The Bank of South Carolina
Annual Report 2017

Plain-text annual report

2017 Annual Report Strong. Secure. Stable. Our Mission: In order to remain the preeminent community bank in this market, The Bank of South Carolina must leverage its capital and, at the same time, maintain a proper balance between capital, earnings, asset quality, and growth, while emphasizing its two primary competitive advantages: its people, and its knowledge of the marketplace. Since the Bank’s inception, the Bank has focused on the following three markets: local businesses and their owners and managers, professionals, and individuals who desire a higher level of service. To penetrate these markets, the Bank has sought to differentiate itself with personal service, responsiveness, attention to detail, and long- term customer relationships. In addition, the directors, officers, and employees are committed to improving the growth and welfare of the entire community through personal involvement in community organizations and activities. We are committed to remaining independent, to growing the share of the market we are in, to weaving ourselves tightly within the fabric of our community, and to remaining the bank of choice in Charleston. Our Profile: The Bank of South Carolina is a state-chartered financial institution with depository accounts insured by the FDIC. The Bank was organized on October 23, 1986, and our first office opened for business on February 26, 1987. It is a wholly-owned subsidiary of Bank of South Carolina Corporation which became effective on April 17, 1995. These statements have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation. 5-Year Financial Performance YEARS ENDED DECEMBER 31 2017 2016 2015 2014 2013 Net Income $ 4,901,825 $ 5,247,063 $ 4,884,288 $ 4,398,820 $ 4,076,924 Performance Ratios: Return on Average Equity Return on Average Assets Average Equity to Average Assets Net Interest Margin Net Charge-offs to Average Loans Allowance for Loan Losses as a Percentage of Total Loans (1) Per Share Data: Basic Income Diluted Income Year-End Book Value Cash Dividends Declared Dividend Payout Ratio (1) Excluding mortgage loans to be sold 11.37% 1.14% 10.07% 3.76% 0.01% 12.65% 1.28% 10.10% 3.71% 0.05% 12.64% 1.29% 10.18% 3.72% 0.04% 12.12% 1.23% 10.11% 3.70% 0.02% 11.72% 1.23% 10.48% 3.79% 0.15% 1.43% 1.48% 1.41% 1.42% 1.51% $0.99 $0.97 $8.57 $0.58 $1.06 $1.04 $8.19 $0.54 $0.99 $0.96 $7.96 $0.52 $0.90 $0.87 $7.49 $0.62 $0.83 $0.83 $7.79 $0.50 58.87% 50.86% 49.94% 62.88% 54.63% Total Loans (2) Earning Assets s d n a s u o h t n i s d n a s u o h t n i $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 2013 2014 2015 2016 2017 (2) Including mortgage loans to be sold Total Deposits $500,000 $400,000 $300,000 $200,000 $100,000 $0 s d n a s u o h t n i s d n a s u o h t n i $500,000 $400,000 $300,000 $200,000 $100,000 $0 $50,000 $40,000 $30,000 $20,000 $10,000 $0 2013 2014 2015 2016 2017 Shareholders’ Equity 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Bank of South Carolina Corporation Annual Report 2017 1 To Our Stockholders, Customers, Employees and Friends, We are very proud of the Bank’s performance in 2017. What would have resulted in our most profitable year in our 30- plus year history, ended up being our second best yet. As a result of accounting requirements under the new tax reform legislation, we were required to write down our deferred tax asset by approximately $660,000 in 2017. In 2017, we were again rated a 5-Star Bank by Bauer Financial and were rated at or near the top for being the #1 community bank in South Carolina by the FMC Consulting Group. Deposits exceeded $400 million for the first time in a reporting period, and for the fourth time in six years, we were able to increase our quarterly cash dividend. For us to continue our success and perpetuate what we are doing, we are compelled to invest and reinvest in our young bankers. This is certainly not an inexpensive endeavor; but then again, what great education isn’t? We have consistently budgeted for banking schools, seminars, webinars, on- line course work, and other training to prepare the next generation of BKSC bankers – bankers that work with-in, and, as a team. Of note, approximately 22% of our employees are either currently enrolled or have graduated from the South Carolina Bankers Association’s Bankers School - a three-year commitment by both the Bank and the participant. I am very Deposits exceeded $400 million for the first time in a reporting period, and for the fourth time in six years, we were able to increase our quarterly cash dividend. proud to announce that our own Ford Menefee, Senior Vice President, will be the Chairman of the Banker’s School in 2019. In 2012, I stated, “Our Bank was born with the highest regard for corporate governance.” One of the many aspects of governance is independence – both externally and internally. Externally, we sail our own ship and make our own decisions locally. Internally, our credit, audit, compliance, and risk areas are independent of management and report to our Board of Directors and Audit & Compliance Committee, respectively. These walls are not veiled and remain strong – to the extent that it has been noted on numerous occasions by our many examiners. We recently formalized our Risk Department and moved to it the duties and responsibilities of audit and compliance. Lauren Nilan, Vice President, heads up this important area within the Bank. Life and banking are complicated enough without the need to know about Bitcoin, blockchain platforms, and cryptocurrencies. The Bank of South Carolina continues to concentrate on fundamentals and understanding the very essence of what banking is, and what it means to our customers. Banking is not complex, remains basic, and is where fundamentals never change. Every bank has a reason to exist and a purpose within its community. As we begin our journey through the next 30 years, we are constantly reminded of why we do exist – to serve the citizens and businesses of the South Carolina Lowcountry who understand and appreciate the long-term and often generational nature of relationship banking. Our purpose is to remain relevant and exceed expectations in a shrinking, homogenous financial arena and to fill a void in service to both our customers and our community. The fundamentals of our Bank remain strong and we are very encouraged that the collective impact of tax reform will complement our business model and result in even better performance in the future – performance we believe will result in greater value to our employees, customers, and shareholders. $4.9m 2017 Earnings 58.87% 2017 Dividend Payout Ratio 2 Bank of South Carolina Corporation Annual Report 2017 The Bank of South Carolina continues to concentrate on fundamentals and understanding the very essence of what banking is, and what it means to our customers. Fleetwood S. Hassell Douglas H. Sass Eugene H. Walpole, IV Susanne K. Boyd Hugh C. Lane, Jr. President & CEO Executive Vice President Executive Vice President Executive Vice President Chairman & Senior Lender & CFO & COO 1.14% 2017 Return on Assets 11.37% 2017 Return on Equity Bank of South Carolina Corporation Annual Report 2017 3 Our Community Strong. Secure. Stable. Our Commitment to the Community By definition, a community bank supports and is reflective of the market it serves. The directors, officers and employees of The Bank of South Carolina have an extraordinary lifelong history of involvement in enhancing the growth, welfare and quality of life in the Lowcountry, both individually and corporately. Our contribution does not begin and end with a check written to a charitable organization. Our people not only make a difference for our customers, but we actively make a difference in a number of civic and community groups, including the following: Ashley Hall School Association of the Blind and Visually Impaired Cainhoy Athletic Soccer Club Charleston Breakfast Rotary Club Charleston Community Sailing Charleston Museum Charleston Parks Conservancy Charleston Waterkeeper Charleston Young Life Coastal Conservation Association of South Carolina College of Charleston Foundation Driving for Downs Golf Tournament Exchange Club of Charleston Florence Crittenton Programs of SC Flower Guild at St. Andrews Anglican Church Gibbes Museum of Art HALOS - Helping and Lending Outreach Support Healing Farms Ministries Huguenot Society of South Carolina Junior Achievement Junior League Kiwanis Club of Charleston Kiwanis Club of Summerville Komen Lowcountry Race for the Cure Low Country Mustang Club Lowcountry Community Chaplaincy Lowcountry Food Bank Lowcountry Land Trust Medical Outreach Clinic of Summerville Mortgage Bankers Association of the Carolinas Mortgage Lenders Association of Greater Charleston Mt. Pleasant Chamber of Commerce Mt. Pleasant Rotary Club MUSC Children’s Hospital Burned Children’s Fund Operation Home Pawmetto Lifeline Porter Gaud Board of Trustees Preservation Society of Charleston Rotary Club of Charleston Rotary Club of St. Andrews SC Community Loan Fund Sculpture in the South Shadowmoss Swim Team Society of Colonial Wars in The State Of South Carolina Soul of the Lowcountry South Carolina Bankers Association South Carolina Chamber of Commerce South Carolina Independent Colleges and Universities South Carolina Manufacturers Alliance South Carolina Society State Board of Financial Institutions Summerville Chamber of Commerce Summerville Citadel Club Summerville DREAM Summerville Rotary Evening Club Summerville Rotary Lunch Club Summerville Sweet Tea Half Marathon & 10K The Center for Heirs’ Property Preservation The Citadel Foundation The Metro Exchange Club of Charleston The Singers of Summerville The Stray Dog Society Tricounty Family Ministries Trident United Way VFW Post 3137 Wadmalaw Island Land Planning Committee West Ashley United Women of the Traditional Service Group at St. Andrews Anglican Church 4 Bank of South Carolina Corporation Annual Report 2017 March 6, 2018 Dear Shareholder: The Annual Meeting of Shareholders of Bank of South Carolina Corporation will be held at 2:00 p.m. on Tuesday, April 10, 2018, at the Bank of South Carolina headquarters located at 256 Meeting Street, Charleston, South Carolina. Enclosed you will find the formal Notice of Annual Meeting of Shareholders, Proxy Card, and Proxy Statement detailing the matters which will be acted upon. Again this year, we are incorporating the enclosed Annual Report on Form 10K, as filed with the Securities and Exchange Commission, as our Annual Report to Shareholders. We urge you to be a part of your Company by voting on the business to come before the Annual Meeting. This year we are giving you three ways to cast your vote. Even if you plan to attend the meeting we encourage you to vote as soon as possible by using one of the following: • Vote by Internet –www.proxyvote.com • Vote by Phone – 1-800-690-6903 • Vote by Mail – Use the postage paid envelope provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717 We appreciate your continued interest and investment in Bank of South Carolina Corporation. Sincerely, Fleetwood S. Hassell President & CEO P.O. BOX 538 : CHARLESTON, SC 29402 : P 843-724-1500 : F 843-724-1513 SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant (cid:95) Filed by a Party other than the Registrant Check the appropriate box: Preliminary Proxy Statement Confidential, for use of the Commission only (as permitted by Rule 14a-6(e) (2)) (cid:95)(cid:3) Definitive Proxy Statement Definitive Additional Materials Soliciting Material under Rule 14a-12 Bank of South Carolina Corporation (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): (cid:95) No fee required. Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0- 11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: Fee paid previously with preliminary materials. Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: PROXY MATERIAL OF BANK OF SOUTH CAROLINA CORPORATION NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 10, 2018 Dear Shareholder: I cordially invite you to attend the Annual Meeting of Shareholders of Bank of South Carolina Corporation, to be held on Tuesday, April 10, 2018 at 2:00pm EDT at 256 Meeting Street, Charleston, South Carolina 29401, for the following purposes: 1. to elect nineteen Directors to our Board of Directors to serve a one-year term; 2. 3. to ratify the appointment of Elliott Davis, LLC as the Company’s independent registered public accounting firm for the year ended December 31, 2018; to transact such other business as may properly come before the Annual Meeting or any adjournment of the meeting. The Board of Directors set the close of business on February 22, 2018 as the record date to determine the Shareholders who are entitled to vote at the Annual Meeting. Under rules of the Securities and Exchange Commission, we are providing access to our proxy materials by sending you this full set of proxy materials, including a proxy card, and notifying you of the availability of our proxy materials on the Internet. Although we would like each Shareholder to attend the Annual Meeting, I realize that for some of you this is not possible. Whether or not you plan to attend the Annual Meeting, we encourage you to vote as soon as possible through the Internet, by telephone or by signing, dating and mailing your proxy card in the enclosed postage-paid envelope. Internet voting permits you to vote at your convenience, 24 hours a day, seven days a week. For specific instructions on voting, please refer to the instructions on the enclosed proxy card. Our 2018 Proxy Statement and Annual Report for the year ended December 31, 2017 are available free of charge at http://www.banksc.com and http://www.proxyvote.com. Your vote is very important, and I appreciate the time and consideration that I am sure you will give it. On behalf of the Board of Directors /s/Richard W. Hutson, Jr. Richard W. Hutson, Jr., Secretary March 5, 2018 PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS OF BANK OF SOUTH CAROLINA CORPORATION TO BE HELD ON APRIL 10, 2018 PROXY STATEMENT The Board of Directors of the Bank of South Carolina Corporation (the “Company”) are using this Proxy Statement to solicit Proxies from its Shareholders for the 2018 Annual Meeting of Shareholders. The Company is making this Proxy Statement and the enclosed form of Proxy available to its Shareholders on or about March 5, 2018. The information provided in this Proxy Statement contains important information for you to consider when deciding how to vote on the matters brought before the meeting. The Board encourages you to read it carefully. INFORMATION ABOUT THE ANNUAL MEETING Time and Place of the Annual Meeting The Annual Meeting will be held as follows: Date: Tuesday, April 10, 2018 Time: 2:00 p.m. Eastern Standard Time Place: The Bank of South Carolina, 256 Meeting Street, Charleston, South Carolina Matters to be Considered at the Annual Meeting At the meeting, you will be asked to consider and vote upon the following proposals: Proposal 1: To elect nineteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2019 Annual Meeting of Shareholders; Proposal 2: To ratify the appointment by the Audit & Compliance Committee of the Company’s Board of Directors of Elliott Davis, LLC as the Company’s independent registered public accounting firm for the year ended December 31, 2018; Proposal 3: To transact such other business as may properly come before the meeting and any adjournment or postponement of the meeting. IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDERS’ MEETING TO BE HELD APRIL 10, 2018 This Proxy Statement (providing important information for the Annual Meeting) and the Company’s Annual Report (which includes its Annual Report on Form 10-K as filed with the Securities and Exchange Commission) accompany this Notice. The Proxy Statement and 2017 Annual Report to Shareholders are available at http://www.banksc.com and at http://www.proxyvote.com. Who is Entitled to Vote? The Board of Directors of the Company has fixed the close of business on February 22, 2018, as the record date for Shareholders entitled to notice of and to vote at the Annual Meeting of Shareholders. Only holders of record of Bank of South Carolina Corporation’s Common Stock on that date are entitled to notice of and to vote at the Annual Meeting. Each Shareholder is entitled to one vote for each share of Bank of South Carolina Corporation Common Stock that the Shareholder owns; provided, however, that the Shareholders have cumulative voting rights for the election of Directors. The right to cumulate votes means that the Shareholders are entitled to multiply the number of votes they are entitled to cast by the number of Directors for whom they are entitled to vote and cast the product for a single candidate or distribute the product among two or more candidates. On February 15, 2018, there were 4,990,879 shares of Bank of South Carolina Corporation’s Common Stock outstanding and entitled to vote at the Annual Meeting. How Do I Vote? If you are the “record holder” of your shares, meaning that you own your shares in your own name and not through a bank, broker or other nominee, you may vote in one of four ways. 1. You may vote over the Internet. If you have Internet access, you may vote your shares from any location in the world by following the “Vote by Internet” instructions on the enclosed proxy card. 2. You may vote by telephone. You may vote your shares by following the “Vote by Telephone” instructions on the enclosed proxy card. 3. You may vote by mail. You may vote by completing and signing the proxy card enclosed with this proxy statement and promptly mailing it in the enclosed postage-prepaid envelope. You do not need to put a stamp on the enclosed envelope if you mail it in the United States. 4. You may vote in person. If you attend the Annual Meeting, you may vote by delivering your completed proxy card in person. How Do I Vote at the Annual Meeting? Proxies are solicited to provide all Shareholders of record on the voting record date an opportunity to vote on matters scheduled for the Annual Meeting and described in these materials. You are a Shareholder of record if your shares of Bank of South Carolina Corporation Common Stock are held in your name. If you are a beneficial owner of Bank of South Carolina Corporation Common Stock held by a broker, bank or other nominee (i.e., in “street name”), please see the instructions in the following question. Shares of Bank of South Carolina Corporation Common Stock can only be voted if the Shareholder is present in person or by Proxy at the Annual Meeting. To ensure your representation at the Annual Meeting, the Board recommends that you vote by Proxy even if you plan to attend the Annual Meeting. You can always change your vote at the meeting if you are a Shareholder of record. Voting instructions are included in this material. Shares of Bank of South Carolina Corporation Common Stock represented by properly executed Proxies will be voted by the individuals named on the Proxy (selected by The Board of Directors) in accordance with the Shareholder’s instructions. Where properly executed Proxies are returned with no specific instructions as how to vote at the Annual Meeting, the persons named in the Proxy will vote the shares “For” the proposals as recommended by the Board of Directors. If any other matters are properly presented at the Annual Meeting for action, the persons named in the enclosed Proxy and acting thereunder will have the discretion to vote on these matters in accordance with their best judgment. As a Shareholder of Bank of South Carolina Corporation Common Stock, you may receive more than one Proxy card depending on how your shares are held. For example, you may hold some of your shares individually, some jointly with your spouse and some in trust for your children. In this case, you will receive three separate Proxy cards to vote. 2 What if My Shares Are Held in Street Name? If you hold your shares in street name, it is critical that you cast your vote if you want it to count in the election of Director Nominees. In the past, if you held your shares in street name and you did not indicate how you wanted your shares voted in the election of Directors, your bank or broker was allowed to vote those shares on your behalf as they deemed appropriate. Due to changes in regulations, your bank or broker no longer has the ability to vote your uninstructed shares on a discretionary basis. Thus, if you hold your shares in street name and you do not instruct your bank or broker how to vote in the election of Directors, no votes will be cast on your behalf. If your shares are held in street name, you will need proof of ownership to be admitted to the Annual Meeting. A recent brokerage statement or a letter from the record holder of your shares, are examples of proof of ownership. If you want to vote your shares of Common Stock held in street name in person at the Annual Meeting, you will have to get a written Proxy in your name from the broker, bank or other nominee who holds your shares. The solicitation of Proxies on behalf of the Board of Directors is conducted by Directors, officers and regular employees of the Company and its wholly owned subsidiary, The Bank of South Carolina (the "Bank"), at no additional compensation over regular salaries. The cost of printing and mailing of all Proxy materials has been paid by the Company. Brokers and others involved in handling and forwarding the Proxy materials to their customers having beneficial interests in the stock of the Company registered in the names of Nominees will be reimbursed for their reasonable expenses in doing so. How Many Shares Must Be Present to Hold the Meeting? A quorum must be present at the meeting for any business to be conducted. The presence at the meeting, in person or by Proxy, of at least a majority of the shares of Bank of South Carolina Corporation Common Stock entitled to vote at the Annual Meeting as of the record date shall constitute a quorum. Proxies received but marked as abstentions or broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting. What if a Quorum is Not Present at the Meeting? If a quorum is not present at the scheduled time of the meeting, a majority of the Shareholders present or represented by Proxy may adjourn the meeting until a quorum is present. The time and place of the adjourned meeting will be announced at the time the adjournment is taken, and no other notice will be given unless the meeting is adjourned for 30 days or more. An adjournment will have no effect on the business that may be conducted at the meeting. Will Cumulative Voting Apply for the Election of Directors? The solicitation of Proxies on behalf of the Board of Directors includes a solicitation for discretionary authority to cumulate votes. How will votes be counted? With respect to all proposals, shares will not be voted in favor of the matter, and will not be counted as voting on the matter, if they either (1) abstain from voting on a particular matter, or (2) are “broker non-votes.” Banks, brokers and other nominees who do not receive instructions with respect to Proposals 1 or 2 will not be allowed to vote these shares, and all such shares will be “broker non- votes” rather than votes “for” or “against.” Accordingly, abstentions and “broker non-votes” for a particular proposal will not be counted as votes cast to determine the outcome of a particular proposal. With respect to Proposal 1, the election of Directors of the Company, cumulative voting will be allowed and election will be by plurality of votes cast. With respect to Proposal 2, it will be approved if more votes are cast for the proposal than votes cast against. May I Revoke My Proxy? Any Shareholder executing a Proxy for the meeting on the Proxy Form provided may revoke the Proxy in writing delivered to the President of the Company prior to the meeting or by attending the meeting and voting in person. PROPOSAL 1 – ELECTION OF DIRECTORS: Our by-laws provide for a Board of Directors consisting of not fewer than 15 individuals and not more than 25 individuals. The number of Directors may be increased or decreased from time to time by majority vote of the Board of Directors or the Shareholders. The Board of Directors proposes that the nineteen nominees described below be elected for a new term expiring at the 2019 Annual Meeting of Shareholders or until their respective successors are duly elected and qualified. Each nominee has agreed to serve if elected. If any named nominee is unable to serve, the Board of Directors, upon the recommendation of the Nominating Committee, may select different nominees for election as Directors. 3 The name of each Nominee designated by the Board of Directors of the Company for election as a Director of the Company and certain information provided by such Nominee to the Company are set forth in the table below. Hugh C. Lane, Jr, Charles G. Lane, and William L. Hiott, Jr served as initial Directors of the Bank from October 22, 1986, when the Bank's charter was issued until the first Annual Meeting of Shareholders on April 14, 1987, and were elected to serve a one-year term at such Annual Meeting and subsequent Annual Meetings. These Directors of the Bank were elected Directors of the Company upon its organization in 1995. Alan I. Nussbaum, MD and Edmund Rhett, Jr., MD, were first elected as Directors of the Company during 1999. Dr. Linda J. Bradley McKee, CPA was first elected as a Director of the Company during 2002. They were all re-elected as Directors of the Company to serve one-year terms at subsequent Annual Meetings. Graham M. Eubank, Jr., Richard W. Hutson, Jr. and Malcolm M. Rhodes, MD were elected pursuant to the By-Laws of the Company on December 16, 2004, and were elected to serve one-year terms at subsequent Annual Meetings. Fleetwood S. Hassell was first elected by the Shareholders on April 11, 2006 at the Annual Meeting, and was elected to serve one-year terms at subsequent Annual Meetings. Glen B. Haynes, DVM was first elected by the Shareholders on April 10, 2007, at the Annual Meeting and was elected to serve one-year terms at subsequent Annual Meetings. David W. Bunch was first elected by the Shareholders on April 14, 2009, at the Annual Meeting and was elected to serve one-year terms at subsequent Annual Meetings. Sheryl G. Sharry, previously serving as an Executive Officer, was first elected by the Shareholders on April 13, 2010, and was elected to serve one-year terms at subsequent Annual Meetings. Steve D. Swanson served on the Board from 2002 to 2007. Mr. Swanson rejoined the Board of Directors after being elected by the shareholders on April 12, 2011, and was elected to serve one-year terms at subsequent Annual Meetings. Douglas H. Sass, an Executive Officer, and Elizabeth M. Hagood were first elected by the Shareholders on April 9, 2013, and were elected to serve a one-year term at subsequent Annual Meetings. Karen J. Phillips was first elected to serve on the Board of Directors by the Shareholders on April 11, 2017. Susanne K. Boyd and Eugene H. Walpole, IV are recommended for nomination by the Nominating Committee of the Board of Directors. This recommendation was approved by the Board of Directors on December 21, 2017 and will be voted on at the 2018 Annual Meeting. The Board of Directors believes that it is necessary for each of our Directors to possess many qualities and skills. When searching for new candidates, the Nominating Committee considers the evolving needs of the Board of Directors and searches for candidates that fill any current or anticipated future gap. The Board of Directors also believes that all Directors must possess a considerable amount of business management (such as experience as a Chief Executive Officer or Chief Financial Officer) and educational experience. The Nominating Committee first considers management experience and then considers issues of judgment, background, stature, conflicts of interest, integrity, ethics, and commitment to the goal of maximizing Shareholder value when considering Director candidates. The Nominating Committee focuses on issues of diversity, such as diversity in gender, race and national origin, education, professional experience and differences in viewpoints and skills. The Nominating Committee does not have a formal policy with respect to diversity; however, the Board of Directors and the Nominating Committee believe that it is essential that the Board Members represent diverse viewpoints. In considering candidates for the Board of Directors, the Nominating Committee considers the entirety of each candidate’s credentials in the context of these standards. With respect to the nomination of continuing Directors for re-election, the individual’s contributions to the Board are also considered. Certain information with respect to each of the nominees is set forth below, including his or her principal occupation, qualifications, and directorships during the past five years. The nominees were each recommended to the Board of Directors by the Nominating Committee whose goal is to assemble a Board that operates cohesively, encourages candid communication and discussion, and focuses on activities that help us maximize Shareholder value. The Nominating Committee also looks at the individual strengths of Directors, their ability to contribute to the Board, and whether their skills and experience complement those of the other Directors. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" EACH OF THE NOMINEES. Executive Officer Directors and Nominees Age 41 Nominee Susanne K. Boyd Ms. Boyd has been with the Bank since 1997 and has served as the Courier Teller, Check Card Specialist, Electronic Banking Officer, Information Security Officer, Assistant Vice President, Vice President, and Senior Vice President of Operations and Technology. She has served as the Chief Operating Officer for the Bank and the Corporation since November 2015 and was named Executive Vice President for the Bank and Corporation in December 2017. Ms. Boyd is a graduate of College of Charleston, South Carolina Bankers School and Georgia Bankers Association Southern Operations and Technology School. She has received training in Information Security, Administration of the Bank’s core system, Internet Banking Compliance and Cyber Crime and is a Certified Regulatory Vendor Program Manager. Ms. Boyd has served on the South Carolina Bankers Association Operations Committee and has been a member of the Infragard South Carolina Chapter. The Nominating Committee recommends the election of Ms. Boyd to the Board of Directors given her broad and unique experience in banking, in-depth knowledge of the technology and its risks related to banks, and continued devotion to the success of the Company. 