S O U N D N E S S .
P R O F I T A B I L I T Y.
G R O W T H .
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256 Meeting Street, Charleston, SC 29401
P: 843-724-1500 // F: 843-724-1513
100 North Main Street, Summerville, SC 29483
P: 843-832-7100 // F: 843-832-7115
1337 Chuck Dawley Blvd., Mt. Pleasant, SC 29464
P: 843-971-3300 // F: 843-971-3315
2027 Sam Rittenberg Blvd., Charleston, SC 29407
P: 843-958-1041 // F: 843-958-1050
COMING IN 2019
9403 Highway 78, North Charleston, SC 29456
Bank of South Carolina Corporation’s common stock trades on the NASDAQ Stock Market under the symbol “BKSC”
Visit www.banksc.com
ANNUAL REPORT
2018
44614_Cvr.indd 1-3
2/26/19 9:25 AM
Five-Year Financial Performance
Years Ended December 31
2018
2017
2016
2015
2014
Net Income
$ 6,922,934
$ 4,901,825
$ 5,247,063
$ 4,884,288
$ 4,398,820
Performance Ratios:
Return on Average Equity
Return on Average Assets
Average Equity to Average Assets
Net Interest Margin
Net (Recoveries) Charge-offs to
Average Loans
Allowance for Loan Losses as a
Percentage of Total Loans (1)
Per Share Data:
Basic Income (2)
Diluted Income (2)
Year-End Book Value (2)
Cash Dividends Declared
Dividend Payout Ratio
Selected Average Balances:
Total Assets
Total Loans(3)
Total Deposits
15.85%
1.61%
10.15%
4.15%
11.37%
1.14%
10.07%
3.76%
12.65%
1.28%
10.10%
3.71%
12.64%
1.29%
10.18%
3.72%
12.12%
1.23%
10.11%
3.70%
(0.01)%
0.01%
0.05%
0.04%
0.02%
1.53%
1.43%
1.48%
1.41%
1.42%
$ 1.26
$ 1.24
$ 8.25
$ 0.58
54.68%
$ 0.90
$ 0.88
$ 7.79
$ 0.58
58.87%
$ 0.97
$ 0.94
$ 7.45
$ 0.54
50.86%
$ 0.90
$ 0.88
$ 7.24
$ 0.52
49.94%
$ 0.81
$ 0.79
$ 7.49
$ 0.62
62.88%
$ 430,495,412 $ 428,174,359
$ 410,581,560 $ 379,527,104 $ 358,774,284
$ 277,223,600 $ 264,881,222 $ 265,151,258 $ 243,729,630 $ 232,281,473
$ 386,025,147 $ 384,524,305 $ 367,822,900 $ 337,969,217 $ 319,131,466
Total Shareholders’ Equity
$ 43,691,359 $ 43,121,778 $ 41,479,755
$ 38,631,718 $ 36,283,441
(1) Excluding mortgage loans to be sold
(2) Adjusted to retroactively reflect 10% stock dividend
(3) Including mortgage loans to be sold
Annual Earnings & Cash Dividend History
Total Earnings: $77,788,707
Total Cash Dividends: $43,683,667
Earnings
Cash Dividends
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
7
8
9
1
8
8
9
1
9
8
9
1
0
9
9
1
1
9
9
1
2
9
9
1
3
9
9
1
4
9
9
1
5
9
9
1
6
9
9
1
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9
9
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9
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1
9
9
9
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6
0
0
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0
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0
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9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
These statements have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.
Board of Directors
Eugene H. Walpole, IV
Hugh C. Lane, Jr.
Fleetwood S. Hassell
Alan I. Nussbaum, MD
Glen B. Haynes, DVM
Linda J. Bradley McKee, PhD, CPA
Douglas H. Sass
Karen J. Phillips
Susanne K. Boyd
Sheryl G. Sharry
Steve D. Swanson
Elizabeth M. Hagood
Charles G. Lane
David W. Bunch
Graham M. Eubank, Jr.
William L. Hiott, Jr.
Richard W. Hutson, Jr.
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
Emily P. Bailey
Compliance Officer
Rhett D. Bearden
Senior Vice President
Patricia S. Black
Assistant Vice President
W. Heyward Bonner
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
Assistant Vice President
*Officers of the Corporation and of the Bank.
Other Officers are Officers of the Bank only.
David R. Gregorie
Loan Officer
Robert M. Hollings, III
Assistant Vice President
Lawson L. Johnson, III
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
Suzanne B. Olvera
Operations Officer
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
Malcolm M. Rhodes, MD
Edmund Rhett, Jr., MD
Employees
Susan Alford
Nicole Allston
Tammy Barker
Stender Bergmann
Allison Bussells
Markita Chisolm
Michael Ciappa
Anna Cockfield
Molly Dargan
John Daughtridge
Kelly Finocchio
Rebecca Foster
Tammy Fowler
Susan Getz
Bree Greer
Maggie Harken
Lacey Harris
Nancy Herndon
Rio Hirsch
Bryn Hite
Eugenia Hollington
Ally Jenkins
Gail Johanson
Parker Lee
Brittany Liles
Jessica Little
Jo-Chi Mao
Nicole McCarson
Lisa Morgan
Sandy Osborne
Brittany Ossa
Sarah Pearson
Liz Ryan
Mark Shannon
Traci Stone
Kathy Sutler
Lindsay Weber
Kelly Welch
Scott Weller
Laura Wells
Susan West
Appreciation
for
2018 Retirees
WILLETTE M. PARKER
Senior Vice President
31 Years of Service
ORIANNA S. GREGORIE
Senior Vice President
30 Years of Service
44614_Cvr.indd 4-6
2/26/19 9:25 AM
BA N K OF SOU T H CAR OLIN A C OR P OR ATION
1
CONSISTENTLY RANKED
The Top Performing South Carolina Bank
$6.9M
2018 EARNINGS
54.68%
2018 DIVIDEND
PAYOUT RATIO
RANKED #32
COMMUNITY BANK
BY THE
15.85%
2018 RETURN
ON EQUITY
1.61%
2018 RETURN
ON ASSETS
Over
7,000
CUSTOMERS
SERVED
5-STAR BAUER
FINANCIAL
RATING
10% STOCK DIVIDEND AND SPECIAL
$0.10 PER SHARE DIVIDEND IN 2018
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.
2
2018 ANNUAL REPO RT
Dear Stockholders, Customers, Employees and Friends:
Since our origin, we have
built approximately $45
million in capital and paid out
approximately $44 million in
cash dividends.
Once again, we begin this letter with a sense of pride about The
Bank of South Carolina. As we look back at 2018 - a year of
record earnings - it is remarkable how well your company has
performed for so many years now. This performance is not just
of the financial aspect but also of serving our customers, our
shareholders, and our community.
Thirty-two years ago, Hugh C. Lane, Jr. founded this Bank
- a bank not to be sold, but rather remain a legacy institution
to perform in this way. Like all great companies, every day
is DAY ONE for Service, Responsiveness, and Attention to
Detail. Our culture is founded on it.
We were pleased to reward our shareholders in 2018 with a
10% stock dividend in the first quarter and a one-time $0.10
per share cash dividend in conjunction with our regular $0.15
per share cash dividend in the third quarter. The stock dividend
was the second in three years, and our most recent regular
cash dividend was the 117th of our tenure. Since our origin, we
have built approximately $45 million in capital and paid out
approximately $44 million in cash dividends.
2018 held several noteworthy events – namely a return to a more
traditional interest rate environment, groundbreaking for our
new North Charleston office, a continued 5-Star performance
rating by Bauer Financial, and a #1 rating by the Financial
Management Consulting Group. As noted, we ended the year
with record earnings for the fourth quarter and the 2018 year.
Despite a slight decline in deposits, they remain core in nature
BA N K OF SOU T H CAR OLIN A C OR P OR ATION
3
and are sufficient for liquidity purposes. Sadly, we lost our
friends and colleagues - Leon de Brux, a banker for over 50
years, and Ron Coward, an organizer and founding Director of
our Bank.
We swim in oceans of risk yet maintain superior levels of asset
quality. Through disciplined lending, relationship building,
and prudence at every level, extraordinary financial results
have been created, thus providing great value to our many
stakeholders, namely you.
While our investments are critical, we are reminded constantly
that while companies don’t produce new products or new ideas
- people do. Our most important investments are the ones we
make in our people, through banking schools, seminars, and
continuing education. Our talented and dedicated employees
are the key to our ongoing success.
We carry on with an amazing perspective of what long-term
means in an industry with ongoing consolidation. Our message
is the opposite of reading the cooking instructions for instant
grits. We operate, not with exit strategies, but rather continued
investment in our future – investment in people, technology,
and strategic initiatives. Let’s stay the course.
S O U N D N E S S .
P R O F I T A B I L I T Y.
G R O W T H .
Fleetwood S. Hassell
President & CEO
Douglas H. Sass
Executive Vice President
& Senior Lender
Eugene H. Walpole, IV
Executive Vice President
& CFO
Susanne K. Boyd
Executive Vice President
& COO
Hugh C. Lane, Jr.
Chairman
EMPLOYEES OF THE
BANK serve ON THE
BOARDS OF 20 LOCAL
organizations
OVER 1,000
VOLUNTEER
HOURS IN 2018
111 ORGANIZATIONS
SUPPORTED BY THE
BANK
4
2018 ANNUAL REPO RT
Our Commitment
By definition, a community bank supports
and is reflective of the communities 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.
We believe we have a responsibility to the
communities we serve and, by being engaged,
are given a great opportunity to positively
shape the future of those communities.
PROXY MATERIAL OF
BANK OF SOUTH CAROLINA CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 9, 2019
Dear Shareholder:
I cordially invite you to attend the Annual Meeting of Shareholders of Bank of South Carolina Corporation, to be held on April 9, 2019
at 2:00pm EST at 256 Meeting Street, Charleston, South Carolina 29401, for the following purposes:
1.
to elect eighteen Directors to our Board of Directors to serve a one-year term;
2.
to obtain advisory approval of the Company’s Executive Compensation;
3.
4.
to obtain advisory approval of whether Shareholders should vote on the Company’s Executive Compensation (“Say on
Pay”) proposal every one, two, or three years;
to ratify the appointment of Elliott Davis, LLC as the Company’s independent registered public accounting firm for the
year ended December 31, 2019;
5.
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 28, 2019 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, we 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 2019 Proxy Statement and Annual Report for the year ended December 31, 2018 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 4, 2019
PROXY STATEMENT
FOR
THE ANNUAL MEETING OF SHAREHOLDERS
OF BANK OF SOUTH CAROLINA CORPORATION
TO BE HELD ON APRIL 9, 2019
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 2019 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 4, 2019.
