438,687
|
|
Deferred
income tax (benefit) expense
|
|
|
(217,637
|
)
|
|
|
276,362
|
|
|
|
(750,254
|
)
|
Total
income tax expense
|
|
$
|
1,108,982
|
|
|
$
|
2,814,634
|
|
|
$
|
1,688,433
|
|
The
differences between actual income tax expense and the amounts computed by applying the U.S. federal income tax rate of 21% to
pretax income from continuing operations for the periods indicated are reconciled in the table below.
|
|
For
the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Computed
“expected” tax expense
|
|
$
|
1,686,702
|
|
|
$
|
2,623,595
|
|
|
$
|
2,358,069
|
|
Increase (reduction)
in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
rate change impact
|
|
|
—
|
|
|
|
666,674
|
|
|
|
—
|
|
Amortization
of credit and gain
|
|
|
196,477
|
|
|
|
163,411
|
|
|
|
163,411
|
|
Stock
based compensation
|
|
|
15,205
|
|
|
|
24,378
|
|
|
|
26,012
|
|
Valuation
Allowance
|
|
|
7,538
|
|
|
|
16,952
|
|
|
|
4,314
|
|
Other
|
|
|
38,938
|
|
|
|
(4,768
|
)
|
|
|
(203,854
|
)
|
State
income tax, net of federal benefit
|
|
|
(226,578
|
)
|
|
|
(329,412
|
)
|
|
|
(319,525
|
)
|
Federal
Credits
|
|
|
(454,985
|
)
|
|
|
—
|
|
|
|
—
|
|
Tax
exempt interest income
|
|
|
(154,315
|
)
|
|
|
(346,196
|
)
|
|
|
(339,994
|
)
|
|
|
$
|
1,108,982
|
|
|
$
|
2,814,634
|
|
|
$
|
1,688,433
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2018 and 2017 are presented below.
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$
|
850,964
|
|
|
$
|
782,714
|
|
State credit carryforward
|
|
|
647,190
|
|
|
|
488,052
|
|
Unrealized gain (loss)
on securities available for sale
|
|
|
472,421
|
|
|
|
284,877
|
|
Passthrough income
|
|
|
68,438
|
|
|
|
70,603
|
|
State net operating
loss carryforward
|
|
|
74,791
|
|
|
|
67,253
|
|
Nonaccrual interest
|
|
|
27,956
|
|
|
|
19,209
|
|
Other real estate owned
|
|
|
—
|
|
|
|
18,157
|
|
Other
|
|
|
6,155
|
|
|
|
5,214
|
|
Total gross deferred
tax assets
|
|
|
2,147,915
|
|
|
|
1,736,079
|
|
Valuation
allowance
|
|
|
(74,791
|
)
|
|
|
(67,253
|
)
|
Total gross deferred
tax assets, net of valuation allowance
|
|
|
2,073,124
|
|
|
|
1,668,826
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets, principally
due to differences in depreciation
|
|
|
(39,294
|
)
|
|
|
(36,424
|
)
|
Deferred loan fees
|
|
|
(32,825
|
)
|
|
|
(31,930
|
)
|
Other
|
|
|
(56,481
|
)
|
|
|
(53,591
|
)
|
Prepaid
expenses
|
|
|
(210
|
)
|
|
|
(210
|
)
|
|
|
|
(128,810
|
)
|
|
|
(122,155
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
1,944,314
|
|
|
$
|
1,546,671
|
|
In
2018, the Company invested in a Federal Rehabilitation Credit. The tax credit was used during the year ended December 31,
2018. Amortization expense recognized for the year ended December 31, 2018 was $354,888. In 2016, the Company invested in a
South Carolina Rehabilitation Credit. The tax credit is included in deferred tax assets and is being amortized. Amortization
expense recognized for the years ended December 31, 2018 and 2017 was $306,105, and is included in other operating expense on
the statement of operations.
There
was a $74,791 valuation allowance for deferred tax assets at December 31, 2018 associated with the Company’s state net operating
loss. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon
the generation of future taxable income during the periods in which those temporary differences become deductible and prior to
their expiration governed by the income tax code. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods during which the deferred income tax assets are expected to be deductible,
management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the
existing valuation allowance at December 31, 2018. The amount of the deferred income tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.
The
Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary
differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured
to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a $666,674 increase
in income tax expense for the year ended December 31, 2017 and a corresponding $666,674 decrease in net deferred tax assets as
of December 31, 2017.
The
Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related
to uncertain tax positions in accordance with applicable regulations.
Tax
returns for 2015 and subsequent years are subject to examination by taxing authorities.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
11.
|
Commitments
and Contingencies
|
We
are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Our 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. We use the same credit policies in making commitments
and conditional obligations as we do 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. If deemed necessary, the amount of collateral obtained upon extension of credit is based on our credit evaluation
of the borrower. Collateral held varies, but may include accounts receivable, negotiable instruments, inventory, property, plant
and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to $96,115,504 and $92,869,285
at December 31, 2018 and 2017, respectively.
Standby
letters of credit represent our obligation to a third party contingent upon the failure by our customer to perform under the terms
of an underlying contract with the third party or obligates us to guarantee or stand as surety for the benefit of the third party.