4 Age 58 First elected to the Board 2006 Fleetwood S. Hassell Mr. Hassell has been with the Bank since its organization in 1986. During his career of over thirty five years in banking, Mr. Hassell has held the position of Assistant Vice President, Vice President, Senior Vice President, Executive Vice President and Senior Lender, and, since April 11, 2012, the President/Chief Executive Officer. Born and raised in Charleston, SC, Mr. Hassell earned a BS and MBA from the University of South Carolina School of Business. He was elected to the Board of Directors of the Bank and the Company in 2006. Currently, Mr. Hassell serves on the College of Charleston Foundation Board, the Association of the Blind and Visually Impaired Board, the South Carolina Bankers Association board, and the Trident United Way Board. In January 2012, Mr. Hassell was appointed to the South Carolina State Board of Financial Institutions. Given Mr. Hassell’s experience in banking, his strong background in commercial lending and business development and his current participation and contributions made to the Board of Directors and its committees, the Nominating Committee recommends his re- election to the Board. Age 70 First elected to the Board 1995 Hugh C. Lane, Jr. Mr. Lane, brother of Charles G. Lane, organized the Bank in 1986, where he served as President/Chief Executive Officer of the Bank from 1986 until 2012. He served as Chairman of the Board of Directors of the Bank since its organization in 1986, and Chairman of the Board of Directors of the Company since its organization in 1995. Mr. Lane was born in Charleston, SC. He earned a BA in economics from the University of Pennsylvania. Mr. Lane began his banking career at Citizens and Southern National Bank of Georgia in Atlanta. His banking career also included working in the Bond, Leasing, and International Departments at the Chemical Bank in New York, City Executive of Citizens and Southern National Bank, Sumter South Carolina, and Executive Vice President, heading the Citizens and Southern National Bank’s Southern Region. Mr. Lane also served on the Board of Directors of Citizens and Southern National Bank of South Carolina for 14 years. Mr. Lane formerly served as an Administrator and Trustee of the Bank of South Carolina Employee Stock Ownership Plan and Trust. In addition to his responsibilities at The Bank of South Carolina, Mr. Lane is currently the Chairman of the Charleston County Conservation Board, Vice Chairman of the Baruch Foundation, and Treasurer of the Ashley Hall Foundation. He has been the recipient of Honorary Doctorates from Charleston Southern University, The Citadel, and Wofford College. He has also received the “Distinguished Citizen Award” from Wofford College National Alumni Council, the Avery Citizenship Award for outstanding community service, the Joseph P. Riley Leadership Award, and the Order of the Palmetto presented by the Governor of South Carolina. In 2015, Mr. Lane was inducted into the South Carolina Business Hall of Fame. The Nominating Committee recommends the re-election of Mr. Lane to the Board of Directors based on his unique and valuable perspective relevant to our Bank’s business and financial performance and strong commitment to the local community. In addition, the Committee considered his current contribution to the Board and his continued devotion to serving the Shareholders of the Company. Age 60 First Elected to the Board 2013 Douglas H. Sass Mr. Sass joined the Bank in January 1994. He has thirty years of experience in banking and oversaw the implementation of the Bank’s Real Estate Appraisal Review Program. He has served in various officer level positions at the Bank, including Security Officer, Appraisal Officer, and CRA Officer before becoming Executive Vice President and Senior Lender in April of 2012. Additionally, he oversees the Bank’s Loan Department, Credit Department, and Mortgage Origination Department. Mr. Sass serves as an Administrator and Trustee of the Bank of South Carolina Employee Stock Ownership Plan and Trust. Mr. Sass is a native of Charleston and a graduate of The Citadel with a degree in Business Administration. He is a graduate of the South Carolina Bankers School at the University of South Carolina and The Graduate School of Bank Management at the University of Virginia. Mr. Sass currently serves as President of The Charleston Museum and is a member of the Board of the Regents Tri-County Family Ministries as well as active in other various civic organizations. Based on Mr. Sass’s experience in banking, appraisals, his robust background in commercial lending and business development, and his continued devotion to the success of the Company, the Nominating Committee recommends his re-election to the Board. Age 33 Nominee Eugene H. Walpole, IV Mr. Walpole joined the Bank in September 2012. Since that time, he has served as an Assistant Vice President, Vice President, and Senior Vice President in the role of Risk Management Officer. In March 2016, Mr. Walpole was named Chief Financial Officer of the Bank and Corporation and, in December 2017, was named Executive Vice President of the Bank and Corporation. Mr. Walpole also serves as Administrator and Trustee of the Bank of South Carolina Employee Stock Ownership Plan and Trust. Prior to joining the Bank, Mr. Walpole spent four years performing financial statement audits, regulatory filing reviews, and Sarbanes-Oxley 404 compliance testing for publicly traded and privately held financial institutions. Mr. Walpole is a Charleston native and graduate of Presbyterian College, University of South Carolina, and South Carolina Bankers School. He holds the designations of Certified Public Accountant, Certified Financial Services Auditor, and Certification in Risk Management Assurance. Mr. Walpole has served on various committees of the South Carolina Bankers Association and is an active member of the local community. He currently serves as a board member of the Lowcountry Land Trust and the Coastal Conservation Association of South Carolina. The Nominating Committee recommends the election of Mr. Walpole to the Board of Directors given his experience in banking, in- depth knowledge of the financials of the Company, commitment to the local community, and continued devotion to the success of the 5 Company. Age 68 Non-Employee Directors David W. Bunch Mr. Bunch has been a member of the Board of Directors of the Bank and the Company since 2009. He was born in Charleston, South Carolina and graduated from Clemson University. He has been employed by XO Bunch Organizations since 1973, serving as President, Hughes Motors, Inc.; Vice-President, Bunch Leasing Co.; Vice-President, Florence Truck Center, Inc.; Partner, Bunch Truck & Equipment, LLC; Partner, Bunch & Sons-Real Estate; Managing member, Wando Properties, LLC; and President, Double D Leasing Co., Inc. In addition to serving on the Board of Directors of the Bank and Company, Mr. Bunch currently serves on the Loan Committee and the Community Reinvestment Act Committee First elected to the Board 2009 The Nominating Committee recommends the re-election of David Bunch to the Board of Directors based on his valuable knowledge of business and his participation on the Loan and Audit & Compliance Committees and various community Boards. First elected to the Board 2005 Graham M. Eubank, Jr. Age 51 Mr. Eubank has been a member of the Board of Directors of the Bank and the Company since 2005. He was born in Fayetteville, North Carolina and raised in Charleston, South Carolina. He received a BS in Management from Clemson University. He is also a graduate of the National Automobile Dealers Association Dealer Candidate Academy. In 1992, Mr. Eubank began working with his family’s business, Palmetto Ford, Inc., where he has held various positions including New Car Sales Manager, Used Car Sales Manager and Parts and Service Director. Currently Mr. Eubank is President and CEO of the Palmetto Car and Truck Group which is comprised of Ford, Lincoln, Mama’s Used Cars and Quick Lane Auto and Tire Center. In addition to serving on the Board of Directors of the Bank and the Company, he currently serves on the Nominating Committee and is the Chair of the Compensation Committee. As a local business owner, Mr. Eubank provides an important perspective on economic issues relevant to our community and company, which is why the Nominating Committee recommends Mr. Eubank for re-election to the Board of Directors. Age 57 Elizabeth M. Hagood Mrs. Hagood is the former Executive Director of the Lowcountry Land Trust. Mrs. Hagood grew up in Charlotte, NC and graduated from Davidson College with a BA in 1983 and the Darden School of Business at the University of Virginia with a MBA in 1989. Mrs. Hagood currently serves on the Boards of the Preservation Society of Charleston, Open Space Institute Advisory Board, and the Charleston County Greenbelt Advisory Board. In addition to serving on the Board of Directors of the Bank and Company, Ms. Hagood also serves on the Loan Committee, Community Reinvestment Act Committee, and the Nominating Committee. First elected to the Board 2013 Her education, distinct perspective on social responsibility and diversity, experience on various committees within the organization, and continued service to the Charleston community through her leadership roles in various organizations, led the Nominating Committee to recommend Mrs. Hagood for re-election to the Board of Directors. Age 64 First elected to the Board 2007 Glen B. Haynes, DVM Dr. Haynes has been a member of the Board of Directors of the Bank and the Company since 2007. He was born in Charlottesville, Virginia and has lived in Summerville, South Carolina for 33 years. He graduated from Virginia Tech with a BS in Biology. He received a DVM from the University of Georgia. In addition to serving on the Board of Directors of the Bank and the Company, Dr. Haynes has served as President of the Summerville Rotary Club, President of Frances Willis SPCA, Chairman of the South Carolina Board of Veterinary Medical Examiners, and President of Trident Veterinary Medical Association. Dr. Haynes is a member of the American Veterinary Medical Association and a member of St. Paul’s Anglican Church where he has served on the vestry. Currently, Dr. Haynes is Chairman of the Frances Willis SPCA Endowment Board and is a construction volunteer for Habitat for Humanity. Dr. Haynes has been committed to the success of the Company and currently serves on the Loan Committee, the Community Reinvestment Act Committee, and Nominating Committee in addition to the Board of Directors of the Bank and Company. In recommending Dr. Haynes for re-election to the Board of Directors, the Nominating Committee considered this experience as well as his strong ties to the Summerville community and his work ethic demonstrated in running his own practice. Age 74 William L. Hiott, Jr. Mr. Hiott was with the Bank from its organization in 1986 until his retirement in 2011. He held various positions including the Executive Vice President and Cashier of the Bank and the Executive Vice President and Treasurer of the Company. He has served on the Board of Directors of the Bank since its organization in 1986 and the Company since its organization in 1995. He received a BS in Accounting from Charleston Southern University and is a graduate of South Carolina Bankers School and the University of Wisconsin’s Bank Administration Graduate School. First elected to the Board 1995 The Nominating Committee recommends Mr. Hiott for re-election to the Board of Directors based on his experience in banking, in- depth knowledge of the financials of the Company, his strong commitment to the local community, and his current contributions to the Board. 6 Richard W. Hutson, Jr. Age 61 Mr. Hutson has been a member of the Board of Directors of the Bank and Company since 2005. He received a BA from The University of the South. Mr. Hutson is the Manager of William M. Means Company, Insurance. Mr. Hutson has served on the Boards of the South Carolina Historical Society and the Historic Charleston Foundation. He has served as President of the South Carolina Historical Society. Mr. Hutson has served on the Audit & Compliance Committee, Investment Committee, and the Loan Committee, and currently serves on the Asset Liability/Investment Committee in addition to the Board of Directors of the Bank and Company. First elected to the Board 2005 The Nominating Committee recommends Mr. Hutson for re-election to the Board due to his business experience, commitment to the Bank and Company through various committee involvement, and strong ties to the Charleston community. Age 64 Charles G. Lane Mr. Lane is the brother of Hugh C. Lane, Jr. and has been a member of the Board of Directors of the Bank since its organization in 1986, and a member of the Board of Directors of the Company since its organization in 1995. He has devoted nearly thirty years to ensuring the success of the Company. He is a graduate of Clemson University. Mr. Lane is a Managing Member of Holcombe, Fair and Lane, LLC - a commercial real estate company. He currently serves on the Executive/ Long- Range Planning Committee, Asset Liability/Investment Committee, Loan Committee, and Community Reinvestment Act Committee. First elected to the Board 1995 Mr. Lane’s expertise in the real estate market and the local community have been valuable to the Board in its decision-making and is why the Nominating Committee recommends his re-election. Linda J. Bradley McKee, PhD, CPA Dr. McKee has been a member of the Board of Directors of the Bank and Company since 2002. Dr. McKee earned a BS in Mathematics from the University of Texas at Arlington, a MS in Accounting from Texas Tech, and a PhD in Accounting from the University of North Texas. She is an Associate Professor of Accounting at the College of Charleston. In addition to serving on the Board of the Bank and the Company, she currently serves on the Audit & Compliance Committee. She served as President of the Charleston Estate Planning Council and Program Director of Charleston Tax Roundtable. Age 68 First elected to the Board 2002 Dr. McKee is considered by the Board of Directors to be a financial expert under applicable guidelines of the Securities and Exchange Commission. She has an extensive background in accounting and taxation and has been an asset to the Board and the Audit & Compliance Committee. For the above reasons, the Nominating Committee recommends Dr. McKee for re-election to the Board of Directors. First elected to the Board 1999 Alan I. Nussbaum, MD Age 67 Dr. Nussbaum has been a member of the Board of Directors of the Bank since 1999. He received a BA from Johns Hopkins University and a MD from Harvard Medical School. Dr. Nussbaum completed his internship and residency in Internal Medicine at Duke University Medical Center. In addition, Dr. Nussbaum completed a Fellowship in Rheumatology and Immunology at the Medical University of South Carolina and has practiced rheumatology in Charleston since 1982. Dr. Nussbaum currently serves a Lead Director of the Bank and Company. He is the Chairman of the Executive/Planning Committee and serves on the Asset Liability/Investment Committee and Compensation Committee. The Nominating Committee recommends the re-election of Dr. Alan Nussbaum to the Board of Directors based on the commitment that he has made to the Board, community involvement, and knowledge of the Company. Age 57 Karen J. Phillips Mrs. Phillips received a BA in Political Science from The University of the South and an MBA in Finance from The University of South Carolina. She is a Certified Financial Planner ® and is President of Atlantic Coast Asset Management, Inc., a financial management firm. She is a member of the Board of Directors of Kanuga Conferences, Inc., and the past Chairman of the Board of Directors of Ashley Hall School, where she currently serves as a Trustee. First elected to the Board 2017 The Nominating Committee recommends Mrs. Phillips for re-election due to her leadership within the community, financial expertise, and unique perspective relevant to financial performance. Edmund Rhett, Jr., MD Age 71 Dr. Rhett has been a member of the Board of Directors of the Bank since 1999. Dr. Rhett received a BA from The University of the South and a MD from the Medical College of Georgia. He has a private gynecological practice, Rhett Women’s Center. Dr. Rhett has been on the Board of Directors of the Canterbury house for over thirty years and has served as President of its Board for nearly twenty years. Additionally, Dr. Rhett currently serves as Chairman of the Nominating Committee, and serves on the Asset Liability/Investment Committee, and the Executive/Long- Range Planning Committee within the organization. First elected to the Board 1999 The Nominating Committee recommends the re-election of Dr. Rhett to the Board of Directors, based on his commitment to the Bank, board leadership, and community involvement. 7 Malcolm M. Rhodes, MD Age 59 Dr. Rhodes has been a member of the Board of Directors of the Bank and Company since 2005. He received a BA from Duke University and a MD from the Medical University of South Carolina. He is a Fellow of the American Board of Pediatrics and has been a partner at Parkwood Pediatric Group since 1988. He is on the clinical faculty at MUSC and Bon-Secours St. Francis Hospitals. In addition to serving on the Board of Directors of the Bank and the Company, Dr. Rhodes currently represents South Carolina on the Atlantic States Marine Fisheries Commission. Dr. Rhodes served as the Past Chairman of the Audit & Compliance Committee. First elected to the Board 2005 The Nominating Committee recommends the re-election of Dr. Rhodes to the Board of Directors based on his knowledge of business including running a medical practice, and involvement with several local hospitals. Age 64 First elected to the Board 2010 Sheryl G. Sharry Mrs. Sharry was with the Bank since its organization in 1986 until her retirement in 2014. She held various positions in the Bank, including but not limited to Assistant Vice President – Operations Department, Vice President – Operations & Technology, Senior Vice President – Operations & Technology, and Chief Financial Officer/ Executive Vice President. Mrs. Sharry serves as a Trustee of the Bank of South Carolina Employee Stock Ownership Plan and Trust. Mrs. Sharry became a member of the Board of Directors of the Bank and Company in 2010. She is a graduate of the College of Charleston, South Carolina Bankers School, and the School of Bank Investments and Financial Management. In addition to serving on the Board of the Bank and the Company, she serves on the Executive/Long- Range Planning Committee and Asset Liability/Investment Committee. Mrs. Sharry is recommended for re-election to the Board of Directors by the Nominating Committee based on her strong background in operations and technology of the Company, experience in banking, valuable knowledge of financial reporting and performance of the Company, and continued devotion to the success of the Company. Age 51 First elected to the Board 2002-2007; Re-elected 2011 Steve D. Swanson Mr. Swanson founded Automated Trading Desk, a pioneering electronic trading firm based in South Carolina. As President and CEO, Mr. Swanson grew the business from pure proprietary trading to creating a fully automated market maker servicing the broker-dealer community. After its acquisition by Citigroup in 2007, Mr. Swanson became responsible for global equity and option electronic trading operations. Mr. Swanson serves on the Board of the College of Charleston Foundation, the College of Charleston School of Business Board, the Honors College Advisory Board, and the Board of Trustees of South Carolina State University. In addition to serving on the Board of the Bank and the Company, he also serves as Chairman of the Audit & Compliance Committee. Based on Mr. Swanson’s extensive experience in both starting and running a business, valuable perspective on economic issues relevant to our Company, professional perception on financial reporting, and his extensive community involvement, the Nominating Committee recommends Mr. Swanson for re-election to the Board of Directors. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following tables set forth, as of December 31, 2017, information regarding share ownership of: (cid:120) (cid:120) (cid:120) those persons or entities (or groups of affiliated persons or entities) known by management to beneficially own more than five percent of our common stock; each non-employee Director; and each employee Director (including Director nominees). Persons and groups who beneficially own more than five percent of our common stock are required to file with the Securities and Exchange Commission (“SEC”), and provide us, reports disclosing their ownership pursuant to the Securities Exchange Act of 1934 (“Exchange Act”). To the extent known to the Board of Directors, no other person or entity, other than those set forth below, beneficially owned more than five percent of the outstanding shares our common stock as of the close of business on December 31, 2017. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In accordance with Rule 13d(3) of the Exchange Act, a person is deemed the beneficial owner of any shares of Common Stock if he or she has voting and/or investment power with respect to those shares. Therefore, the tables below includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of the named individuals, and other forms of ownership over which shares the persons named in the table may possess voting and/or investment power. 8 The table below shows the security ownership of certain beneficial owners of more than 5 percent of any class of Common Stock. Title of class Common Stock Common Stock Name and Address of Beneficial Owner Hugh C. Lane, Jr. (1) 256 Meeting Street Charleston, South Carolina 29401 The Bank of South Carolina Employee Stock Ownership Plan and Trust ("the ESOP") 256 Meeting Street Charleston, South Carolina 29401 Amount and Nature of Beneficial Ownership 746,064(2) Percent of Class 14.953% 286,013(3) 5.733% The table below shows the security ownership of management, directors, and nominees. Title of class Name of Beneficial Owner Amount and Nature of Beneficial Ownership Percent of Class Executive Officers/Directors and Director Nominees Common Stock Common Stock Common Stock Common Stock Common Stock Current Directors Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Total Hugh C. Lane, Jr. (1) Fleetwood S. Hassell(3) Susanne K. Boyd (Nominee) Douglas H. Sass(3) Eugene H. Walpole, IV(3) (Nominee) David W. Bunch Graham M. Eubank, Jr. Elizabeth M. Hagood Glen B. Haynes, DVM William L. Hiott, Jr. Richard W. Hutson, Jr. Charles G. Lane (1) Dr. Linda J. Bradley McKee, CPA Alan I. Nussbaum, MD Karen J. Phillips Edmund Rhett, Jr. MD Malcolm M. Rhodes, MD Sheryl G. Sharry Steve D. Swanson 746,064(2) 100,297 (4) 5,520(4) 26,783 (4) 4,085(4) 1,928 947 110 7,430 189,410(4) 6,574 228,158(4) 2,141 3,911 5,318(4) 5,065(4) 4,471 90,761 15,035 1,444,009 14.953% 2.010% .111% .537% .082% .039% .019% .002% .150% 3.796% .132% 4.573% .043% .078% .107% .102% .090% 1.819% .301% 28.942% (1) To the extent known to the Board, the emancipated children and grandchildren of Hugh C. Lane, Jr. and Charles G. Lane, collectively, have beneficial ownership of 979,418 shares or 19.630% of the outstanding shares. As more fully described in the following footnotes, Hugh C. Lane, Jr., is the only one of the above who has a beneficial ownership interest in more than 5% percent of our common stock. Hugh C. Lane, Jr., disclaims any beneficial interest in those shares in which other members of his family have a beneficial interest other than those shares his wife owns directly and those for which he serves as Trustee or she serves as custodian (as more fully described in the following footnote). (2) To the extent known to the Board, Hugh C. Lane, Jr., Chairman of the Board of both the Bank and the Company, directly owns and has sole voting and investment power with respect to 274,245 shares; as a Trustee for the Mills Bee Lane Memorial Foundation, he has shared voting and investment power with respect to 11,895 shares; he is indirectly beneficial owner of 15,444 shares owned by his wife and 39,727 shares owned by the ESOP in which he has a vested interest. Hugh C. Lane, Jr., disclaims any beneficial interest in the 410,327 shares owned by extended family members. All of the shares beneficially owned by Hugh C. Lane, Jr., are currently owned. Hugh C. Lane, Jr., has had beneficial ownership of more than 5% of our common stock since October 23, 1986. (3) The Trustees of the Employee Stock Ownership Plan (“ESOP’), Fleetwood S. Hassell, President/Chief Executive Officer and Director of the Bank and Company; Eugene H. Walpole, IV, Chief Financial Officer/ Executive Vice President and Nominated Director of the Bank and Company; Douglas H. Sass, Senior Lender/Executive Vice President and Director of the Bank and Company; and Sheryl G. Sharry, Director of the Bank and Company disclaim beneficial ownership of the 286,013 shares owned by the ESOP with all shares allocated to members of the Plan each of whom under the terms of the Plan has the right to direct the Trustees as to the manner in which voting rights are to be exercised. 9 (4) To the extent known to the Board of Directors, each of the following Directors and nominees for election as Director (each of whom directly owns and has sole voting and investment power of all shares beneficially owned by him or her except as set forth in this footnote) indirectly owns the following number of shares: Fleetwood S. Hassell - an aggregate of 12,879 shares owned by his wife, held by him as a co-Trustee with Charles G. Lane for the children of Hugh C. Lane, Jr., unallocated shares held by him as a Trustee of the ESOP, and 38,056 shares owned by the ESOP, in which he has a vested interest; Douglas H. Sass – 16,777 shares owned by the ESOP in which he has a vested interest; William L. Hiott, Jr. - an aggregate of 9,739 shares directly owned by his wife; Charles G. Lane - an aggregate of 52,884 shares owned by his wife, held by him as a co- Trustee with Fleetwood S. Hassell for the children of Hugh C. Lane, Jr., held by him as a Trustee of Mills Bee Lane Memorial Foundation, and held by him as a Trustee of Holcombe Trust; Karen J. Phillips – 3,318 shares owned by her husband; Edmund Rhett, Jr., MD - 914 shares owned by his wife; Susanne K. Boyd – 148 shares owned by children and 4,907 shares owned by the ESOP in which she has a vested interest; Eugene H. Walpole, IV- 1,379 shares owned by the ESOP in which he has a vested interest. All such indirectly owned shares are included in the totals of the number of shares set forth in the above table and beneficially owned by the Directors and nominees. No Director or Executive Officer was involved in any legal proceedings related to bankruptcy, securities, or commodities laws nor have any members been convicted in criminal proceedings in the past 10 years. In addition there are no pending legal proceedings against any Executive Officer or Director. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE MATTERS Introduction The Company’s Board of Directors conducts its business through Board meetings and through its committees. Hugh C. Lane, Jr. presently serves as Chairman of the Board of Directors. The Board of Directors of the Company held 6 meetings (including all regularly scheduled and special meetings) during the year ended December 31, 2017. No Directors attended fewer than 75% of the aggregate of (i) the total number of meetings of the Board of Directors and (ii) the total number of meetings held by all committees of the Board of Directors on which they served. Change in Bylaws The Company and the Bank each amended their bylaws on December 21, 2017 to (i) prohibit the offices of Chairman of the Board and President be held by the same person and (ii) provide that the President will report to the Chairman of the Board. Director Independence: The Board of Directors is comprised of a majority of independent Directors in compliance with SEC and National Association of Securities Dealers Automated Quotations (“NASDAQ”) rules. All members of the Audit & Compliance Committee, the Compensation Committee, and the Nominating Committee are independent pursuant to SEC and NASDAQ rules. The members of these committees do not have any relationship to the Bank or Company that may interfere with the exercise of their independence from management. None of the members of the Nominating Committee are current or former officers or employees of the Bank or Company. One member of the Compensation Committee, William L. Hiott, Jr., retired from the Bank in April 2010. One member of the Audit & Compliance Committee, William L. Hiott, Jr., retired from the Bank in April 2010. Two members of the Executive/ Long –Range Planning Committee, William L. Hiott, Jr. and Sheryl G. Sharry, retired from the Bank in April 2010 and 2016, respectively. All members of the Board of Directors are independent except Hugh C. Lane, Jr., Chairman of the Board, Fleetwood S. Hassell, President/Chief Executive Officer, Douglas H. Sass, Senior Lender/Executive Vice President, and Charles G. Lane, brother of Hugh C. Lane, Jr. Two nominees, Susanne K. Boyd and Eugene H. Walpole, IV are not independent and currently serve the Company as the Chief Operating Officer/ Executive Vice President and Chief Financial Officer/ Executive Vice President, respectively. Board of Directors Our Board of Directors conducts its business through meetings and through its committees. Hugh C. Lane, Jr., presently serves as Chairman of the Board. The Board of Directors of the Company held 6 meetings (including all regularly scheduled and special meetings) during the year ended December 31, 2017. Board Leadership Structure The Board of Directors believes that Hugh C. Lane, Jr., is the best person to serve as Chairman of the Board because he is the Director most familiar with our business and industry, and most capable of effectively identifying strategic priorities and leading the discussion and execution of strategy. Independent Directors and management have different perspectives and roles in strategy development. Our independent Directors bring experience, oversight and expertise from outside the company and industry, while Hugh C. Lane, Jr., brings company-specific experience and expertise. The Board of Directors believe that the combined experience as Chairman of the Board and past President/Chief Executive Officer promotes strategic development and executions, and facilitates information flow between management and the Board of Directors, which are essential to effective governance. 10 One of the key responsibilities of the Board of Directors is to develop strategic direction and hold management accountable for the execution of strategy once it is developed. The Board believes the combined role of the Chairman of the Board and an independent Lead Director, having the duties described below, is in the best interest of Shareholders as it provides the appropriate balance between strategy development and independent oversight of management. Lead Director Alan I. Nussbaum, MD, an independent Director was selected by the Board of Directors to serve as the Lead Director of all meetings of the non-management Directors held in executive session. Dr. Nussbaum has held this position since April 12, 2011. Non- management Directors of the Board of Directors are required to meet on a regular scheduled basis without the presence of Directors that are not considered independent (IM-5605-2 NASDAQ Corporate Governance Rules). The Lead Director chairs these sessions. Risk Management The Board of Directors has an active role, as a whole and at the committee level, in overseeing the management of our risks. The Board of Directors regularly reviews information regarding our credit, liquidity, and operations, as well as the risks associated with each. The Audit & Compliance Committee oversees the management of financial risks. The Nominating Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed through committee reports about such risks. In addition, Lauren Nilan, CPA, serves as Risk Management Officer/Senior Vice President overseeing our internal controls. Committees and Committee Charters The Board of Directors has four committees: the Executive/Long-Range Planning Committee, the Compensation Committee, the Nominating Committee, and the Audit & Compliance Committee. Each committee serves in a dual capacity as a committee of the Company and the Bank. The following table lists the membership of the standing committees of the Board of Directors. Director David W. Bunch Graham M. Eubank, Jr. Elizabeth M. Hagood Fleetwood S. Hassell Glen B. Haynes, DVM William L. Hiott, Jr. Richard W. Hutson, Jr. Charles G. Lane Hugh C. Lane, Jr. Dr. Linda J. Bradley McKee, PhD, CPA Alan I. Nussbaum, MD Karen J. Phillips Edmund Rhett, Jr., MD Malcolm M. Rhodes, MD Douglas H. Sass Sheryl G. Sharry Steve D. Swanson Audit & Compliance (cid:404) Executive/Long- Range Planning Compensation Committee Nominating Committee (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) (cid:404) Audit & Compliance Committee The Audit & Compliance Committee members are appointed and approved by the Board of Directors, annually. The Audit & Compliance Committee is to be comprised of not less than four members of the Board or such larger number as approved by the Board of Directors. During 2017, the Audit & Compliance Committee held four meetings. Members are considered to be independent of the Company under applicable rules and regulations, including Rule 4200(a)(15) of NASDAQ. The Board of Directors has determined that Linda J. Bradley McKee, PhD, CPA, qualifies as a financial expert under the applicable guidelines of the Exchange Act. The Audit & Compliance Committee operates under a written Charter adopted by the Board of Directors which is renewed and reassessed for adequacy on an annual basis. The Charter outlines the Committee’s responsibilities for overseeing the entire audit function and appraising the effectiveness of internal and external audit efforts including: reviewing our financial statements, evaluating internal accounting controls, reviewing reports of regulatory authorities, and determining that all examinations required by law are performed. The Board of Directors may amend the Charter at any time. The most recent Audit & Compliance Committee charter may be obtained at our Internet website http://www.banksc.com. 11 The Audit & Compliance Committee recommends to the Board of Directors the appointment of the independent auditors for the next fiscal year, reviews and approves the auditors’ audit plan, and reviews with the independent auditors the results of the audit and management’s response. Review of the Company’s Audited Financial Statements for the Fiscal Year Ended December 31, 2017 Management is responsible for our internal controls and the financial reporting process. The independent auditors are responsible for performing an independent audit of our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and issuing a report thereon. The Audit & Compliance Committee’s responsibility is to monitor and oversee the process. In this context, the Audit & Compliance Committee has met and held discussions with management and Elliott Davis, LLC, our independent auditors, in 2017. In discharging its oversight responsibility as to the audit process, the Audit & Compliance Committee has received the written disclosures and the letter from the independent auditors required by applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) regarding the independent auditor’s communications with the Audit & Compliance Committee concerning independence and has discussed with the independent auditors their independence from the Company and management. The Audit & Compliance Committee also discussed with management, the internal auditors and the independent auditors the quality and adequacy of our internal controls. The Audit & Compliance Committee reviewed with the independent auditor their audit plans, audit scope and identification of audit risks. The Audit & Compliance Committee reviewed and discussed with the independent auditors all communications required by generally accepted auditing standards, including those described in the PCAOB Auditing Standard (“AS”) 16, as modified or supplemented, “Communications with Audit Committees,” and Rule 2-07 of Regulation S-K, promulgated by the SEC, and, with and without management present, discussed and reviewed the results of the independent auditors’ examination of the financial statements. The Audit & Compliance Committee also discussed the results of the internal audit examinations. The Audit & Compliance Committee reviewed and discussed the audited consolidated financial statements of the Company as of and for the year ended December 31, 2017, with management and the independent auditors. Based on the above-mentioned review and discussion with management and the independent auditors, the Audit & Compliance Committee recommended to the Board of Directors that the Company’s audited consolidated financial statements be included in its annual Report on Form 10-K for the year ended December 31, 2017, for the filing with the SEC. During 2017, the Committee appointed Elliott Davis, LLC as our independent auditors for the year ending December 31, 