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 9, 2019
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 eighteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2020 Annual
Meeting of Shareholders;
Proposal 2: To obtain advisory approval of the Company’s Executive Compensation;
Proposal 3: To obtain advisory approval of whether Shareholders should vote on the Company’s Executive Compensation
(“Say on Pay”) proposal every one, two, or three years;
Proposal 4: 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, 2019;
Proposal 5: 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 9, 2019
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 2018 Annual Report to Shareholders are available at http://www.banksc.com and at http://www.proxyvote.com.
1
Who is Entitled to Vote?
The Board of Directors of the Company has fixed the close of business on February 28, 2019, 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, 2019, there were 5,515,515 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.
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.
2
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, 2, 3, or 4 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, 3, and 4, each
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.
3
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 eighteen nominees described below be elected for a new term expiring at the 2020 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.
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, an executive officer,
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. Hugh C. Lane, Jr, an executive officer, Charles G. Lane, and William L. Hiott, Jr were
elected Directors of the Company upon its organization in 1995. Alan I. Nussbaum, MD was elected as a Director of the Company
during 1999 and was elected to serve one-year terms at subsequent Annual Meetings. Dr. Linda J. Bradley McKee, CPA was elected
as a Director of the Company during 2002 and was elected 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, an executive officer, was
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 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 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 was 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 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 elected to serve on the Board of Directors by the Shareholders on April 11, 2017. Susanne K. Boyd and Eugene H. Walpole, IV,
Executive Officers, were elected by the Shareholders on April 10, 2018.
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.
4
Executive Officer Directors and Nominees
Susanne K. Boyd
Age 42
First elected to the Board 2018
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. Ms. Boyd serves on the Executive/Long-Range Planning Committee and Asset
Liability/Investment Committee.
The Nominating Committee recommends the re-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 commitment to the success of
the Company.
Fleetwood S. Hassell
Age 59
First elected to the Board 2006
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, Senior Lender, and
now, 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. Mr. Hassell previously served on the South Carolina State
Board of Financial Institutions. Mr. Hassell serves on the Executive/Long-Range Planning Committee, Asset Liability/Investment
Committee, Community Reinvestment Act Committee, and Loan Committee.
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.
Hugh C. Lane, Jr.
Age 71
First elected to the Board 1995
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 Board of
Trustees of Ashley Hall School. 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. Mr.
Lane serves on the Executive/Long-Range Planning Committee, Asset Liability/Investment Committee, Community Reinvestment
Act Committee, and Loan Committee.
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.
5
Douglas H. Sass
Age 61
First Elected to the Board 2013
Mr. Sass joined the Bank in January 1994. He has thirty five 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 and is active in
other various civic organizations. Mr. Sass serves on the Executive/Long-Range Planning Committee, Asset Liability/Investment
Committee, Community Reinvestment Act Committee, and Loan Committee.
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.
Eugene H. Walpole, IV
Age 34
First elected to the Board 2018
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. Mr. Walpole serves on
the Executive/Long-Range Planning Committee, Asset Liability/Investment Committee, Community Reinvestment Act Committee,
and Loan Committee.
The Nominating Committee recommends the re-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 Company.
Non-Employee Directors
David W. Bunch
Age 68
First elected to the Board 2009
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 serves as Chairman of the
Loan Committee and Community Reinvestment Act Committee and also serves on the Audit & Compliance Committee.
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, Community Reinvestment Act, and Audit & Compliance Committees.
Graham M. Eubank, Jr.
Age 51
First elected to the Board 2005
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, Mr. Eubank currently serves on the Nominating Committee and is the Chairman 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.
6
Elizabeth M. Hagood
Age 57
First elected to the Board 2013
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, Life Resources, Inc., Open Space Institute Advisory
Board, Lowcountry Open Land Trust, and the Charleston County Greenbelt Advisory Board. In addition to serving on the Board of
Directors of the Bank and Company, Ms. Hagood serves on the Loan Committee, Community Reinvestment Act Committee, and the
Nominating Committee.
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.
Glen B. Haynes, DVM
Age 64
First elected to the Board 2007
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.
In addition to serving on the Board of Directors of the Bank and Company, Dr. Haynes serves on the Loan Committee, Community
Reinvestment Act Committee, and the Nominating Committee.
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.
William L. Hiott, Jr.
Age 74
First elected to the Board 1995
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. Mr. Hiott is a member of the Board of Directors of the Harry Hampton Wildlife
Fund. In addition to serving on the Board of Directors of the Bank and Company, Mr. Hiott serves on the Asset Liability/Investment
Committee, Community Reinvestment Act Committee, Loan Committee, Audit & Compliance Committee, Executive/Long-Range
Planning Committee, and Compensation Committee.
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 of Directors.
Richard W. Hutson, Jr.
Age 62
First elected to the Board 2005
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 Insurance Company. 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 serves on the Asset Liability/Investment Committee in addition to the Board of Directors of the Bank
and Company.
The Nominating Committee recommends Mr. Hutson for re-election to the Board due to his business experience, commitment to the
Bank and Company and strong ties to the Charleston community.
7
Charles G. Lane
Age 64
First elected to the Board 1995
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 and 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 serves on the Board of Directors of the Center for Humans and Nature. He
currently serves on the Executive/Long-Range Planning Committee, Asset Liability/Investment Committee, Loan Committee, and
Community Reinvestment Act Committee.
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
Age 68
First elected to the Board 2002
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 Adjunct Professor of Accounting at the College of Charleston as well as President of the Charleston Estate
Planning Council and Program Director of Charleston Tax Roundtable. In addition to serving on the Board of Directors of the Bank
and the Company, Dr. McKee serves on the Audit & Compliance Committee.
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 of Directors and the
Audit & Compliance Committee. For the above reasons, the Nominating Committee recommends Dr. McKee for re-election to the
Board of Directors.
Alan I. Nussbaum, MD
Age 67
First elected to the Board 1999
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 serves as a Lead Director of
the Bank and Company. He is the Chairman of the Executive/Long-Range 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 of Directors, community involvement, and knowledge of the Company.
Karen J. Phillips
Age 58
First elected to the Board 2017
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 Life Resources, Inc., and the past
Chairman of the Board of Trustees of Ashley Hall School, where she currently serves as a Trustee. In addition to serving on the
Board of Directors of the Bank and Company, Mrs. Phillips serves on the Audit & Compliance Committee, Loan Committee, and
Community Reinvestment Act Committee.
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.
Malcolm M. Rhodes, MD
Age 60
First elected to the Board 2005
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 represents South Carolina on the Atlantic
States Marine Fisheries Commission.
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.
8
Sheryl G. Sharry
Age 64
First elected to the Board 2010
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 Directors of the Bank and the Company, Mrs. Sharry
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.
Steve D. Swanson
Age 51
First elected to the Board 2002-2007;
Re-elected 2011
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 MedTrust Medical Transport, Trident United Way, Charleston Angel Partners,
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. Mr. Swanson previously served on the Board of SnapCap. In addition to
serving on the Board of Directors of the Bank and the Company, Mr. Swanson serves as the Chairman of the Audit & Compliance
Committee and serves on the Executive/Long-Range Planning 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.
9
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of December 31, 2018, information regarding share ownership of:
•
•
•
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, 2018.
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.
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 . . . . . . . . . . . . . . . . . . . Hugh C. Lane, Jr.(1)
Name and Address of Beneficial Owner
Amount and Nature
of Beneficial Ownership
820,108(2)
Percent of Class
14.19%
Common Stock . . . . . . . . . . . . . . . . . . .
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
The table below shows the security ownership of management, directors, and nominees.
Name of Beneficial Owner
Eugene H. Walpole, IV(3)
Title of class
Executive Officers/Directors
Common Stock . . . . . . . . . . . . . . . . . . . Hugh C. Lane, Jr.(1)
Fleetwood S. Hassell(3)
Common Stock . . . . . . . . . . . . . . . . . . .
Common Stock . . . . . . . . . . . . . . . . . . .
Susanne K. Boyd
Common Stock . . . . . . . . . . . . . . . . . . . Douglas H. Sass(3)
Common Stock . . . . . . . . . . . . . . . . . . .
Current Directors
Common Stock . . . . . . . . . . . . . . . . . . . David W. Bunch
Common Stock . . . . . . . . . . . . . . . . . . . Graham M. Eubank, Jr.
Common Stock . . . . . . . . . . . . . . . . . . .
Common Stock . . . . . . . . . . . . . . . . . . . Glen B. Haynes, DVM
Common Stock . . . . . . . . . . . . . . . . . . . William L. Hiott, Jr.
Common Stock . . . . . . . . . . . . . . . . . . .
Common Stock . . . . . . . . . . . . . . . . . . .
Common Stock . . . . . . . . . . . . . . . . . . . Dr. Linda J. Bradley McKee, CPA
Common Stock . . . . . . . . . . . . . . . . . . . Alan I. Nussbaum, MD
Common Stock . . . . . . . . . . . . . . . . . . . Karen J. Phillips
Common Stock . . . . . . . . . . . . . . . . . . .
Common Stock . . . . . . . . . . . . . . . . . . . Malcolm M. Rhodes, MD
Common Stock . . . . . . . . . . . . . . . . . . .
Common Stock . . . . . . . . . . . . . . . . . . .
Richard W. Hutson, Jr.
Charles G. Lane(1)
Sheryl G. Sharry
Steve D. Swanson
Edmund Rhett, Jr. MD
Elizabeth M. Hagood
Total
10
308,613(3)
5.34%
Amount and Nature
of Beneficial Ownership
Percent of Class
820,108(2)
118,434(4)
7,633(4)
37,736(4)
5,592(4)
2,120
1,041
121
8,173
208,571(4)
7,231
254,736(4)
2,855
4,302
6,624(4)
7,554(4)
4,918
99,837
16,538
1,614,124
14.19%
2.05%
*
*
*
*
*
*
*
3.61 %
*
4.41 %
*
*
*
*
*
1.73%
*
27.94%
*
Represents less than 1%
(cid:11)(cid:20)(cid:12)(cid:3) (cid:55)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:80)(cid:68)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:70)(cid:75)(cid:76)(cid:79)(cid:71)(cid:85)(cid:72)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)(cid:71)(cid:70)(cid:75)(cid:76)(cid:79)(cid:71)(cid:85)(cid:72)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:43)(cid:88)(cid:74)(cid:75)(cid:3)(cid:38)(cid:17)(cid:3)(cid:47)(cid:68)(cid:81)(cid:72)(cid:15)(cid:3)(cid:45)(cid:85)(cid:17)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:68)(cid:85)(cid:79)(cid:72)(cid:86)(cid:3)(cid:42)(cid:17)(cid:3)(cid:47)(cid:68)(cid:81)(cid:72)(cid:15)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:15)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:82)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)
of 455,507 shares or 7.88% 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
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(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 294,025 shares; as a Trustee for the Mills Bee Lane Memorial Foundation, he has shared voting and investment power with respect to 13,084
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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.