The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of
goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be
drawn only when the underlying event fails to occur as intended. We can seek recovery of the amounts paid from the borrower. Commitments under standby letters of credit are usually for one year
or less. At December 31, 2018 and 2017, we have recorded no liability for the current carrying amount of the obligation to perform
as a guarantor; as such amounts are not considered material. The maximum potential amount of undiscounted future payments related
to standby letters of credit at December 31, 2018 and 2017 was $1,169,644 and $1,219,644, respectively.
|
12.
|
RELATED
PARTY TRANSACTIONS
|
In
the opinion of management, loans to our executive officers and directors are made on substantially the same terms, including interest
rates and collateral, as those terms prevailing at the time for comparable loans with persons not related to the lender that do
not involve more than the normal risk of collectability. There were no past due loans to our executive officers as of December
31, 2018 and 2017.
The
table below summarizes related party loans.
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Balance
at beginning of the year
|
|
$
|
4,569,780
|
|
|
$
|
3,944,140
|
|
New loans or advances
|
|
|
1,428,098
|
|
|
|
2,879,435
|
|
Repayments
|
|
|
(1,596,169
|
)
|
|
|
(2,253,795
|
)
|
Balance
at the end of the year
|
|
$
|
4,401,710
|
|
|
$
|
4,569,780
|
|
At
December 31, 2018 and 2017, total deposits held by related parties were $8,914,967 and $7,180,958, respectively.
The
Company also leased office space from a related party as discussed in the Premises, Equipment and Leasehold Improvements footnote.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
table below summarizes of the components of other operating expense.
|
|
For
the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Advertising
and business development
|
|
$
|
12,217
|
|
|
$
|
10,844
|
|
|
$
|
16,159
|
|
Supplies
|
|
|
85,984
|
|
|
|
75,965
|
|
|
|
94,006
|
|
Telephone and postage
|
|
|
175,520
|
|
|
|
207,526
|
|
|
|
194,853
|
|
Insurance
|
|
|
43,866
|
|
|
|
44,613
|
|
|
|
42,192
|
|
Professional fees
|
|
|
459,348
|
|
|
|
451,882
|
|
|
|
431,424
|
|
Data processing services
|
|
|
579,666
|
|
|
|
585,497
|
|
|
|
594,550
|
|
State and FDIC insurance
and fees
|
|
|
183,867
|
|
|
|
165,280
|
|
|
|
242,926
|
|
Courier service
|
|
|
54,044
|
|
|
|
82,907
|
|
|
|
96,823
|
|
Amortization of state
tax credit
|
|
|
306,106
|
|
|
|
306,105
|
|
|
|
325,000
|
|
Amortization of federal
tax credit
|
|
|
354,888
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
697,957
|
|
|
|
587,118
|
|
|
|
601,843
|
|
Total
other operating expenses
|
|
$
|
2,953,463
|
|
|
$
|
2,517,737
|
|
|
$
|
2,639,776
|
|
We
have a Stock Incentive Plan which was approved in 1998 with 180,000 (329,422 adjusted for five 10% stock dividends and a 25% stock dividend) shares reserved and a Stock Incentive Plan which was approved in 2010 with
300,000 (363,000 adjusted for two 10% stock dividends) shares reserved. Under both plans, options are periodically granted to
employees at a price not less than the fair market value of the shares at the date of grant. Employees become 20% vested
after five years and then vest 20% each year until fully vested. The right to exercise each such 20% of the options is
cumulative and will not expire until the tenth anniversary of the date of the grant. All employees are eligible to
participate in this plan if the Executive/Long-Range Committee, in its sole discretion, determines that such person has
contributed or can be expected to contribute to our profits or growth.
Option
awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date
of grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes)
model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of our common
stock. The expected term of the options granted shall not exceed ten years from the date of grant (the amount of time options
granted are expected to be outstanding). The risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant.
The
fair value of options granted was determined using the following weighted-average assumptions as of grant date:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Risk free
interest rate
|
|
|
2.88
|
%
|
|
|
2.43
|
%
|
|
|
2.33
|
%
|
Expected life (in years)
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
10
|
|
Expected stock price
volatility
|
|
|
33.69
|
%
|
|
|
34.20
|
%
|
|
|
27.95
|
%
|
Dividend yield
|
|
|
3.61
|
%
|
|
|
4.00
|
%
|
|
|
3.47
|
%
|
There
are currently no options to purchase or shares exercisable under the 1998 Omnibus Stock Incentive Plan as of December 31, 2018.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents a summary of the activity under the 1998 and 2010 Omnibus Stock Incentive Plans for the years ended December
31.
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding, January 1
|
|
|
117,191
|
|
|
$
|
10.79
|
|
|
|
154,085
|
|
|
$
|
10.19
|
|
|
|
201,151
|
|
$
|
9.97
|
|
Granted
|
|
|
11,275
|
|
|
|
18.23
|
|
|
|
10,175
|
|
|
|
20.72
|
|
|
|
11,000
|
|
|
14.54
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
(24,056
|
)
|
|
|
8.96
|
|
|
|
(36,454
|
)
|
|
|
9.57
|
|
|
|
(43,100
|
)
|
|
9.51
|
|
Forfeited
|
|
|
(1,650
|
)
|
|
|
20.02
|
|
|
|
(10,615
|
)
|
|
|
15.83
|
|
|
|
(14,966
|
)
|
|
12.28
|
|
Outstanding, December
31
|
|
|
102,760
|
|
|
$
|
11.89
|
|
|
|
117,191
|
|
|
$
|
10.79
|
|
|
|
154,085
|
|
$
|
10.19
|
|
Exercisable at year
end
|
|
|
32,219
|
|
|
$
|
8.81
|
|
|
|
31,694
|
|
|
$
|
8.77
|
|
|
|
13,882
|
|
$
|
10.35
|
|
Information
has been retroactively adjusted for the 2018 10% stock dividends as applicable.