2017. Submitted by: Steve D. Swanson, Chairman David W. Bunch William L. Hiott, Jr. Dr. Linda J. Bradley McKee, CPA Karen J. Phillips Executive/Long-Range Planning Committee The Executive/Long-Range Planning Committee consists of our President/Chief Executive Officer, the Chairman of the Board, the Senior Lender/ Executive Vice President and six designated Directors. Alan I. Nussbaum, MD, an independent Director, serves as Chairman of the Committee. During 2017, the Executive/Long-Range Planning Committee held one meeting. In addition to long- range and strategic planning, the principal function of the Committee is to exercise all authority of the Board of Directors in the management and affairs of the Company and the Bank. In addition, the Committee acts on behalf of the entire Board of Directors between the regular Board meetings. Compensation Committee The Compensation Committee consists of three independent Directors appointed by the Board of Directors to assist the Board in fulfilling its oversight responsibilities. The Committee also functions as the Compensation Committee of the Bank. The duties and responsibilities of the Compensation Committee are as follows: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) to review and approve compensation of the Executive Officers in light of our goals and objectives (Executive Officers may not be present during voting or deliberations on their compensation); to oversee regulatory compliance and risk management with respect to compensation matters; to make regular reports to the Board of Directors. to review and approve the Report of Compensation for inclusion in our annual Proxy Statement, in accordance with applicable rules and regulations; to review and approve the Compensation Discussion and Analysis of the Company’s annual Proxy Statement, and recommend to management that it be included in the annual Proxy Statement; and 12 (cid:120) to perform any other duties or responsibilities expressly delegated to the Committee by the Board of Directors from time to time. The Compensation Committee’s policies and procedures for decisions did not change since the positive advisory vote by the shareholders on the compensation of the most highly compensated Executive Officers at the Annual Meeting held April 11, 2016. The Board of Directors has determined that each of the Directors serving on our Compensation Committee is independent and satisfies other requirements imposed by: (cid:120) NASDAQ; (cid:120) The Exchange Act and the rules and regulations of the SEC under the Exchange Act; and (cid:120) Any other laws, rules or regulations applicable to us. The Compensation Committee has sole discretion to hire, retain, terminate and approve fees and other retention terms of independent legal, accounting or other advisors (including compensation consultants) as it deems appropriate without management or Board approval. In doing so, the Compensation Committee shall comply with all applicable rules of the SEC or NASDAQ. The Committee met one time in 2017 and did not consult independent legal counsel or compensation consultants. The most recent Compensation Committee charter may be obtained at our website http://www.banksc.com. Nominating Committee The Nominating Committee consists of four independent Directors. The function of the Nominating Committee is to recommend a slate of proposed Directors to the Board of Directors. The Nominating Committee has adopted a written Charter. A copy of this Charter may be obtained at our website http://www.banksc.com. The Nominating Committee met twice time during 2017. Nominations, other than those made by the Nominating Committee, may be made in writing and delivered or mailed to the President/ Chief Executive Officer of the Company not less than 14 days or no more than 50 days prior to any meeting of Shareholders calling for election of Directors; provided however, that if less than 21 days notice of the meeting is given to Shareholders, such nomination shall be mailed or delivered to the President/Chief Executive Officer of the Company not later than the close of business on the 7th day following the day on which the Notice of Meeting was mailed. Nominations not made according to these procedures will be disregarded. The Nominating Committee has a policy with regard to consideration of any Director candidates recommended by Shareholders and that policy is to consider any and all such recommendations. The Nominating Committee has adopted specific minimum qualifications which the Nominating Committee believes must be met by a nominee for a position on our Board of Directors. The qualifications include: (cid:120) (cid:120) (cid:120) (cid:120) nominee must be recognized as successful in such nominee's business or community efforts; have a recognized reputation for honesty and integrity; have demonstrated a commitment to the community in which we operate; have demonstrated in meetings with the Nominating Committee a commitment to the best interest of the Company, its subsidiary Bank, and their officers, Directors, employees and Shareholders The Nominating Committee's process for identifying and evaluating nominees for Director, including nominees recommended by Shareholders, is to investigate whether or not such nominee meets the specific minimum qualifications adopted as a policy by the Committee through contacts the members have in their community. There are no differences in the manner in which the Committee evaluates nominees for Director whether the nominee is recommended by a committee member or a Shareholder. We do not utilize or pay a fee to any third party (compensation consultant) to evaluate nominees for Director. Code of Business Conduct and Ethics: We expect all of our employees to conduct themselves honestly and ethically. Our Board of Directors has adopted a Code of Ethics that applies to all employees. The Code of Ethics requires the officers, employees , and Directors to maintain the highest standards of professional ethical conduct. The Code includes guidelines relating to the ethical handling of actual or potential conflicts of interest, compliance with laws, accurate financial reporting and procedures for promoting compliance with, and reporting violations of the Code. The Code of Ethics may be obtained at our website http://www.banksc.com. Shareholder Communication with the Board of Directors: The Board of Directors has adopted a process by which Shareholders may communicate with them. Shareholders may send a written communication to Fleetwood S. Hassell, President/Chief Executive Officer, Bank of South Carolina Corporation, 256 Meeting Street, Charleston, South Carolina 29401, or fax such communication to Fleetwood S. Hassell, President/Chief Executive Officer, at (843) 724-1513. A Shareholder is free to address any communication to any Director at the address of such Director set forth in this Proxy Statement. Any communication from a Shareholder received by the President shall be sent to all members of the Executive Committee and, if any member of the Executive Committee so directs, will be sent to all members of the Board of Directors. 13 In addition, any Shareholder or interested party who has any concerns or complaints relating to accounting, internal accounting controls or auditing matters, may contact the Audit & Compliance Committee by writing to the following address: Bank of South Carolina Corporation Audit & Compliance Committee c/o Steve D. Swanson, Chairman Bank of South Carolina Corporation 615 Pitt Street Mt. Pleasant, SC 29464 Related Party Transactions: We entered into a rental contract on May 27, 2010, with Holcombe, Fair and Lane, LLC. Charles G. Lane, Director and brother of Hugh C. Lane, Jr., Chairman of the Board of Directors, is a Managing Member of Holcombe, Fair and Lane, LLC. The original contract was a two year lease on office space at a rate of $2,095 a month. A copy of the lease was filed with the 2010 10-K. The contract was renegotiated on April 5, 2013, for larger office space at a rate of $4,000 a month. A copy of this lease was filed with the March 31, 2013 10-Q. An addendum was made to the lease on May 25, 2017, extending the lease for a period of twenty four months at a base rate of $5,000 a month. A copy of this lease was filed with the June 30, 2017 10-Q. In addition, Sass, Herrin and Associates, Inc. an appraisal firm, is on our list of approved appraisal companies. Herbert R. Sass, III, MAI, SRA, fifty percent owner of Sass, Herrin and Associates, Inc., is the brother of Douglas H. Sass, Executive Vice President. We do not have any other existing continuing contractual relationships with any Director, nominee for election as Director or Executive Officer, or any Shareholder owning, directly or indirectly, more than 5% of the shares of our common stock, or any associate of the foregoing persons. Related party transactions have been and will continue to be made as any other ordinary business transaction using substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These transactions did not and will not involve more than the normal risk of collectability or present any other unfavorable features. DIRECTOR COMPENSATION The following table sets forth the information regarding the compensation earned by each Director who served on the Board of Directors during the year ended December 31, 2017. Our officers other than the Secretary do not receive payment for their participation on the Board of Directors or its Committees. Transactions and Relations with Directors, Executive Officers, and their Associates and Affiliates of Directors NAME Susanne K. Boyd David W. Bunch Graham M. Eubank, Jr. Elizabeth M. Hagood Fleetwood S. Hassell Glen B. Haynes, DVM William L. Hiott, Jr. Richard W. Hutson, Jr. Charles G. Lane Hugh C. Lane, Jr. Dr. Linda J. Bradley McKee, CPA Alan I. Nussbaum, MD Edmund Rhett, Jr. MD Malcolm M. Rhodes, MD Douglas H. Sass Sheryl G. Sharry Steve D. Swanson Eugene H. Walpole, IV FEES EARNED OR PAID IN CASH - $7,100 $5,850 $5,450 - $6,950 $8,400 $4,800 $6,700 - $5,450 $6,300 $6,000 $5,550 - $6,700 $5,050 - Non-Executive-Officer Directors of the Company received $200.00 for each meeting of the Board of Directors of the Company attended. Non-Executive-Officer Directors of the Bank received $350.00 for each meeting of the Board of Directors of the Bank attended. Directors of the Company and the Bank also receive $150.00 for each Company or Bank board committee meeting attended. In addition, non-Executive-Officer Directors of the Bank received $250.00 for each Advisory Board meeting attended. Section 16A Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires our Directors, Executive Officers and persons who own beneficially more than 10% of our outstanding common stock to file with the SEC initial reports of ownership and reports of changes in their ownership of our common stock. Directors, Executive Officers and greater than 10% Shareholders are required by SEC regulations to 14 furnish us with copies of the forms they file. To our knowledge, no person beneficially owned more than 10% of our common stock during 2017. During the fiscal year ended December 31, 2017, five executive officers and one director filed untimely Forms 4. Susanne K. Boyd, Chief Operating Officer/Executive Vice President, filed three untimely Form 4 reports for three transactions. Fleetwood S. Hassell, President/ Chief Executive Officer, filed four untimely Form 4 reports for four transactions. Hugh C. Lane, Jr, Chairman of the Board, filed three untimely Form 4 report for three transactions. Douglas H. Sass, Executive Vice President, filed three untimely Form 4 reports for three transactions. Eugene H. Walpole, IV, Chief Financial Officer/Executive Vice President, filed four untimely Form 4 reports for four transactions. Sheryl G. Sharry, Director, filed two untimely Form 4 reports for two transactions. Based solely on a review of the copies of such reports furnished to us, during the fiscal year ended December 31, 2017, all other Directors and Executive Officers complied with all applicable Section 16(a) filing requirements. Executive Compensation-Compensation Discussion and Analysis This section discusses our compensation program, including how it relates to the Executive Officers named in the compensation tables which follow in this section. The Executive Officers of the Company and the Bank consist of: Susanne K. Boyd, Chief Operating Officer/ Executive Vice President, Nominee Fleetwood S. Hassell, President/Chief Executive Officer, Director (cid:120) (cid:120) (cid:120) Hugh C. Lane, Jr., Chairman of the Board (cid:120) Douglas H. Sass, Senior Lender/Executive Vice President, Director (cid:120) Eugene. H. Walpole, IV, Chief Financial Officer/ Executive Vice President, Nominee Set forth below is an analysis of the objectives of our compensation program, the material compensation policy made under this program and the material factors that the Compensation Committee considers in making those decisions. Overview of Compensation Program The Compensation Committee of the Board of Directors, which consists solely of independent Directors, has the responsibility for developing, implementing, and monitoring adherence to our compensation philosophies and program. Our compensation program is based upon the following philosophies: (cid:120) (cid:120) (cid:120) preserve the financial strength, safety and soundness of the Company and the Bank; reward and retain key personnel by compensating them in the midpoint salary ranges at comparable financial institutions and making them eligible for the Employee Stock Ownership Plan and Trust (“ESOP”) and the Omnibus Stock Incentive Plans; and focus management on maximizing earnings while managing risk by maintaining high asset quality, managing interest rate risk within Board guidelines, emphasizing cost control, and maintaining appropriate levels of capital. Our primary forms of compensation for Executive Officers include base salary, the ESOP, and the 1998 and 2010 Omnibus Stock Incentive Plans. Base Salary The Compensation Committee sets the base salary for the five Executive Officers. The Committee’s objectives are: (cid:120) (cid:120) to encourage the achievement of our long-range objectives by providing compensation that reflects the performance of the individual and the achievement of our objectives. The level of compensation shall be reasonable based upon our goals and objectives, normal and customary levels of compensation within the banking industry (taking into consideration geographic and competitive factors), our asset quality, capital level, operations and profitability, and the duties performed and responsibilities held by the individual. to establish compensation guidelines that will attract and retain qualified personnel through an overall level of compensation opportunity that is competitive within the banking industry. 15 As a smaller reporting company, defined by Item 10(f), the following table sets forth all remuneration paid during the years ended December 31, 2017, 2016, and 2015 by the Bank to the Chairman of the Board of Directors and the two most highly compensated Executive officers of the Company and the Bank for their services in all capacities. Such Executive Officers receive no compensation from the Company as Executive Officers or as Directors or in any other capacity. We did not issue any stock awards to our Executive Officers during the years ended December 31, 2017, 2016 or 2015. No options were granted to any Executive Officer during the years ended December 31, 2017, 2016 or 2015. Additionally, there was no non-equity incentive plan compensation or nonqualified deferred compensation earnings given during the years ended December 31, 2017, 2016, and 2015. Name and Principal Position Hugh C. Lane, Jr., Chairman of the Board Fleetwood S. Hassell President/Chief Executive Officer Douglas H. Sass, Senior Lender/Executive Vice President Summary Compensation Table Year Salary (1) Bonus 2017 2016 2015 2017 2016 2015 2017 2016 2015 $270,153.68 $240,002.41 $240,002.41 $268,612.65 $231,127.45 $215,673.26 $188,732.21 $161,471.55 $150,675.80 $20,000.00 $15,100.00 $15,100.00 $20,000.00 $15,100.00 $15,100.00 $15,000.00 $12,600.00 $15,100.00 All Other Compensation (2) $20,998.15 $17,542.21 $16,305.15 $21,106.60 $16,931.92 $14,750.12 $14,753.69 $11,970.10 $10,595.74 Total $311,151.83 $272,644.62 $271,407.56 $309,719.25 $263,159.37 $245,523.38 $218,485.90 $186,041.65 $176,371.54 1) The Compensation Committee, consisting of Graham M. Eubank, Jr., Alan I. Nussbaum, and William L. Hiott, Jr., compares salaries for similar positions at similar sized banks within South Carolina as well as the overall bank and individual performance. Once the Compensation Committee establishes the salary levels, the salaries are recommended to the Board of Directors for approval. (See “Compensation Committee” for further discussion.) The Compensation Committee recommended and the Board of Directors approved a $10,000 increase in salary for the Chairman of the Board, a $17,334 increase in the salary of the President/Chief Executive Officer and a $12,110 increase in salary for the Senior Lender/Executive Vice President for the year ended December 31, 2017. The Board of Directors approved this recommendation on December 15, 2016. The Compensation Committee recommended and the Board of Directors approved a $16,125 increase in the salary of the President/Chief Executive Officer and an $11,265 increase in salary for the Senior Lender/Executive Vice President for the year ended December 31, 2016. The Board of Directors approved this recommendation on December 17, 2015. The Compensation Committee recommended and the Board of Directors approved a $15,000 increase in the salary of the President/Chief Executive Officer and a $10,500 increase in salary for the Senior Lender/Executive Vice President for the year ended December 31, 2015. The Board of Directors approved this recommendation on December 18, 2014. 2) On November 2, 1989, the Bank adopted an ESOP to provide retirement benefits to eligible employees for long and faithful service. The other compensation represents the amount contributed to the Bank’s ESOP. (See table and discussion below for other compensation.) The median salary for all employees other than the Executive Officers was $57,634. Employee Stock Ownership Plan and Trust Agreement Eugene H. Walpole, IV, Fleetwood S. Hassell, Sheryl G. Sharry, and Douglas H. Sass currently serve as Plan Administrators and as Trustees for the ESOP. 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 1st 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 to the Plan are at the sole discretion of the Board of Directors. 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 Board of Directors approved the contribution of $375,000 to the ESOP for the fiscal year ended December 31, 2017. The contribution was made during 2017. 16 A participant becomes vested in the ESOP based upon the employee’s credited years of service. The vesting schedule is as follows: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 1 Year of Service 2 Years of Service 3 Years of Service 4 Years of Service 5 Years of Service 0% Vested 25% Vested 50% Vested 75% Vested 100% Vested The Plan became effective as of January 1, 1989, was amended effective January 1, 2007, and approved by the Board of Directors on January 18, 2007. This amendment was made to comply with the Pension Protection Act of 2006. 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 Plan currently owns 286,013 shares or 5.733% of our common stock outstanding. The following table sets forth details of “All Other Compensation” as presented above in the Summary Compensation Table. Name Hugh C. Lane, Jr. Fleetwood S. Hassell Douglas H. Sass Employee Stock Ownership Plan $20,998.15 $21,106.60 $14,753.69 Total $20,998.15 $21,106.60 $14,753.69 Omnibus Stock Incentive Plan On April 14, 1998, the Shareholders approved the 1998 Omnibus Stock Incentive Plan. The plan was established to assist us in recruiting and retaining employees with ability and initiative by enabling employees to participate in its future success and to associate their interests with those of the Company and the Shareholders. This plan expired on April 14, 2008. The remaining outstanding options granted under this plan can still be exercised in accordance with the plan. The Shareholders approved the 2010 Omnibus Stock Incentive Plan on April 13, 2010. Like the 1998 Plan, under the 2010 Plan any employee of the Company or the Bank is eligible to participate in the Plan if the Executive Committee, in its sole discretion, determines that such a person has contributed or can be expected to contribute to the profits or growth of the Company or the Bank. No member of the Committee may participate in this Plan during the time that their participation would prevent the Committee from being “disinterested” for purposes of the Securities and Exchange Commission Rule 16b-3. 17 The following information with respect to the outstanding equity awards as of December 31, 2017, is presented for the named Executive Officers with additional discussion below. OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2017 OPTION AWARDS STOCK AWARDS Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price (#) Option Expiration Date Market Value of Shares or Units of Stock That Have Not Vested ($) Number of Shares of Units of Stock That Have Not Vested (#) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value or Unearned Shares, Units or Other Rights That Have Not Vested (#) - - - - - 6,600 3,300 4,400 - - - - - $9.47 $9.47 $10.10 - June 23, 2021 June 23, 2021 June 28, 2022 - - - - - - - - - - - - - - - - Name Hugh C. Lane, Jr. Fleetwood S. Hassell Douglas H. Sass In the event of a prospective reorganization, consolidation or sale of substantially all of the assets or any other form of corporate reorganization in which the Company would not be the surviving entity or in the event of the acquisition, directly or indirectly, of the beneficial ownership of 24% of our common stock or the making, orally or in writing, of a tender offer for, or any request or invitation for tender of, or any advertisement making or inviting tenders of our stock by any person, all options in effect at that time would accelerate so that all options would become immediately exercisable and could be exercised within one-year immediately following the date of acceleration but not thereafter. In the case of termination of employment of an option holder other than involuntary termination without just cause, retirement, death or legal disability, the option holder may exercise the option only with respect to those shares of common stock as to which he or she has become vested. The option holder may exercise the option with respect to such shares no more than 30 days after the date of termination of employment (but in any event prior to the expiration date). In the event that the option holder's employment is terminated without just cause, the option shall become fully vested and fully exercisable as of the date of his or her termination without regard to the five year vesting schedule. The option holder may exercise the option following an involuntary termination without just cause until the expiration date of the option. In the event the option holder remains in the continuous employment of the Company or any subsidiary from the date of the grant until the option holder's retirement, the option shall become fully vested and fully exercisable as of the date of his or her retirement without regard to the five year schedule. The option holder may exercise the option following his or her retirement until the expiration date. In the event the option holder remains in the continuous employment of the Company or a subsidiary from the date of the grant until his or her death, the option shall become fully vested and fully exercisable as of the date of death without regard to the five year vesting schedule. The person or persons entitled to exercise the option following the option holder's death may exercise the option until the expiration date. In the event the option holder remains in the continuous employment of the Company or any subsidiary from the date of the grant until the date of his or her legal disability, the option shall become fully vested and fully exercisable as of the date of his or her termination of employment on account of his or her legal disability without regard to the five year vesting schedule. The option holder may exercise the option following such termination of employment until the expiration date. The 1998 and 2010 Omnibus Stock Incentive Plan provides for adjustment in the number of shares of common stock authorized under the Plan or granted to an employee to protect against dilution in the event of changes in the Company's capitalization, including stock splits and dividends. 18 As shown below Fleetwood S. Hassell, President/Chief Executive Officer exercised options to purchase 2,200 shares at $9.47 on May 11, 2017. The price per share on the date of exercise was $20.17. Douglas H. Sass exercised options to purchase 1,100 shares at $9.47 and 1,100 shares at $10.10 on December 19, 2017. The price per share on the date of exercise was $18.50. 2017 OPTION EXERCISES AND STOCK VESTED OPTION AWARDS STOCK AWARDS Number of Shares Acquired on Exercise(#) Value Realized on Exercise ($) Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($) - 2,200 2,200 - $20,834 $21,527 - - - - - - Name Hugh C. Lane, Jr. Fleetwood S. Hassell Douglas H. Sass Equity Compensation Plan Information The following table summarizes the total outstanding options and the weighted-average exercise price of the Company’s equity compensation Plan as of December 31, 2017 (as adjusted for a 10% stock dividend declared August 27, 2015): Number of Securities to be Issued Upon Exercise of Outstanding Options Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights 1,600 $11.73 Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans 1 104,940 $11.67 121,208 106,540 $11.67 121,208 Plan Category 1998 Omnibus Stock Incentive Plan approved by Shareholders2 2010 Omnibus Stock Incentive Plan approved by Shareholders3 Total 1 2 3 In accordance with the 1998 Omnibus Stock Incentive Plan, options are no longer granted under this Plan. This Plan expired April 14, 2008. Options granted before this date shall remain valid in accordance with their terms. The number of securities to be issued upon exercise of the outstanding options represents the total outstanding options under the 1998 Omnibus Stock Incentive Plan. As per the agreement, the above options shall remain valid in accordance with their terms. The 2010 Omnibus Stock Incentive Plan was approved by the Shareholders at the 2010 Annual Meeting. There were 330,000 shares reserved under this Plan. On September 24, 2010, options to purchase 36,300 shares were granted to 21 employees (other than Executive Officers) with options to purchase 825 shares forfeited with the resignation of one employee in 2010. On March 24, 2011, options to purchase 5,500 shares were granted to 1 employee and on June 23, 2011, options to purchase 105,600 shares were granted to 22 employees including Sheryl G. Sharry, and Fleetwood S. Hassell, both Executive Officers who each received options to purchase 11,000 shares. Douglas H. Sass, Executive Vice President, also received options on June 23, 2011, to purchase 5,500 shares. During the year ended December 31, 2011, options to purchase 6,325 shares were forfeited with the resignation of 2 employees. On June 28, 2012, the Executive Committee granted options to purchase 9,900 shares to 5 employees including Douglas H. Sass, Executive Vice President, who received options to purchase 5,500 shares. In addition, the Board of Directors granted options to purchase 2,750 shares to 1 employee on September 24, 2012. Options to purchase 4,400 shares were forfeited during the year ended December 31, 2012 (3.025 had been issued under the 1998 Plan) with the resignation of 3 employees. On June 27, 2013, options to purchase 5,500 shares were granted to 5 employees. Options to purchase 2,200 shares were granted to 3 employees on December 19, 2013. Options to purchase 10,618 (1,815 issued under the 1998 Plan) shares were forfeited during the year ended December 31, 2013, with the resignation of 10 employees. On July 24, 2014, options to purchase 11,000 shares were granted to 12 employees. Options to purchase 7,150 shares were forfeited during the year ended December 31, 2014, with the resignation of 5 employees. On April 23, 2015 options to purchase 20,350 shares were granted to 9 employees and options to purchase 3,300 shares were granted on June 29, 2015. Options to purchase 7,150 shares were forfeited during the 19 year ended December 31, 2015. All shares have been adjusted to reflect a 10% stock dividend declared August 27, 2015. On March 24, 2016, options to purchase 10,000 shares were granted to 2 employees and options to purchase 12,858 shares were forfeited during 2016. On January 26, 2017, options to purchase 6,750 shares were granted to 2 employees. On February 13, 2017, options to purchase 2,500 shares were granted to one employee. During 2017, options to purchase 9,650 shares were forfeited. During the fiscal year ended December 31, 2017, we had no plans or arrangements pursuant to which any Executive Officer, Director or principal Shareholder received contingent remuneration or personal benefits other than the contingent remuneration and life, disability, dental and health insurance benefits. Life, disability, dental and health insurance benefits are available for all employees of the Bank who work at least 30 hours a week. Benefit programs provided to Executive Officers, officers and employees are listed in the table below. Benefit Plan Executive Officers Officers Full Time Employees Employee Stock Ownership Plan Medical and Dental Plans Life and Disability Plans Stock Option Plans x x x x x x x x x x x x We do not have an employment agreement with any officer or employee. We currently believe that the named Executive Officers receive sufficient compensation that employment agreements are not necessary to induce them to remain with the Company. In addition, we do not have any agreement with the Company’s Executive Officers that provide for cash severance payments upon termination of employment or in connection with a change in control. Although there is inherent risk in the business of banking, we do not believe that any of our compensation policies and practices provide incentives to our employees to take risks that are reasonably likely to have a material adverse effect on us. We believe that our compensation policies and practices are consistent with those of similar bank holding companies and their banking subsidiaries and are intended to encourage and reward performance that is consistent with sound practice in the industry. PROPOSAL 2: TO RATIFY THE APPOINTMENT BY THE AUDIT & COMPLIANCE COMMITTEE OF THE COMPANY’S BOARD OF DIRECTORS OF ELLIOTT DAVIS, LLC AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDED DECEMBER 31, 2018. The Audit & Compliance Committee of the Board of Directors has appointed Elliott Davis, LLC as our independent accounting firm for the year ended December 31, 2018, and that appointment is being submitted to Shareholders for ratification. The appointment of Elliott Davis, LLC as independent public accountants was approved by the Audit & Compliance Committee of the Board of Directors and ratified by the Shareholders at the 2017 Annual Shareholders’ Meeting. At the 2018 Annual Shareholders’ Meeting the following resolution will be subject to ratification by a simple majority vote of shares represented at the meeting: RESOLVED, that the selection of Elliott Davis, LLC as the independent certified public accountants of Bank of South Carolina Corporation (the "Company") and its sole subsidiary, The Bank of South Carolina (the "Bank"), for the fiscal year ending December 31, 2018, is hereby ratified. If ratification is not achieved, the selection of an independent certified public accountant will be reconsidered and made by the Board of Directors. Even if selection is ratified, the Board of Directors reserves the right to, and in its discretion may, direct the appointment of any other independent certified public accounting firm at any time if the Board of Directors decides that such a change would be in the best interests of the Company and our Shareholders. Independent Registered Public Accounting Firm Auditing and Related Fees The services provided by Elliott Davis, LLC include the audit of the financial statements of the Company. These services have been furnished at customary rates and terms. There are no existing direct or indirect agreements or understandings that fix a limit on current or future fees for these audit services. Elliott Davis, LLC assisted in the preparation of the Company’s and Bank’s tax returns for the fiscal years ending December 31, 2017 and 2016. These non-audit services were routine in nature and did not compose more than 25% of the total fees paid to Elliott Davis, LLC in 2017 or 2016. A representative of Elliott Davis, LLC is expected to attend the Annual Meeting of Shareholders with the opportunity to make a statement, if desired, and is expected to be available to respond to appropriate questions. 