(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
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Fleetwood S. Hassell - an aggregate of 56,135 shares owned by his wife; held by him as a co-Trustee with Charles G. Lane for the children of Hugh C. Lane,
Jr.; and shares owned by the ESOP in which he has a vested interest; Douglas H. Sass – an aggregate of 19,736 shares owned by the ESOP in which he has a
vested interest and held by his wife; William L. Hiott, Jr. - an aggregate of 10,713 shares directly owned by his wife; Charles G. Lane - an aggregate of 61,384
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 – 3,649 shares owned by her husband; Edmund Rhett, Jr., MD – 1,005
shares owned by his wife; Susanne K. Boyd – an aggregate of 6,063 shares owned by children and shares owned by the ESOP in which she has a vested interest;
Eugene H. Walpole, IV- 2,010 shares owned by the ESOP in which he has a vested interest. All such indirectly owned shares are included in the totals of the
(cid:81)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:86)(cid:72)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:70)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:82)(cid:90)(cid:81)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:17)
No Director or Executive Officer was involved in or has any pending legal proceedings related to bankruptcy, securities, or commodities
laws nor have any members been convicted in criminal proceedings in the past 10 years.
11
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 six meetings (including all
regularly scheduled and special meetings) during the year ended December 31, 2018. 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, 2018 to (i) prohibit the offices of Chairman and President/
Chief Executive Officer be held by the same person and (ii) provide that the President/Chief Executive Officer will report to the
Chairman.
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 and 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, Susanne K. Boyd, Chief Operations Officer/Executive Vice President, Eugene H. Walpole, IV, Chief
Financial Officer/Executive Vice President and Charles G. Lane, brother of Hugh C. Lane, Jr.
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 six meetings (including all regularly scheduled and special
meetings) during the year ended December 31, 2018.
Board Leadership Structure
The Board of Directors believes that Hugh C. Lane, Jr., is the best person to serve as Chairman 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 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.
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 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.
12
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 of the Company has four standing 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 of the Company.
Director
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, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eugene H. Walpole, IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit &
Compliance
Executive/
Long-Range
Planning
•
Compensation
Committee
Nominating
Committee
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 2018, 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.
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.
13
Review of the Company’s Audited Financial Statements for the Fiscal Year Ended December 31, 2018
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 2018. 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 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, 2018, 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, 2018, for the filing with the SEC. During 2018, the Committee
appointed Elliott Davis, LLC as our independent auditors for the year ending December 31, 2018.
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, Chairman, Senior Lender/
Executive Vice President, Chief Operating Officer/Executive Vice President, Chief Financial Officer/Executive Vice President and
six designated Directors. Alan I. Nussbaum, MD, an independent Director, serves as Chairman of the Committee. During 2018, 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:
•
•
•
•
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;
14
•
•
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
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:
• NASDAQ;
• The Exchange Act and the rules and regulations of the SEC under the Exchange Act; and
• 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 2018 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 once time during 2018.
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:
•
•
•
•
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.
15
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.
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 one or both of the following addresses:
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
bankofscreports@gmail.com
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.
16
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, 2018. 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
—
7,625
4,550
7,525
—
8,500
9,150
5,550
8,450
—
6,700
6,800
7,200
6,250
—
6,925
5,700
—
$
$
$
$
$
$
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 $400.00 for each meeting of the Board of Directors of the Bank
attended. Directors of the Company and the Bank also receive $175.00 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 16(a) 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 furnish us with copies of the forms they file. To our knowledge, no person beneficially owned more than 10% of our common
stock during 2018. During the fiscal year ended December 31, 2018, five executive officers and one director filed untimely Forms 4.
Susanne K. Boyd, Chief Operating Officer/Executive Vice President, filed one untimely Form 4 report for one transaction. Fleetwood
S. Hassell, President/Chief Executive Officer, filed one untimely Form 4 report for one transaction. Douglas H. Sass, Senior Lender/
Executive Vice President, filed one untimely Form 4 report for one transaction. Eugene H. Walpole, IV, Chief Financial Officer/
Executive Vice President, filed one untimely Form 4 report for one transaction. Sheryl G. Sharry, Director, filed one untimely Form
4 report for one transaction. Based solely on a review of the copies of such reports furnished to us, during the fiscal year ended
December 31, 2018, all other Directors and Executive Officers complied with all applicable Section 16(a) filing requirements.
17
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, Director
Fleetwood S. Hassell, President/Chief Executive Officer, Director
• Hugh C. Lane, Jr., Chairman, Director
• Douglas H. Sass, Senior Lender/Executive Vice President, Director
• Eugene. H. Walpole, IV, Chief Financial Officer/Executive Vice President, Director
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:
•
•
•
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
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:3)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:191)(cid:89)(cid:72)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:182)(cid:86)(cid:3)(cid:82)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:29)
•
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.
As a smaller reporting company, defined by Item 10(f), the following table sets forth all remuneration paid during the years ended
December 31, 2018, 2017, and 2016 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, 2018, 2017 or 2016. No options were granted to any Executive Officer during the years
ended December 31, 2018, 2017 or 2016. Additionally, there was no non-equity incentive plan compensation or nonqualified deferred
compensation earnings given during the years ended December 31, 2018, 2017, and 2016.
18
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
2018
2017
2016
2018
2017
2016
2018
2017
2016
Salary(1)
270,000
250,000
240,000
266,338
248,459
231,127
186,706
173,580
161,470
$
$
$
$
$
$
$
$
$
Bonus
$ 25,300
$ 20,150
$ 15,100
$ 25,300
$ 20,150
$ 15,100
$ 20,300
$ 15,150
$ 12,600
All Other
Compensation(2)
22,450
$
20,998
$
17,542
$
22,450
$
21,107
$
16,932
$
16,899
$
14,754
$
11,970
$
Total
$ 317,750
$ 291,148
$ 272,642
$ 314,088
$ 289,716
$ 263,159
$ 223,905
$ 203,484
$ 186,040
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 $20,000 increase in salary for the Chairman of the Board, an $18,581 increase in the salary of the President/
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:3)(cid:7)(cid:20)(cid:22)(cid:15)(cid:20)(cid:21)(cid:25)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:47)(cid:72)(cid:81)(cid:71)(cid:72)(cid:85)(cid:18)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)
Directors approved this recommendation on December 21, 2017. The Compensation Committee recommended and the Board of Directors approved a $10,000
(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:15)(cid:3)(cid:68)(cid:3)(cid:7)(cid:20)(cid:26)(cid:15)(cid:22)(cid:22)(cid:23)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:18)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:3)(cid:7)(cid:20)(cid:21)(cid:15)(cid:20)(cid:20)(cid:19)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)
the Senior Lender/Executive Vice President for the year ended December 31, 2017. The Board of Directors approved this recommendation on December 15,
(cid:21)(cid:19)(cid:20)(cid:25)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:68)(cid:3)(cid:7)(cid:20)(cid:25)(cid:15)(cid:20)(cid:21)(cid:24)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:18)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:3)
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.
(cid:21)(cid:12)(cid:3) (cid:50)(cid:81)(cid:3)(cid:49)(cid:82)(cid:89)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:15)(cid:3)(cid:20)(cid:28)(cid:27)(cid:28)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:68)(cid:71)(cid:82)(cid:83)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:3)(cid:40)(cid:54)(cid:50)(cid:51)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:85)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:79)(cid:76)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:68)(cid:76)(cid:87)(cid:75)(cid:73)(cid:88)(cid:79)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
represents the amount contributed to the Bank’s ESOP. (See table and discussion below for other compensation.)
(cid:55)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:71)(cid:76)(cid:68)(cid:81)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:7)(cid:25)(cid:23)(cid:15)(cid:20)(cid:25)(cid:22)(cid:17)
Employee Stock Ownership Plan and Trust Agreement
Fleetwood S. Hassell, Douglas H. Sass, Sheryl G. Sharry, and Eugene H. Walpole, IV 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 $420,000 to the ESOP for the fiscal year ended December 31, 2018. The
contribution was made during 2018.
A participant becomes vested in the ESOP based upon the employee’s credited years of service. The vesting schedule is as follows:
•
•
•
•
•
1 Year of Service
0% Vested
2 Years of Service
25% Vested
3 Years of Service
50% Vested
4 Years of Service
75% Vested
5 Years of Service
100% Vested
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).
19
The Plan currently owns 308,613 shares or 5.34% 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
22,450
$
22,450
$
16,899
$
$
$
$
Total
22,450
22,450
16,899
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.
The following information with respect to the outstanding equity awards as of December 31, 2018, is presented for the named
Executive Officers with additional discussion below.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2018
OPTION AWARDS
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Option
Exercise
Price
($)
—
— $
— $
— $
—
8.61
8.61
9.18
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
—
—
—
—
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
—
4,840
2,420
3,630
Number of
Shares of
Units of Stock
That Have
Not Vested
(#)
Market Value
of Shares or
Units of Stock
That Have
Not Vested
($)
—
—
—
—
—
—
—
—
Option
Expiration Date
—
June 23, 2021
June 23, 2021
June 28, 2022
STOCK AWARDS
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
(#)
—
—
—
—
—
—
—
—
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.
20
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.
As shown below Fleetwood S. Hassell, President/Chief Executive Officer exercised options to purchase 2,420 shares at $8.61 on
June 27, 2018. The price per share on the date of exercise was $20.70. Douglas H. Sass exercised options to purchase 1,210 shares
at $8.61 and 1,210 shares at $9.18 on June 25, 2018 and July 16, 2018, respectively. The price per share on the date of exercise was
$20.40 and $20.80, respectively.