The
following table presents information pertaining to options outstanding at December 31, 2018.
December
31, 2018
|
|
Exercise
Price
|
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted
Average Exercise Price
|
|
|
Intrinsic
Value of Options Outstanding
|
|
|
Number
of Options Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
|
Intrinsic
Value of Options Exercisable
|
|
$
|
8.61
|
|
|
|
41,075
|
|
|
|
6.33
|
|
|
$
|
8.61
|
|
|
$
|
353,656
|
|
|
|
24,645
|
|
|
$
|
8.61
|
|
|
$
|
277,504
|
|
$
|
8.90
|
|
|
|
2,541
|
|
|
|
1.75
|
|
|
$
|
8.90
|
|
|
$
|
22,615
|
|
|
|
2,033
|
|
|
$
|
8.90
|
|
|
$
|
22,300
|
|
$
|
9.18
|
|
|
|
7,199
|
|
|
|
3.50
|
|
|
$
|
9.18
|
|
|
$
|
66,087
|
|
|
|
2,880
|
|
|
$
|
9.18
|
|
|
$
|
30,783
|
|
$
|
9.65
|
|
|
|
2,420
|
|
|
|
2.25
|
|
|
$
|
9.65
|
|
|
$
|
23,353
|
|
|
|
1,452
|
|
|
$
|
9.65
|
|
|
$
|
14,840
|
|
$
|
9.92
|
|
|
|
1,815
|
|
|
|
3.75
|
|
|
$
|
9.92
|
|
|
$
|
18,005
|
|
|
|
726
|
|
|
$
|
9.92
|
|
|
$
|
7,224
|
|
$
|
12.26
|
|
|
|
5,444
|
|
|
|
5.59
|
|
|
$
|
12.26
|
|
|
$
|
66,743
|
|
|
|
—
|
|
|
$
|
12.26
|
|
|
$
|
—
|
|
$
|
12.40
|
|
|
|
2,419
|
|
|
|
5.00
|
|
|
$
|
12.40
|
|
|
$
|
29,996
|
|
|
|
484
|
|
|
$
|
12.40
|
|
|
$
|
3,614
|
|
$
|
13.05
|
|
|
|
14,217
|
|
|
|
6.33
|
|
|
$
|
13.05
|
|
|
$
|
185,532
|
|
|
|
—
|
|
|
$
|
13.05
|
|
|
$
|
—
|
|
$
|
13.62
|
|
|
|
3,630
|
|
|
|
6.50
|
|
|
$
|
13.62
|
|
|
$
|
49,441
|
|
|
|
—
|
|
|
$
|
13.62
|
|
|
$
|
—
|
|
$
|
14.54
|
|
|
|
5,500
|
|
|
|
7.25
|
|
|
$
|
14.54
|
|
|
$
|
79,970
|
|
|
|
—
|
|
|
$
|
14.54
|
|
|
$
|
—
|
|
$
|
18.23
|
|
|
|
10,450
|
|
|
|
9.25
|
|
|
$
|
18.23
|
|
|
$
|
190,504
|
|
|
|
—
|
|
|
$
|
18.23
|
|
|
$
|
—
|
|
$
|
19.00
|
|
|
|
2,750
|
|
|
|
8.17
|
|
|
$
|
19.00
|
|
|
$
|
52,250
|
|
|
|
—
|
|
|
$
|
19.00
|
|
|
$
|
—
|
|
$
|
19.82
|
|
|
|
3,300
|
|
|
|
8.09
|
|
|
$
|
19.82
|
|
|
$
|
65,406
|
|
|
|
—
|
|
|
$
|
19.82
|
|
|
$
|
—
|
|
|
|
|
|
|
102,760
|
|
|
|
6.26
|
|
|
$
|
11.71
|
|
|
$
|
1,203,558
|
|
|
|
32,220
|
|
|
$
|
11
.71
|
|
|
$
|
356,265
|
|
All
relevant information has been retroactively adjusted for the 2018 10% stock dividends as applicable.
The
total intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016, were $262,415, $311,836,
and $273,979, respectively.
We
recognized compensation cost for the years ended December 31, 2018, 2017 and 2016 in the amount of $72,408, $71,701, and $76,529,
respectively, related to the granted options.
As
of December 31, 2018, there was a total of $248,027 in unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Plan. The cost is expected to be recognized over a weighted average period of 4.19 years.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
15.
|
EMPLOYEE
STOCK OWNERSHIP PLAN AND TRUST
|
We
established an Employee Stock Ownership Plan (“ESOP”) effective January 1, 1989. Any employee of the Bank is eligible
to become a participant in the ESOP upon reaching 21 years of age and credited with one-year of service (1,000 hours of service).
The employee may enter the Plan on the January 1
st
that occurs nearest the date on which the employee first satisfies
the age and service requirements described above. 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.
The
Company recognizes expense when the contribution is approved by the Board of Directors. The total expenses amounted to $420,000,
$375,000, and $345,000 during the years ended December 31, 2018, 2017, and 2016, respectively. The plan currently owns 308,613
shares of common stock of Bank of South Carolina Corporation.