20 Before the independent certified public accountants of the Company and the Bank are engaged to render non-audit services for the Company or the Bank, each engagement is approved by the Audit & Compliance Committee. All of the audit and tax services provided by Elliott Davis, LLC for the fiscal year ending December 31, 2017 and 2016 were preapproved by the Audit & Compliance Committee. Audit Fees Audit related fees Total audit and related fees Tax Fees Total Fees 2017 2016 $ $ 91,897 $ - 91,897 16,450 108,347 $ 86,100 - 86,100 12,300 98,400 THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF ELLIOTT DAVIS, LLC AS THE COMPANY’S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2018. PROPOSAL 3: TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING AND ANY ADJOURNMENT OR POSTPONEMENT OF THE MEETING. We are not aware of any matters to come before the meeting that will require the vote of Shareholders other than those matters indicated in the Notice of Meeting and this Proxy Statement. However, if any other matter calling for Shareholder action should properly come before the meeting or any adjournments thereof, those persons named as Proxies in the enclosed Proxy Form will vote thereon according to their best judgment. In the opinion of Management, there are no legal proceedings pending other than routine litigation incidental to our business involving amounts which are not material to the financial condition of the Company or the Bank. PENDING LITIGATION ANNUAL REPORT The Annual Report for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on Form 10-K, is mailed herewith to all Shareholders. SHAREHOLDER PROPOSALS FOR THE 2019 ANNUAL SHAREHOLDERS’ MEETING Shareholder proposals, if any, for inclusion in the Proxy Statement relating to the 2019 Annual Shareholders’ meeting, must be addressed to and received in the office of the President/Chief Executive Officer no later than December 1, 2018. To ensure prompt receipt by the Company, the proposal should be sent certified mail, return receipt requested. By Order of the Board of Directors /s/Richard W. Hutson, Jr. Richard W. Hutson, Jr., Secretary March 5, 2018 21 This page intentionally left blank U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0-27702 BANK OF SOUTH CAROLINA CORPORATION (Exact name of registrant as specified in its charter) South Carolina (State or other jurisdiction of incorporation or organization) 57-1021355 (IRS Employer Identification Number) 256 Meeting Street, Charleston, SC (Address of principal executive offices) 29401 (Zip Code) Issuer's telephone number: (843) 724-1500 Securities registered under Section 12(b) of the Exchange Act: Common Stock (Title of Class) Securities registered under Section 12(g) of the Exchange Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ____ Yes X No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files). Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10-K. ____ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Emerging Growth Company __ ___ Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company X If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period by complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X Aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price of such stock on June 30, 2017 was $64,613,716. As of February 15, 2018, the Registrant has outstanding 4,990,879 shares of common stock. - 2 - BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY Item 1.Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures Table of Contents PART I Page PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers, and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services Item 15. Exhibits and Financial Statement Schedules PART IV 5 11 12 12 12 12 12 16 17 35 36 77 77 78 78 78 79 79 79 79 3 PART I CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report, including information included or incorporated by reference in this document, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1934. We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1996 and are including this statement for the express purpose of availing the Bank of South Carolina Corporation (the “Company”) of protections of such safe harbor with respect to all “forward-looking statements” contained in this Form 10-K. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of the Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors that are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitations, those described under the heading “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission (the “SEC”) and the following: (cid:120) Risk from changes in economic, monetary policy, and industry conditions (cid:120) Changes in interest rates, shape of the yield curve, deposit rates, the net interest margin and funding sources (cid:120) Market risk (including net income at risk analysis and economic value of equity risk analysis) and inflation (cid:120) Risk inherent in making loans including repayment risks and changes in the value of collateral (cid:120) Loan growth, the adequacy of the allowance for loan losses, provisions for loan losses, and the assessment of problem loans Increased cybersecurity risk, including potential business disruptions or financial losses (cid:120) Level, composition, and re-pricing characteristics of the securities portfolio (cid:120) Deposit growth and changes in the mix or type of deposit products and services (cid:120) Continued availability of senior management and ability to attract and retain key personnel (cid:120) Technological changes (cid:120) (cid:120) Ability to control expenses (cid:120) Changes in compensation (cid:120) Risks associated with income taxes including potential for adverse adjustments (cid:120) Changes in accounting policies and practices (cid:120) Changes in regulatory actions, including the potential for adverse adjustments (cid:120) Recently enacted or proposed legislation and changes in political conditions (cid:120) Reputational risk We will undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings with the SEC, in our press releases, and in oral and written statements, which are not statements of historical fact, constitute forward-looking statements. 4 Item 1. Business General 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 the Company, effective April 17, 1995. At the time of the reorganization, each outstanding share of the Bank was exchanged for two shares of Company stock. Market Area The Bank operates as an independent, community oriented, commercial bank providing a broad range of financial services and products to the Charleston – North Charleston metro area, which includes Charleston, Berkeley, and Dorchester county. We have four banking house locations: 256 Meeting Street, Charleston, SC; 100 North Main Street, Summerville, SC; 1337 Chuck Dawley Boulevard, Mt. Pleasant, SC; and 2027 Sam Rittenberg Boulevard, Charleston, SC. We intend to open a banking office in North Charleston, SC on Highway 78 and Ingleside Boulevard in the future (copy of the lease incorporated as Exhibit 10.13 in the June 30, 2017 Form 10-Q). The Charleston – North Charleston metro area grew 15.2% between 2011 and 2016 according to the U.S. Bureau of Economic Analysis. The primary economic drivers of our market area are manufacturing, tourism, technology, and the healthcare industry. This includes manufacturing campuses for Boeing, Volvo Cars, and Mercedes-Benz Vans’ in the area. Tourism has also contributed to the economic growth as both Conde Nast Traveler and Travel Leisure Magazine have recognized the area as a top tourism destination. Additionally, Charleston is considered the number one mid-sized U.S. metro area for IT growth according to the U.S. Bureau of Labor Statistics. References to “we,” “us,” “our,” “the Bank,” or “the Company” refer to the parent and its subsidiary, that are consolidated for financial purposes. The Company (ticker symbol: BKSC) is publicly traded on the National Association of Securities Dealers Automated Quotations (“NASDAQ”), and is under the reporting authority of the SEC. All of our electronic filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are accessible at no cost on our website, http://www.banksc.com, through the “Investor Relations” link. Our filings are also available through the SEC’s web site at http://www.sec.gov or by calling 1-800-SEC-0330. Competition The financial services industry is highly competitive. We face competition in attracting deposits and originating loans based upon a variety of factors including: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) interest rates offered on deposit accounts interest rates charged on loans credit and service charges the quality of services rendered the convenience of banking facilities and other delivery channels relative lending limits in the case of loans increase in non-banking financial institutions providing similar services continued consolidation, and legislative, regulatory, economic, and technological changes We compete with commercial banks, savings institutions, finance companies, credit unions and other financial services companies. Many of our larger commercial bank competitors have greater name recognition and offer certain services that we do not. However, we believe that we have developed an effective competitive advantage in our market area by emphasizing exceptional service and possessing of local trends and conditions. 5 Lending Activities We focus our lending activities on small and middle market businesses, professionals and individuals in our geographic markets and typically require personal guarantees. Our primary lending activities are for commercial, commercial real estate, and consumer purposes, with the largest category being commercial real estate. Most of our lending activity is to borrowers within our market area. Commercial Loans As of December 31, 2017, $51.7 million, or 19.14%, of our loan portfolio consisted of commercial loans. We originate various types of secured and unsecured commercial loans to customers in our market area in order to provide customers with working capital and funds for other general business purposes. The term of these loans generally range from less than one year to 10 years. These loans bear either a fixed interest rate or an interest rate linked to a variable market index, depending on the individual loan, its purpose, and underwriting of that loan. Commercial credit decisions are based upon our credit assessment of each applicant. We evaluate the applicant’s ability to repay in accordance with the proposed terms of the loan and we assess the risks involved. In addition to evaluating the applicant’s financial statements, we consider the adequacy of the primary and secondary sources of repayment for the loan. Credit agency reports of the applicant’s personal credit history supplement our analysis of the applicant’s creditworthiness. In addition, collateral supporting a secured transaction is analyzed to determine its marketability. Commercial business loans generally have higher interest rates than residential loans of similar duration because they have a higher risk of default with repayment generally depending on the successful operation of the borrower’s business and the adequacy of any collateral. Commercial Real Estate Loans As of December 31, 2017, commercial real estate construction loans comprised $2.3 million, or 0.86%, of our loan portfolio. We make construction loans for commercial properties to businesses. Advances on construction loans are in accordance with a schedule reflecting the cost of construction. Loans are typically underwritten with a maximum loan to value ratio of 80% based on current appraisals with value defined as the purchase price, appraised value, or cost of construction, whichever is lower. Repayment of construction loans on non-residential and income-producing properties is normally attributable to rental income, income from the borrower’s operating entity, or the sale of the property. Construction loans are interest-only during the construction period, which typically does not exceed 12 months and are often paid-off with permanent financing. Before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state-licensed appraiser. We review and inspect properties before disbursement of funds during the term of the construction loan. Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. Construction loans also expose us to risk that improvements will not be completed on time in accordance with specifications and projected costs. As of December 31, 2017, $140.2 million, or 51.89%, of our loan portfolio consisted of other commercial real estate loans, excluding commercial construction loans. Properties securing our commercial real estate loans are primarily comprised of business owner-occupied properties, small office buildings and office suites, and income-producing real estate. We base our decision to lend primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement computed after a deduction for an appropriate vacancy factor and reasonable expenses. We typically require property casualty insurance, title insurance, earthquake insurance, wind and hail coverage, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property. 6 Commercial real estate loans generally carry higher credit risks, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income- producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions not within the control of the borrower or lender could affect the value of the underlying collateral or the future cash flow of the property. Consumer Loans Consumer real estate loans were $70.8 million, or 26.20%, of the loan portfolio as of December 31, 2017. Consumer real estate loans consist of consumer construction loans, consumer real estate loans, HELOCs, and mortgage originations. We make construction loans for owner-occupied residential properties. Advances on construction loans are in accordance with a schedule reflecting the cost of construction, but are limited to a maximum loan-to-value ratio of 80%. Before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state- licensed appraiser. We review and inspect properties before disbursement of funds during the term of the construction loan. Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. Construction loans also expose us to risk that improvements will not be completed on time in accordance with specifications and projected costs. Consumer real estate loans consist of loans secured by first or second mortgages on primary residences, and originate as adjustable-rate or fixed-rate loans. Owner-occupied properties located in the Company's market area serve as the collateral for these loans. The Company currently originates residential mortgage loans for our portfolio with a maximum loan-to- value ratio of 80% for traditional owner-occupied homes. In addition to consumer real estate loans, we offer home equity loans and lines of credit secured by the borrower’s primary or secondary residence. Our home equity loans and lines of credit currently originate with adjustable- rate with a floor. We generally underwrite home equity loans and lines of credit with the same criteria that we use to underwrite mortgage loans to be sold. For a borrower’s primary and secondary residences, home equity loans and lines of credit are typically underwritten with a maximum loan-to-value ratio of 80% when combined with the principal balance of the existing mortgage loan. We require a current appraisal or internally prepared real estate evaluations on home equity loans and lines of credit. At the time we close a home equity loan or line of credit, we record a mortgage to perfect our security interest in the underlying collateral. All residential loans that we originate are underwritten pursuant to our policies and procedures. We originate both adjustable-rate and fixed-rate loans. A rising interest rate environment that typically results in decreased loan demand may adversely affect our loan origination and sales activity. Other consumer loans totaled $5.2 million and were 1.91% of the loan portfolio as of December 31, 2017. These loans are originated for various purposes, including the purchase of automobiles, boats, and other legitimate personal purposes. Consumer loans may entail greater credit risk than mortgage loans to be sold, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. The application of various federal and state laws, including bankruptcy and insolvency laws, may also limit the amount which can be recovered on such loans. Loan Approval Procedures and Authority Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Board of Directors of the Bank. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment, credit history, and information on the historical and projected income and expenses of the borrower. 7 The objectives of our lending program are to: 1. Establish a sound asset structure 2. Provide a sound and profitable loan portfolio to: a) Protect the depositor’s funds b) Maximize the shareholders’ return on their investment 3. Promote the stable economic growth and development of the market area served by the Bank 4. Comply with all regulatory agency requirements and applicable law The underwriting standards and loan origination procedures include officer lending limits, which are approved by the Board of Directors. The individual secured/unsecured lending authority of the President/Chief Executive Officer of the Bank is set at $1,500,000 and the individual secured/unsecured lending authority of the Senior Lender/Executive Vice President is set at $750,000. The President/Chief Executive Officer of the Bank and the Senior Lender/Executive Vice President may jointly lend up to 10% of the Bank’s unimpaired capital for the previous quarter end. In the absence of either of the above, the other may, jointly with the approval of either the Chairman of the Board of Directors or a majority of the Loan Committee of the Board of Directors, lend up to 10% of the Bank’s unimpaired capital for the previous quarter end. The Board of Directors, with two-thirds vote, may approve the aggregate credit in excess of this limit but may not exceed 15% of the Bank’s unimpaired capital. Loan limits apply to the total direct and indirect liability of the borrower. All loans above the loan officer’s authority must have the approval of a loan officer with the authority to approve a loan of that amount. Pooling of loan authority is not allowed except as outlined above for the President/Chief Executive Officer, Senior Lender/Executive Vice President, a majority of the Loan Committee or two-thirds of the Board of Directors. All new credit which results in aggregate direct, indirect, and related credit, not under an approved line of credit of a threshold set forth in our loan policy, with the exceptions of mortgage loans in the process of being sold to investors and loans secured by properly margined negotiable securities traded on an established market or other cash collateral, are reviewed in detail on a monthly basis by the Loan Committee. Certain new credits that meet a higher threshold than required for the Loan Committee are reviewed by the Board of Directors of the Bank at its regular monthly meeting. Employees At December 31, 2017, we employed 77 people, with three individuals considered part time and one individual considered hourly, none of whom are subject to a collective bargaining agreement. We provide a variety of benefit programs including an Employee Stock Ownership Plan and Trust, Stock Incentive Plan, health, life, disability and other insurance. We believe our relationship with our employees is excellent. Supervision and Regulation We are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions and provide for general regulatory oversight of virtually all aspects of operations. The regulations are primarily intended to protect depositors, customers, and the integrity of the U.S. banking system and capital markets. The following information describes some of the more significant laws and regulations applicable to us. The description is qualified in its entirety by reference to the applicable laws and regulations. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures, and with the various bank regulatory agencies. Changes in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on our business operations and earnings. Dodd-Frank Act On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became effective. This law has broadly affected the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services industry, and will continue to significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including the Company and the Bank. The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”) as an agency to centralize responsibility for consumer financial protection, including implementing, examining and enforcing compliance with federal consumer financial laws. The CFPB exercises supervisory review of banks under its jurisdiction. The CFPB 8 focuses its rulemaking in several areas, particularly in the areas of mortgage reform involving the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act. There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based. Governmental intervention and new regulations could materially and adversely affect our business, financial condition and results of operations. Volcker Rule Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” prohibits any bank, bank holding company, or affiliate (referred to collectively as “banking entities”) from engaging in two types of activities: proprietary trading and the ownership or sponsorship of private equity or hedge funds that are referred to as covered funds. Proprietary trading, in general, is trading in securities on a short-term basis for a banking entity’s own account. In December 2013, federal banking agencies, the SEC and the Commodity Futures Trading Commission, finalized a regulation to implement the Volcker Rule. At December 31, 2017, the Company has evaluated our securities portfolio and has determined that we do not hold any covered funds. Bank Holding Company Act The Company is a one-bank holding company under the federal Bank Holding Company Act of 1956, as amended. As a result, the Company is primarily subject to the supervision, examination and reporting requirements of the Board of Governors (the “Federal Reserve Board”) of the Federal Reserve Bank (the “Federal Reserve”) under the Act and its regulations promulgated thereunder. Moreover, as a bank holding company located in South Carolina, the Company is also subject to the regulations of the South Carolina State Board of Financial Institutions. Capital Requirements The Federal Reserve Board imposes certain capital requirements on the Company under the Bank Holding Company Act, including a minimum leverage ratio and minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are essentially the same as those that apply to the Bank and are described under “Regulatory Capital Requirements” in the notes to the financial statements. The ability of the Company to pay dividends to shareholders depends on the Bank’s ability to pay dividends to the Company, which is subject to regulatory restrictions as described below in “Dividends.” Standards for Safety and Soundness The Federal Deposit Insurance Act requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to (1) internal controls, information systems and internal audit systems, (2) loan documentation, (3) credit underwriting, (4) interest rate risk (5) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock exposure, and valuation, as well as standards for compensation, fees, and benefits. The federal banking agencies have adopted regulations and “Interagency Guidelines Establishing Standards for Safety and Soundness” to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Regulatory Examination All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate banking agency against each institution or affiliate, as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the Federal Deposit Insurance Corporation (“FDIC”), their federal regulatory agency, and state supervisor when applicable. The federal banking regulatory agencies prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating to, among other things, the following: (cid:120) (cid:120) Internal controls Information systems and audit systems 9 Interest rate risk exposure (cid:120) Loan documentation (cid:120) Credit underwriting (cid:120) (cid:120) Asset quality (cid:120) Liquidity (cid:120) Capital adequacy (cid:120) Bank Secrecy Act (cid:120) Sensitivity to market risk Transactions with Affiliates and Insiders We are subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Such extensions of credit must be made on substantially the same terms, including interest rates, and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of repayment or present other unfavorable features. Dividends The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years. A depository institution may not pay any dividend if payment would cause the institution to become undercapitalized or if it already is undercapitalized. Consumer Protection Regulations Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected by the Bank are subject to state usury laws and federal laws concerning interest rates. Our loan operations are also subject to federal laws applicable to credit transactions, such as: (cid:120) The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers (cid:120) The Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves (cid:120) The Fair Lending Act, fair equitable, and nondiscriminatory access to credit for consumers (cid:120) The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit (cid:120) The Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies (cid:120) The Fair Debt Collection Act, governing the manner in which consumer debt may be collected by collection agencies (cid:120) The rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of the Bank also are subject to: (cid:120) The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records (cid:120) The Electronic Funds Transfer Act and the Federal Reserve Board issued Regulation E to implement the act, which governs automatic deposits to and withdrawals from deposit and customer’s rights and liabilities arising from the use of automated teller machines and other electronic banking services (cid:120) Regulation DD, which implements the Truth in Savings Act to enable consumers to make informed decisions about deposit accounts at depository institutions. Regulation DD requires depository institutions to provide disclosures so that consumers can make meaningful comparisons among depository institutions. 10 Enforcement Powers The Company is subject to supervision and examination by the Federal Reserve and the South Carolina State Board of Financial Institutions. The Bank is subject to extensive federal and state regulations that significantly affect business and activities. These regulatory bodies have broad authority to implement standards and to initiate proceedings designed to prohibit depository institutions from engaging in activities that represent unsafe or unsound banking practices or constitute violations of applicable laws, rules, regulations, administrative orders, or written agreements with regulators. These regulatory bodies are authorized to take action against institutions that fail to meet such standards, including the assessment of civil monetary penalties, the issuance of cease-and-desist orders, and other actions. Bank Secrecy Act/Anti-Money Laundering We are subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. We must maintain a Bank Secrecy Act Program that includes established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee-training program; and testing of the program by an independent audit function. The enactment of the USA Patriot Act amended and expanded the focus of the Bank Secrecy Act to facilitate information sharing among governmental entities and the Company for the purpose of combating terrorism and money laundering. It improves anti-money laundering and financial transparency laws, information collection tools and the enforcement mechanics for the U.S. government. These provisions include (a) standards for verifying customer identification at account opening; (b) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (c) reports by nonfinancial trades and businesses filed with the U.S. Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10,000; (d) suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws; and (e) regulations and enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons. Similar in purpose to the Bank Secrecy Act, the Office of Foreign Assets Control (“OFAC”), a division of the U.S. Department of Treasury, controls and imposes economic and trade sanctions based on U.S. foreign policy and national security goals against targeted countries and individuals based on threats to foreign policy, national security, or the U.S. economy. OFAC has and will send banking regulatory agencies lists of names of individuals and organizations suspected of aiding, concealing, or engaging in terrorist acts. Among other things, the Bank must block transactions with or accounts of sanctioned persons and report those transactions after their occurrence. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. Privacy and Credit Reporting In connection with our lending activities, we are subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act (the "CRA"). The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." In addition, federal banking regulators, pursuant to the Gramm-Leach-Bliley Act, have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with nonaffiliated third parties. Item 1A. Risk Factors Under the filer category of “smaller reporting company”, as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide information requested by Part I, Item 1A of its Form 10-K. 11 Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company’s headquarters is located at 256 Meeting Street in downtown Charleston, South Carolina. This site is also the location of the main office of the Bank. The Bank also operates from three additional locations: 100 North Main Street, Summerville, SC; 1337 Chuck Dawley Boulevard, Mount Pleasant, SC; and 2027 Sam Rittenberg Boulevard, Charleston, SC. The Bank’s mortgage department is located at 1071 Morrison Drive, Charleston, SC. On January 28, 2014, we signed a lease to open a banking office on Highway 78 and Ingleside Boulevard, North Charleston, SC in the future (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). On July 31, 2017, a new lease agreement was authorized and is incorporated as Exhibit 10.13 filed with the June 30, 2017 Form 10-Q. The Company owns the 2027 Sam Rittenberg Boulevard location, which houses the Operations Department of the Bank as well as operating as a banking office. The Company leases all other locations. The owned location is not encumbered and all of the leases have renewal options. Each banking location is suitable and adequate for banking operations. Item 3. Legal Proceedings In our opinion, there are no other legal proceedings pending other than routine litigation incidental to the Company’s business involving amounts that are not material to our financial condition. Item 4. Mine Safety Disclosures Not applicable. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities At December 31, 2017, there were 5,230,675 shares issued and 4,989,279 shares outstanding of the 12,000,000 authorized shares of common stock of the Company. Our common stock is traded on the NASDAQ under the trading symbol “BKSC”. 12 Information regarding the historical market prices of our common stock and dividends declared on that stock is shown below. 2017 Quarter ended March 31, 2017 Quarter ended June 30, 2017 Quarter ended September 30, 2017 Quarter ended December 31, 2017 2016 Quarter ended March 31, 2016 Quarter ended June 30, 2016 Quarter ended September 30, 2016 Quarter ended December 31, 2016 2015 Quarter ended March 31, 2015 Quarter ended June 30, 2015 Quarter ended September 30, 2015 Quarter ended December 31, 2015 High Low Dividends $ $ $ $ $ $ $ $ $ $ $ $ 21.85 21.15 19.95 19.35 16.75 16.25 18.63 23.47 13.72 15.92 16.86 16.87 $ $ $ $ $ $ $ $ $ $ $ $ 19.28 18.80 17.47 18.00 14.91 15.51 15.95 18.39 13.35 13.59 13.48 16.00 $ $ $ $ $ $ $ $ $ $ $ $ 0.14 0.14 0.15 0.15 0.13 0.13 0.14 0.14 0.13 0.13 0.13 0.13 As of February 15, 2018, there were approximately 1,909 shareholders of record with shares held by individuals and in nominee names. The market price for our common stock as of February 15, 2018, was $19.13. The future payment of cash dividends is subject to the discretion of the Board of Directors and depends upon a number of factors, including future earnings, financial condition, cash requirements, and general business conditions. Cash dividends, when declared, are paid by the Bank to the Company for distribution to shareholders of the Company. Certain regulatory requirements restrict the amount of dividends that the Bank can pay to the Company. At our December 1995 Board Meeting, the Board of Directors authorized the repurchase of up to 140,918 shares of its common stock on the open market. At our October 1999 Board Meeting, the Board of Directors authorized the repurchase of up to 45,752 shares of its common stock on the open market and again at our September 2001 Board meeting, the Board of Directors authorized the repurchase of up to 54,903 shares of its common stock on the open market. As of the date of this report, the Company owns 241,396 shares, adjusted for three 10% stock dividends, a 10% stock distribution, and a 25% stock dividend. At the Annual Meeting in April 2007, the shareholders’ voted to increase the number of authorized shares from 6,000,000 to 12,000,000. As of February 15, 2018, there were 5,232,275 shares of common stock issued and 4,990,879 shares of common stock outstanding. THE BANK OF SOUTH CAROLINA EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST During 1989, the Board of Directors of the Bank adopted an Employee Stock Ownership Plan and Trust Agreement (“ESOP”) to provide retirement benefits to eligible employees of the Bank for long and faithful service. An amendment and restatement was made to the ESOP effective January 1, 2007 and approved by the Board of Directors January 18, 2007. 