2018 OPTION EXERCISES AND STOCK VESTED
Name
Hugh C. Lane, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fleetwood S. Hassell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Douglas H. Sass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Compensation Plan Information
OPTION AWARDS
STOCK AWARDS
Number
of Shares
Acquired on
Exercise
(#)
Value
Realized on
Exercise
($)
Number
of Shares
Acquired on
Vesting
(#)
Value
Realized on
Vesting
($)
2,420
2,420
$
$
—
20,836
21,526
—
—
—
—
—
—
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, 2018:
Plan Category
1998 Omnibus Stock Incentive Plan approved by Shareholders2 . . . . . . . . . . .
2010 Omnibus Stock Incentive Plan approved by Shareholders3 . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options
Warrants and
Rights
Weighted-
Average
Exercise Price
of Outstanding
Options,
Warrants and
Rights
— $
$
$
102,760
102,760
—
11.71
11.71
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans1
—
166,158
166,158
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 363,000 shares reserved under this Plan. All
(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:192)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:20)(cid:19)(cid:8)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:71)(cid:72)(cid:70)(cid:79)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:36)(cid:88)(cid:74)(cid:88)(cid:86)(cid:87)(cid:3)(cid:21)(cid:26)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:83)(cid:85)(cid:76)(cid:79)(cid:3)(cid:20)(cid:19)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:17)
During the fiscal year ended December 31, 2018, 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.
21
Benefit Plan
Employee Stock Ownership Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical and Dental Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life and Disability Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive
Officers
x
x
x
x
Officers
x
x
x
x
Full Time
Employees
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.
22
PROPOSAL 2: TO OBTAIN ADVISORY APPROVAL OF THE COMPANY’S EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) enables the Shareholders of the
Company to vote to approve, on a non-binding basis, the compensation of the Company’s named Executive Officers as disclosed
pursuant to Item 402 of Regulation S-K of the SEC. Accordingly, the Board of Directors recommends that you approve the
compensation of the Company’s named Executive Officers as described under Executive Compensation-Compensation Discussion
and Analysis, the Compensation Table and narrative discussion in this Proxy Statement.
The Company seeks to align the interests of its named Executive Officers with the interests of its Shareholders. Therefore, the
Company’s compensation programs are designed to reward the named Executive Officers for the achievement of strategic and
operational goals and the achievement of increased Shareholder value, while at the same time avoid encouraging of unnecessary or
excessive risk-taking. The Compensation Committee of the Board does not engage external compensation consultants to provide an
independent and objective review of the Company’s compensation program for executive management or to offer recommendations
on this compensation program. The Company believes that its compensation policies and procedures are competitive and focused on
performance and are strongly aligned with the long-term interest of its Shareholders.
The proposal described below, commonly known as a “Say on Pay” proposal, gives you the opportunity to express your views regarding
the compensation of the named Executive Officers by voting to approve or not approve such compensation as described in this Proxy
Statement. This vote is advisory and will not be binding upon the Company, the Board or the Compensation Committee. However,
the Company, the Board and the Compensation Committee will take into account the outcome of the vote when considering future
executive compensation arrangements. The vote on this resolution is not intended to address any specific element of compensation,
but rather relates to the overall compensation of the named Executive Officers, as described in this Proxy Statement in accordance
with the compensation disclosure rules of the Securities and Exchange Commission.
The Board recommends that the Shareholders vote in favor of the following resolution at the Annual Meeting:
“RESOLVED, that the compensation paid to the Company’s named Executive Officers, as disclosed in the Company’s Proxy
Statement for the 2019 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and
Exchange Commission, including the Executive Compensation - Compensation Discussion and Analysis, the compensation
tables and any related material disclosed in the Proxy Statement, is hereby APPROVED.”
23
PROPOSAL 3: TO OBTAIN ADVISORY APPROVAL OF WHETHER SHAREHOLDERS SHOULD VOTE ON THE
COMPANY’S EXECUTIVE COMPENSATION (“SAY ON PAY”) PROPOSAL EVERY ONE, TWO, OR THREE YEARS
The Dodd-Frank Act requires that the Company provide Shareholders with the opportunity to vote, on a non-binding advisory basis, for
their preference as to how frequently the Company should consult the Shareholders through an advisory Say on Pay vote. Shareholders
may indicate whether they would prefer that the Company conduct future Say on Pay votes every year, every two years or every three
years. Shareholders also may abstain from casting a vote on this proposal.
The Board of Directors has determined that a Say on Pay vote that occurs once every three years is the most appropriate alternative
for the Company and therefore the Board recommends that you vote in favor of conducting a Say on Pay vote every three years. The
Board believes that a Say on Pay vote occurring every three years will provide our Shareholders with sufficient time to evaluate the
effectiveness of the Company’s overall compensation philosophy, policies and practices in the context of the long-term business
results of the Company for the corresponding period, while avoiding an over-emphasis on short-term variations in compensation and
business results. A Say on Pay vote occurring every three years will also permit Shareholders to observe and evaluate the effect of
any changes to the executive compensation policies and practices of the Company that have occurred since the last advisory vote on
executive compensation.
This vote is advisory, which means that is not binding on the Company, the Board of Directors and the Compensation Committee. The
Company recognizes that the Shareholders may have different views as to the best approach and looks forward to hearing from the
Shareholders as to their preferences on the frequency of the Say on Pay vote. The Board of Directors and Compensation Committee
will carefully review the outcome of the frequency vote; however, when considering the frequency of future Say on Pay votes, the
Board of Directors may decide that it is in the Company’s and the Shareholders’ long-term best interest to hold a Say on Pay vote more
or less frequently than the frequency receiving the most votes cast by the Shareholders.
The proxy card provides Shareholders with the opportunity to choose among four options (holding the Say on Pay vote every year, every
two years, every three years or abstain from voting). Shareholders are not being asked to approve or disapprove the recommendation
of the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE OPTION OF ONCE EVERY
THREE YEARS AS THE PREFERRED FREQUENCY FOR SAY ON PAY VOTES.
24
PROPOSAL 4: 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, 2019.
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, 2019, 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 2018 Annual Shareholders’ Meeting. At the 2019 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, 2019, 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, 2018
and 2017. 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 2018 or 2017.
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.
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, 2018 and 2017 were preapproved by the Audit &
Compliance Committee.
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit related fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total audit and related fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
88,825
$
—
88,825
13,525
102,350
$
2017
91,897
—
91,897
16,450
108,347
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, 2019.
25
PROPOSAL 4: 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, 2018, filed with the Securities and Exchange Commission on Form 10-K,
is mailed herewith to all Shareholders.
SHAREHOLDER PROPOSALS FOR THE 2020 ANNUAL SHAREHOLDERS’ MEETING
Shareholder proposals, if any, for inclusion in the Proxy Statement relating to the 2020 Annual Shareholders’ meeting, must be
addressed to and received in the office of the President/Chief Executive Officer no later than December 1, 2019. 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 4, 2019
26
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:2)
□
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)
256 Meeting Street, Charleston, SC
(Address of principal executive offices)
57-1021355
(IRS Employer
Identification Number)
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 (cid:2) 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 (cid:2) 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 (cid:2) No □
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted
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). Yes (cid:2) 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 10-K 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 □ Accelerated filer □ Non-accelerated filer □ Smaller reporting company (cid:2) Emerging Growth Company □
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 (cid:2)
Aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price of such stock on June 30,
2018 was $74,908,192.
As of February 14, 2019, the Registrant has outstanding 5,514,305 shares of common stock.
BANK OF SOUTH CAROLINA CORPORATION
AND SUBSIDIARY
Table of Contents
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
1
7
7
8
8
8
9
11
12
30
31
70
70
70
71
71
71
72
72
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
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, 2018 as filed with the Securities and Exchange
Commission (the “SEC”) and the following:
• Risk from changes in economic, monetary policy, and industry conditions
• Changes in interest rates, shape of the yield curve, deposit rates, the net interest margin and funding sources
• Market risk (including net income at risk analysis and economic value of equity risk analysis) and inflation
• Risk inherent in making loans including repayment risks and changes in the value of collateral
• Loan growth, the adequacy of the allowance for loan losses, provisions for loan losses, and the assessment of problem loans
• Level, composition, and re-pricing characteristics of the securities portfolio
• Deposit growth and changes in the mix or type of deposit products and services
• Continued availability of senior management and ability to attract and retain key personnel
• Technological changes
•
• Ability to control expenses
• Changes in compensation
• Risks associated with income taxes including potential for adverse adjustments
• Changes in accounting policies and practices
• Changes in regulatory actions, including the potential for adverse adjustments
• Recently enacted or proposed legislation and changes in political conditions
• Reputational risk
Increased cybersecurity risk, including potential business disruptions or financial losses
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.
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 at 9403 Highway 78,
North Charleston, SC in 2019 (copy of the lease incorporated as Exhibit 10.13 in the June 30, 2017 Form 10-Q).
1
The Charleston – North Charleston metro area grew 33.11% between 2012 and 2017 according to the U.S. Bureau of Economic
Analysis. The primary economic drivers of our market area are manufacturing, hospitality, technology, and the healthcare industry.
This includes manufacturing campuses for Boeing, Volvo Cars, and Mercedes-Benz Vans in the area. Hospitality 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:
•
•
•
•
•
•
•
•
•
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
knowledge of local trends and conditions.
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, 2018, $54.8 million, or 19.96%, 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 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.
2
Commercial Real Estate Loans
As of December 31, 2018, commercial real estate construction loans comprised $7.3 million, or 2.66%, of our loan portfolio. We make
construction loans for commercial properties to businesses. Advances on construction loans are made 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 twelve 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, 2018, $143.7 million, or 52.32%, 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.
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 $63.8 million, or 23.22%, of the loan portfolio as of December 31, 2018. 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. Similar to commercial real estate construction financing, consumer
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.
3
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 $5.0 million and were 1.83% of the loan portfolio as of December 31, 2018. These loans are originated
for various purposes, including the purchase of automobiles, boats, and other 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.
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, 2018, we employed 79 people, with four 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
4
regulations. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, 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”) 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 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, 2018, 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 (see Note 18). 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 exposure, and (5) asset growth. The agencies also must
prescribe standards for asset quality, earnings, and stock 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
5
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:
Internal controls
Information systems and audit systems
Interest rate risk exposure
•
•
• Loan documentation
• Credit underwriting
•
• Asset quality
• Liquidity
• Capital adequacy
• Bank Secrecy Act
•
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:
• The federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers
• The Home Mortgage Disclosure Act of 1975, which requires 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
• The Fair Lending Act, which requires fair, equitable, and nondiscriminatory access to credit for consumers
• The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit
• The Fair Credit Reporting Act of 1978, which governs the use and provision of information to credit reporting agencies
• The Fair Debt Collection Act, which governs the manner in which consumer debt may be collected by collection agencies
• 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:
• 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
• 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
• Regulation DD, which implements the Truth in Savings Act to enable consumers to make informed decisions about deposit
accounts at depository institutions.
6
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 (“USA Patriot Act”). 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.
Item 1B.
Unresolved Staff Comments
None.