A
participant vests in the ESOP based upon the participant’s credited years of service. The vesting schedule is as follows:
●
|
1
Year of Service
|
0%
Vested
|
●
|
2 Years of Service
|
25%
Vested
|
●
|
3 Years of Service
|
50%
Vested
|
●
|
4 Years of Service
|
75%
Vested
|
●
|
5 Years of Service
|
100% Vested
|
Periodically,
the Internal Revenue Service “IRS” requires a restatement of a qualified retirement plan to ensure that the plan document
includes provisions required by legislative and regulatory changes made since the last restatement. There have been no substantive
changes to the plan. The Board of Directors approved a restated plan, on January 26, 2012 (incorporated as Exhibit 10.5 in the
2011 10-K). The Plan was submitted to the IRS for approval and a determination letter was issued September 26, 2013, stating that
the plan satisfies the requirements of Code Section 4975(e)(7). On January 26, 2017, the Board of Directors approved a restated
plan (incorporated as Exhibit 10.6 in the 2016 10-K). The Plan was submitted to the IRS for approval and a determination letter
was issued November 17, 2017, stating that the plan satisfies the requirements of Code Section 4975(e)(7).
The
Bank’s ability to pay dividends to the Company is restricted by the laws and regulations of the State of
South Carolina. Generally, these restrictions allow the Bank to pay dividends from current earnings without the prior
written consent of the South Carolina Commissioner of Banking, if it received a satisfactory rating at its most recent
examination. Cash dividends when declared, are paid by the Bank to the Company for distribution to shareholders of the
Company. The Bank paid dividends of $3.8 million, $2.7 million, and $2.3 million to the Company
during the years ended December 31, 2018, 2017 and 2016, respectively.
On April 10, 2018,
the Company’s Board of Directors declared a ten percent stock dividend to our shareholders. The record date was April
30, 2018 and the distribution date was May 31, 2018. Earnings per share and average shares outstanding have been adjusted for
all periods presented to retroactively reflect the stock dividend in our consolidated financial statements. Total shares
outstanding increased by 499,095 shares.
|
17.
|
Income
Per Common Share
|
Basic
income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted
income per share is computed by dividing net income by the weighted-average number of common shares and potential common
shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and
the average market price of common stock. Earnings per share and average shares outstanding have been adjusted for all
periods presented to retroactively reflect the ten percent stock dividend declared on April 10, 2018.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table is a summary of the reconciliation of average shares outstanding for the years ended December 31.
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,922,934
|
|
|
$
|
4,901,825
|
|
|
$
|
5,247,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
5,500,027
|
|
|
|
5,471,001
|
|
|
|
5,428,884
|
|
Effect of dilutive
shares
|
|
|
88,985
|
|
|
|
97,492
|
|
|
|
132,855
|
|
Weighted average
shares outstanding - diluted
|
|
|
5,589,012
|
|
|
|
5,568,493
|
|
|
|
5,561,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
1.26
|
|
|
$
|
0.90
|
|
|
$
|
0.97
|
|
Earnings per share - diluted
|
|
$
|
1.24
|
|
|
$
|
0.88
|
|
|
$
|
0.94
|
|
|
18.
|
Regulatory
Capital Requirements
|
The
Company and the Bank are subject to various capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Company and the Bank’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification are also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
Current
quantitative measures established by regulation to ensure capital adequacy require that we 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. We believe that the Company and the Bank meet all capital adequacy requirements to which they were subject
at December 31, 2018 and 2017.
On
July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s
(“BCBS”) capital guidelines for U.S. banks (“Basel III”). Following the actions by the Federal Reserve,
the FDIC also approved regulatory capital requirements on July 9, 2013. The FDIC’s rule is identical in substance to the
final rules issued by the Federal Reserve Bank.
Basel
III became effective on January 1, 2015. The purpose is to improve the quality and increase the quantity of capital for all banking
organizations. The minimum requirements for the quantity and quality of capital were increased. The rule includes a new common
equity Tier 1 capital to risk-weighted assets ratio of 4.50% and a common equity Tier 1 capital conservation buffer of 2.50% of
risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00% to 6.00% and
requires a minimum leverage ratio of 4.00%. In addition, the rule also implements strict eligibility criteria for regulatory capital
instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. All final rule requirements
will be phased in over a multi-year schedule. The capital conservation buffer in effect for the year ended December 31, 2018 was
8.39%.