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, however, to comply with the IRS rules, the Board of Directors approved a restated plan, on January 26, 2012 (incorporated as Exhibit 10.5 in the 2011 10-K) and submitted the plan to the IRS for approval. The IRS issued a determination letter on September 26, 2013, stating that the plan satisfied 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 restated 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 Board of Directors of the Bank approved a cash contribution of $375,000 to The Bank of South Carolina ESOP for 13 the fiscal year ended December 31, 2017. The Board of Directors of the Bank approved cash contributions of $345,000 and $315,000 for the fiscal years ended December 31, 2016 and 2015, respectively. The contributions were made during the respective fiscal years. An employee of the Bank who is not a member of an ineligible class of employees is eligible to participate in the plan upon reaching 21 years of age and being credited with one year of service (1,000 hours of service). All employees are eligible employees except for the following ineligible classes of employees: (cid:120) Employees whose employment is governed by a collective bargaining agreement between employee representatives and the Company in which retirement benefits were the subject of good faith bargaining unless the collective bargaining agreement expressly provides for the inclusion of such employees in the plan (cid:120) Employees who are non-resident aliens who do not receive earned income from the Company which constitutes income from sources within the United States (cid:120) Any person who becomes an employee as the result of certain asset or stock acquisitions, mergers, or similar transactions (but only during a transitional period) (cid:120) Certain leased employees (cid:120) Employees who are employed by an affiliated company that does not adopt the plan (cid:120) Any person who is deemed by the Company to be an independent contractor on his or her employment commencement date and on the first day of each subsequent plan year, even if such person is later determined by a court or a governmental agency to be or to have been an employee. The employee may enter the Plan on the January 1st 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. A participant becomes vested in the ESOP based upon the employee’s credited years of service. The vesting schedule is as follows: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 1 Year of Service 2 Years of Service 3 Years of Service 4 Years of Service 5 Years of Service 0% Vested 25% Vested 50% Vested 75% Vested 100% Vested The Bank is the Plan Administrator. Eugene H. Walpole, IV, Fleetwood S. Hassell, Sheryl G. Sharry and Douglas H. Sass, currently serve as the Plan Administrative Committee and Trustees for the Plan. At December 31, 2017, the Plan owned 286,013 shares of common stock of the Company. THE BANK OF SOUTH CAROLINA STOCK INCENTIVE PLAN We have a Stock Incentive Plan, which was approved in 1998, with 180,000 (329,422 adjusted for three 10% stock dividends, a 10% stock distribution, and a 25% stock dividend) shares reserved, and a Stock Incentive Plan, which was approved in 2010, with 300,000 (330,000 adjusted for a 10% stock dividend) 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. Participating 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. Employees are eligible to participate in this plan if the Executive/Long-Range Planning Committee, in its sole discretion, determines that an employee has contributed or can be expected to contribute to our profits or growth. 14 The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of our common stock. The expected term of the options granted will 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. 15 Item 6. Selected Financial Data The following table sets forth certain selected financial information concerning the Company and its wholly-owned subsidiary. The information was derived from audited consolidated financial statements. The information should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations,” which follows, and the audited consolidated financial statements and notes, which are presented elsewhere in this report. 2017 2016 2015 2014 2013 $ 4,901,825 $ 5,247,063 $ 4,884,288 $ 4,398,820 $ 4,076,924 446,566,498 272,274,363 413,949,636 264,962,325 399,172,512 248,442,944 367,225,802 241,442,873 340,893,703 223,059,647 139,250,250 119,978,944 119,997,585 113,994,112 94,648,221 24,034,194 435,558,807 402,888,300 42,764,635 4,973,637 5,058,352 18,101,300 403,042,569 372,522,851 40,612,974 4,935,349 5,054,114 23,898,862 392,339,391 358,718,612 39,151,712 4,912,499 5,067,085 5,680,613 361,117,598 322,419,027 36,759,982 4,907,208 5,032,211 16,080,721 333,788,589 305,242,655 34,739,143 4,897,902 4,906,234 428,174,359 264,881,222 410,581,560 265,151,258 379,527,104 243,729,630 358,774,284 232,281,473 332,092,490 226,267,071 130,161,937 110,762,289 110,633,399 99,488,314 67,484,036 - - - - - 23,558,893 418,602,052 384,524,305 43,121,778 26,474,258 402,387,805 367,822,900 41,479,755 17,549,903 371,912,932 337,969,217 38,631,718 19,588,597 351,358,384 319,131,466 36,283,441 31,524,293 325,275,400 296,482,622 34,800,116 11.37% 1.14% 10.07% 3.76% 0.01% 12.65% 1.28% 10.10% 3.71% 0.05% 12.64% 1.29% 10.18% 3.72% 0.04% 12.12% 1.23% 10.11% 3.70% 0.02% 11.72% 1.23% 10.48% 3.79% 0.15% 1.43% 1.48% 1.41% 1.42% 1.51% 0.99 $ 0.97 $ 8.57 $ 0.58 $ 1.06 $ 1.04 $ 8.19 $ 0.54 $ 0.99 $ 0.96 $ 7.96 $ 0.52 $ 0.90 $ 0.87 $ 7.49 $ 0.62 $ 58.87% 50.86% 49.94% 62.88% 0.83 0.83 7.79 0.50 54.63% (1) (2) Including mortgage loans to be sold Excluding mortgage loans to be sold 77 74 16 81 77 77 For December 31: Net income Selected Year End Balance: securities Total assets Total loans (1) Investment available for sale Interest-bearing deposits at the Federal Reserve Earning assets Total deposits Shareholder’s equity Weighted average shares outstanding - basic Weighted average shares outstanding - diluted For the Year: Selected Average Balances: securities Total assets Total loans (1) Investment available for sale Federal funds sold and resale agreements Interest-bearing deposits at the Federal Reserve Earning assets Total deposits Shareholder’s equity Performance Ratios: Return on average equity Return on average assets Average equity to average assets Net interest margin Net charge-offs to average loans Allowance for loan losses as a percentage of total loans (2) Per Share: Basic income Diluted income Year end book value Cash dividends declared Dividend payout ratio $ $ $ $ Full time employee equivalents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis is included to assist the shareholder in understanding our financial condition, results of operations, and cash flow. This discussion should be reviewed in conjunction with the audited consolidated financial statements and accompanying notes presented in Item 8 of this report and the supplemental financial data appearing throughout this report. Since the primary asset of the Company is its wholly-owned subsidiary, most of the discussion and analysis relates to the Bank. OVERVIEW The Company is a bank holding company headquartered in Charleston, South Carolina, with $446,566,498 in assets as of December 31, 2017 and net income of $848,699 and $4,901,825, respectively, for the three and twelve months ended December 31, 2017. The Company offers a broad range of financial services through its wholly owned subsidiary, the Bank. The Bank is a state-chartered commercial bank, which operates principally in the Charleston, Dorchester, and Berkeley counties of South Carolina. The Bank’s original and current concept is to be a full service financial institution specializing in personal service, responsiveness, and attention to detail to foster long-standing relationships. We derive most of our income from interest on loans and investment securities. The primary source of funding for making these loans and investment securities is our interest and non-interest-bearing deposits. Consequently, one of the key measures of our success is the amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest- bearing liabilities. A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The reserve for credit losses consists of the allowance for loan losses (the "allowance") and a reserve for unfunded commitments (the "unfunded reserve"). The allowance provides for probable and estimable losses inherent in our loan portfolio while the unfunded reserve provides for potential losses related to unfunded lending commitments. The allowance is increased or decreased through the provisioning process. For a detailed discussion on the allowance for loan losses, see “Allowance for Loan Losses”. In addition to earning interest on loans and investment securities, we earn income through fees and other expenses we charge to the customer. The various components of other income and other expenses are described in the following discussion. The discussion and analysis also identifies significant factors that have affected our financial position as of December 31, 2017 as compared to December 31, 2016 and our operating results for 2017 compared to 2016 and 2016 compared to 2015, and should be read in conjunction with the consolidated financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion. CRITICAL ACCOUNTING POLICIES We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States (“GAAP”) and with general practices within the banking industry in the preparation of our consolidated financial statements. Our significant accounting policies are set forth in the notes to the consolidated financial statements of this report. Certain accounting policies involve significant judgments and assumptions made by the Company that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on factors that we believe to be reasonable under the circumstances. Because of the number of judgments and assumptions that we make, actual results could differ and have a material impact on the carrying values of our assets and liabilities and our results of operations. 17 We consider our policy regarding the allowance for loan losses to be our most subjective accounting policy due to the significant degree of judgment. We have developed what we believe to be appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers, which were not known at the time of the issuance of the consolidated financial statements. For additional discussion concerning our allowance for loan losses and related matters, see “Allowance for Loan Losses”. COMPARISON OF THE YEAR ENDED DECEMBER 31, 2017 TO DECEMBER 31, 2016 Net income decreased $345,238 or 6.58% to $4,901,825, or basic and diluted income per share of $0.99 and $0.97, respectively for the year ended December 31, 2017 from $5,247,063 or basic and diluted income per share of $1.06 and $1.04, respectively for the year ended December 31, 2016. The decrease in net income was primarily due to the enactment of the Tax Cuts and Jobs Act on December 22, 2017 and the related revaluation of the deferred tax asset. Deferred tax assets and liabilities must be adjusted to legislation based on the enactment date not the effective date; therefore, the deferred tax asset was revalued at a corporate tax rate of 21% instead of 34% in accordance with GAAP at December 22, 2017. This revaluation resulted in additional income tax expense of $666,674. Our returns on average assets and average equity for the year ended December 31, 2017 were 1.14% and 11.37%, respectively, compared with 1.28% and 12.65%, respectively, for the year ended December 31, 2016. Net interest income increased $828,427 or 5.55% to $15,745,284 for the year ended December 31, 2017 from $14,916,857 for the year ended December 31, 2016. This increase was primarily due to increases in interest and fees on loans and investment securities. Interest and fees on loans increased $435,418 or 3.89% to $13,287,318 for the year ended December 31, 2017 from $12,851,900 for the year ended December 31, 2016, as the result of the increases in the Federal Funds rate set by the Federal Reserve. Interest income on investment securities increased $306,944 or 13.32% to $2,612,018 for the year ended December 31, 2017 from $2,305,074 for the year ended December 31, 2016 a result of the increase in the average balance of investment securities from $110,762,289 for the year ended December 31, 2016 to $130,161,937 for the year ended December 31, 2017. Average earning assets increased $16,214,247 or 4.03% to $418,602,052 for the year ended December 31, 2017 from $402,387,805 for the year ended December 31, 2016. This is primarily related to the increase in the average balance of investment securities as stated in the previous paragraph. The provision to the allowance for loan losses for the year ended December 31, 2017 was $55,000 compared to $570,000 for the year ended December 31, 2016. The decrease was primarily a result of slower loan growth in the first three quarters of the year and lower net charge-offs. The Board of Directors determined that this provision was appropriate based upon the strength of our reserve and the anticipation of continued loan growth and an improving economy. Charge- offs of $185,449 and recoveries of $154,230, together with the provision to the allowance, resulted in an allowance for loan losses of $3,875,398 or 1.43% of total loans at December 31, 2017. Other income decreased $592,612 or 20.71% to $2,268,471 for the year ended December 31, 2017. Our mortgage banking income decreased $330,283 or 23.80% to $1,057,457 for the year ended December 31, 2017 from $1,387,740 for the year ended December 31, 2016 due to decreased volume. We were also impacted by an increase in competition as new banks enter the market area. Mortgage banking income is highly influenced by mortgage interest rates and the housing market. Mortgage loan originations decreased $20,241,046 or 26.62% to $55,791,625 for the year ended December 31, 2017 from $76,032,671 for the year ended December 31, 2016. We also had gains of $380,904 on the sales of investment securities during the year ended December 31, 2016 compared to gains of $45,820 during the year ended December 31, 2017, a decrease of $335,084 or 87.97%. The decrease in gains was due to the little difference between short-term and long-term rates for bonds of the same credit quality in the current market. Other expense decreased $30,148 or 0.29% to $10,242,296 for the year ended December 31, 2017, from $10,272,444 for the year ended December 31, 2016. Salaries and employee benefits decreased $27,098 or 0.45% from $6,087,929 for the year ended December 31, 2016 to $6,060,831 for the year ended December 31, 2017. Other operating expenses decreased $122,039 to $2,517,737 during the year ended December 31, 2017 from $2,639,776 during the year ended December 31, 2016. This decrease was primarily attributable to a decrease in state and FDIC insurance and fees. Our net occupancy expense increased $43,028 or 2.82% to $1,571,076 for the year ended December 31, 2017, from $1,528,048 for the year ended December 31, 2016. Our net occupancy expense includes rent and insurance on our banking locations as well as 18 the cost of repairs and maintenance on these facilities. Occupancy expense increased primarily due to annual rent increases at our Meeting Street and Summerville banking locations as well as an increase in insurance on banking locations, offset by a decrease in the cost of maintenance and repairs and depreciation on furniture, fixtures and equipment. For the year ended December 31, 2017, the Company’s effective tax rate was 36.48% compared to 24.34% during the year ended December 31, 2016. The increase in the effective tax rate is directly related to the income tax expense recorded due to the revaluation of the deferred tax asset. As a result of the enactment of the Tax Cuts and Jobs Act changing the corporate tax rate to 21% from 34%, the deferred tax asset was revalued on December 22, 2017. This revaluation resulted in additional income tax expense of $666,674. COMPARISON OF THE YEAR ENDED DECEMBER 31, 2016 TO DECEMBER 31, 2015 Net income increased $362,775 or 7.43% to $5,247,063, or basic and diluted income per share of $1.06 and $1.04, respectively for the year ended December 31, 2016 from $4,884,288 or basic and diluted income per share of $0.99 and $0.96, respectively for the year ended December 31, 2015. This increase is primarily due to increases in interest and fees on loans offset by higher provision for loan losses expense and lower mortgage banking income. Our returns on average assets and average equity for the year ended December 31, 2016 were 1.28% and 12.65%, respectively, compared with 1.29% and 12.64%, respectively, for the year ended December 31, 2015. Net interest income increased $1,089,304 or 7.88% to $14,916,857 for the year ended December 31, 2016 from $13,827,553 for the year ended December 31, 2015. This increase was primarily due to increases in interest and fees on loans and other interest income. Interest and fees on loans increased $1,056,597 or 8.96% to $12,851,900 for the year ended December 31, 2016 from $11,795,303 for the year ended December 31, 2015, as the result of higher average loan balances, an improving local economy, and consumer confidence. Other interest income, earned mostly on interest- bearing deposits in other banks, increased $93,057 or 204.22% to $138,623 for the year ended December 31, 2016 from $45,566 for the year ended December 31, 2015. Average earning assets increased $30,474,873 or 8.19% to $402,387,805 for the year ended December 31, 2016 from $371,912,932 for the year ended December 31, 2015. Average loans increased $21,421,628 or 8.79% for the year ended December 31, 2016. Average interest-bearing deposits in other banks increased $8,924,355 or 50.85% to $26,474,258 for the year ended December 31, 2016 from $17,549,903 for the year ended December 31, 2015. The provision to the allowance for loan losses for the year ended December 31, 2016 was $570,000 compared to $192,500 for the year ended December 31, 2015. The increase was primarily a result of loan growth. The Board of Directors determined that this provision was appropriate based upon the strength of our reserve and the anticipation of continued loan growth and an improving economy. Charge-offs of $208,295, recoveries of $72,085, together with the provision to the allowance, resulted in an allowance for loan losses of $3,851,617 or 1.48% of total loans at December 31, 2016. Non-interest income decreased $188,875 or 6.19% to $2,861,083 for the year ended December 31, 2016. Our mortgage banking income decreased $217,936 or 13.57% to $1,387,740 for the year ended December 31, 2016 from $1,605,676 for the year ended December 31, 2015 due to the loss of two loan originators during 2016. Mortgage banking income is highly influenced by mortgage interest rates and the housing market. According to local real estate market reports, the sales volume in the Charleston market increased 10% for the year ended December 31, 2016 compared to the year ended December 31, 2015. The Charleston market had 17,114 home sales during 2016 with a median sales price of $245,000 compared to 16,202 home sales in 2015 at a median price of $229,000. Mortgage loan originations decreased $15,021,252 or 16.50% to $76,032,671 for the year ended December 31, 2016 from $91,053,923 for the year ended December 31, 2015. Service charges, fees and commissions increased $70,342 to $1,061,349 for the year ended December 31, 2016 from $991,007 for the year ended December 31, 2015. This increase was primarily due to an increase of $52,416 in debit card fees resulting from increased usage particularly by our business customers. We also had gains of $380,904 on the sales of investment securities during the year ended December 31, 2016 compared to gains of $423,832 during the year ended December 31, 2015. Other expense increased $758,969 or 7.98% to $10,272,444 for the year ended December 31, 2016, from $9,513,475 for the year ended December 31, 2015. Salaries and employee benefits increased $228,726 or 3.90% from $5,859,203 for the year ended December 31, 2015 to $6,087,929 for the year ended December 31, 2016. Base wages increased $134,013 to $4,768,176 for the year ended December 31, 2016. This increase was primarily due to annual merit increases. Our 19 contribution to the ESOP increased from $315,000 in 2015 to $345,000 for 2016. Other operating expenses increased $471,394. During 2016, the Company invested in a South Carolina Historic Rehabilitation Tax Credit of $937,211, which will be amortized over three years. As of December 31, 2016, the balance of the credit was $612,211. For the year ended December 31, 2016, the Company amortized $325,000 of the credit. Our net occupancy expense increased $47,442 or 3.20% to $1,528,048 for the year ended December 31, 2016, from $1,480,606 for the year ended December 31, 2015. Our net occupancy expense includes rent and insurance on our banking locations as well as the cost of repairs and maintenance on these facilities. Occupancy expense increased primarily due to annual rent increases at our Meeting Street and Summerville banking locations as well as an increase in insurance on banking locations, offset by a decrease in the cost of maintenance and repairs and depreciation on furniture, fixtures and equipment. For the year ended December 31, 2016, the Company’s effective tax rate was 24.34% compared to 31.89% during the year ended December 31, 2015. The Company invested in a South Carolina Historic Rehabilitation Tax Credit during 2016, which resulted in a decrease to the effective rate. ASSET AND LIABILITY MANAGEMENT We manage our assets and liabilities to ensure there is sufficient liquidity to enable management to fund deposit withdrawals, loan demand, capital expenditures, reserve requirements, operating expenses, and dividends; and to manage daily operations on an ongoing basis. Funds are primarily provided by the Bank through customer deposits, principal and interest payments on loans, mortgage loan sales, the sale or maturity of securities, temporary investments and earnings. The Asset Liability/Investment Committee (“ALCO”) manages asset and liability procedures though the ultimate responsibility rests with the President/Chief Executive Officer. At December 31, 2017, total assets increased 7.88% to $446,566,498 and total deposits increased 8.15% to $402,888,300 from December 31 2016. As of December 31, 2017, earning assets, which are composed of U.S. Treasury, Government Sponsored Enterprises and Municipal Securities in the amount of $139,250,250, interest-bearing deposits at the Federal Reserve in the amount of $24,034,194 and total loans, including mortgage loans held for sale, in the amount of $272,274,363, consisted of approximately 97.54% of our total assets. The yield on a majority of our earning assets adjusts in tandem with changes in the general level of interest rates. Some of the Company’s deposit liabilities are issued with fixed terms and can be repriced only at maturity. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and interest rates. Our risk consists primarily of interest rate risk in our lending and investing activities as they relate to the funding by deposit and borrowing activities. Our policy is to minimize interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities and to attempt to maintain an asset sensitive position over a six-month period. By adhering to this policy, we anticipate that our net interest margins will not be materially affected, unless there is an extraordinary precipitous change in interest rates. The average net interest rate spread for 2017 increased to 3.70% from 3.64% for 2016 and the average net interest margin for 2017 increased to 3.76% from 3.71% for 2016. At December 31, 2017 and 2016, our net cumulative gap was liability sensitive for periods less than one year and asset sensitive for periods of one year or more. The reason for the shift in sensitivity is the direct result of management’s strategic decision to invest excess funds held at the Federal Reserve into fixed rate investment securities that match our investment policy objectives. Management is aware of this departure from policy and will continue to closely monitor our sensitivity position going forward. Since the rates on most of our interest-bearing liabilities can vary on a daily basis, we continue to maintain a loan portfolio priced predominately on a variable rate basis. However, in an effort to protect future earnings in a declining rate environment, we offer certain fixed rates, interest rate floors, and terms primarily associated with real estate transactions. We seek stable, long-term deposit relationships to fund our loan portfolio. Furthermore, we do not have any brokered deposits or internet deposits. 20 At December 31, 2017, the average maturity of the investment portfolio was 3.90 years with an average yield of 2.04% compared to 4.13 years with an average yield of 1.99% at December 31, 2016. We do not take foreign exchange or commodity risks. In addition, we do not own mortgage-backed securities nor do we have any exposure to the sub-prime market or any other distressed debt instruments. The following table summarizes our interest sensitivity position as of December 31, 2017. Less than three months Three months to less than six months Six months to less than one year One year to less than five years One Day Five years or more Total Estimated Fair Value Interest-earning assets (in thousands) Loans(1) Investment securities available for sale(2) Interest-bearing deposits at the Federal Reserve Total Interest-bearing liabilities (in thousands) CD’s and other time deposits less than $250,000 CD’s and other time deposits $250,000 and over Money market and interest bearing demand accounts Savings Total Net Cumulative $ 141,856 $ 11,699 $ 16,347 $ 26,282 $ 75,838 $ 252 $ 272,274 $ 265,277 - 1,452 1,045 9,057 72,622 56,431 140,607 139,250 (cid:31) 24,034 165,890 $ $ - 13,151 $ - 17,392 $ - 35,339 $ - 148,460 $ - 56,683 $ 24,034 436,915 $ 24,034 428,561 $ 63 $ 8,955 $ 4,878 $ 7,081 $ 2,319 $ - $ 23,296 $ 22,515 - 4,347 5,868 3,410 5,000 - 18,625 18,207 186,801 34,910 221,774 $ - - 13,302 $ - - 10,746 $ - - 10,491 $ - - 7,319 $ - - - $ 186,801 34,910 263,632 $ 186,801 34,910 262,433 (55,884) $ $ (151) $ (56,035) $ 6,646 $ (49,389) $ 24,848 $ (24,541) $ 141,141 $ 116,600 $ 56,683 $ 173,283 173,283 $ $ (1) Including mortgage loans to be sold and deferred fees (2) At amortized cost 21 LIQUIDITY Historically, we have maintained our liquidity at levels believed by management to be adequate to meet requirements of normal operations, potential deposit outflows and strong loan demand and still allow for optimal investment of funds and return on assets. The following table summarizes future contractual obligations as of December 31, 2017. Contractual Obligations (in thousands) Time deposits Operating leases Total contractual cash obligations Payment Due by Period Less than 1 Year 1-5 Years Total After 5 Years $ $ 41,920 $ 13,411 55,331 $ 34,585 $ 580 35,165 $ 7,335 $ 2,251 9,586 $ - 10,580 10,580 Proper liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our primary liquid assets are cash and due from banks, investments available for sale, interest-bearing deposits at the Federal Reserve, and mortgage loans held for sale. Our primary liquid assets accounted for 38.93% and 36.38% of total assets at December 31, 2017 and 2016, respectively. Investment securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates and liquidity needs. All of the investment securities presently owned are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity. At December 31, 2017, we had unused short-term lines of credit totaling approximately $23.0 million (which can be withdrawn at the lender's option). Additional sources of funds available to us for liquidity include increasing deposits by raising interest rates paid and selling mortgage loans held for sale. We also established a Borrower-In-Custody arrangement with the Federal Reserve. This arrangement permits us to retain possession of assets pledged as collateral to secure advances from the Federal Reserve Discount Window. At December 31, 2017, we could borrow up to $88.2 million. There have been no borrowings under this arrangement. Our core deposits consist of non-interest bearing demand accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our reliance on certificates of deposit greater than $250,000 and other large deposits. We maintain a Contingency Funding Plan (“CFP”) that identifies liquidity needs and weighs alternate courses of action designed to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. At December 31, 2017 and 2016, our liquidity ratio was 37.68% and 38.27%, respectively. Average earning assets increased by $16,214,247 from 2016 to 2017. This increase was primarily due to a $19,399,648 increase in investment securities available for sale. Throughout the year, the Bank bought investment securities when liquidity was greater than needed and loan demand was stable to improve the yield earned on our investment securities portfolio. 22 The following table shows the composition of average assets over the past five fiscal years. Composition of Average Assets Loans (1) Investment securities available for sale Interest-bearing deposits at the Federal Reserve Non-earning assets Total average assets 2017 2016 2015 2014 2013 $ 264,881,222 $ 265,151,258 $ 243,729,630 $ 232,281,473 $ 226,267,071 130,161,937 110,762,289 110,633,399 99,488,314 67,484,036 23,558,893 9,572,307 $ 428,174,359 $ 26,474,258 8,193,755 410,581,560 $ 17,549,903 7,614,172 379,527,104 $ 19,588,597 7,415,900 358,774,284 $ 31,524,293 6,817,090 332,092,490 (1) Including mortgage loans to be sold and deferred fees ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table shows changes in interest income and expense based upon changes in volume and changes in rates. 2017 vs. 2016 2016 vs. 2015 2015 vs. 2014 Volume Rate Net Dollar Change(1) Volume Rate Net Dollar Change(1) Volume Rate Net Dollar Change(1) $ (12,868) $ 448,286 $ 435,418 $ 1,038,280 $ 18,317 $ 1,056,597 $ 554,074 $ (21,819) $ 532,255 390,667 (83,722) 306,945 2,780 (86,785) (84,005) 239,933 43,671 283,604 $ $ (16,770) 361,029 12,863 6,097 (14,974) $ $ 147,957 512,521 (2,853) (340) 44,330 - - $ 3,986 $ 41,137 131,187 873,550 10,010 5,757 29,356 $ $ 31,025 1,072,085 28,628 3,061 $ $ 62,032 (6,436) 1,050 295 (48,234) (7,529) - (1,817) 891 45,123 $ (18,362) $ (5,293) 828,427 $ $ $ $ $ $ $ $ 93,057 1,065,649 29,678 3,356 $ $ (5,272) 788,735 9,146 3,474 $ $ 1,107 22,959 215 (268) $ $ (4,165) 811,694 9,361 3,206 (55,763) (17,738) (1,633) (19,371) (926) (160) 412 (23,655) $ (5,278) $ (1,274) 1,089,304 252 (6,552) 818,246 $ $ Loans (2) Investment securities available for sale Interest-bearing deposits at the Federal Reserve Interest income Interest-bearing transaction accounts Savings Time deposits Securities sold under agreement to repurchase Interest expense Increase in net interest income (1) Volume/Rate changes have been allocated to each category based on the percentage of each to the total change (2) Including mortgage loans to be sold 23 YIELDS ON AVERAGE EARNING ASSETS AND RATES ON AVERAGE INTEREST-BEARING LIABILITIES The following table shows the yields on average earning assets and average interest-bearing liabilities. Average Balance 2017 Interest Paid/ Earned Average Yield/ Rate (1) Average Balance 2016 Interest Paid/ Earned Average Yield/ Rate (1) Average Balance 2015 Interest Paid/ Earned Average Yield/ Rate (1) $ 264,881,222 $ 13,287,318 5.02% $ 265,151,258 $ 12,851,900 4.85% $ 243,729,630 $ 11,795,303 4.84% 130,161,937 2,612,018 2.01% 110,762,289 2,305,074 2.08% 110,633,399 2,389,079 2.16% 23,558,893 269,811 1.15% 26,474,258 138,623 0.52% 17,549,903 45,566 $ 418,602,052 $ 16,169,147 3.86% $ 402,387,805 $ 15,295,597 3.80% $ 371,912,932 $ 14,229,948 $ 178,146,123 $ 174,296 0.10% $ 167,534,223 $ 164,286 0.10% $ 138,332,181 $ 134,608 33,694,318 44,097,537 40,028 209,533 0.12% 0.48% 28,687,719 47,930,721 34,271 180,176 0.12% 0.38% 26,123,223 60,726,160 30,915 235,939 0.26% 3.83% 0.10% 0.12% 0.39% - 6 0.00% 751 7 0.93% 1,934,493 933 0.05% $ 255,937,978 $ 423,863 0.17% $ 244,153,414 $ 378,740 0.16% $ 227,116,057 $ 402,395 3.70% 3.76% 3.64% 3.71% $ 15,745,284 $ 14,916,857 $ 13,827,553 0.18% 3.65% 3.72% Interest- earning assets Loans (2) Investment securities available for sale Interest-bearing deposits at the Federal Reserve Total earning assets Interest- bearing liabilities Interest-bearing transaction accounts Savings Time deposits Securities sold under agreement to repurchase Total interest- bearing liabilities Net interest spread Net interest margin Net interest income The effect of forgone interest income as a result of non-accrual loans was not considered in the above analysis (1) (2) Average loan balances include non-accrual loans and mortgage loans to be sold 24 The following tables summarize the carrying value of investment securities as of the indicated dates and the weighted- average yields of those securities at December 31, 2017. INVESTMENT PORTFOLIO December 31, 2017 (in thousands) U.S. Treasury Notes Government-Sponsored Enterprises Municipal securities Total Weighted average yields U.S. Treasury Notes Government-Sponsored Enterprises Municipal securities Total Amortized Cost Due After One Year Through Five Years 23,166 33,366 16,090 72,622 1.87% 1.86% 2.55% 1.76% After Five Years Through Ten Years 9,808 $ 25,536 17,946 53,290 $ 2.05% 2.01% 2.52% 1.60% Within One Year 2,997 $ 5,542 3,015 11,554 $ $ $ 1.59% 1.51% 2.21% 1.40% After Ten Years $ $ - - 3,141 3,141 0.00% 0.00% 2.18% 2.18% Total 35,971 64,444 40,192 140,607 $ $ $ $ Market Value 35,560 63,556 40,134 139,250 2.04% The following tables present the amortized cost and market value of investment securities for the past three years. December 31, 2017 (in thousands) U.S. Treasury Notes Government-Sponsored Enterprises Municipal securities Total December 31, 2016 (in thousands) U.S. Treasury Notes Government-Sponsored Enterprises Municipal securities Total December 31, 2015 (in thousands) U.S. Treasury Notes Government-Sponsored Enterprises Municipal securities Total Amortized Cost Market Value $ $ 35,971 64,444 40,192 140,607 Amortized Cost $ $ 24,148 51,738 45,057 120,943 Amortized Cost $ $ 34,518 51,136 32,768 118,422 $ $ $ $ $ $ 35,560 63,556 40,134 139,250 Market Value 23,939 51,034 45,006 119,979 Market Value 34,634 51,284 34,080 119,998 At December 31, 2017, we had eight U.S. Treasury Notes with an unrealized loss of $411,145 compared to four U.S. Treasury Notes with an unrealized loss of $250,385 at December 31, 2016. At December 31, 2017, we had 15 Government-Sponsored Enterprises with an unrealized loss of $887,811 compared to eight Government-Sponsored Enterprises with an unrealized loss of $833,321 at December 31, 2016. At December 31, 2017, we had 49 Municipal Securities with an unrealized loss of $545,146 compared to 54 Municipal Securities with an unrealized loss of $816,413 at December 31, 2016. Interest rate increases caused the unrealized losses on these investments. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Therefore, these investments are not considered other-than-temporarily impaired. We have the ability to hold these investments until market price recovery or maturity. The primary purpose of the investment portfolio is to fund loan demand, to manage fluctuations in deposits and liquidity, to satisfy pledging requirements and to generate a favorable return on investment. In doing these things, our main objective is to adhere to sound investment practices. To that end, all purchases and sales of investment securities are made through reputable securities dealers that have been approved by the Board of Directors. The Board of Directors of the Bank review the entire investment portfolio at each regular monthly meeting, including any purchases, sales, calls, and 25 maturities during the previous month. Furthermore, the credit department conducts a financial underwriting assessment of all municipal securities and their corresponding municipalities annually and management reviews the assessments. LOAN PORTFOLIO COMPOSITION We focus our lending activities on small and middle market businesses, professionals and individuals in our geographic market. At December 31, 2017, outstanding loans (including mortgage loans and deferred loan fees of $152,047) totaled $270,180,640, which equaled 67.06% of total deposits and 60.50% of total assets. The following is a schedule of our loan portfolio, excluding both mortgage loans to be sold and deferred loan fees, as of December 31, 2017, compared to the prior four years: (in thousands) Classification Commercial Commercial real estate construction Commercial real estate other Consumer real estate Consumer other Total loans Book Value of Loans As of December 31, 2017 51,723 2,318 140,187 70,798 5,155 270,181 $ $ 2016 52,262 1,209 122,968 77,132 7,005 260,576 $ $ 2015 50,938 1,005 115,736 69,777 5,166 242,622 $ $ 2014 49,900 1,512 115,740 62,055 4,911 234,118 $ $ 2013 53,308 1,517 104,741 54,699 4,090 218,355 $ $ We had no foreign loans or loans to fund leveraged buyouts at any time during the years ended December 31, 2013 through December 31, 2017. The following table presents the contractual terms to maturity for loans outstanding at December 31, 2017. Demand loans, loans having no stated schedule of repayment or stated maturity, and overdrafts are reported as due in one year or less. The table does not include an estimate of prepayments, which can significantly affect the average life of loans and may cause our actual principal experience to differ from that shown. (in thousands) Classification Commercial Commercial real estate construction Commercial real estate other Consumer real estate Consumer other Total loans Loans maturing after one year with: Fixed interest rates Floating interest rates Total Selected Loan Maturity as of December 31, 2017 One year or less 32,802 $ 1,602 38,501 24,815 2,338 100,058 $ $ $ Over one year but less than 5 years 17,505 $ 716 85,191 8,654 2,702 114,768 $ Over 5 years 1,416 $ - 16,495 37,329 115 55,355 $ Total 51,723 2,318 140,187 70,798 5,155 270,181 $ $ 75,969 190,248 266,217 IMPAIRED LOANS A loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current information and events. All loans placed on non-accrual status are classified as impaired. However, not all impaired loans are on non-accrual status nor do they all represent a loss. 26 Impairment loss is measured by: a. The present value of the future cash flow discounted at the loan’s effective interest rate, or b. The fair value of the collateral if the loan is collateral dependent. The following is a schedule of our impaired loans and non-accrual loans. Loan Non-Accrual Loans Impaired Loans 2017 831,859 $ 3,724,262 $ $ $ Impaired and Non-Accrual Loans as of December 31, 2014 882,413 7,051,127 2015 2,061,088 6,542,707 2016 1,741,621 5,901,784 $ $ $ $ 2013 1,575,440 7,136,907 $ $ TROUBLED DEBT RESTRUCTURINGS According to GAAP, we are required to account for certain loan modifications or restructurings as a troubled debt restructuring (“TDR”), when appropriate. In general, the modification or restructuring of a debt is considered a 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. Three factors must always be present: 1. An existing credit must formally be renewed, extended, or modified, 2. The borrower is experiencing financial difficulties, and 3. We grant a concession that we would not otherwise consider. The following is a schedule of our TDR’s including the number of loans represented. Number of TDRs Amount of TDRs $ Troubled Debt Restructurings as of December 31, 2017 1 33,300 $ 2016 2 378,382 $ 2015 3 458,268 $ 2014 2 466,541 $ 2013 4 1,196,341 Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 310-20-35-9 allows a loan to be removed from TDR status if the terms of the loan reflect current market rates and the loan has been performing under modified terms for an extended period of time or under certain other circumstances. One TDR with a balance of $345,082 at December 31, 2016 paid off during the year ended December 31, 2017. During the year ended December 31, 2016, one TDR was paid off with a balance of $72,919 at December 31, 2015. During the year ended December 31, 2014 a loan receivable with a balance of $496,090, was removed from TDR status. The borrower consistently paid as agreed and made substantial reductions to principal. In addition, one loan receivable was paid off during the year ended December 31, 2014 with a balance of $106,194 at December 31, 2013. We do not know of any potential problem loans which will not meet their contractual obligations that are not otherwise discussed herein. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents our estimate of probable losses inherent in our loan portfolio. The adequacy of the allowance for loan losses (the “allowance”) is reviewed by the Loan Committee and by the Board of Directors on a quarterly basis. For purposes of this analysis, adequacy is defined as a level sufficient to absorb estimated losses in the loan portfolio as of the balance sheet date presented. To remain consistent with GAAP, the methodology employed for this analysis has been modified over the years to reflect the economic environment and new accounting pronouncements. The credit department reviews this calculation on a quarterly basis. In addition, the Company’s Risk Management Officer validates the allowance calculation on a periodic basis. The methodology is based on a reserve model that is comprised of the three components listed below: 1) Specific reserve analysis for impaired loans based on Financial Accounting Standards Board (“FASB”) ASC 310- 10-35, Receivables - Overall 2) General reserve analysis applying historical loss rates based on FASB ASC 450-20, Contingencies: Loss Contingencies 3) Qualitative or environmental factors. 27 Loans greater than $50,000 are reviewed for impairment on a quarterly basis if any of the following criteria are met: 1) The loan is on non-accrual 2) The loan is a troubled debt restructuring 3) The loan is over 60 days past due 4) The loan is rated sub-standard, doubtful, or loss 5) Excessive principal extensions are executed 6) If we are provided information that indicates we will not collect all principal and interest as scheduled Impairment is measured by the present value of the future cash flow discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An impaired loan may not represent an expected loss. A general reserve analysis is performed on all loans, excluding impaired loans. This analysis includes a pool of loans that are reviewed for impairment but are not found to be impaired. Historical losses are segregated into risk-similar groups and a loss ratio is determined for each group over a five-year period. The five-year average loss ratio by type is then used to calculate the estimated loss based on the current balance of each group. Qualitative and environmental loss factors are also applied against the portfolio, excluding impaired loans. These factors include external risk factors that we believe are representative of our overall lending environment. We believe that the following factors create a more comprehensive loss projection, which we can use to monitor the quality of the loan portfolio. 1) Portfolio risk a) Levels and trends in delinquencies and impaired loans and changes in loan rating matrix b) Trends in volume and terms of loans c) Over-margined real estate lending risk 2) National and local economic trends and conditions 3) Effects of changes in risk selection and underwriting practices 4) Experience, ability and depth of lending management staff 5) 6) Effects of changes in credit concentrations Industry conditions a) Loan concentration b) Geographic concentration c) Regulatory concentration 7) Loan and credit administration risk a) Collateral documentation b) c) Maintenance of financial information risk Insurance risk The sum of each component’s analysis contributes to the “estimated loss” within our total portfolio. Portfolio Risk Portfolio risk includes the levels and trends in delinquencies, impaired loans and changes in the loan rating matrix, trends in volume and terms of loans and overmargined real estate lending. We are satisfied with the stability of the past due and non-performing loans and believe there has been no decline in the quality of our loan portfolio due to any trend in delinquent or adversely classified loans. Sizable unsecured principal balances on a non-amortizing basis are monitored. Although the vast majority of our real estate loans are underwritten on a cash flow basis, the secondary source of repayment is typically tied to our ability to realize on the collateral. Accordingly, we closely monitor loan to value ratios. The maximum collateral advance rate is 80% on all real estate transactions, with the exception of raw land at 65% and land development at 70%. Occasionally, we extend credit beyond our normal collateral advance margins in real estate lending. We refer to these loans as overmargined real estate loans. Although infrequent, the aggregate of these loans represent a notable part of our portfolio. Accordingly, these loans are monitored and the balances reported to the Board of Directors every quarter. An excessive level of this practice (as a percentage of capital) could result in additional regulatory scrutiny, competitive disadvantages and potential losses if forced to convert the collateral. The consideration of overmargined real estate loans directly relates to the capacity of the borrower to repay. We often request additional collateral to bring the loan to value 28 ratio within the policy objectives and require a strong secondary source of repayment. Although significantly under the threshold of 100% of capital (currently approximately $42.8 million), the number of overmargined real estate loans currently totals approximately $9,495,471 or approximately 3.51% of our loan portfolio at December 31, 2017 compared to $10,015,945 or approximately 3.84% of the loan portfolio at December 31, 2016. A credit rating matrix is used to rate all extensions of credit and to provide a more specified picture of the risk each loan poses to the quality of the loan portfolio. There are eight possible ratings used to determine the quality of each loan based on the following characteristics: cash flow, collateral quality, guarantor strength, financial condition, management quality, operating performance, the relevancy of the financial statements, historical loan performance, debt coverage ratio, and the borrower’s leverage position. The matrix is designed to meet our standards and expectations of loan quality. One hundred percent of our loans are graded. National and local economic trends and conditions National and local economic trends and conditions are constantly changing and both positively and negatively impact borrowers. Most macroeconomic conditions are not controllable by us and are incorporated into the qualitative risk factors. Natural and environmental disasters, political uncertainty, international instability, as well as problems in the traditional mortgage market are a few of the trends and conditions that are currently affecting the national and local economies. These changes have impacted borrowers’ ability, in many cases, to repay loans in a timely manner. On occasion, a loan’s primary source of repayment (i.e., personal income, cash flow, or lease income) may be eroded as a result of unemployment, lack of revenues, or the inability of a tenant to make rent payments. Effects of changes in risk selection and underwriting practices The quality of our loan portfolio is contingent upon our risk selection and underwriting practices. All new loans (except for mortgage loans in the process of being sold to investors and loans secured by properly margined negotiable securities traded on an established market or other cash collateral) with exposure over $300,000 are reviewed by the Loan Committee on a monthly basis. The Board of Directors review credits over $750,000 monthly. Annual credit analyses are conducted on credits over $500,000 upon the receipt of updated financial information. Prior to any extension of credit, every significant commercial loan goes through sound credit underwriting. The Credit Department conducts a detailed cash flow on each proposal using the most current financial information. Experience, ability and depth of lending management staff We have over 350 combined years of lending experience among our lending staff. In addition to the lending staff, we have an Advisory Board for each office, including the anticipated North Charleston branch, comprised of business and community leaders from the specific office market area. We meet with these advisory boards quarterly to discuss the trends and conditions in each respective market. We are aware of the many challenges currently facing the banking industry. As other banks look to increase earnings in the short term, we will continue to emphasize the need to maintain safe and sound lending practices and core deposit growth managed with a long-term perspective. Industry conditions There continues be an influx of new banks and consolidation of existing banks in our geographic area, which creates pricing competition. We believe that our borrowing base is well established and therefore unsound price competition is not necessary. Effects of changes in credit concentrations The risks associated with the effects of changes in credit concentration include loan concentration, geographic concentration and regulatory concentration. As of December 31, 2017, three Standard Industrial Code groups comprised more than 2% of our total outstanding loans. The groups are activities related to real estate, offices and clinics of doctors, and offices of lawyers. We are located along the coast and on an earthquake fault line, increasing the chances that a natural disaster may impact our borrowers and us. We have a Disaster Recovery Plan in place; however, the amount of time it would take for our customers to return to normal operations is unknown. Our plan is reviewed and tested annually. Loan and credit administration risk Loan and credit administration risk includes collateral documentation, insurance risk and maintaining financial information risk. 29 The majority of our loan portfolio is collateralized with a variety of our borrowers’ assets. The execution and monitoring of the documentation to properly secure the loan is the responsibility of our lenders and Loan Department. We require insurance coverage naming us as the mortgagee or loss payee. Although insurance risk is also considered collateral documentation risk, the actual coverage, amounts of coverage and increased deductibles are important to management. Risk includes a function of time during which the borrower’s financial condition may change; therefore, keeping financial information up to date is important to us. Our policy requires all new loans (with a credit exposure of $10,000 or more), regardless of the customer’s history with us, to have updated financial information. In addition, we monitor appraisals closely as real estate values are improving. Based on our allowance for loan loss model, we recorded a provision for loan loss of $55,000 for the year ended December 31, 2017 primarily based on our analysis of the adequacy of the allowance for loan losses, compared to $570,000 for the year ended December 31, 2016. At December 31, 2016, the five-year average loss ratios were: 0.110% Commercial, 0.00% Commercial Real Estate Construction, .073% Commercial Real Estate Other, 0.064% Consumer Real Estate, and .064% Consumer Other. During the year ended December 31, 2017, charge-offs of $185,449 and recoveries of $154,230 were recorded to the allowance for loan losses, resulting in an allowance for loan losses of $3,875,398 or 1.43% of total loans, compared to charge-offs of $208,295 and recoveries of $72,085 resulting in an allowance for loan losses of $3,851,617 or 1.48% of total loans at December 31, 2016. Net charge-offs for the year ended December 31, 2017, were $31,219 as compared to net charge-offs of $136,210 for the year ended December 31, 2016. We believe loss exposure in the portfolio is identified, reserved against, and closely monitored, to ensure that economic changes are promptly addressed in the analysis of reserve adequacy. The accrual of interest is generally discontinued on loans which become 90 days past due as to principal or interest. The accrual of interest on some loans may continue even though they are 90 days past due if the loans are well secured or in the process of collection and we deem it appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of 6 to 9 months, they are reviewed individually to determine if they should be returned to accrual status. At December 31, 2017 there was one loan over 90 days past due still accruing interest compared to two loans over 90 days past due still accruing interest at December 31, 2016. The loans at December 31, 2017 and 2016 were all considered impaired. 30 The following table represents a summary of loan loss experience for the past five years. Summary of Loan Loss Experience (in thousands) Balance of allowance for loan losses at beginning of 2017 2016 2015 2014 2013 period $ 3,852 $ 3,418 $ 3,335 $ 3,292 $ 3,433 Charge-offs: Commercial Commercial real estate construction Commercial real estate other Consumer real estate Consumer other Total charge-offs Recoveries: Commercial Commercial real estate construction Commercial real estate other Consumer real estate Consumer other Total recoveries Net charge-offs Provision charged to operations - - (181) - (5) (186) 6 - 87 60 1 154 (32) 55 (33) - (78) (82) (15) (208) - - 65 - 7 72 (136) 570 (100) - (55) (6) (40) (201) 9 - 54 6 22 91 (110) 193 (83) - (16) - (14) (113) - - 46 - 27 73 (40) 83 (245) - - - (146) (391) 23 - 15 - 5 43 (348) 207 Balance of allowance for loan losses at end of period $ 3,875 $ 3,852 $ 3,418 $ 3,335 $ 3,292 We believe the allowance for loan losses at December 31, 2017, is adequate to cover estimated losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Our judgments are based on numerous assumptions about current events that we believe to be reasonable, but may or may not be valid. Thus, 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 following table presents a breakdown of the allowance for loan losses for the past five years. (in thousands) Commercial Commercial real estate construction Commercial real estate other Consumer real estate Consumer other Total $ 2017 2016 %(1) $ 1,404 36% $ $ 1,545 %(1) $ December 31, 2015 $ %(1) 20% $ 897 21% $ 2014 2013 %(1) $ 1,211 21% $ $ 1,449 %(1) 24% 23 1% 52 1% 60 1% 43 1% 22 1% 1,550 797 101 39% 21% 3% 3,875 100% 1,375 726 154 47% 29% 3% $ 3,852 100% 1,345 941 175 3,418 47% 29% 2% 100% $ 1,112 863 105 49% 27% 2% 3,335 100% $ 1,064 673 84 3,292 49% 25% 2% 100% $ (1) Loan category as a percentage of total loans. The allowance is also subject to examination testing by regulatory agencies, which may consider such factors 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 to them at the time of their examination. The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, 31 is inherently similar to the methodology used to determine the allowance for loan losses described above, adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio. No provision was recorded during the year ended December 31, 2017. A provision of $4,001 was recorded during the year ended December 31, 2016. The balance for the reserve for unfunded lending commitments was $24,826 as of December 31, 2017 and 2016. OTHER REAL ESTATE OWNED Real estate acquired because of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until it is sold. When the property is acquired, it is recorded at the lesser of the fair value of the property less estimated selling costs or the total loan balance. It is in our best interest to determine the fair market value by engaging an independent appraisal within 30 days of property being acquired into OREO. We cannot hold the property for a period of more than five years unless we have prior approval from the Commissioner of Banking of the State Board of Financial Institutions. The Bank will pay property taxes along with insurance expenses until the property is sold. OREO at December 31, 2017 consisted of one property in the amount of $435,479 compared to one property in the amount of $521,943 at December 31, 2016. One loan receivable valued at $98,832 transferred to OREO and subsequently sold during the year ended December 31, 2017 for a loss of $1,477. One property sold during the year ended December 31, 2016 for a loss of $13,450. One loan receivable valued at $35,473 moved to OREO during the year ended December 31, 2014, and ultimately sold at a gain of $2,382. We had no OREO during the year ended December 31, 2013. NONPERFORMING ASSETS Nonperforming assets include OREO, nonaccrual loans and loans past due 90 days or more and still accruing interest. The following table summarizes nonperforming assets for the five years ended December 31, 2017: Nonperforming Assets (in thousands) Nonaccrual loans Loans past due 90 days or more and still accruing interest Total nonperforming loans Other real estate owned Total nonperforming assets 2017 2016 2015 2014 2013 $ 832 $ 1,742 $ 2,061 $ 882 $ 1,575 33 865 435 1,300 123 1,865 522 $ 2,387 $ 2 2,063 620 2,683 1,274 2,156 522 2,678 $ - 1,575 - 1,575 $ $ Nonperforming assets to total assets Nonperforming loans to total loans 0.29% 0.32% 0.58% 0.72% 0.67% 0.85% 0.73% 0.92% 0.46% 0.72% DEPOSITS The following table shows the contractual maturities of time deposits in denominations of $100,000 or more at December 31, 2017. Less than three months Three months to less than six months Six months to less than one year One year to less than five years One Day Five years or more Total (in thousands) CD’s and other time deposits less than $100,000 CD’s and other time deposits $100,000 and over Total $ $ 63 $ 3,442 $ 2,795 $ 3,337 $ 1,553 $ - $ 11,190 - 63 $ 9,860 13,302 $ 7,951 10,746 $ 7,154 10,491 $ 5,766 7,319 $ - - $ 30,731 41,921 Certificates of Deposit $100,000 and over decreased $726,905 or 2.31% for the year ended December 31, 2017, from $31,456,776 at December 31, 2016. This decrease was primarily due to the maturity of Public Funds used for construction projects. 32 The following table presents average deposits by category: ( in thousands) Non-interest-bearing demand Interest-bearing transaction accounts Savings Time deposits Total average deposits 2017 2016 2015 Average Amount 128,586 178,146 33,694 44,098 384,524 $ $ Average Rate Paid n/a 0.10% 0.12% 0.48% Average Amount 123,670 167,534 28,688 47,931 367,823 $ $ Average Rate Paid n/a 0.10% 0.12% 0.38% Average Amount 112,788 138,332 26,123 60,726 337,969 $ $ Average Rate Paid n/a 0.10% 0.12% 0.39% Deposits increased $30,365,449 or 8.15% to $402,888,300 as of December 31, 2017, from $372,522,851 as of December 31, 2016. Non-interest bearing deposits increased $13,222,270 to $139,256,748 as of December 31, 2017, primarily from new account growth and an improved economy. We also experienced larger balances in existing customer accounts including growth in our interest- bearing transaction accounts because of large real estate escrow funds. We fund growth through core deposits. We do not have, nor do we rely on, Brokered Deposits or Internet Deposits as a source to do so. SHORT-TERM BORROWINGS Securities sold under agreements to repurchase with customers mature on demand. At December 31, 2017 and 2016, there were no securities sold under agreements to repurchase. There was no amount outstanding at any month-end during 2017. At December 31, 2017 and 2016, 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 $88.2 million. We established this arrangement as an additional source of liquidity. There have been no borrowings under this arrangement. At December 31, 2017 and 2016, the Bank had unused short-term lines of credit totaling approximately $23.0 million and $21.0 million, respectively (which are withdrawable at the lender’s option). OFF-BALANCE SHEET ARRANGEMENTS In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. We use such transactions for general corporate purposes or customer needs. General corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customer requests for funding. Our off-balance sheet arrangements consist principally of commitments to extend credit described below. We estimate probable losses related to binding unfunded lending commitments and record a reserve for unfunded lending commitments in other liabilities on the consolidated balance sheet. At December 31, 2017 and 2016, the balance of this reserve was $24,826. At December 31, 2017 and 2016, we had no interests in non-consolidated special purpose entities. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on 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 $92,869,285 and $81,234,269 as of December 31, 2017 and 2016, respectively. 33 Standby letters of credit represent our obligation to a third party contingent upon the failure of 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. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2017 and 2016 was $1,219,644 and $793,992, respectively. We originate certain fixed rate residential loans and commit these loans for sale. The commitments to originate fixed rate residential loans and the sales commitments are freestanding derivative instruments. We had forward sales commitments, totaling $2,093,723 at December 31, 2017, to sell loans held for sale of $2,093,723, compared to forward sales commitments of $4,386,210 at December 31, 2016, to sell loans held for sale of $4,386,210. The fair value of these commitments was not significant at December 31, 2017 or 2016. We had no embedded derivative instruments requiring separate accounting treatment. Once we sell certain fixed rate residential loans, the loans are no longer reportable on our balance sheet. With most of these sales, we have an obligation to repurchase the loan in the event of a default of principal or interest on the loan. This recourse period ranges from three to nine months. Misrepresentation or fraud carries unlimited time for recourse. The unpaid principal balance of loans sold with recourse was $13.4 million at December 31, 2017 and $18.1 million at December 31, 2016. For the twelve months ended December 31, 2017 and December 31, 2016, there were no loans repurchased. EFFECT OF INFLATION AND CHANGING PRICES The consolidated financial statements have been prepared in accordance with GAAP, which require the measurement of financial position and results of operations in terms of historical dollars without consideration of changes in the relative purchasing power over time due to inflation. Unlike most other industries, the assets and liabilities of financial institutions like the Company are primarily monetary in nature. As a result, interest rates generally have a more significant impact on our performance than the effects of general levels of inflation and changes in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. We strive to manage the relationship between interest rate sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation. CAPITAL RESOURCES Our capital needs have been met to date through the $10,600,000 in capital raised in our initial offering, the retention of earnings less dividends paid and the exercise of options to purchase stock. Total shareholders’ equity at December 31, 2017 was $42,764,635. The rate of asset growth since our inception has not negatively impacted our capital base. 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 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk- weighted assets from 4% to 6% and requires a minimum leverage ratio of 4%. 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. Full compliance with all of the final rule requirements will be phased in over a multi-year schedule. At December 31, 2017, the Bank was categorized as “well capitalized”. To be categorized as “well capitalized” the Bank 34 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. We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the financial statements. We must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Current and previous quantitative measures established by regulation to ensure capital adequacy require that we maintain minimum amounts and ratios of total and Tier 1 capital to risk- weighted assets and to average assets. We believe, as of December 31, 2017, that the Company and the Bank meet all capital adequacy requirements to which we are subject. There are no current conditions or events that we are aware of that would change the Company’s or the Bank’s category. Please see “Notes to Consolidated Financial Statements” for the Company’s and the Bank’s various capital ratios at December 31, 2017. Item 7A. Quantitative and Qualitative Disclosures About Market Risk See the Market Risk section in “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this report. 35 (cid:90)(cid:28)(cid:87)(cid:75)(cid:90)(cid:100)(cid:3)(cid:75)(cid:38)(cid:3)(cid:47)(cid:69)(cid:24)(cid:28)(cid:87)(cid:28)(cid:69)(cid:24)(cid:28)(cid:69)(cid:100)(cid:3)(cid:90)(cid:28)(cid:39)(cid:47)(cid:94)(cid:100)(cid:28)(cid:90)(cid:28)(cid:24)(cid:3)(cid:87)(cid:104)(cid:17)(cid:62)(cid:47)(cid:18)(cid:3)(cid:4)(cid:18)(cid:18)(cid:75)(cid:104)(cid:69)(cid:100)(cid:47)(cid:69)(cid:39)(cid:3)(cid:38)(cid:47)(cid:90)(cid:68)(cid:3) (cid:3) (cid:3) 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(cid:286)(cid:400)(cid:410)(cid:349)(cid:373)(cid:258)(cid:410)(cid:286)(cid:400)(cid:3) (cid:373)(cid:258)(cid:282)(cid:286)(cid:3) (cid:271)(cid:455)(cid:3) (cid:373)(cid:258)(cid:374)(cid:258)(cid:336)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:853)(cid:3) (cid:258)(cid:400)(cid:3) (cid:449)(cid:286)(cid:367)(cid:367)(cid:3) (cid:258)(cid:400)(cid:3) (cid:286)(cid:448)(cid:258)(cid:367)(cid:437)(cid:258)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3) (cid:410)(cid:346)(cid:286)(cid:3) (cid:381)(cid:448)(cid:286)(cid:396)(cid:258)(cid:367)(cid:367)(cid:3) (cid:393)(cid:396)(cid:286)(cid:400)(cid:286)(cid:374)(cid:410)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3) (cid:381)(cid:296)(cid:3) (cid:410)(cid:346)(cid:286)(cid:3) (cid:296)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3) (cid:400)(cid:410)(cid:258)(cid:410)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:856)(cid:3)(cid:116)(cid:286)(cid:3)(cid:271)(cid:286)(cid:367)(cid:349)(cid:286)(cid:448)(cid:286)(cid:3)(cid:410)(cid:346)(cid:258)(cid:410)(cid:3)(cid:381)(cid:437)(cid:396)(cid:3)(cid:258)(cid:437)(cid:282)(cid:349)(cid:410)(cid:400)(cid:3)(cid:393)(cid:396)(cid:381)(cid:448)(cid:349)(cid:282)(cid:286)(cid:3)(cid:258)(cid:3)(cid:396)(cid:286)(cid:258)(cid:400)(cid:381)(cid:374)(cid:258)(cid:271)(cid:367)(cid:286)(cid:3)(cid:271)(cid:258)(cid:400)(cid:349)(cid:400)(cid:3)(cid:296)(cid:381)(cid:396)(cid:3)(cid:381)(cid:437)(cid:396)(cid:3)(cid:381)(cid:393)(cid:349)(cid:374)(cid:349)(cid:381)(cid:374)(cid:856)(cid:3) (cid:3) (cid:3) (cid:116)(cid:286)(cid:3)(cid:346)(cid:258)(cid:448)(cid:286)(cid:3)(cid:400)(cid:286)(cid:396)(cid:448)(cid:286)(cid:282)(cid:3)(cid:258)(cid:400)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:258)(cid:374)(cid:455)(cid:918)(cid:400)(cid:3)(cid:258)(cid:437)(cid:282)(cid:349)(cid:410)(cid:381)(cid:396)(cid:3)(cid:400)(cid:349)(cid:374)(cid:272)(cid:286)(cid:3)(cid:1006)(cid:1004)(cid:1004)(cid:1010)(cid:856)(cid:3) (cid:3) (cid:18)(cid:381)(cid:367)(cid:437)(cid:373)(cid:271)(cid:349)(cid:258)(cid:853)(cid:3)(cid:94)(cid:381)(cid:437)(cid:410)(cid:346)(cid:3)(cid:18)(cid:258)(cid:396)(cid:381)(cid:367)(cid:349)(cid:374)(cid:258)(cid:3) (cid:68)(cid:258)(cid:396)(cid:272)(cid:346)(cid:3)(cid:1009)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1012)(cid:3) (cid:3) BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2017 2016 ASSETS Cash and due from banks Interest-bearing deposits at the Federal Reserve Bank Investment securities available for sale (amortized cost of $140,606,807 and $120,942,615 in 2017 and 2016, respectively) Mortgage loans to be sold Loans Less: Allowance for loan losses Net loans Premises, equipment and leasehold improvements, net Other real estate owned Accrued interest receivable Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits: Non-interest-bearing demand Interest-bearing demand Money market accounts Time deposits over $250,000 Other time deposits Other savings deposits Total deposits Accrued interest payable and other liabilities Total liabilities Commitments and contingencies Notes 6 and 11 Shareholders’ equity $ $ $ 8,486,025 $ 24,034,194 139,250,250 2,093,723 270,180,640 (3,875,398) 266,305,242 2,244,525 435,479 1,720,920 1,996,140 446,566,498 $ 139,256,748 $ 108,967,196 77,833,728 18,624,924 23,295,492 34,910,212 402,888,300 913,563 403,801,863 8,141,030 18,101,300 119,978,944 4,386,210 260,576,115 (3,851,617) 256,724,498 2,296,624 521,943 1,614,002 2,185,085 413,949,636 126,034,478 96,260,589 77,307,662 17,822,136 26,019,121 29,078,865 372,522,851 813,811 373,336,662 Common stock-no par, 12,000,000 shares authorized; 5,230,675 and 5,197,535 shares issued at December 31, 2017 and 2016, respectively; 4,989,279 and 4,956,139 shares outstanding at December 31, 2017 and 2016, respectively Additional paid in capital Retained earnings Treasury stock: 241,396 shares at December 31, 2017 and 2016 Accumulated other comprehensive loss, net of income taxes Total shareholders’ equity Total liabilities and shareholders’ equity $ See accompanying notes to consolidated financial statements. - 37,236,566 8,471,780 (2,247,415) (696,296) 42,764,635 446,566,498 $ - 36,824,022 6,643,476 (2,247,415) (607,109) 40,612,974 413,949,636 37 BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2017 2016 2015 Interest and fee income Loans, including fees Taxable securities Tax-exempt securities Other Total interest and fee income Interest expense Deposits Short-term borrowings Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income Service charges and fees Mortgage banking income Gains on sales of securities Other non-interest income Total other income Other expense Salaries and employee benefits Net occupancy expense Other operating expenses Net other real estate owned expenses Total other expenses Income before income tax expense Income tax expense Net income Weighted average shares outstanding Basic Diluted Basic income per common share Diluted income per common share $ $ $ $ $ 13,287,318 1,585,505 1,026,513 269,811 16,169,147 $ 12,851,900 1,297,636 1,007,438 138,623 15,295,597 423,857 6 423,863 15,745,284 55,000 15,690,284 1,135,037 1,057,457 45,820 30,157 2,268,471 6,060,831 1,571,076 2,517,737 92,652 10,242,296 7,716,459 2,814,634 378,733 7 378,740 14,916,857 570,000 14,346,857 1,061,349 1,387,740 380,904 31,090 2,861,083 6,087,929 1,528,048 2,639,776 16,691 10,272,444 6,935,496 1,688,433 11,795,303 1,376,441 1,012,638 45,566 14,229,948 401,463 932 402,395 13,827,553 192,500 13,635,053 991,007 1,605,676 423,832 29,443 3,049,958 5,859,203 1,480,606 2,168,382 5,284 9,513,475 7,171,536 2,287,248 4,901,825 $ 5,247,063 $ 4,884,288 4,973,637 5,058,352 $ 0.97 $ 0.99 4,935,349 5,054,114 1.06 1.04 $ $ 4,912,499 5,067,085 0.99 0.96 See accompanying notes to consolidated financial statements. 