7
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. A fifth office at 9403 Highway 78 in North Charleston, SC is under
construction and will open in 2019. 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 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.
8
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
At December 31, 2018, there were 5,777,474 shares issued and 5,510,917 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”.
Information regarding the historical market prices of our common stock and dividends declared on that stock is shown below.
High
Low
Dividends
2018
Quarter ended March 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended September 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21.45 $
21.90 $
21.15 $
20.90 $
18.90 $
17.55 $
19.50 $
17.89 $
2017
Quarter ended March 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended September 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21.85 $
21.15 $
19.95 $
19.35 $
19.28 $
18.80 $
17.47 $
18.00 $
2016
Quarter ended March 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Quarter ended December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16.75 $
16.25 $
18.63 $
23.47 $
14.91 $
15.51 $
15.95 $
18.39 $
0.15
0.15
0.25
0.15
0.14
0.14
0.15
0.15
0.13
0.13
0.14
0.14
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 266,557
shares, adjusted for five 10% stock dividends 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 14, 2019, there were approximately 1,853 shareholders of record with shares held by individuals and in nominee
names. The market price for our common stock as of February 14, 2019, was $18.51. As of February 14, 2019, there were 5,780,862
shares of common stock issued and 5,514,305 shares of common stock outstanding.
9
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 $420,000 to the ESOP for the fiscal year ended December 31,
2018. The Board of Directors of the Bank approved cash contributions of $375,000 and $345,000 for the fiscal years ended December
31, 2017 and 2016, 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:
• 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
• Employees who are non-resident aliens who do not receive earned income from the Company which constitutes income from
sources within the United States
• 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)
• Certain leased employees
• Employees who are employed by an affiliated company that does not adopt the plan
• 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:
•
•
•
•
•
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, 2018, the Plan owned 308,613 shares of
common stock of the Company.
10
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 four 10% stock dividends, and a
25% stock dividend) shares reserved, and a Stock Incentive Plan, which was approved in 2010, with 300,000 (363,000 adjusted for
two 10% stock dividends) shares reserved. Under both plans, options are periodically granted to employees at a price not less than the
fair market value of the shares at the date of grant. 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.
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.
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.
For December 31:
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Year End Balances:
Total assets . . . . . . . . . . . . . . . . . . . . . .
Total loans(1) . . . . . . . . . . . . . . . . . . . . .
Investment securities available
2018
2017
2016
2015
2014
$ 6,922,934
$
4,901,825
$
5,247,063
$
4,884,288
$
4,398,820
429,135,198
275,863,705
446,566,498
272,274,363
413,949,636
264,962,325
399,172,512
248,442,944
367,225,802
241,442,873
for sale . . . . . . . . . . . . . . . . . . . . .
119,668,874
139,250,250
119,978,944
119,997,585
113,994,112
Interest-bearing deposits at the
Federal Reserve . . . . . . . . . . . . . .
Earning assets . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . .
25,506,784
421,039,363
382,378,388
45,462,561
24,034,194
435,558,807
402,888,300
42,764,635
18,101,300
403,042,569
372,522,851
40,612,974
23,898,862
392,339,391
358,718,612
39,151,712
5,680,613
361,117,598
322,419,027
36,759,982
Weighted average shares outstanding -
basic . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,500,027
5,471,001
5,428,884
5,403,749
5,397,929
Weighted average shares outstanding -
diluted . . . . . . . . . . . . . . . . . . . . . . . . .
5,589,012
5,568,493
5,561,739
5,573,794
5,535,432
For the Year:
Selected Average Balances:
Total assets . . . . . . . . . . . . . . . . . . . . . .
Total loans(1) . . . . . . . . . . . . . . . . . . . . .
Investment securities available
430,495,412
277,223,600
428,174,359
264,881,222
410,581,560
265,151,258
379,527,104
243,729,630
358,774,284
232,281,473
for sale . . . . . . . . . . . . . . . . . . . . .
123,347,669
130,161,937
110,762,289
110,633,399
99,488,314
Interest-bearing deposits at the
Federal Reserve . . . . . . . . . . . . . .
Earning assets . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . .
20,151,823
420,723,092
386,025,147
43,691,359
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
11
Performance Ratios:
Return on average equity . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . .
Net (recoveries) charge-offs to average
loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses as a percentage
of total loans(2) . . . . . . . . . . . . . . . . . . .
Per Share:
Basic income per common share(3) . . . . . . .
Diluted income per common share(3). . . . . .
Year end book value(3) . . . . . . . . . . . . . . . . .
Dividends per common share . . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . .
$
$
$
$
2018
2017
2016
2015
2014
15.85%
1.61%
10.15%
4.15%
11.37%
1.14%
10.07%
3.76%
12.65%
1.28%
10.10%
3.71%
12.64%
1.29%
10.18%
3.72%
12.12%
1.23%
10.11%
3.70%
(0.01)%
0.01%
0.05%
0.04%
0.02%
1.53%
1.43%
1.48%
1.41%
1.42%
$
1.26
$
1.24
$
8.25
0.58
$
54.68%
$
0.90
$
0.88
$
7.79
0.58
$
58.87%
$
0.97
$
0.94
$
7.45
$
0.54
50.86%
$
0.90
$
0.88
$
7.24
0.52
$
49.94%
0.81
0.79
7.49
0.62
62.88%
Full time employee equivalents . . . . . . . . .
79
77
74
81
77
(1)
Including mortgage loans to be sold.
(2) Excluding mortgage loans to be sold.
(cid:11)(cid:22)(cid:12)(cid:3) (cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:87)(cid:85)(cid:82)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:192)(cid:72)(cid:70)(cid:87)(cid:3)(cid:20)(cid:19)(cid:8)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:17)
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.
12
OVERVIEW
The Company is a bank holding company headquartered in Charleston, South Carolina, with $429.1 million in assets as of
December 31, 2018 and net income of $6.9 million for the year ended December 31, 2018. 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. 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, 2018 as compared to
December 31, 2017 and our operating results for 2018 compared to 2017 and 2017 compared to 2016, 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.
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”.
13
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2018 TO DECEMBER 31, 2017
Net income increased $2.0 million or 41.23% to $6.9 million, or basic and diluted income per share of $1.26 and $1.24, respectively,
for the year ended December 31, 2018 from $4.9 million or basic and diluted income per share of $0.90 and $0.88, respectively, for the
year ended December 31, 2017. The increase in net income was primarily due to improved margins resulting from a lower corporate
tax rate due to the enactment of the Tax Cuts and Jobs Act and rising interest rates on interest-earning assets. Our returns on average
assets and average equity for the year ended December 31, 2018 were 1.61% and 15.85%, respectively, compared with 1.14% and
11.37%, respectively, for the year ended December 31, 2017.
Net interest income increased $1.7 million or 10.78% to $17.4 million for the year ended December 31, 2018 from $15.7 million for
the year ended December 31, 2017. This increase was primarily due to increases in interest and fees on loans and investment securities.
Interest and fees on loans increased $1.8 million or 13.84% to $15.1 million for the year ended December 31, 2018 from $13.3 million
for the year ended December 31, 2017, as the result of the increases in the Federal Funds target rate set by the Federal Reserve. Interest
income on investment securities increased $4,980 or 0.31% to $2.6 million for the year ended December 31, 2018.
Average earning assets increased $2.1 million or 0.51% to $420.7 million for the year ended December 31, 2018 from $418.6 million
for the year ended December 31, 2017. This is primarily related to the increase in the average balance of loans offset by decreases in
average investment securities and interest-bearing deposits at the Federal Reserve.
The provision to the allowance for loan losses for the year ended December 31, 2018 was $325,000 compared to $55,000 for the year
ended December 31, 2017. The increase was primarily driven by the growth of our loan portfolio in accordance with our allowance
for loan loss methodology. The Board of Directors determined that this provision was appropriate based upon the adequacy of our
reserve. Charge-offs of $115,887 and recoveries of $129,820, together with the provision to the allowance, resulted in an allowance
for loan losses of $4,214,331 or 1.53% of total loans at December 31, 2018.
Other income decreased $273,846 or 12.07% to $2.0 million for the year ended December 31, 2018, from $2.3 million for the
year ended December 31, 2017. Our mortgage banking income decreased $270,564 or 25.59% to $786,893 for the year ended
December 31, 2018 from $1.1 million for the year ended December 31, 2017 due to decreased volume. We were also impacted by an
increase in competition as new banks entered the market area. Mortgage banking income is highly influenced by mortgage interest
rates and the housing market.
Other expense increased $837,938 or 8.18% to $11.1 million for the year ended December 31, 2018, from $10.2 million for the
year ended December 31, 2017. Salaries and employee benefits increased $427,398 or 7.05% from $6.1 million for the year
ended December 31, 2017 to $6.5 million for the year ended December 31, 2018. Other operating expenses increased $435,726 to
$3.0 million during the year ended December 31, 2018 from $2.5 million during the year ended December 31, 2017. This increase
is directly related to the amortization expense of $354,888 for our investment in a Federal Rehabilitation Tax Credit.
For the year ended December 31, 2018, the Company’s effective tax rate was 13.81% compared to 36.48% during the year ended
December 31, 2017. The decrease in the effective tax rate is directly related to the income tax expense recorded due to the revaluation
of the deferred tax asset in 2017, as well as our investment in a Federal Rehabilitation Tax Credit in 2018. As a result of the enactment
of the Tax Cuts and Jobs Act, which changed 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 in 2017.
14
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2017 TO DECEMBER 31, 2016
Net income decreased $345,238 or 6.58% to $4.9 million, or basic and diluted income per share of $0.90 and $0.88, respectively
for the year ended December 31, 2017 from $5.2 million or basic and diluted income per share of $0.97 and $0.94, 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 $15.7 million for the year ended December 31, 2017 from $14.9 million 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 $13.3 million for the year ended December 31, 2017 from $12.9 million 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 $2.6 million for the year ended December 31, 2017 from $2.3 million for
the year ended December 31, 2016 a result of the increase in the average balance of investment securities from $110.8 million for the
year ended December 31, 2016 to $130.2 million for the year ended December 31, 2017.
Average earning assets increased $16.2 million or 4.03% to $418.6 million for the year ended December 31, 2017 from $402.4 million
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 adequacy 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 $3.9 million or 1.43% of total loans at December 31, 2017.