At
December 31, 2018, the Bank was categorized as “well capitalized” under Basel III. To be categorized as “well
capitalized” the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital
and Tier 1 leverage ratios of 10.00%, 8.00%, 6.50%, and 5.00%, respectively, and to be categorized as “adequately capitalized,”
the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital, and Tier 1 leverage
ratios of 8.00%, 6.00%, 4.50%, and 4.00%, respectively.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables present the actual and required capital amounts and ratios for the Company and Bank at December 31, 2018
and 2017:
|
|
December
31, 2018
|
|
|
|
Actual
|
|
|
For
Capital
Adequacy Purposes
|
|
|
To
Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
(
in thousands
)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
50,657
|
|
|
|
16.69
|
%
|
|
$
|
24,280
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
$
|
49,695
|
|
|
|
16.39
|
%
|
|
$
|
24,262
|
|
|
|
8.00
|
%
|
|
$
|
30,328
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
46,864
|
|
|
|
15.44
|
%
|
|
$
|
18,210
|
|
|
|
6.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
$
|
45,898
|
|
|
|
15.13
|
%
|
|
$
|
18,197
|
|
|
|
6.00
|
%
|
|
$
|
24,262
|
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
46,864
|
|
|
|
10.76
|
%
|
|
$
|
17,428
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
$
|
45,898
|
|
|
|
10.54
|
%
|
|
$
|
17,419
|
|
|
|
4.00
|
%
|
|
$
|
21,773
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
46,864
|
|
|
|
15.44
|
%
|
|
$
|
13,658
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
$
|
45,898
|
|
|
|
15.13
|
%
|
|
$
|
13,647
|
|
|
|
4.50
|
%
|
|
$
|
13,647
|
|
|
|
4.50
|
%
|
|
|
December
31, 2017
|
|
|
|
Actual
|
|
|
For
Capital
Adequacy Purposes
|
|
|
To
Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
(
in thousands
)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
47,986
|
|
|
|
15.97
|
%
|
|
$
|
23,213
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
$
|
47,100
|
|
|
|
15.69
|
%
|
|
$
|
24,020
|
|
|
|
8.00
|
%
|
|
$
|
30,025
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
44,253
|
|
|
|
14.73
|
%
|
|
$
|
17,410
|
|
|
|
6.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
$
|
43,344
|
|
|
|
14.44
|
%
|
|
$
|
18,015
|
|
|
|
6.00
|
%
|
|
$
|
24,020
|
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
44,253
|
|
|
|
10.01
|
%
|
|
$
|
16,738
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
$
|
43,344
|
|
|
|
9.82
|
%
|
|
$
|
17,661
|
|
|
|
4.00
|
%
|
|
$
|
22,077
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
44,253
|
|
|
|
14.73
|
%
|
|
$
|
13,058
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
$
|
43,344
|
|
|
|
14.44
|
%
|
|
$
|
13,511
|
|
|
|
4.50
|
%
|
|
$
|
19,516
|
|
|
|
6.50
|
%
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
19.
|
Disclosures
Regarding Fair Value of Financial Instruments
|
|
Fair value measurements
apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring
basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or
most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction
is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities
that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. GAAP establishes
a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable
inputs. Observable inputs, which are developed based on market data we have obtained from independent sources, are ones that
market participants would use in pricing an asset or liability. Unobservable inputs, which are developed based on the best
information available in the circumstances, reflect our estimate of assumptions that market participants would use in pricing
an asset or liability.
|
|
|
|
The fair value hierarchy
gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level
1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down
into three levels based on the reliability of inputs as follows:
|
|
●
|
Level 1: valuation
is based upon unadjusted quoted market prices for identical instruments traded in active markets.
|
|
●
|
Level 2: valuation
is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or
similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions
are observable in the market or can be corroborated by market data.
|
|
●
|
Level 3: valuation
is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants
would use in determining fair value.
|
|
Fair value estimates
are made at a specific point of time, based on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from offering for sale our entire holdings of a particular
financial instrument. Because no active market exists for a significant portion of our financial instruments, fair value estimates
are based on judgements regarding future expected loss experience, current economic conditions, current interest rates and
prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value also would affect significantly the estimates. In addition,
the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of these estimates.
|
|
|
|
The following paragraphs
describe the valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:
|
|
|
|
Investment Securities
Available for Sale
|
|
|
|
Investment securities
are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices are not available,
fair value is measured using independent pricing models or other model-based valuation techniques such as the present value
of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit
loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by
dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government
sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities
in less liquid markets.
|
|
Derivative Instruments
|
|
|
|
Derivative
instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on
the change in the value of the underlying loan between the commitment date and the end of the period. We classify these
instruments as Level 3.
We
had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments
consisting of fixed rate conforming loan commitments with interest rate locks and commitments to sell fixed rate conforming
loans on a best efforts basis. We do not currently engage in hedging activities. Based on the short-term fair value of
mortgage loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial
statements as of December 31, 2018 and 2017.
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Assets and liabilities
measured at fair value on a recurring basis at December 31, 2018 and 2017 are in the following table.
|
|
|
Balance
as of December 31, 2018
|
|
|
|
Quoted Market Price in Active Markets
Level
1
|
|
|
Significant Other Observable Inputs
Level
2
|
|
|
Significant Unobservable Inputs
Level
3
|
|
|
Total
|
|
U.S. Treasury
Notes
|
|
$
|
32,356,634
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,356,634
|
|
Government-Sponsored
Enterprises
|
|
|
—
|
|
|
|
59,369,280
|
|
|
|
—
|
|
|
|
59,369,280
|
|
Municipal
Securities
|
|
|
—
|
|
|
|
21,701,005
|
|
|
|
6,241,955
|
|
|
|
27,942,960
|
|
Total
|
|
$
|
32,356,634
|
|
|
$
|
81,070,285
|
|
|
$
|
6,241,955
|
|
|
$
|
119,668,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2017
|
|
|
|
Quoted
Market Price in Active Markets
Level 1
|
|
|
Significant Other Observable Inputs
Level
2
|
|
|
Significant Unobservable Inputs
Level
3
|
|
|
Total
|
|
U.S. Treasury Notes
|
|
$
|
35,559,845
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,559,845
|
|
Government-Sponsored
Enterprises
|
|
|
—
|
|
|
|
63,556,504
|
|
|
|
—
|
|
|
|
63,556,504
|
|
Municipal
Securities
|
|
|
—
|
|
|
|
28,675,012
|
|
|
|
11,458,889
|
|
|
|
40,133,901
|
|
Total
|
|
$
|
35,559,845
|
|
|
$
|
92,231,516
|
|
|
$
|
11,458,889
|
|
|
$
|
139,250,250
|
|
There
were no liabilities recorded at fair value on a recurring basis as of December 31, 2018 or 2017.