38 BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2017 2016 $ 4,901,825 $ 5,247,063 $ 2015 4,884,288 Net income Other comprehensive loss: Unrealized (loss) gain on securities arising during the period Reclassification adjustment for securities gains realized in net income Other comprehensive loss, before tax Income tax effect related to items of other comprehensive loss Other comprehensive loss, after tax Total comprehensive income $ (347,006) (2,158,236) 26,255 (45,820) (392,886) 116,007 (276,879) 4,624,946 $ (380,904) (2,539,140) 939,482 (1,599,658) 3,647,405 $ (423,832) (397,577) 147,104 (250,473) 4,633,815 See accompanying notes to consolidated financial statements. 39 BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2017, 2016, 2015 ADDITIONAL PAID IN CAPITAL RETAINED EARNINGS $ 28,779,108 - $ 8,640,291 4,884,288 $ TREASURY STOCK (1,902,439) - $ - 122,946 - - - - 7,360,703 (7,020,505) (344,976) 78,987 - - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 1,243,022 - $ TOTAL 36,759,982 4,884,288 (250,473) (250,473) - - - 122,946 (4,778) 78,987 $ $ - 36,341,744 $ (2,439,240) 4,064,834 $ - (2,247,415) $ - 992,549 $ (2,439,240) 39,151,712 - - 405,749 76,529 5,247,063 - - - - - - - - 5,247,063 (1,599,658) (1,599,658) - - 405,749 76,529 - 36,824,022 $ (2,668,421) 6,643,476 $ - (2,247,415) $ - (607,109) $ (2,668,421) 40,612,974 - - 340,843 71,701 4,901,825 - - - - - - - - 4,901,825 (276,879) (276,879) - - 340,843 71,701 (187,692) 187,692 - $ - 37,236,566 $ (2,885,829) 8,471,780 $ - (2,247,415) $ - (696,296) $ (2,885,829) 42,764,635 December 31, 2014 Net income Other comprehensive loss Exercise of stock options 10% stock dividend 446,597 common 21,945 treasury at $15.72 Stock-based compensation expense Cash dividends ($0.52 per common share) December 31, 2015 Net income Other comprehensive loss Exercise of stock options Stock-based compensation expense Cash dividends ($0.54 per common share) December 31, 2016 Net income Other comprehensive loss Exercise of stock options Stock-based compensation expense Reclassification of tax effects stranded in accumulated other comprehensive income by tax reform Cash dividends ($0.58 per common share) December 31, 2017 See accompanying notes to consolidated financial statements. 40 BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Gain on sale of securities Loss on sale of other real estate Valuation and other adjustments to other real estate owned Provision for loan losses Stock-based compensation expense Deferred income taxes Net amortization of unearned discounts on investment securities Origination of mortgage loans held for sale Proceeds from sale of mortgage loans held for sale (Increase) decrease in accrued interest receivable and other assets Increase (decrease) in accrued interest payable and other liabilities Net cash provided by operating activities Cash flows from investing activities: Proceeds from calls and maturities of investment securities available for sale Proceeds from sale of available for sale securities Purchase of investment securities available for sale Proceeds from sale of other real estate Net increase in loans Purchase of premises, equipment and leasehold improvements, net Net cash used by investing activities Cash flows from financing activities: Net increase in deposit accounts Net decrease increase in short-term borrowings Dividends paid Stock options exercised Cash in lieu of fractional shares Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow data: Cash paid during the year for: Interest Income taxes Supplemental disclosure for non-cash investing and financing activity: Change in unrealized gain (loss) on securities available for sale, net of income taxes Change in dividends payable Loans transferred to other real estate owned Reclassification of tax effects stranded accumulated other comprehensive income due to tax reform See accompanying notes to consolidated financial statements. 2017 Years Ended December 31, 2016 2015 $ 4,901,825 $ 5,247,063 $ 4,884,288 193,298 (45,820) 1,477 86,464 55,000 71,701 276,362 381,079 (55,791,625) 58,084,112 (78,328) 46,412 8,181,957 4,713,870 20,231,265 (44,944,586) 89,355 (9,726,576) (141,199) (29,777,871) 30,365,449 - (2,832,489) 340,843 - 27,873,803 6,277,889 26,242,330 189,188 (380,904) 13,450 - 570,000 76,529 (750,254) 250,755 (76,032,671) 77,466,700 (63,949) (543,083) 6,042,824 9,630,804 36,218,087 (48,239,241) 85,001 (18,089,620) (196,584) (20,591,553) 13,804,239 - (2,613,715) 405,749 - 11,596,273 (2,952,456) 29,194,786 196,827 (423,832) - - 192,500 78,987 4,748 109,311 (91,053,923) 92,558,765 391,043 176,898 7,115,612 2,315,000 16,564,118 (25,389,485) - (8,712,885) (133,632) (15,356,884) 36,299,585 (6,980,681) (2,380,062) 122,946 (4,778) 27,057,010 18,815,738 10,379,048 32,520,219 $ 26,242,330 $ 29,194,786 379,302 2,496,047 (276,879) 53,340 90,832 187,692 $ $ $ $ $ $ 400,531 2,320,830 $ $ 419,004 2,196,000 (1,599,658) 54,706 - - $ $ $ $ (250,473) 59,178 186,210 - $ $ $ $ $ $ $ 41 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION 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 preparation of the financial statements are 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, 2017 and 2016, respectively. 42 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest-bearing Deposits at the Federal Reserve: Interest-bearing deposits at the Federal Reserve mature within one year and are carried at cost. 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 2017 and 2016. 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. 43 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 such factors 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, 2017, 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. 44 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2017 and 2016. 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 has, therefore, 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, 2017 and 2016. We had no embedded derivative instruments requiring hedge accounting treatment at December 31, 2017. We do not currently engage in hedging activities. 45 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. In August 2015, the FASB deferred the effective date of the amendments. As a result of the deferral, the guidance will be effective for the Company for reporting periods beginning after December 15, 2017. We will apply this guidance using a modified retrospective approach. Because the amendment does not apply to revenue associated with financial instruments, such as loans and investment securities available for sale, we do not expect this amendment to have a material effect on our consolidated financial statements. We are still evaluating the effects of the amendment regarding its applicability and related impact on credit card fees and deposit service charges. 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 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect this amendment to have a material effect on its financial statements. 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 are currently evaluating the effect that implementation of the new standard will have on our results of operations and cash flows but expect the effect on the financial position to be considerable due to the fact that substantially all operating lease commitments will be recognized as right of use assets and lease liabilities based on the present value of unpaid lease payments as of the date of adoption. 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 amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect this amendment to have a material effect on its 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 amendments will be effective for the Company for reporting 46 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its 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 amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its 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 amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its 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 effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will continue to evaluate the impact of this ASU and does not expect these amendments to have a material effect on its 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 are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective date. The Company does not expect this amendment to have a material effect on its 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. This amendment is effective for annual periods beginning after December 15, 2017. The Company does not expect this amendment to have a material effect on its 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 47 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the tax (the the change 2017 Tax Act”). The Company has opted to early adopt 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. under rates Cuts Jobs Tax and Act 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: AMORTIZED COST DECEMBER 31, 2017 GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES ESTIMATED FAIR VALUE U.S. Treasury Notes Government-Sponsored Enterprises Municipal Securities $ 35,970,990 $ - $ (411,145) $ 35,559,845 64,444,315 40,191,502 - 487,545 (887,811) (545,146) 63,556,504 40,133,901 Total $ 140,606,807 $ 487,545 $ (1,844,102) $ 139,250,250 AMORTIZED COST DECEMBER 31, 2016 GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES ESTIMATED FAIR VALUE U.S. Treasury Notes Government-Sponsored Enterprises Municipal Securities $ 24,148,295 $ 41,153 $ (250,385) $ 23,939,063 51,737,930 45,056,390 129,482 765,813 (833,321) (816,413) 51,034,091 45,005,790 Total $ 120,942,615 $ 936,448 $ (1,900,119) $ 119,978,944 The amortized cost and estimated fair value of investment securities available for sale at December 31, 2017 and December 31, 2016, by contractual maturity are as follows: DECEMBER 31, 2017 DECEMBER 31, 2016 AMORTIZED COST ESTIMATED FAIR VALUE AMORTIZED COST ESTIMATED FAIR VALUE Due in one year or less Due in one year to five years Due in five years to ten years Due in ten years and over $ 11,554,040 $ 72,622,056 53,290,088 3,140,623 11,546,968 $ 72,124,395 52,576,036 3,002,851 3,343,347 $ 82,848,411 29,662,030 5,088,827 3,350,205 82,682,901 29,169,228 4,776,610 Total $ 140,606,807 $ 139,250,250 $ 120,942,615 $ 119,978,944 Securities pledged to secure deposits and repurchase agreements at December 31, 2017 and 2016, had a carrying amount of $49,424,692 and $47,619,232, respectively. 48  # December 31, 2017 Available for sale U.S. Treasury Notes Government- Sponsored Enterprises Municipal Securities Total 12 December 31, 2016 Available for sale U.S. Treasury Notes Government- Sponsored Enterprises Municipal Securities Total 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, 2017 and 2016. 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 Gross Unrealized Loss Fair Value # Fair Value Gross Unrealized Loss # Fair Value Gross Unrealized Loss 8 $ 35,559,845 $ (411,145) - $ - $ - 8 $ 35,559,845 $ (411,145) 53,275,064 (462,174) 3 10,281,440 (425,637) 15 63,556,504 (887,811) 20 40 $ 96,650,130 $ (1,008,317) 32 $ 21,337,625 $ (134,998) 29 11,056,185 7,815,221 (410,148) 49 (835,785) 72 18,871,406 (545,146) $ 117,987,755 $ (1,844,102) 4 $ 17,968,594 $ (250,385) - $ - $ - 4 $ 17,958,594 $ (250,385) 8 30,136,720 (833,321) - 22,606,430 54 (816,413) 66 $ 70,711,744 $ (1,900,119) - - $ - - - $ - 8 30,136,720 (833,321) - - 54 66 22,606,430 (816,413) $ 70,711,744 $ (1,900,119) The table below shows the proceeds received from sales of securities available for sale and gross realized gains and losses. Gross proceeds Gross realized gains Gross realized losses 2017 For the Year Ended December 31, 2016 $ 20,231,265 $ 36,218,087 $ 16,564,118 423,832 - 154,692 (108,872) (4,059) 384,963 2015 The tax provision related to these gains was $15,578 and $140,934 for the year ended December 31, 2017 and 2016, respectively. 49 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. LOANS AND ALLOWANCE FOR LOAN LOSSSES Major classifications of loans (net of deferred loan fees of $152,047 at December 31, 2017, and $136,446 at December 31, 2016) are as follows: Commercial loans Commercial real estate: Construction Other Consumer: Real Estate Other Total loans Allowance for loan losses Total loans, net December 31, 2017 $ 51,723,237 $ 2016 52,262,209 2,317,857 140,186,324 1,208,901 122,968,126 70,797,973 5,155,249 270,180,640 77,131,816 7,005,063 260,576,115 (3,875,398) 266,305,242 $ (3,851,617) 256,724,498 $ We had $113.4 million and $101.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at December 31, 2017 and 2016, 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: (cid:120) (cid:120) (cid:120) Excellent (1) The borrowing entity has more than adequate cash flow, unquestionable strength, strong earnings and capital, where applicable. Good (2) The borrowing entity has dependable cash flow, better than average financial condition, good capital and no overdrafts. Satisfactory (3) The borrowing entity has adequate cash flow, satisfactory financial condition, and explainable overdrafts (if any). (cid:120) Watch (4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical earnings, soft capital, loan to/from stockholders, and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and growth. (cid:120) (cid:120) 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. 50 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cid:120) (cid:120) 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. The following tables illustrate credit risks by category and internally assigned grades at December 31, 2017 and December 31, 2016. “Pass” includes loans internally graded as excellent, good and satisfactory. Commercial Real Estate Construction December 31, 2017 Commercial Real Estate Other Commercial Consumer Real Estate Consumer Other Total Pass Watch OAEM Sub- Standard Doubtful Loss $ 47,456,205 $ 2,403,978 - 1,863,054 1,936,335 $ 381,522 - 134,401,977 $ 3,605,621 610,806 1,567,920 68,570,298 $ 1,934,802 4,933,696 $ 185,746 - 292,873 - 35,807 257,298,511 8,511,669 610,806 3,759,654 - - - - - - - - - - - - - Total $ 51,723,237 $ 2,317,857 $ 140,186,324 $ 70,797,973 $ 5,155,249 $ 270,180,640 Commercial Real Estate Construction December 31, 2016 Commercial Real Estate Other Commercial Consumer Real Estate Consumer Other Total Pass Watch OAEM Sub- Standard Doubtful Loss $ $ 48,289,944 1,004,957 1,666,048 $ 798,884 410,017 - $ 116,490,396 2,625,079 995,549 $ 74,115,426 899,306 630,957 $ 6,728,367 147,992 28,939 246,423,017 5,087,351 3,321,493 1,301,260 - - - - - 2,857,102 - - 1,486,127 - - 99,765 - - 5,744,254 - - Total $ 52,262,209 $ 1,208,901 $ 122,968,126 $ 77,131,816 $ 7,005,063 $ 260,576,115 51 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables include an aging analysis of the recorded investment of past-due financing receivable by class. December 31, 2017 30-59 Days Past Due $ 3,531 $ 60-89 Days Past Due 192,846 $ Greater Than 90 Days Total Past Due - $ 196,377 $ Current 51,526,860 $ Total Loans Receivable 51,723,237 $ Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total - - - 10,302 13,833 $ $ - - - - - - 2,317,857 2,317,857 651,578 651,578 139,534,746 140,186,324 - - 70,797,973 70,797,973 34,107 44,409 192,846 $ 685,685 $ 892,364 $ December 31, 2016 5,110,840 269,288,276 $ 5,155,249 270,180,640 $ 34,107 34,107 30-59 Days Past Due 438,159 $ $ 60-89 Days Past Due Greater Than 90 Days Total Past Due - $ - $ 438,159 $ Current 51,824,050 $ Total Loans Receivable 52,262,209 $ - 6,363 415,457 - - - - - 1,208,901 1,208,901 1,501,153 1,507,516 121,460,610 122,968,126 89,908 - 415,457 76,716,359 77,131,816 - 56,784 916,763 $ $ - - $ 33,322 1,534,475 $ 90,106 2,451,238 $ 6,914,957 258,124,877 $ 7,005,063 260,576,115 $ 33,322 123,230 Recorded Investment (cid:149) 90 Days and Accruing - - - - Recorded Investment (cid:149) 90 Days and Accruing - - There were two loans 90 days or more past due and still accruing interest at December 31, 2017. There were two loans 90 days or more past due and still accruing interest at December 31, 2016. The following table summarizes the balances of non-accrual loans: Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total $ $ Loans Receivable on Non-Accrual December 31, 2017 December 31, 2016 41,651 $ - 790,208 - - 831,859 $ 61,781 - 1,678,876 - 964 1,741,621 52 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 loan category at December 31, 2017, December 31, 2016 and December 31, 2015. 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. Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total December 31, 2017 Allowance for Loan Losses Beginning Balance Charge-offs Recoveries Provisions Ending Balance Allowance for Loan Losses Beginning Balance Charge-offs Recoveries Provisions Ending Balance $ 1,545,188 $ 51,469 $ - 6,000 (147,600) - - (27,831) 1,374,706 (180,587) 87,030 268,606 $ 726,391 $ - 60,000 10,527 $ 153,863 (4,862) 1,200 (48,702) 3,851,617 (185,449) 154,230 55,000 $ 1,403,588 $ 23,638 $ 1,549,755 $ 796,918 $ 101,499 $ 3,875,398 Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total December 31, 2016 $ $ 896,854 (33,046) - 681,380 $ 59,861 - - (8,392) $ 1,345,094 (78,300) 65,000 42,912 $ 941,470 (82,015) - (133,064) $ 174,548 (14,934) 7,085 (12,836) 3,417,827 (208,295) 72,085 570,000 $ 1,545,188 $ 51,469 $ 1,374,706 $ 726,391 $ 153,863 $ 3,851,617 Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total December 31, 2015 Allowance for Loan Losses Beginning Balance Charge-offs Recoveries Provisions Ending Balance $ $ $ 1,211,130 (99,737) 9,164 (223,703) $ 42,904 - - 16,957 $ 1,112,387 (55,252) 53,753 234,206 $ 863,351 (6,075) 6,075 78,119 $ 105,076 (40,007) 22,558 86,921 3,334,848 (201,071) 91,550 192,500 896,854 $ 59,861 $ 1,345,094 $ 941,470 $ 174,548 $ 3,417,827 53 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present, by portfolio segment and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans. Commercial Real Estate Construction December 31, 2017 Commercial Real Estate Other Consumer Real Estate Commercial Consumer Other Total Allowance for Loan Losses Individually evaluated for impairment Collectively evaluated for impairment Total Allowance for Losses Loans Receivable Individually evaluated for impairment Collectively evaluated for impairment Total Loans Receivable Allowance for Loan Losses Individually evaluated for impairment Collectively evaluated for impairment Total Allowance for Losses Loans Receivable Individually evaluated for impairment Collectively evaluated for impairment Total Loans Receivable $ 832,571 $ - $ 99,523 $ 43,042 $ 34,107 $ 1,009,243 571,017 23,638 1,450,232 753,876 67,392 2,866,155 $ 1,403,588 $ 23,638 $ 1,549,755 $ 796,918 $ 101,499 $ 3,875,398 $ 1,812,461 $ - $ 1,584,821 $ 292,873 $ 34,107 $ 3,724,262 49,910,776 2,317,857 138,601,503 70,505,100 5,121,142 266,456,378 $ 51,723,237 $ 2,317,857 $ 140,186,324 $ 70,797,973 $ 5,155,249 $ 270,180,640 Commercial Real Estate Construction December 31, 2016 Commercial Real Estate Other Consumer Real Estate Commercial Consumer Other Total $ 1,051,219 $ - $ 324,587 $ 43,119 $ 89,047 $ 1,507,972 493,969 51,469 1,050,119 683,272 64,816 2,343,645 $ 1,545,188 $ 51,469 $ 1,374,706 $ 726,391 $ 153,863 $ 3,851,617 $ 1,301,259 $ - $ 3,225,351 $ 1,286,127 $ 89,047 $ 5,901,784 50,960,950 1,208,901 119,742,775 75,845,689 6,916,016 254,674,331 $ 52,262,209 $ 1,208,901 $ 122,968,126 $ 77,131,816 $ 7,005,063 $ 260,576,115 54 With no related allowance recorded: Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other With an allowance recorded: Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other $ $ $ $ $ BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2017 and 2016, loans individually evaluated and considered impaired are presented in the following table. Impaired and Restructured Loans As of the year ended December 31, 2017 2016 Unpaid Principal Balance Recorded Investment Related Allowance Unpaid Principal Balance Recorded Investment Related Allowance $ 152,490 $ 152,490 $ - - 1,058,601 249,754 - 1,058,601 249,754 - 1,460,845 $ 1,460,845 $ - - - - - - $ 250,040 $ 250,040 $ - - 2,174,770 1,243,008 - 3,667,818 $ 2,174,770 1,243,008 - 3,667,818 $ $ - - - - - - 1,659,971 $ 1,659,971 $ 832,571 $ 1,051,219 $ 1,051,219 $ 1,051,219 - - - - - - 626,021 43,119 34,107 2,363,218 $ 526,220 43,119 34,107 2,263,417 $ 99,523 43,042 34,107 1,009,243 $ 1,050,581 43,119 89,047 2,233,966 $ 1,050,581 43,119 89,047 2,233,966 $ 324,587 43,119 89,047 1,507,972 1,812,461 $ 1,812,461 $ 832,571 $ 1,301,259 $ 1,301,259 $ 1,051,219 - - - - - - 1,684,622 292,873 34,107 3,824,063 $ 1,584,821 292,873 34,107 3,724,262 $ 99,523 43,042 34,107 1,009,243 $ 3,225,351 1,286,127 89,047 5,901,784 $ 3,225,351 1,286,127 89,047 5,901,784 $ 324,587 43,119 89,047 1,507,972 55 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. 2017 For the year ended December 31, 2016 2015 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other With an allowance recorded: Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other $ 169,594 $ 9,700 $ 267,747 $ 12,282 $ 750,350 $ 43,853 - - - - - - 1,062,516 43,755 2,267,288 81,582 2,500,204 249,754 - 1,481,864 $ 12,649 - 66,104 $ 1,242,515 - 3,777,550 $ 22,111 - 115,975 $ 450,117 56,758 3,757,429 $ 128,352 17,035 2,557 191,797 1,736,896 $ 103,758 $ 1,087,559 $ 49,985 $ 1,009,765 $ 49,166 - - - - - - 627,070 8,148 1,047,685 41,938 35,591 2,441,495 $ 1,752 1,869 115,527 $ 43,155 94,945 2,273,344 $ 16,138 1,514 5,533 73,170 $ 1,066,896 811,014 55,439 2,943,114 $ 48,945 32,362 3,540 134,013 1,906,490 $ 113,458 $ 1,355,306 $ 62,267 $ 1,760,115 $ 93,019 - - - - - - 1,689,586 51,903 3,314,973 97,720 3,567,100 291,692 35,591 3,923,359 $ 14,401 1,869 181,631 $ 1,285,670 94,945 6,050,894 $ 23,625 5,533 189,145 $ 1,261,131 112,197 6,700,543 $ 177,297 49,397 6,097 325,810 $ $ $ $ $ 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, 2017, there was one TDR with a balance of $33,300, compared to two TDRs with a total balance of $378,392 as of December 31, 2016, and three TDRs with a total balance of $458,268 as of December 31, 2015. These TDRs were granted extended payment terms with no principal reduction. All TDRs were performing as agreed as of December 31, 2017 and 2016, respectively. No TDRs that were modified within the previous twelve months defaulted during the years ended December 31, 2017 and 2016. 56 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Our loans were concentrated in the following categories. Commercial Commercial Real Estate Construction Commercial Real Estate Other Consumer Real Estate Consumer Other Total Loans December 31, 2017 December 31, 2016 19.14% 0.86% 51.89% 26.20% 1.91% 100.00% 20.06% 0.46% 47.20% 29.59% 2.69% 100.00% 6. PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Premises, equipment and leasehold improvements are summarized in the table below. Bank buildings Land Leasehold purchase Lease improvements Construction in process Equipment Accumulated depreciation Total December 31, 2017 2016 $ $ 1,824,613 $ 838,075 30,000 690,212 11,754 3,405,686 6,800,340 (4,555,815) 2,244,525 $ 1,824,613 838,075 30,000 690,212 11,754 3,264,488 6,659,142 (4,362,518) 2,296,624 Depreciation and amortization on our bank premises and equipment charged to operating expense totaled $193,298 in 2017, $189,188 in 2016, and $196,827 in 2015. 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; and 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 $54,720, $51,690, and $50,184 for the years ended December 31, 2017, 2016, and 2015, 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. 57 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Management intends to exercise its option on the lease agreements. Lease payments below include the lease renewals. Minimum rental commitments for these leases as of December 31, 2017 are presented in the table below. 2018 2019 2020 2021 2022 and thereafter Total $ $ 580,028 594,713 547,650 552,922 11,136,228 13,411,541 Total rental expense was $612,717, $594,567, and $591,058 in 2017, 2016 and 2015, respectively. 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 but 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 future. Rental payments do not commence until we take control of our space. 7. OTHER REAL ESTATE OWNED The following table summarizes the activity in other real estate owned at December 31, 2017 and December 31, 2016. Balance, beginning of year Additions-foreclosure Sales Write-downs Balance, end of year $ $ December 31, 2017 December 31, 2016 521,943 90,832 (90,832) (86,464) 435,479 $ $ 620,394 - (98,451) - 521,943 As of December 31, 2017, we had one property with a balance of $435,479 classified as OREO. Another property valued at $90,832 classified as OREO during 2017 was ultimately sold at a loss of $1,477. We had one property valued at $521,943 classified as OREO as of December 31, 2016. Another property valued at $98,451 classified as OREO during 2015 was ultimately sold at a loss of $13,450 during 2016. 8. DEPOSITS At December 31, 2017 and 2016, certificates of deposit of $250,000 or more totaled approximately $18,624,924 and $17,822,136, respectively. At December 31, 2017, the scheduled maturities of certificates of deposit are presented in the table below. 2018 2019 2020 2021 2022 and thereafter 34,585,073 5,891,415 398,505 577,407 468,016 41,920,416 $ $ 58 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2017, deposits with a deficit balance of $66,479 were re-classified as other loans, compared to $24,963 at December 31, 2016. 9. SHORT-TERM BORROWINGS Securities sold under agreements to repurchase with customers mature on demand. At December 31, 2017 and 2016, there were no securities sold under agreements to repurchase. There was no amount outstanding at any month-end during 2017 and 2016. At December 31, 2017 and 2016, 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 $88.2 million. We established this arrangement as an additional source of liquidity. There have been no borrowings under this arrangement. At December 31, 2017 and 2016, the Bank had unused short-term lines of credit totaling approximately $23.0 million and $21.0 million, respectively (which are withdrawable at the lender’s option). 10. INCOME TAXES 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, 2017, 2016 and 2015 are presented in the table below. Income tax expense Unrealized gains (losses) on securities available for sale presented in accumulated other comprehensive income (loss) Total Income tax expense was as follows: Current income taxes Federal State Total current tax expense Deferred income tax (benefit) expense Total income tax expense For the year ended December 31, 2017 2,814,634 116,007 2,930,641 $ $ 2016 1,688,433 (939,482) 748,951 $ $ 2015 2,287,248 (147,104) 2,140,144 For the year ended December 31, 2017 2016 2015 2,538,272 - 2,538,272 276,362 2,814,634 $ $ 2,438,687 - 2,438,687 (750,254) 1,688,433 $ $ 2,102,154 224,083 2,326,237 (38,989) 2,287,248 $ $ $ $ 59 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The differences between actual income tax expense and the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income from continuing operations for the periods indicated are reconciled in the table below. Computed “expected” tax expense Increase (reduction) in income taxes resulting from: Tax rate change impact Amortization of credit and gain Stock based compensation Valuation allowance Other State income tax, net of federal benefit Tax exempt interest income For the year ended December 31, 2017 2,623,595 $ 2016 2,358,069 $ 2015 2,438,322 666,674 163,411 24,378 16,952 (4,768) (329,412) (346,196) 2,814,634 $ - 163,411 26,012 4,314 (203,854) (319,525) (339,994) 1,688,433 $ - - 26,856 11,093 5,052 147,895 (341,970) 2,287,248 $ $ The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below. Deferred tax assets: Allowance for loan losses State credit carryforward Unrealized loss on securities available for sale Passthrough income State net operating loss carryforward Nonaccrual interest OREO Other Total gross deferred tax assets Valuation allowance Total gross deferred tax assets, net of valuation allowance Deferred tax liabilities: Prepaid expenses Deferred loan fees Fixed assets, principally due to differences in depreciation Other Total gross deferred tax liabilities $ December 31, 2017 2016 782,714 $ 488,052 284,877 70,603 67,253 19,209 18,157 5,214 1,736,079 (67,253) 1,668,826 (210) (31,930) (36,424) (53,591) (122,155) 1,248,551 236,536 356,562 - 50,301 - - 45,661 1,937,611 (50,301) 1,887,310 (2,779) (46,392) (52,236) (78,877) (180,284) Net deferred tax assets $ 1,546,671 $ 1,707,026 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, 2017 and 2016 was $306,105 and $325,000, respectively, and is included in other operating expense on the statement of operations. There was a $67,253 valuation allowance for deferred tax assets at December 31, 2017 and $50,301 at December 31, 2016 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 60 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2017. 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 2014 and subsequent years are subject to examination by taxing authorities. 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 $92,869,285 and $81,234,269 at December 31, 2017 and 2016, 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. The majority of these standby letters of credit are unsecured. Commitments under standby letters of credit are usually for one year or less. At December 31, 2017 and 2016, 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, 2017 and 2016 was $1,219,644 and $793,992, 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 61 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS loans to our executive officers as of December 31, 2017 and 2016. The table below summarizes related party loans. December 31, 2017 2016 Balance at beginning of year New loans or advances Repayments Balance at end of year $ $ 3,944,140 $ 2,879,435 (2,253,795) 4,569,780 $ 6,523,137 4,833,545 (7,412,542) 3,944,140 At December 31, 2017 and 2016, total deposits held by related parties were $7,180,958 and $4,376,563, respectively. The Company also leased office space from a related party as discussed in the Premises, Equipment and Leasehold Improvements footnote. 13. OTHER EXPENSE The table below summarizes of the components of other operating expense. Advertising and business development Supplies Telephone and postage Insurance Professional fees Data processing services State and FDIC insurance and fees Courier service Amortization of state tax credit Other Total other expense 14. STOCK INCENTIVE PLAN For the year ended December 31, 2017 10,844 $ 75,965 207,526 44,613 454,882 585,497 165,280 82,907 306,105 584,118 2,517,737 $ 2016 16,159 $ 94,006 194,853 42,192 431,424 594,550 242,926 96,823 325,000 601,843 2,639,776 $ 2015 16,662 111,604 188,052 42,504 423,319 518,788 228,627 95,877 - 542,949 2,168,382 $ $ We have a Stock Incentive Plan which was approved in 1998 with 180,000 (329,422 adjusted for three 10% stock dividends, a 10% stock distribution, and a 25% stock dividend) shares reserved and a Stock Incentive Plan which was approved in 2010 with 300,000 (330,000 adjusted for a 10% stock dividend) 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 62 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: Risk free interest rate Expected life (in years) Expected stock price volatility Dividend yield 2017 2016 2015 2.43% 7.5 34.20% 4.00% 2.33% 10 27.95% 3.47% 1.96% 10 19.62% 4.13% 2.33% 10 19.62% 4.13% There are currently options to purchase 1,600 shares outstanding and exercisable under the 1998 Omnibus Stock Incentive Plan with options to purchase 1,600 shares exercisable at December 31, 2017. This plan has expired, however, shares granted before the expiration date may still be exercised. The following table presents a summary of the activity under the 1998 and 2010 Omnibus Stock Incentive Plans for the years ended December 31. 