Other income decreased $592,612 or 20.71% to $2.3 million for the year ended December 31, 2017. Our mortgage banking
income decreased $330,283 or 23.80% to $1.1 million for the year ended December 31, 2017 from $1.4 million 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 $20.2 million or 26.62% to $55.8 million for the year ended December 31, 2017 from $76.0 million 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 $10.2 million for the year ended December 31, 2017, from $10.3 million for the
year ended December 31, 2016. Salaries and employee benefits decreased $27,098 or 0.45% from $6.1 million for the year ended
December 31, 2016 to $6.1 million for the year ended December 31, 2017. Other operating expenses decreased $122,039 to $2.5 million
during the year ended December 31, 2017 from $2.6 million 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 $1.6 million
for the year ended December 31, 2017, from $1.5 million for the year ended December 31, 2016. 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, 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.
15
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, 2018, total assets decreased 3.90% to $429.1 million from $446.6 million as of December 31, 2017 and total deposits
decreased 5.09% to $382.4 million from $402.9 million as of December 31, 2017.
As of December 31, 2018, earning assets, which are composed of U.S. Treasury, Government Sponsored Enterprises and Municipal
Securities in the amount of $119.7 million, interest-bearing deposits at the Federal Reserve in the amount of $25.5 million and total
loans, including mortgage loans held for sale, in the amount of $275.9 million, constituted approximately 98.11% 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 liabilities are issued with fixed terms and can be repriced only at maturity.
16
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 and or precipitous change in interest rates. The average net
interest rate margin for 2018 increased to 4.15% from 3.76% for 2017. The average net interest margin for 2017 increased to 3.76%
from 3.71% for 2016. At December 31, 2018 and 2017, 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.
At December 31, 2018, the average maturity of the investment portfolio was 3.69 years with an average yield of 2.08% compared to
3.90 years with an average yield of 2.04% at December 31, 2017.
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, 2018.
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
$137,630
$ 12,605
$ 16,434
$ 23,337
$ 84,806
$
1,051
$275,863
$263,781
Interest-earning assets
(in thousands)
Loans(1) . . . . . . . . . . . . . . . . . . . .
Investment securities available
for sale(2) . . . . . . . . . . . . . . . .
—
560
3,283
403
99,753
17,919
121,918
119,669
Interest-bearing deposits at the
Federal Reserve . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
25,507
$163,137
Interest-bearing liabilities
(in thousands)
CD’s and other time deposits
—
—
—
—
$ 13,165
$ 19,717
$ 23,740
$184,559
$ 18,970
— 25,507
$423,288
25,507
$408,957
less than $250,000 . . . . . . . .
$
— $
6,851
$
5,034
$
6,025
$
2,149
$
— $ 20,059
$ 24,841
CD’s and other time deposits
$250,000 and over . . . . . . . .
—
9,161
1,605
3,644
—
—
14,410
13,907
Money market and interest-
bearing demand accounts . . .
Savings . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
181,508
35,461
$216,969
—
—
$
$ 16,012
—
—
$
6,639
—
—
$
9,669
—
—
$
2,149
— 181,508
— 35,461
— $251,438
181,508
35,461
$255,717
Net . . . . . . . . . . . . . . . . . . . . . . .
Cumulative . . . . . . . . . . . . . . . . .
$ (53,832) $ (2,847) $ 13,078
$182,410
$ (56,679) $ (43,601) $ (29,530) $152,880
$ 14,071
$ 18,970
$171,850
$171,850
Including mortgage loans to be sold and deferred fees.
(1)
(2) At amortized cost.
17
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, 2018.
LIQUIDITY
Payment Due by Period
One to
Less than
five years
one year
After
five years
Total
Contractual Obligations
(in thousands)
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total contractual cash obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$34,469 $32,320 $ 2,149 $ —
10,992
619 2,358 8,014
$45,461 $32,939 $ 4,507 $ 8,014
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 35.58% and 38.93% of total assets at December 31, 2018 and 2017,
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, 2018, 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, 2018, we could borrow up to
$79.3 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, 2018 and 2017, our liquidity ratio was 34.27% and 37.68%, respectively.
Average earning assets increased by $2.1 million from 2017 to 2018. This increase was primarily due to a $12.3 million increase in
average loans which was offset by a $6.8 million decrease in investment securities available for sale and a $3.4 million decrease in
average interest-bearing deposits at the Federal Reserve. 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.
The following table shows the composition of average assets over the past five fiscal years.
Loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale . . . . . . . .
Interest-bearing deposits at the Federal Reserve .
Non-earning assets . . . . . . . . . . . . . . . . . . . . . . . .
Total average assets . . . . . . . . . . . . . . . . . . . . . . .
(1)
Including mortgage loans to be sold and deferred fees.
2018
2017
2016
$277,223,600 $264,881,222 $265,151,258 $243,729,630 $232,281,473
123,347,669 130,161,937 110,762,289 110,633,399 99,488,314
20,151,823 23,558,893 26,474,258 17,549,903 19,588,597
7,415,900
$430,495,412 $428,174,359 $410,581,560 $379,527,104 $358,774,284
9,572,307
8,193,755
7,614,172
9,772,320
2014
2015
18
The following table shows changes in interest income and expense based upon changes in volume and changes in rates.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
2018 vs. 2017
2017 vs. 2016
2016 vs. 2015
Volume
Rate
Change(1) Volume
Rate
Net
Dollar
Net
Dollar
Change(1)
Volume
Rate
Net
Dollar
Change(1)
Loans(2) . . . . . . . . . . . . . . . . . . . . . . . $ 619,462
Investment securities available
for sale . . . . . . . . . . . . . . . . . . . . (133,820)
Interest-bearing deposits at the
Federal Reserve . . . . . . . . . . . . .
(38,839)
Interest income . . . . . . . . . . . . . . . . . $ 446,803
Interest-bearing transaction
$1,219,536 $1,838,998 $ (12,868)
$ 448,286
$ 435,418 $ 1,038,280
$ 18,317
$ 1,056,597
138,800
4,980 390,667
(83,722)
306,945
2,780
(86,785)
(84,005)
162,625
123,786 (16,770)
147,957
131,187
31,025
62,032
93,057
$1,520,961 $1,967,764 $361,029
$ 512,521
$ 873,550 $ 1,072,085
$ (6,436)
$ 1,065,649
accounts . . . . . . . . . . . . . . . . . . . $
Savings . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . .
(11,973)
Interest expense . . . . . . . . . . . . . . . . . $ (11,952)
(1,334)
1,355
$ 214,584 $ 213,250 $ 12,863
$ (2,853)
$ 10,010 $
28,628
$
1,050
$
29,678
40,614
27,277
41,969
6,097
(340)
15,304 (14,974)
44,330
5,757
29,356
3,061
295
(50,051)
(6,638)
3,356
(56,689)
$ 282,475 $ 270,523 $
3,986
$ 41,137
$ 45,123 $
(18,362)
$ (5,293)
$
(23,655)
Increase in net interest income . . . . .
$1,697,241
$ 828,427
$ 1,089,304
(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.
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.
2018
2017
2016
Average
Balance
Interest
Paid/Earned
Average
Yield/
Rate(1)
Average
Balance
Interest
Paid/Earned
Average
Yield/
Rate(1)
Average
Balance
Interest
Paid/Earned
Average
Yield/
Rate(1)
Interest-earning assets
Loans(2) . . . . . . . . . . . . . . . . . $ 277,223,600 $ 15,126,316
Investment Securities
5.46% $ 264,881,222 $ 13,287,318
5.02% $ 265,151,258 $ 12,851,900
4.85%
Available for Sale . . . . . 123,347,669
2,616,998
2.12% 130,161,937
2,612,018
2.01% 110,762,289
2,305,074
2.08%
Federal Funds Sold &
Interest-bearing
deposits . . . . . . . . . . . . . 20,151,823
393,597
Total earning assets . . . . . . . . $ 420,723,092 $ 18,136,911
Interest-bearing liabilities
Interest-bearing transaction
1.95% 23,558,893
269,811
1.15% 26,474,258
138,623
4.31% $ 418,602,052 $ 16,169,147
3.86% $ 402,387,805 $ 15,295,597
accounts . . . . . . . . . . . . . $ 176,796,964 $
387,552
0.22% $ 178,146,123 $
174,302
0.10% $ 167,534,974 $
164,293
Savings . . . . . . . . . . . . . . . . . 34,857,035
Time deposits . . . . . . . . . . . . 41,325,783
Total interest-bearing
81,997
0.24% 33,694,318
40,028
0.12% 28,687,719
34,271
224,837
0.54% 44,097,537
209,533
0.48% 47,930,721
180,176
0.52%
3.80%
0.10%
0.12%
0.38%
liabilities . . . . . . . . . . . . $ 252,979,782 $
694,386
0.27% $ 255,937,978 $
423,863
0.17% $ 244,153,414 $
378,740
0.16%
Net interest spread . . . . . . . . .
Net interest margin . . . . . . . .
Net interest income . . . . . . . .
4.04%
4.15%
3.69%
3.76%
3.64%
3.71%
$ 17,442,525
$ 15,745,284
$ 14,916,857
(1) The effect of forgone interest income as a result of non-accrual loans was not considered in the above analysis.
(2) Average loan balances include non-accrual loans and mortgage loans to be sold.
19
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, 2018.
INVESTMENT PORTFOLIO
(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
After
Five Years
One Year
through
through
Ten Years
Five Years
Within
One Year
After
Ten Years
Total
Estimated
Fair Value
$
$
— $ 32,966
55,692
—
11,096
4,246
4,246 $ 99,754
$
— $
4,993
12,511
$ 17,504
$
— $ 32,966 $ 32,357
59,369
—
27,943
415
415 $ 121,919 $ 119,669
60,685
28,268
—%
—%
2.42%
2.42%
1.87%
1.98%
2.54%
2.31%
—%
2.38%
2.32%
2.32%
—%
—%
1.65%
1.65%
2.08%
The following tables present the amortized cost and estimated fair value of investment securities for the past three years.
December 31, 2018
(in thousands)
U.S. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-Sponsored Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Estimated
Fair Value
$ 32,966
60,685
28,268
$ 121,919
$ 32,357
59,369
27,943
$ 119,669
Amortized
Cost
Estimated
Fair Value
$ 35,971
64,444
40,192
$ 140,607
$ 35,560
63,556
40,134
$ 139,250
Amortized
Cost
Estimated
Fair Value
$ 24,148
51,738
45,057
$ 120,943
$ 23,939
51,034
45,006
$ 119,979
As of December 31, 2018, we had seven U.S. Treasury Notes with an unrealized loss of $609,059 compared to eight U.S. Treasury
Notes with an unrealized loss of $411,145 at December 31, 2017. At December 31, 2018, we had 13 Government-Sponsored Enterprises
with an unrealized loss of $1.3 million compared to 15 Government-Sponsored Enterprises with an unrealized loss of $887,811 at
December 31, 2017. At December 31, 2018, we had 33 Municipal Securities with an unrealized loss of $437,941 compared to 49
Municipal Securities with an unrealized loss of $545,146 at December 31, 2017. The unrealized losses on these securities are related to
the increasing interest rate environment. 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.