The
following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the years ended December 31, 2018 and 2017.
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Beginning
balance
|
|
$
|
11,458,889
|
|
|
$
|
13,977,857
|
|
Total realized/unrealized
gains (losses)
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
—
|
|
|
|
—
|
|
Included in other comprehensive
income
|
|
|
150,993
|
|
|
|
137,751
|
|
Purchases, issuances,
and settlements, net of maturities
|
|
|
(5,367,927
|
)
|
|
|
(2,656,719
|
)
|
Transfers
in and/or out of Level 3
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
6,241,955
|
|
|
$
|
11,458,889
|
|
There
were no transfers between fair value levels in 2018 or 2017.
The
following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring
basis:
OREO
Loans,
secured by real estate, are adjusted to the lower of the recorded investment in the loan or the fair value of the real estate
upon transfer to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent
market prices, appraised values of the collateral or our estimation of the value of the collateral. When the fair value of the
collateral is based on an observable market price or a current appraisal, we record the asset as nonrecurring Level 2. When an
appraised value is not available or we determine the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, we record the asset as nonrecurring Level 3.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired
Loans
Impaired
loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to
sell is the most frequently used method. Typically, we review the most recent appraisal and if it is over 12 to 18 months old
we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location
of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in
the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis.
Specifically, as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary
market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming
or immediately following the determination that the loan is impaired.
However,
as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and surrounding areas
and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby
the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar
properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These
valuations are reviewed and updated on a quarterly basis.
In
accordance with ASC 820,
Fair Value Measurement,
impaired loans, where an allowance is established based on the fair value
of collateral, require classification in the fair value hierarchy. At December 31, 2018 and December 31, 2017, substantially all
of the impaired loans were evaluated based on the fair value of the collateral. These impaired loans are classified as Level 3.
Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value.
Mortgage
Loans to be Sold
Mortgage
loans to be sold carried at the lower of cost or market value. The fair values of mortgage loans to be sold are based on current
market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates fair
value. These loans are classified as Level 2.
Certain
assets and liabilities are measured at fair value on a ongoing basis; that is, the instruments are not measured at fair value
on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of
impairment). The following tables present information about certain assets and liabilities measured at fair value on a nonrecurring
basis at December 31, 2018 and 2017.
|
|
December 31, 2018
|
|
|
Quoted
Market Price in Active Markets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Total
|
|
Impaired
loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,223,028
|
|
|
$
|
2,223,028
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loans
held for sale
|
|
|
—
|
|
|
|
1,199,438
|
|
|
|
—
|
|
|
|
1,199,438
|
|
Total
|
|
$
|
—
|
|
|
$
|
1,199,438
|
|
|
$
|
2,223,028
|
|
|
$
|
3,422,466
|
|
|
|
December 31, 2017
|
|
|
Quoted
Market
Price in Active Markets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Total
|
|
Impaired
loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,735,051
|
|
|
$
|
1,735,051
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
435,479
|
|
|
|
435,479
|
|
Mortgage loans to be sold
|
|
|
—
|
|
|
|
2,093,723
|
|
|
|
—
|
|
|
|
2,093,723
|
|
Total
|
|
$
|
—
|
|
|
$
|
2,093,723
|
|
|
$
|
2,170,530
|
|
|
$
|
4,264,253
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There
were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2018 or 2017.
The
following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31,
2018:
|
|
Inputs
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
General
Range
of Inputs
|
Impaired
Loans
|
|
Appraisal
Value/Comparison Sales/Other Estimates
|
|
Appraisals
and/or Sales of Comparable Properties
|
|
Appraisals
Discounted 10% to 20% for Sales Commissions and Other Holding Costs
|
|
|
|
|
|
|
|
Other
Real Estate Owned
|
|
Appraisal
Value/Comparison Sales/Other Estimates
|
|
Appraisals
and/or Sales of Comparable Properties
|
|
Appraisals
Discounted 10% to 20% for Sales Commissions and Other Holding Costs
|
Accounting
standards require disclosure of fair value information for all of our assets and liabilities that are considered financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to estimate fair value.
Under
the accounting standard, 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 of existing financial instruments do not represent the underlying value of those instruments on our
books.
The
following paragraphs describe the methods and assumptions we use in estimating the fair values of financial instruments:
a.
Cash and due from banks, interest-bearing deposits at the Federal Reserve Bank
The
carrying value approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.
b.
Investment securities available for sale
Investment
securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices,
if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions.
c.
Loans
During
the first quarter of 2018, the Company adopted ASU 2016-01,
Recognition and Measurement of Financial Assets and Liabilities.
The amendments included within this standard, which are applied prospectively, require the Company to measure and disclose
fair value of balance sheet financial instruments using an exit price notion. Prior to adopting the amendments included in the
standard, the Company measured fair value under an entry price notion. The entry price notion previously applied by the Company
used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument.
The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk,
and market factors that sometimes exist in exit prices in dislocated markets.
As
of December 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures
to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously
applied entry price notion. The fair value of the Company’s loan portfolio has always included a credit risk assumption
in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that
a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair
valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans,
impaired loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under
the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow
model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily
the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced
credit risk provides an estimated exit price for the Company’s loan portfolio.
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For
variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.
Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.
As
of December 31, 2017, the fair value of the Company’s loan portfolio included a credit risk assumption in the determination
of the fair value of its loans. This credit risk assumption was intended to approximate the fair value that a market participant
would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented
approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other
loans. The results are then adjusted to account for credit risk. For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted
cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted
cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality.