2017 2016 2015 Weighted Average Exercise Price 11.06 21.56 - 10.28 15.42 11.87 9.74 Shares 140,905 $ 9,250 - (33,140) (11,300) 105,715 $ 28,813 $ Weighted Average Exercise Price 10.81 15.99 - 10.26 13.84 11.06 11.50 Shares 183,302 $ 10,000 - (39,539) (12,858) 140,905 $ 12,620 $ Weighted Average Exercise Price 10.48 14.44 - 13.11 11.64 10.81 12.95 Shares 176,181 $ 23,650 - (9,378) (7,151) 183,302 $ 17,457 $ Outstanding, January 1 Granted Expired Exercised Forfeited Outstanding, December 31 Exercisable at year end Information has been retroactively adjusted for the 2015 10% stock dividend as applicable. 63 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents information pertaining to options outstanding at December 31, 2017. December 31, 2017 Intrinsic Value of Outstanding Options Number of Options Exercisable 530,554 20,756 Exercise Price $ $ $ $ $ $ $ $ $ $ $ $ $ 9.47 9.79 10.10 10.61 10.91 11.73 13.49 13.64 14.35 14.98 15.99 20.90 21.80 Number of Options Outstanding 51,890 5,280 7,645 3,300 2,200 1,600 4,950 2,200 12,925 3,300 5,000 2,500 3,750 106,540 Weighted Average Remaining Contractual Life Weighted Average Exercise Price 3.50 2.70 4.60 3.20 4.90 0.20 6.60 5.90 7.50 7.60 8.30 9.90 21.80 9.90 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 9.47 9.79 10.10 10.61 10.91 11.73 13.49 13.64 14.35 14.98 15.99 20.90 21.80 11.87 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 52,296 73,351 29,979 19,326 12,743 30,713 13,320 69,079 15,558 18,523 (3,014) (7,895) Weighted Average Exercise Price 9.47 9.79 10.10 10.61 10.91 11.73 - - - - - - - 9.74 $ $ $ $ $ $ $ $ $ $ $ $ $ $ Intrinsic Value of Exercisable Options 212,221 31,378 14,670 11,992 3,865 12,743 - - - - - - - 286,869 $ $ $ $ $ $ 3,168 1,529 1,320 440 1,600 - $ - $ - $ - $ - $ - $ - $ $ 854,533 28,813 All relevant information has been retroactively adjusted for the 2015 10% stock dividend. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016, and 2015, were $311,836, $273,979, and $14,272, respectively. We recognized compensation cost for the years ended December 31, 2017, 2016 and 2015 in the amount of $71,701, $76,529, and $78,987, respectively, related to the granted options. As of December 31, 2017, there was a total of $284,123 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 2.81 years. 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 1st 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 $375,000 during the year ended December 31, 2017, $345,000 during the year ended December 31, 2016, and $315,000 for the year ended December 31, 2015. The plan currently owns 286,013 shares of common stock of Bank of South Carolina Corporation. 64 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A participant vests in the ESOP based upon the participant’s credited years of service. The vesting schedule is as follows: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 1 Year of Service 0% Vested 2 Years of Service 25% Vested 50% Vested 3 Years of Service 4 Years of Service 75% Vested 100% Vested 5 Years of Service 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). 16. DIVIDENDS 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 $2,685,000, $2,340,000, and $2,475,000 to the Company during the years ended December 31, 2017, 2016 and 2015, respectively. On August 27, 2015, the Company’s Board of Directors declared a ten percent stock dividend to our shareholders. The record date was September 8, 2015 and the distribution date was September 28, 2015. Earnings per share and average shares outstanding have been adjusted to reflect the stock dividend in our consolidated financial statements. 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. 65 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. Numerator: Net income Denominator: Weighted average shares outstanding Effect of dilutive shares Weighted average shares outstanding- diluted Earnings per share - basic Earnings per share - diluted $ $ $ 2017 2016 2015 4,901,825 $ 5,247,063 $ 4,884,288 4,973,637 84,715 5,058,352 4,935,349 118,765 5,054,114 0.99 $ 0.97 $ 1.06 $ 1.04 $ 4,912,499 154,586 5,067,085 0.99 0.96 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, 2017 and 2016. 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, 2017 was 1.25%. At December 31, 2017, 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. 66 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, 2017 and 2016: December 31, 2017 Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio (in thousands) Total capital to risk-weighted assets: Company Bank $ 47,986 $ 47,100 15.97% 15.69% $23,213 $24,020 8.00% 8.00% N/A $ 30,025 N/A 10.00% Tier 1 capital to risk-weighted assets: Company Bank $44,253 $43,344 14.73% 14.44% $17,410 $18,015 6.00% 6.00% N/A $24,020 Tier 1 capital to average assets: Company Bank Common equity Tier 1 capital: $44,253 $43,344 10.01% 9.82% $16,738 $17,661 4.00% 4.00% N/A $22,077 N/A 8.00% N/A 5.00% Company Bank $44,253 $43,344 14.73% 14.44% $13,058 $13,511 4.50% 4.50% N/A $19,516 N/A 6.50% December 31, 2016 Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio (in thousands) Total capital to risk-weighted assets: Company Bank $ 44,850 $ 44,544 15.46% 15.36% $23,213 $23,207 8.00% 8.00% N/A $29,009 N/A 10.00% Tier 1 capital to risk-weighted assets: Company Bank $41,220 $40,915 14.21% 14.10% $17,410 $17,405 6.00% 6.00% N/A $23,207 Tier 1 capital to average assets: Company Bank Common equity Tier 1 capital: $41,220 $40,915 9.85% 9.78% $16,738 $16,735 4.00% 4.00% N/A $20,919 N/A 8.00% N/A 5.00% Company Bank $41,220 $40,915 14.21% 14.10% $13,058 $13,054 4.50% 4.50% N/A $18,856 N/A 6.50% 67 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 that market participants would use in pricing an asset or liability are developed based on market data we have obtained from independent sources. 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: (cid:120) Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets. (cid:120) 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. (cid:120) 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. 68 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The fair value of these commitments was not significant at December 31, 2017 or 2016. Assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and December 31, 2016 are as follows: December 31, 2017 Quoted Market Price in active markets (Level 1) 35,559,845 $ Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) - $ - $ Total 35,559,845 U.S. Treasury Notes Government Sponsored $ Enterprises Municipal Securities Total - - $ 35,559,845 $ 63,556,504 28,675,012 92,231,516 $ 63,556,504 - 40,133,901 11,458,889 11,458,889 $ 139,250,250 December 31, 2016 Quoted Market Price in active markets (Level 1) 23,939,063 $ Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) - $ - $ Total 23,939,063 U.S. Treasury Notes Government Sponsored $ Enterprises Municipal Securities Total - - $ 23,939,063 $ 51,034,091 31,027,933 82,062,024 $ 51,034,091 - 13,977,857 45,005,790 13,977,857 $ 119,978,944 There were no liabilities recorded at fair value on a recurring basis as of December 31, 2017 or December 31, 2016. 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, 2017 and 2016: Beginning balance Total gains or (losses) (realized/unrealized) Included in earnings Included in other comprehensive income Purchases, issuances and settlements, net of maturities Transfers in and/or out of Level 3 Ending balance $ $ There were no transfers between fair value levels in 2017 or 2016. 69 December 31, 2017 13,977,857 $ 2016 5,217,678 - 137,751 (2,656,719) - 11,458,889 $ - (818,821) 9,579,000 - 13,977,857 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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, 2017 and December 31, 2016, 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. 70 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an on going 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, 2017, and 2016. Quoted Market Price in active markets (Level 1) - - - - Quoted Market Price in active markets (Level 1) - - - - $ $ $ $ December 31, 2017 Significant Other Observable Inputs (Level 2) - - 2,093,723 2,093,723 December 31, 2016 Significant Other Observable Inputs (Level 2) - - 4,386,210 4,386,210 $ $ $ $ $ $ $ $ Impaired loans Other real estate owned Mortgage loans to be sold Total Impaired loans Other real estate owned Mortgage loans to be sold Total Significant Unobservable Inputs (Level 3) 1,735,051 $ Total 1,735,051 435,479 435,479 - 2,170,530 $ 2,093,723 4,264,253 Significant Unobservable Inputs (Level 3) 4,143,772 $ Total 4,143,772 521,943 521,943 - 4,665,715 $ 4,386,210 9,051,925 There were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2017 or 2016. The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2017: Impaired Loans Valuation Technique Appraisal Value/ Comparison Sales/Other Estimates Inputs Unobservable Input Appraisals and/or Sales of Comparable Properties Other Real Estate Owned Appraisal Value/ Comparison Sales/Other Estimates Appraisals and/or Sales of Comparable Properties General Range of Inputs Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs 71 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 The carrying values of variable rate consumer and commercial loans and consumer and commercial loans with remaining maturities of three months or less, approximate fair value. The fair values of fixed rate consumer and commercial loans with maturities greater than three months are determined using a discounted cash flow analysis and assume the rate being offered on these types of loans at December 31, 2017 and December 31, 2016, approximate market. The carrying value of mortgage loans held for sale approximates fair value. For lines of credit, the carrying value approximates fair value. 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. 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. 72 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments as of December 31, 2017 and December 31, 2016. 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 Interest-bearing deposits at the Federal Reserve Investment securities available for sale Mortgage loans to be sold Net loans Accrued interest receivable Financial Liabilities: Demand deposits Time deposits Accrued interest payable Financial Assets: Cash and due from banks $ Interest-bearing deposits at the Federal Reserve Investment securities available for sale Mortgage loans to be sold Net loans Accrued interest receivable Financial Liabilities: Demand deposits Time deposits Accrued interest payable - - - - - - $ 8,486,025 $ 8,486,025 $ 8,486,025 $ 24,034,194 24,034,194 24,034,194 $ - - - - 139,250,250 139,250,250 35,559,845 92,231,516 11,458,889 2,093,723 266,305,242 2,093,723 265,277,204 1,720,920 1,720,920 360,967,884 41,920,416 360,967,884 40,722,870 96,190 96,190 - - - - - - 2,093,723 - 1,720,920 360,967,884 40,722,870 96,190 - 265,277,204 Fair Value Measurements at December 31, 2016 Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 8,141,030 $ 8,141,030 $ 8,141,030 $ 18,101,300 18,101,300 18,101,300 $ - - 119,978,944 119,978,944 23,939,063 82,062,024 13,977,857 4,386,210 256,724,498 4,386,210 256,555,052 1,614,002 1,614,002 328,681,594 43,841,257 328,681,594 43,856,383 51,629 51,629 - - - - - - 4,386,210 - 1,614,002 328,681,594 43,856,383 51,629 - 256,555,052 - - - - 73 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. ACCUMULATED OTHER COMPREHENSIVE INCOME The following table summarizes the components of accumulated other comprehensive income (loss) and changes in those components as of and for the years ended December 31: Available for sale securities Balance December 31, 2014 Change in net unrealized gains (losses) on securities available for sale Reclassification adjustment for net securities gains included in net income Income tax expense (benefit) Balance December 31, 2015 Change in net unrealized gains (losses) on securities available for sale Reclassification adjustment for net securities gains included in net income Income tax expense Balance December 31, 2016 Change in net unrealized gains (losses) on securities available for sale Reclassification adjustment for net securities gains included in net income Income tax expense Reclassification of tax effects stranded in other comprehensive income by tax reform Balance December 31, 2017 $ $ 1,243,022 26,255 (423,832) 147,104 992,549 (2,158,236) (380,904) 939,482 (607,109) (347,066) (45,820) 116,007 187,692 (696,296) The following table shows the line items in the consolidated Statements of Income affected by amounts reclassified from accumulated other comprehensive income (loss): Gain on sale of investments, net Tax effect Total reclassification, net of tax $ $ Year ended December 31, 2017 2016 45,820 $ (15,578) 30,242 $ 380,904 $ (140,934) 239,970 $ 2015 423,832 - 423,832 21. 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, 2017 and 2016, and the related condensed statements of income and cash flows for the years ended December 31, 2017, 2016 and 2015, are as follows: Condensed Statements of Financial Condition Assets Cash Investment in wholly-owned bank subsidiary Other assets Total assets Liabilities and shareholders’equity Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity 2017 2016 947,216 $ 43,437,503 127,274 43,511,993 $ 922,595 40,308,166 76,077 41,306,838 747,358 42,764,635 43,511,993 $ 693,864 40,612,974 41,306,838 $ $ $ 74 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Statements of Income Interest income Net operating expenses Dividends received from bank Equity in undistributed earnings of subsidiary Net income 2017 484 (189,872) 2,685,000 2,406,213 4,901,825 $ $ 2016 571 $ (177,612) 2,340,000 3,084,104 5,247,063 $ $ $ 2015 302 (195,636) 2,475,000 2,604,622 4,884,288 Condensed Statements of Cash Flows 2017 2016 2015 Cash flows from operating activities: Net income Stock-based compensation expense Equity in undistributed earnings of subsidiary Decrease (increase) in other assets Increase in other liabilities Net cash provided by operating activities Cash flows from financing activities: Dividends paid Cash in lieu of fractional shares Stock options exercised Net cash used by financing activities Net increase (decrease) in cash Cash at the beginning of the year Cash at the end of the year Supplemental disclosure for non-cash investing and financing activity Change in dividends payable $ 4,901,825 71,701 $ 5,247,063 $ 76,529 4,884,288 78,987 (2,406,213) (51,197) 151 2,516,267 (2,832,489) - 340,843 (2,491,646) (3,084,104) (55,923) - 2,183,565 (2,613,715) - 405,749 (2,207,966) 24,621 922,595 947,216 $ (24,401) 946,996 922,595 $ (2,604,622) 202,043 - 2,560,696 (2,380,062) (4,778) 122,946 (2,261,894) 298,802 648,194 946,996 53,340 $ 54,706 $ 59,178 $ $ 75 BANK OF SOUTH CAROLINA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The tables below represent the quarterly results of operations for the years ended December 31, 2017 and 2016, respectively: Total interest and fee income Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income Other expense Income before income tax expense Income tax expense Net income Basic income per common share Diluted income per common share Total interest and fee income Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income Other expense Income before income tax expense Income tax expense Net income Basic income per common share Diluted income per common share $ $ $ $ $ $ $ $ Fourth 4,327,409 109,934 4,217,475 2,500 4,214,975 538,236 2,696,005 2,057,206 1,208,507 848,699 $ $ Third 4,117,032 110,625 4,006,407 20,000 3,986,407 481,882 2,484,538 1,983,751 543,098 1,440,653 2017 $ $ Second 3,933,285 106,522 3,826,763 30,000 3,796,763 696,479 2,590,123 1,903,119 516,734 1,386,385 $ $ First 3,791,421 96,782 3,694,639 2,500 3,692,139 551,874 2,471,630 1,772,383 546,295 1,226,088 0.17 $ 0.17 $ 0.29 $ 0.29 $ 0.28 $ 0.27 $ 0.25 0.24 Fourth 3,862,720 95,146 3,767,574 175,000 3,592,574 638,896 2,715,147 1,516,323 203,444 1,312,879 $ $ Third 4,030,143 96,467 3,933,676 210,000 3,723,676 686,586 2,584,268 1,825,994 399,656 1,426,338 2016 $ $ Second 3,770,669 92,988 3,677,681 140,000 3,537,681 729,572 2,436,881 1,830,372 518,262 1,312,110 $ $ First 3,632,065 94,139 3,537,926 45,000 3,492,926 806,029 2,536,148 1,762,807 567,071 1,195,736 0.27 $ 0.26 $ 0.28 $ 0.28 $ 0.27 $ 0.26 $ 0.24 0.24 76 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d- 15(e) promulgated under the Securities and Exchange Act of 1934 as amended (the “Act”) was carried out as of December 31, 2017 under the supervision and with the participation of the Bank of South Carolina Corporation’s management, including its President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President and several other members of the Company’s senior management. Based upon that evaluation, Bank of South Carolina Corporation’s management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President concluded that, as of December 31, 2017, the Company’s disclosure controls and procedures were effective in ensuring that the information the Company is required to disclose in the reports filed or submitted under the Act has been (i) accumulated and communicated to management (including the President/Chief Executive Officer and Chief Financial Officer/Executive Vice President) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Management’s Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. Under the supervision and with the participation of management, including the President/Chief Executive Officer and the Chief Financial Officer/Executive Vice President, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2017, based on the 2013 framework established in a report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. Based on this assessment, management believes that as of December 31, 2017, the Company’s internal control over financial reporting was effective. There were no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to the final ruling by the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report. The Audit and Compliance Committee, composed entirely of independent Directors, meets periodically with management, the Company’s Compliance Officer, Risk Management Officer and Elliott Davis, LLC (separately and jointly) to discuss audit, financial and related matters. Elliott Davis, LLC, the Compliance Officer, and the Risk Management Officer have direct access to the Audit and Compliance Committee. 77 Item 9B. Other Information There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2017 that was not reported. Item 10. Directors, Executive Officers, Promoters and Corporate Governance PART III The information required by this item contained under the sections captioned “Proposal 1: To elect nineteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2019 Annual Meeting of Shareholders” and “Meetings and Committees of the Board of Directors and Corporate Governance Matters” included on pages 4-22 in the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 10, 2018, a copy of which has been filed with the SEC, the “Proxy Statement”, is incorporated in this document by reference. Executive Officers The information concerning the Company’s executive officers is contained under the section captioned “Proposal 1: To elect nineteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2019 Annual Meeting of Shareholders,” included on pages 3-4 of the Company’s Proxy Statement, and is incorporated in this document by reference. Audit and Compliance Committee Financial Expert The Audit and Compliance Committee of the Company is composed of Directors Linda J. Bradley McKee, PhD, CPA, David W. Bunch, William L. Hiott, Jr., Karen J. Phillips, and Steve D. Swanson (Chairman). The Board has selected the Audit and Compliance Committee members based on its determination that they are qualified to oversee the accounting and financial reporting processes of the Company and audits of the Company’s financial statements. Each member of the Audit and Compliance Committee is “independent” as defined in the NASDAQ Stock Market listing standards for audit committee members. The Board of Directors has determined that Linda J. Bradley McKee, PhD, CPA, qualifies as a financial expert within the meaning of SEC rules and regulations and has designated Dr. Bradley McKee as the Audit and Compliance Committee financial expert. Director Bradley McKee is independent as that term is used in Schedule 14A promulgated under the Exchange Act. Code of Ethics The Company has adopted a “Code of Ethics”, applicable to the Chairman of the Board, the President/Chief Executive Officer, the Chief Financial Officer/ Executive Vice President, the Chief Operating Officer/Executive Vice President and the Senior Lender/Executive Vice President and a “Code of Conduct” for Directors, officers and employees. A copy of these policies may be obtained at the Company’s website: http:// www.banksc.com. Compliance with Insider Reporting The information contained under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” is included on page 14 of the Company’s Proxy Statement and is incorporated in this document by reference. Change in Bylaws The Company and the Bank each amended their bylaws on December 21, 2017 to (i) prohibit the offices of Chairman of the Board and President be held by the same person and(ii) provide that the President will report to the Chairman of the Board. Item 11. Executive Compensation The information required by this item is incorporated by reference to the Section captioned “Directors Compensation” and “Executive Compensation-Compensation Discussion and Analysis” included on pages 15-20 of the Proxy Statement. 78 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security Ownership and Certain Beneficial Owners Information required by this item is incorporated in this document by reference to the Section captioned “Security Ownership of Certain Beneficial Owners and Management”, included on page 8-15 of the Proxy Statement. Security Ownership of Management Information required by this item is incorporated in this document by reference to the Section captioned “Security Ownership of Certain Beneficial Owners and Management”, included on pages 8-20 of the Proxy Statement. Changes in Control Management is not aware of any arrangements, including any pledge by any shareholder of the Company, the operation of which may at a subsequent date result in a change of control of the Company. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated in this document by reference to the Sections captioned “Proposal 1: To elect nineteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2019 Annual Meeting of Shareholders” and “Meetings and Committees of the Board of Directors and Corporate Governance Matters”, included on pages 3-20 of the Proxy Statement. Item 14. Principal Accounting Fees and Services ratify The information required by this item is incorporated in this document by reference to “Proposal 2: To the appointment by the Audit and Compliance Committee of the Company’s Board of Directors of Elliott Davis, LLC as the Company’s independent registered public accounting firm for the year ended December 31, 2018” and “Auditing and Related Fees”, included on page 20-21 of the Proxy Statement. Item 15. Exhibits and Financial Statement Schedules PART IV 1. The Consolidated Financial Statements and Report of Independent Auditors are included in this Form 10-K and listed on pages as indicated. Page (1) (2) (3) (4) (5) (6) (7) Report of Independent Registered Public Accounting Firm ..........................................................36 Consolidated Balance Sheets..........................................................................................................37 Consolidated Statements of Income ...............................................................................................38 Consolidated Statements of Comprehensive Income .....................................................................39 Consolidated Statements of Shareholders' Equity ..........................................................................40 Consolidated Statements of Cash Flows ........................................................................................41 Notes to Consolidated Financial Statements ..................................................................................42 - 76 79 2. Exhibits Plan of Reorganization (Filed with 1995 10-KSB) Articles of Incorporation of the Registrant (Filed with 1995 10-KSB) By-laws of the Registrant (Filed with 1995 10-KSB) Amendments to the Articles of Incorporation of the Registrant (Filed with Form S on June 23, 2011) 2017 Proxy Statement (Filed with 2016 10-K) 2.0 3.0 3.1 3.2 4.0 10.0 Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB) 10.1 10.2 Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB) 10.3 Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB) 10.4 Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with 2010 10-K) Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB) Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with March 31, 2013 10-Q) 1998 Omnibus Stock Incentive Plan (Filed with 2008 10-K/A) 10.5 10.6 Employee Stock Ownership Plan (Filed with 2008 10-K/A) Employee Stock Ownership Plan, Restated (Filed with 2011 Proxy Statement) Employee Stock Ownership Plan, Restated (Incorporated herein) 2010 Omnibus Incentive Stock Option Plan (Filed with 2010 Proxy Statement) 10.7 10.8 Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K) 10.9 Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K) 10.10 First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K) 10.11 Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2015 10-K) 10.12 Extension to Lease Agreement for 256 Meeting Street (Filed within) 10.13 North Charleston Lease Agreement (Filed with June 30, 2017 10Q) 10.14 Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed with September 30, 2017 10Q) 13.0 2016 10-K (Incorporated herein) 14.0 Code of Ethics (Filed with 2004 10-KSB) 21.0 List of Subsidiaries of the Registrant (Filed with 1995 10-KSB) The Registrant's only subsidiary is The Bank of South Carolina (Filed with 1995 10-KSB) 31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a) by the Principal Executive Officer 31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a) by the Principal Financial Officer 32.1 Certification pursuant to Section 1350 Certification pursuant to Section 1350 32.2 80 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 5, 2018 BANK OF SOUTH CAROLINA CORPORATION BY: /s/Fleetwood S. Hassell Fleetwood S. Hassell President/Chief Executive Officer By: /s/Eugene H. Walpole, IV Eugene H. Walpole, IV Chief Financial Officer/Executive Vice President 81 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 March 5, 2018 /s/David W. Bunch David W. Bunch, Director /s/Graham M. Eubank, Jr. Graham M. Eubank, Jr., Director /s/Elizabeth M. Hagood Elizabeth M. Hagood, Director /s/Fleetwood S. Hassell Fleetwood S. Hassell, President/Chief Executive Officer, Director /s/Glen B. Haynes, DVM Glen B. Haynes, DVM, Director /s/William L. Hiott, Jr. William L. Hiott, Jr., Director /s/Richard W. Hutson, Jr. Richard W. Hutson, Jr., Director /s/Charles G. Lane Charles G. Lane, Director /s/Hugh C. Lane, Jr. Hugh C. Lane, Jr., Chairman of the Board, Director /s/Linda. J. Bradley McKee, PHD, CPA Linda J. Bradley McKee, PHD, CPA, Director /s/Alan I. Nussbaum Alan I. Nussbaum, MD, Director /s/Edmund Rhett, Jr. Edmund Rhett, Jr., MD, Director /s/Karen J. Phillips Karen J. Phillips, Director /s/Malcolm M. Rhodes Malcolm M. Rhodes, MD, Director /s/Douglas H. Sass Douglas H. Sass, Executive Vice President, Director 82 March 5, 2018 March 5, 2018 /s/Sheryl G. Sharry Sheryl G. Sharry. Director /s/Steve D. Swanson Steve D. Swanson, Director 83 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934 EXHIBIT 31.1 I, Fleetwood S. Hassell, certify that: CERTIFICATION 1. I have reviewed this Annual Report on Form 10-K of the Bank of South Carolina Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report. 4. The registrant’s other certifying officer (s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within the entity, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of registrant’s disclosure controls and procedures within 90 days prior to the filing date of the report and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any changes in registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting: and 84 5. The registrant’s other certifying officer (s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit and Compliance Committee of the registrant’s Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. March 5, 2018 /s/Fleetwood S. Hassell Fleetwood S. Hassell President/Chief Executive Officer 85 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934 EXHIBIT 31.2 CERTIFICATION I, Eugene H. Walpole, IV, certify that: 1. I have reviewed this Annual Report on Form 10-K of the Bank of South Carolina Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report. 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within the entity, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures within 90 days prior to the filing date of the report and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, registrant’s internal control over financial reporting: and 86 5. The registrant’s other certifying officer (s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit and Compliance Committee of the registrant’s Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in registrant’s internal control over financial reporting. March 5, 2018 /s/ Eugene H. Walpole, IV Eugene H. Walpole, IV Chief Financial Officer/Executive Vice President 87 Exhibit 32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Fleetwood S. Hassell, President/Chief Executive Officer of Bank of South Carolina Corporation (the “Company”), certify, that to the best of my knowledge, based upon a review of the annual report on Form 10-K for the period ended December 31, 2017 of the Company (the “Report”): 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (U.S.C. 78m or 78o(d)); and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 5, 2018 BY: /s/Fleetwood S. Hassell Fleetwood S. Hassell President/Chief Executive Officer Exhibit 32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Eugene H. Walpole, IV, Chief Financial Officer/Executive Vice President of Bank of South Carolina Corporation (the “Company”), certify that to the best of my knowledge, based upon a review of the annual report on Form 10-K for the period ended December 31, 2017 of the Company (the “Report): 1. 2. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (U.S.C. 78m or 78o(d)); and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 5, 2018 BY: /s/Eugene H. Walpole, IV Eugene H. Walpole, IV Chief Financial Officer/Executive Vice President 88 Board of Directors Hugh C. Lane, Jr. Fleetwood S. Hassell Douglas H. Sass Karen J. Phillips Alan I. Nussbaum, MD Glen B. Haynes, DVM Linda J. Bradley McKee, PhD, CPA Malcolm M. Rhodes, MD Steve D. Swanson Sheryl G. Sharry Richard W. Hutson, Jr. David W. Bunch Charles G. Lane Graham M. Eubank, Jr. William L. Hiott, Jr. Edmund Rhett, Jr., MD Elizabeth M. Hagood Officers * Hugh C. Lane, Jr. Chairman * Fleetwood S. Hassell President & Chief Executive Officer * Eugene H. Walpole, IV Executive Vice President & Chief Financial Officer * Douglas H. Sass Executive Vice President & Senior Lender * Susanne K. Boyd Executive Vice President & Chief Operating Officer * Richard W. Hutson, Jr. Secretary * Costa V. Thomas Assistant Secretary Rovina C. Andrade Vice President Jennifer A. Arato Senior Vice President Lucy E. Ashley Senior Vice President Rhett D. Bearden Senior Vice President Patricia S. Black Branch Manager Amy G. Buckner Assistant Vice President Mignonne H. Buhrmaster Senior Vice President Tracy Searson Causby Vice President C. Lynn Christian Senior Vice President Michelle L. Crisp Training Officer Leon B. de Brux Senior Vice President David R. Gregorie Branch Manager Orianna S. Gregorie Senior Vice President Robert M. Hollings, III Assistant Vice President Lawson L. Johnson Branch Mananger Thomas H. Johnson Senior Vice President Ford P. Menefee Senior Vice President Linda J. Menor Assistant Vice President Helene H. Mixon Senior Vice President Lauren O. Nilan Senior Vice President *Officers of the Corporation and of the Bank. Other Officers are Officers of the Bank only. Willette M. Parker Senior Vice President Timeela C. Rivers Remote Deposit Officer Bret J. Roesner Vice President Zachary S. Shaw Senior Credit Analyst & Appraisal Officer Gregory R. Shuler Senior Vice President Valerie C. Stone Senior Vice President Ronald L. Strawn Senior Vice President Terry S. Strawn Senior Vice President Charles K. Talbert Vice President Perry E. Trouche Loan Officer Tammy S. Tucker Vice President Carson D. Williams Vice President Employees Susan Alford Emily Bailey Tammy Barker Stender Bergmann Heyward Bonner Suzanne Bostick Allison Bussells Lucas Chase Markita Chisolm Allison Corcoran John Daughtridge Rebecca Foster Tammy Fowler Susan Getz Sharon Gillespie Bree Greer Maggie Harken Rio Hirsch Bryn Hite Eugenia Hollington Gail Johanson Parker Lee Brittany Liles Jessica Little Jo-Chi Mao Nicole McCarson Lisa Morgan Sandy Osborne Sarah Pearson Chappelle Price Liz Ryan Mark Shannon Traci Stone Kathy Sutler Lindsay Weber Kelly Welch Laura Wells Susan West Bank of South Carolina Corporation’s common stock trades on the NASDAQ Stock Market under the symbol “BKSC” Visit www.banksc.com 100 North Main Street, Summerville, SC 29483 P: 843-832-7100 // F: 843-832-7115 2027 Sam Rittenberg Blvd., Charleston, SC 29407 P: 843-958-1041 // F: 843-958-1050 256 Meeting Street, Charleston, SC 29401 P: 843-724-1500 // F: 843-724-1513 1337 Chuck Dawley Blvd., Mt. Pleasant, SC 29464 P: 843-971-3300 // F: 843-971-3315 www.banksc.com NASDAQ: BKSC 

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