20
The primary purpose of the investment portfolio is to fund loan demand, manage fluctuations in deposits and liquidity, satisfy
pledging requirements and 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 reviews the entire investment portfolio at each
regular monthly meeting, including any purchases, sales, calls, and 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, 2018, outstanding loans (including deferred loan fees of $156,309) totaled $274.7 million, which equaled 71.83%
of total deposits and 64.00% 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, 2018, compared to the prior four years.
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate construction . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
$ 54,829
7,304
143,703
63,787
5,040
$ 274,664
2015
2014
Book Value of Loans as of December 31,
2016
$ 52,262
1,209
122,968
77,132
7,005
$ 260,576
2017
$ 51,723
2,318
140,187
70,798
5,155
$ 270,181
$ 50,938 $ 49,900
1,512
115,736 115,740
62,055
4,911
$ 242,622 $ 234,118
69,777
5,166
1,005
We had no foreign loans or loans to fund leveraged buyouts at any time during the years ended December 31, 2014 through
December 31, 2018.
The following table presents the contractual terms to maturity for loans outstanding at December 31, 2018. 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.
Selected Loan Maturity as of December 31, 2018
(in thousands)
Classification
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
One Year
or Less
$ 29,749
1,374
46,797
17,926
1,883
$ 97,729
Over One
Year but
Less Than
5 years
$ 23,403
5,930
81,555
6,458
3,087
$ 120,433
—
Over
5 Years
$
1,678
15,352
39,404
69
$ 56,503
Total
$ 54,829
7,304
143,703
63,787
5,040
$ 274,664
Loans maturing after one year with:
Fixed interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 85,745
—
$ 85,745
21
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 with a principal balance over $50,000 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.
IMPAIRED LOANS
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
$ 823,534
$4,278,347
Impaired and Non-Accrual Loans as of December 31,
2016
$1,741,621
$5,901,784
2017
$ 831,859
$3,724,262
2015
$2,061,088
$6,542,707
2014
$ 882,413
$7,051,127
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.
2018
Troubled Debt Restructurings as of December 31,
2016
2015
2017
2014
Number of TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount of TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
— $
1
33,300
$
2
$ 378,382
$
3
$ 458,268
$
2
$ 466,541
The Financial Accounting Standards Board Accounting (“FASB”) 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 $33,300 at December 31, 2017 was removed from TDR status during the year ended December 31, 2018
since, at the most recent renewal, the loan was amortized at market rate and no concessions were granted. 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.
22
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 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.
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. Loans are segregated into similar risk groups and a historical loss ratio is determined
for each group over a five-year period. The five-year average loss ratio by loan 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 total“estimated loss” within our portfolio.
23
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 represents 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 ratio within the policy objectives and require a strong secondary source of repayment.
Although significantly under our policy threshold of 100% of capital (currently approximately $45.5 million), the number of
overmargined real estate loans currently totals approximately $8.6 million or approximately 3.12% of our loan portfolio at
December 31, 2018 compared to $9.5 million or approximately 3.51% of the loan portfolio at December 31, 2017.
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.
Our Credit Department conducts a detailed cash flow analysis on each proposal using the most current financial information.
Experience, ability and depth of lending management staff
We have over 300 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.
24
Industry conditions
There continues to 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, geographic and regulatory concentrations. As of
December 31, 2018, 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.
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 appreciating.
Based on our allowance for loan loss model, we recorded a provision for loan loss of $325,000 for the year ended December 31,
2018 primarily based on our analysis of the adequacy of the allowance for loan losses, compared to $55,000 for the year ended
December 31, 2017. At December 31, 2018, the five-year average loss ratios were: 0.08% Commercial, 0.00% Commercial Real
Estate Construction, 0.00% Commercial Real Estate Other, 0.00% Consumer Real Estate, and 0.46% Consumer Other.
During the year ended December 31, 2018, charge-offs of $115,887 and recoveries of $129,820 were recorded to the allowance for
loan losses, resulting in an allowance for loan losses of $4.2 million or 1.53% of total loans, compared to charge-offs of $185,499 and
recoveries of $154,230 resulting in an allowance for loan losses of $3.9 million or 1.43% of total loans at December 31, 2017.
Net recoveries for the year ended December 31, 2018, were $13,933 as compared to net charge-offs of $31,219 for the year ended
December 31, 2017. 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 six to nine months,
they are reviewed individually to determine if they should be returned to accrual status. At December 31, 2018 there were no loans
over 90 days past due still accruing interest compared to two loans over 90 days past due still accruing interest at December 31, 2017.
One of the two loans as of December 31, 2017 was considered impaired.
25
The following table represents a summary of loan loss experience for the past five years.
2018
2017
2016
2015
2014
Summary of Loan Loss Experience
(in thousands)
Balance of the allowance for loan losses at the beginning
of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,875 $
3,852 $
3,418 $
3,335 $
3,292
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(31)
—
—
—
(85)
(116)
14
—
57
45
14
130
14
325
—
—
(181)
—
(5)
(186)
6
—
87
60
1
154
(32)
55
(33)
—
(78)
(82)
(15)
(208)
—
—
65
—
7
72
(136)
(100)
—
(55)
(6)
(40)
(201)
9
—
54
6
22
91
(110)
(83)
—
(16)
—
(14)
(113)
—
—
46
—
27
73
(40)
570
193
207
Balance of the allowance for loan losses at the
end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,214 $
3,875 $
3,852 $
3,418 $
3,459
We believe the allowance for loan losses at December 31, 2018, 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.
2018
2017
December 31,
2016
2015
2014
$
%(1)
19% $1,545
52
1,375
726
154
100% $3,852
1%
52%
26%
2%
$
%(1)
20% $ 897
60
1,345
941
175
100% $3,418
1%
47%
29%
3%
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . .
Commercial real estate construction . .
Commercial real estate other . . . . . . . .
Consumer real estate . . . . . . . . . . . . . .
Consumer other . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$1,665
64
1,292
387
806
$4,214
(1) Loan category as a percentage of total loans.
$
%(1)
20% $1,404
23
1,550
797
101
100% $3,875
3%
52%
23%
2%
26
$
1%
%(1)
21% $1,212
43
47% 1,112
863
29%
105
2%
100% $3,335
%(1)
21%
1%
49%
27%
2%
100%
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, 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. During the year ended December 31, 2018, a provision of
$4,482 was recorded. No provision was recorded during the year ended December 31, 2017. The balance for the reserve for unfunded
lending commitments was $29,308 and $24,826 as of December 31, 2018 and 2017, respectively.
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 and various other expenses until the property is sold. During the year ended December 31, 2018, one property in the
amount of $411,842 was sold at a loss of $33,476. There were no properties classified as OREO as of December 31, 2018. OREO
as of 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.
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, 2018:
NONPERFORMING ASSETS
2018
2017
2016
2015
2014
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 824
—
824
—
$ 824
$ 832
33
865
435
$ 1,300
$ 1,742
123
1,865
522
$ 2,387
$ 2,061
2
2,063
620
$ 2,683
$ 882
1,274
2,156
522
$ 2,678
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . . . . . . . .
0.30% 0.32% 0.72% 0.85% 0.92%
0.19% 0.29% 0.58% 0.67% 0.73%
27
The following table shows the contractual maturities of time deposits in denominations of $100,000 or more at December 31, 2018.
DEPOSITS
Less than
three
months
Three
months
to less than
six months
One Day
Six months
to less than
one year
One year
to less than
five years
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
3,140
$
2,463
$
2,514
$
1,360
$
— $
9,477
—
12,872
— $ 16,012
$
4,176
6,639
$
7,155
9,669
$
789
2,149
$
—
24,992
— $ 34,469
Certificates of Deposit $100,000 and over decreased $5.7 million or 18.67% to $25.0 million as of December 31, 2018 from
$30.7 million as of December 31, 2017. This decrease was primarily due to the maturity of Public Funds used for construction projects.
The following table presents average deposits by category.
2018
2017
2016
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
(in thousands)
Non-interest-bearing demand . . . . . . . . . . . . . . . . . .
Interest-bearing transaction accounts . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total average deposits . . . . . . . . . . . . . . . . . . . . . . . .
$ 133,045
176,797
34,857
41,326
$ 386,025
n/a
$ 128,586
0.22% 178,146
33,694
0.24%
44,098
0.54%
$ 384,524
n/a $ 123,670
0.10% 167,534
28,688
0.12%
47,931
0.48%
$ 367,823
n/a
0.10%
0.12%
0.38%
Deposits decreased $20.5 million or 5.09% to $382.4 million as of December 31, 2018, from $402.9 million as of December 31,
2017. Non-interest bearing deposits decreased $8.3 million to $130.9 million as of December 31, 2018, primarily due to settlements
of municipal accounts to fund projects.
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, 2018 and 2017, there were no
securities sold under agreements to repurchase. There was no amount outstanding at any month-end during 2018.
At December 31, 2018 and 2017, we had no outstanding federal funds purchased. We have a Borrower-In-Custody arrangement with
the Federal Reserve. This arrangement permits the Company to retain possession of loans pledged as collateral to secure advances from
the Federal Reserve Discount Window. Under this agreement, we may borrow up to $79.3 million. We established this arrangement
as an additional source of liquidity. There have been no borrowings under this arrangement.
At December 31, 2018 and 2017, the Bank had unused short-term lines of credit totaling approximately $23.0 million (which are
withdrawable at the lender’s option).
28
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, 2018 and 2017, the balance of this reserve was $29,308 and $24,826, respectively.
At December 31, 2018 and 2017, 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 $96.1 million and $92.9 million as of December 31, 2018 and 2017, respectively.
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, 2018 and 2017 was $1.2 million.
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 $1.2
million at December 31, 2018, to sell loans held for sale of $1.2 million, compared to forward sales commitments of $2.1 million
at December 31, 2017, to sell loans held for sale of $2.1 million. The fair value of these commitments was not significant at
December 31, 2018 or 2017. 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 $14.9 million at December 31, 2017 and $13.4 million at December 31, 2017. For the twelve months ended
December 31, 2018 and December 31, 2017, 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.
29
CAPITAL RESOURCES
Our capital needs have been met to date through the $10.6 million 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, 2018 was $45.5 million.
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, 2018, the Bank was categorized as “well capitalized”. 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.
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, 2018, 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, 2018.
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.
30
Item 8.