The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate
credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price as of December
31, 2017.
d.
Deposits
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, using interest rates currently being offered on the deposit products. 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.
Accrued interest receivable and payable
Since
these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are
deemed a reasonable estimate of fair value.
f.
Loan commitments
Estimates
of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the
credit standing on the counterparties.
The
following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments
as of December 31, 2018 and 2017, respectively.
|
Fair Value Measurements at December 31, 2018
|
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and
due from banks
|
|
$
|
6,325,457
|
|
|
$
|
6,325,457
|
|
|
$
|
6,325,457
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest-bearing
deposits at the Federal Reserve
|
|
|
25,506,784
|
|
|
|
25,506,784
|
|
|
|
25,506,784
|
|
|
|
—
|
|
|
|
—
|
|
Investment securities
available for sale
|
|
|
119,668,874
|
|
|
|
119,668,874
|
|
|
|
32,356,634
|
|
|
|
81,070,285
|
|
|
|
6,241,955
|
|
Mortgage loans to be
sold
|
|
|
1,199,438
|
|
|
|
1,199,438
|
|
|
|
—
|
|
|
|
1,199,438
|
|
|
|
—
|
|
Loans, net
|
|
|
270,449,936
|
|
|
|
263,780,751
|
|
|
|
—
|
|
|
|
|
|
|
|
263,780,751
|
|
Accrued interest receivable
|
|
|
1,561,915
|
|
|
|
1,561,915
|
|
|
|
—
|
|
|
|
1,561,915
|
|
|
|
—
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
347,909,663
|
|
|
|
347,909,663
|
|
|
|
—
|
|
|
|
347,909,663
|
|
|
|
—
|
|
Time deposits
|
|
|
34,468,725
|
|
|
|
38,747,898
|
|
|
|
—
|
|
|
|
38,747,898
|
|
|
|
—
|
|
Accrued interest payable
|
|
|
163,876
|
|
|
|
163,876
|
|
|
|
—
|
|
|
|
163,876
|
|
|
|
—
|
|
|
|
Fair
Value Measurements at December 31, 2017
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
8,486,025
|
|
|
$
|
8,486,025
|
|
|
$
|
8,486,025
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest-bearing
deposits at the Federal Reserve
|
|
|
24,034,194
|
|
|
|
24,034,194
|
|
|
|
24,034,194
|
|
|
|
—
|
|
|
|
—
|
|
Investment
securities available for sale
|
|
|
139,250,250
|
|
|
|
139,250,250
|
|
|
|
35,559,845
|
|
|
|
92,231,516
|
|
|
|
11,458,889
|
|
Mortgage
loans to be sold
|
|
|
2,093,723
|
|
|
|
2,093,723
|
|
|
|
—
|
|
|
|
2,093,723
|
|
|
|
—
|
|
Net
loans
|
|
|
266,305,242
|
|
|
|
265,277,204
|
|
|
|
—
|
|
|
|
—
|
|
|
|
265,277,204
|
|
Accrued
interest receivable
|
|
|
1,720,920
|
|
|
|
1,720,920
|
|
|
|
—
|
|
|
|
1,720,920
|
|
|
|
—
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
360,967,884
|
|
|
|
360,967,884
|
|
|
|
—
|
|
|
|
360,967,884
|
|
|
|
—
|
|
Time
deposits
|
|
|
41,920,416
|
|
|
|
40,722,870
|
|
|
|
—
|
|
|
|
40,722,870
|
|
|
|
—
|
|
Accrued
interest payable
|
|
|
96,190
|
|
|
|
96,190
|
|
|
|
—
|
|
|
|
96,190
|
|
|
|
—
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20.
|
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. The Company’s principal asset is its investment in its Bank subsidiary. The Company’s
condensed statements of financial condition as of December 31, 2018 and 2017, and the related condensed statements of income
and cash flows for the years ended December 31, 2018, 2017 and 2016, are as follows:
|
Condensed
Statements of Financial Condition
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,007,501
|
|
|
$
|
947,216
|
|
Investment
in wholly-owned bank subsidiary
|
|
|
45,103,068
|
|
|
|
42,437,503
|
|
Other
assets
|
|
|
178,629
|
|
|
|
127,274
|
|
Total
assets
|
|
$
|
46,289,198
|
|
|
$
|
43,511,993
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’
equity
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$
|
826,637
|
|
|
$
|
747,358
|
|
Shareholders’
equity
|
|
|
45,462,561
|
|
|
|
42,764,635
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
46,289,198
|
|
|
$
|
43,511,993
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed
Statements of Income
|
|
|
|
For the years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Interest
income
|
|
$
|
1,157
|
|
|
$
|
484
|
|
|
$
|
571
|
|
Net operating expenses
|
|
|
(224,316
|
)
|
|
|
(189,872
|
)
|
|
|
(177,612
|
)
|
Dividends received
from bank
|
|
|
3,775,000
|
|
|
|
2,685,000
|
|
|
|
2,340,000
|
|
Equity
in undistributed earnings of subsidiary
|
|
|
3,371,093
|
|
|
|
2,406,213
|
|
|
|
3,084,104
|
|
Net
income
|
|
$
|
6,922,934
|
|
|
$
|
4,901,825
|
|
|
$
|
5,247,063
|
|
Condensed
Statements of Cash Flows
|
|
|
|
For the years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,922,934
|
|
|
$
|
4,901,825
|
|
|
$
|
5,247,063
|
|
Stock-based
compensation expense
|
|
|
72,408
|
|
|
|
71,701
|
|
|
|
76,529
|
|
Equity
in undistributed earnings of subsidiary
|
|
|
(3,371,093
|
)
|
|
|
(2,406,213
|
)
|
|
|
(3,084,104
|
)
|
Decrease
in other assets
|
|
|
(51,355
|
)
|
|
|
(51,197
|
)
|
|
|
(55,923
|
)
|
(Decrease)
Increase in other liabilities
|
|
|
(6,333
|
)
|
|
|
151
|
|
|
|
—
|
|
Net
cash provided by operating activities
|
|
|
3,566,561
|
|
|
|
2,516,267
|
|
|
|
2,183,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(3,699,845
|
)
|
|
|
(2,832,489
|
)
|
|
|
(2,613,715
|
)
|
Stock
options exercised
|
|
|
193,569
|
|
|
|
340,843
|
|
|
|
405,749
|
|
Net
cash used in financing activities
|
|
|
(3,506,276
|
)
|
|
|
(2,491,646
|
)
|
|
|
(2,207,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
60,285
|
|
|
|
24,621
|
|
|
|
(24,401
|
)
|
Cash
at the beginning of the year
|
|
|
947,216
|
|
|
|
922,595
|
|
|
|
946,996
|
|
Cash
at the end of the year
|
|
$
|
1,007
,501
|
|
|
$
|
947,216
|
|
|
$
|
922,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure for non-cash investing and financing activity
Change in dividends payable
|
|
$
|
85,615
|
|
|
$
|
53,340
|
|
|
$
|
74,706
|
|
BANK
OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
21.
|
Quarterly
Results of Operations (unaudited)
|
The
tables below represent the quarterly results of operations for the years ended December 31, 2018 and 2017, respectively:
|
|
2018
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
Total
interest and fee income
|
|
$
|
4,727,449
|
|
|
$
|
4,665,586
|
|
|
$
|
4,423,867
|
|
|
$
|
4,320,009
|
|
Total
interest expense
|
|
|
249,425
|
|
|
|
195,434
|
|
|
|
139,697
|
|
|
|
109,830
|
|
Net
interest income
|
|
|
4,478,024
|
|
|
|
4,470,152
|
|
|
|
4,284,170
|
|
|
|
4,210,179
|
|
Provision
for loan losses
|
|
|
95,000
|
|
|
|
100,000
|
|
|
|
75,000
|
|
|
|
55,000
|
|
Net
interest income after provision for loan losses
|
|
|
4,383,024
|
|
|
|
4,370,152
|
|
|
|
4,209,170
|
|
|
|
4,155,179
|
|
Total
other income
|
|
|
532,891
|
|
|
|
458,693
|
|
|
|
555,096
|
|
|
|
447,945
|
|
Total
other expense
|
|
|
2,970,411
|
|
|
|
2,816,474
|
|
|
|
2,651,515
|
|
|
|
2,641,834
|
|
Income
before income tax expense
|
|
|
1,945,504
|
|
|
|
2,012,371
|
|
|
|
2,112,751
|
|
|
|
1,961,290
|
|
Income
tax expense
|
|
|
139,310
|
|
|
|
234,218
|
|
|
|
386,394
|
|
|
|
349,060
|
|
Net
income
|
|
$
|
1,806,194
|
|
|
$
|
1,778,153
|
|
|
$
|
1,726,357
|
|
|
$
|
1,612,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.33
|
|
|
$
|
0.32
|
|
|
$
|
0.31
|
|
|
$
|
0.29
|
|
Diluted
income per common share
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
|
$
|
0.31
|
|
|
$
|
0.29
|
|
|
|
2017
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
Total
interest and fee income
|
|
$
|
4,327,409
|
|
|
$
|
4,117,032
|
|
|
$
|
3,933,285
|
|
|
$
|
3,791,421
|
|
Total
interest expense
|
|
|
109,934
|
|
|
|
110,625
|
|
|
|
106,522
|
|
|
|
96,782
|
|
Net
interest income
|
|
|
4,217,475
|
|
|
|
4,006,407
|
|
|
|
3,826,763
|
|
|
|
3,694,639
|
|
Provision
for loan losses
|
|
|
2,500
|
|
|
|
20,000
|
|
|
|
30,000
|
|
|
|
2,500
|
|
Net
interest income after provision for loan losses
|
|
|
4,214,975
|
|
|
|
3,986,407
|
|
|
|
3,796,763
|
|
|
|
3,692,139
|
|
Other
income
|
|
|
538,236
|
|
|
|
481,882
|
|
|
|
696,479
|
|
|
|
551,874
|
|
Other
expense
|
|
|
2,696,005
|
|
|
|
2,484,538
|
|
|
|
2,590,123
|
|
|
|
2,471,630
|
|
Income
before income tax expense
|
|
|
2,057,206
|
|
|
|
1,983,751
|
|
|
|
1,903,119
|
|
|
|
1,772,383
|
|
Income
tax expense
|
|
|
1,208,507
|
|
|
|
543,098
|
|
|
|
516,734
|
|
|
|
546,295
|
|
Net
income
|
|
$
|
848,699
|
|
|
$
|
1,440,653
|
|
|
$
|
1,386,385
|
|
|
$
|
1,226,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.15
|
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
Diluted
income per common share
|
|
$
|
0.15
|
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|