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Bank of South Carolina Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bank of South Carolina Corporation and its subsidiary
(the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income,
shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the
consolidated financial statements and schedules (collectively, the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Elliott Davis, LLC
We have served as the Company’s auditor since 2006.
Columbia, South Carolina
March 4, 2019
31
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
2018
December 31,
2017
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits at the Federal Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale (amortized cost of $121,918,501 and $140,606,807 in
2018 and 2017, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,325,457 $
$
25,506,784
8,486,025
24,034,194
119,668,874
1,199,438
274,664,267
(4,214,331)
270,449,936
2,335,207
—
1,561,915
2,087,587
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
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$429,135,198 $446,566,498
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock - no par 12,000,000 shares authorized; Issued 5,777,474 shares at
December 31, 2018 and 5,753,743 shares at December 31, 2017. Shares
outstanding 5,510,917 and 5,488,207 at December 31, 2018 and December 31,
2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock: 266,557 shares as of December 31, 2018 and 265,536 shares as of
$130,940,138 $139,256,748
108,967,196
94,207,731
77,833,728
87,300,433
18,624,924
15,909,991
23,295,492
18,558,734
34,910,212
35,461,361
402,888,300
382,378,388
913,563
1,294,249
403,801,863
383,672,637
—
46,857,734
2,650,296
—
37,236,566
8,847,164
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss, net of income taxes . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,268,264)
(1,777,205)
45,462,561
(2,247,415)
(1,071,680)
42,764,635
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$429,135,198 $446,566,498
(cid:54)(cid:72)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)
32
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2018
2017
2016
Interest and fee income
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest and fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,126,316
1,872,285
744,713
393,597
18,136,911
$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
Interest expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
694,386
694,386
423,863
423,863
378,740
378,740
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,442,525
325,000
17,117,525
15,745,284
55,000
15,690,284
14,916,857
570,000
14,346,857
Other income
Service charges and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,168,808
786,893
4,735
34,189
1,994,625
1,135,037
1,057,457
45,820
30,157
2,268,471
1,061,349
1,387,740
380,904
31,090
2,861,083
Other expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other real estate owned expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,488,229
1,580,929
57,613
2,953,463
11,080,234
6,060,831
1,571,076
92,652
2,517,737
10,242,296
6,087,929
1,528,048
16,691
2,639,776
10,272,444
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,031,916
1,108,982
7,716,459
2,814,634
6,935,496
1,688,433
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,922,934
$ 4,901,825
$ 5,247,063
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,500,027
5,589,012
5,471,001
5,568,493
5,428,884
5,561,739
Basic income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.26
1.24
$
$
0.90
0.88
$
$
0.97
0.94
(cid:54)(cid:72)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)
33
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss
Unrealized loss 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 before tax . . . . . . .
Other comprehensive loss after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2017
$ 6,922,934 $ 4,901,825 $ 5,247,063
2018
2016
(893,070)
(4,735)
(897,805)
192,280
(705,525)
(2,158,236)
(380,904)
(2,539,140)
939,482
(1,599,658)
$ 6,217,409 $ 4,624,946 $ 3,647,405
(347,066)
(45,820)
(392,886)
116,007
(276,879)
(cid:54)(cid:72)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)
34
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2018, 2017, 2016
December 31, 2015
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . .
Stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based comp expense . . . . . . . . . . . . . . . . . . . . . .
Cash dividends ($0.54 per common share) . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . .
Stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . .
Stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . .
Cash dividends ($0.70 per common share) . . . . . . . . . .
Common stock dividend, 10% . . . . . . . . . . . . . . . . . . .
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional
Paid in
Capital
$36,341,744
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
$ 4,064,834 $(2,247,415) $
— 5,247,063
—
—
—
—
— (2,668,421)
405,749
76,529
—
—
—
—
—
$36,824,022
$ 6,643,476 $(2,247,415) $
—
(1,599,658)
—
—
—
992,549 $39,151,712
5,247,063
(1,599,658)
405,749
76,529
(2,668,421)
(607,109) $40,612,974
— 4,901,825
—
—
—
—
340,843
71,701
—
—
—
—
—
(276,879)
—
—
4,901,825
(276,879)
340,843
71,701
187,692
— (2,885,829)
—
(2,885,829)
$ 8,847,164 $(2,247,415) $ (1,071,680) $42,764,635
(187,692)
—
—
$37,236,566
6,922,934
— 6,922,934
(705,525)
—
—
193,569
—
72,408
—
(3,785,460)
— (3,785,460)
—
(9,334,342)
$ 2,650,296 $(2,268,264) $ (1,777,205) $45,462,561
—
(705,525)
—
—
—
—
—
—
(20,849)
—
—
—
214,418
72,408
9,334,342
$46,857,734
(cid:54)(cid:72)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)
35
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of premises, equipment, and leasehold improvements, net . . .
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
Years Ended December 31,
2017
2016
2018
$ 6,922,934 $ 4,901,825 $ 5,247,063
195,921
(4,735)
33,476
428
23,637
325,000
72,408
(217,637)
193,298
(45,820)
1,477
—
86,464
55,000
71,701
276,362
189,188
(380,904)
13,450
—
—
570,000
76,529
(750,254)
available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origination of mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in accrued interest receivable and other assets . . . . . . . . . .
Increase (decrease) in accrued interest payable and other liabilities . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
303,530
(55,504,124)
56,398,409
472,740
295,071
9,317,058
381,079
(55,791,625)
58,084,112
(78,328)
46,412
8,181,957
250,755
(76,032,671)
77,466,700
(63,949)
(543,083)
6,042,824
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale . .
Proceeds from sale of investment securities available for sale . . . . . . . . . . . . . .
Purchase of investment securities available for sale . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of premises, equipment, and leasehold improvements, net . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
6,932,927
21,434,634
(9,978,050)
378,366
(4,469,694)
(287,031)
14,011,152
4,713,870
20,231,265
(44,944,586)
89,355
(9,726,576)
(141,199)
(29,777,871)
9,630,804
36,218,087
(48,239,241)
85,001
(18,089,620)
(196,584)
(20,591,553)
Cash flows from financing activities:
Net (decrease) increase in deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the period . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at the end of the period . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,509,912)
(3,699,845)
193,569
(24,016,188)
(687,978)
32,520,219
$ 31,832,241
30,365,449
(2,832,489)
340,843
27,873,803
6,277,889
26,242,330
$ 32,520,219
13,804,239
(2,613,715)
405,749
11,596,273
(2,952,456)
29,194,786
$ 26,242,330
Supplemental disclosure of cash flow data:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
626,700
$ 1,169,085
$
379,302
$ 2,496,047
$
400,531
$ 2,320,830
Supplemental disclosures for non-cash investing and financing activity:
Change in unrealized gain on securities available for sale, net of income taxes . .
Change in dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of loans to other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
(705,525) $
85,615 $
— $
(276,879) $ (1,599,658)
54,706
—
53,340 $
90,832 $
(cid:54)(cid:72)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)
36
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 financial statements are prepared in conformity with GAAP, which require management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ significantly from these estimates and assumptions. Material estimates generally
susceptible to significant change are related to the determination of the allowance for loan losses, impaired loans, other real estate
owned, deferred tax assets, the fair value of financial instruments and other-than-temporary impairment of investment securities.
Reclassification:
Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. Such
reclassifications have no effect on shareholders’ equity or the net income as previously reported.
Subsequent Events:
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued.
Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed as of
the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized
subsequent events are events that provide evidence about conditions that did not exist as of the date of the balance sheet but arose
after that date. We have reviewed events occurring through the date the financial statements were available to be issued and no
subsequent events occurred requiring accrual or disclosure.
Cash and Cash Equivalents:
Cash and cash equivalents include working cash funds, due from banks, interest-bearing deposits at the Federal Reserve, items in
process of collection and federal funds sold. All cash equivalents are readily convertible to cash and have maturities of less than
90 days.
Depository institutions are required to maintain reserve and clearing balances at the Federal Reserve Bank. Vault cash satisfied
our daily reserve requirement for the years ended December 31, 2018 and 2017, respectively.
Interest-bearing Deposits at the Federal Reserve:
Interest-bearing deposits at the Federal Reserve mature within one year and are carried at cost.
37
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Securities:
We classify investments into three categories: (1) Held to Maturity - debt securities that we have the positive intent and ability to
hold to maturity, which are reported at amortized cost, adjusted for the amortization of any related premiums or the accretion of
any related discounts into interest income using a methodology which approximates a level yield of interest over the estimated
remaining period until maturity; (2) Trading - debt and equity securities that are bought and held principally for the purpose
of selling them in the near term, which are reported at fair value, with unrealized gains and losses included in earnings; and
(3) Available for Sale - debt and equity securities that may be sold under certain conditions, which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of income
taxes. Unrealized losses on securities due to fluctuations in fair value are recognized when it is determined that an other than
temporary decline in value has occurred.
Realized gains or losses on the sale of investments are recognized on a specific identification, trade date basis. All securities were
classified as available for sale for 2018 and 2017.
Mortgage Loans to be Sold:
We originate fixed and variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed
but not yet settled with an investor are carried in our loans held for sale portfolio. Virtually all of these loans have commitments
to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly
thereafter that the loan was locked in with our customers. Therefore, these loans present very little market risk. We usually
deliver to, and receive funding from, the investor within 30 to 60 days. Commitments to sell these loans to the investor are
considered derivative contracts and are sold to investors on a “best efforts” basis. We are not obligated to deliver a loan or pay a
penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of
the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component
of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and
are included in mortgage banking income in the consolidated statements of income.
Loans and Allowance for Loan Losses:
Loans are carried at principal amounts outstanding. Loan origination fees, net of certain direct origination costs, are deferred
and recognized over the weighted average life of the loan as an adjustment to yield. Interest income on all loans is recorded
on an accrual basis. The accrual of interest and the amortization of net loan fees are generally discontinued on loans that 1) are
maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) the payment of full principal is
not expected; or 3) the principal or interest has been in default for a period of 90 days or more. We define past due loans based on
contractual payment and maturity dates.
The accrual of interest is generally discontinued on loans that become 90 days past due as to principal or interest. The accrual
of interest on some loans may continue even though they are 90 days past due if the loans are well secured or in the process
of collection and management deems it appropriate. If non-accrual loans decrease their past due status to less than 30 days
for a period of six to nine months, they are reviewed individually by management to determine if they should be returned to
accrual status.
When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to
principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the
extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged
off. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest
income and then to principal.
We account for impaired loans by requiring that all loans (greater than $50,000) where it is estimated that we will be unable
to collect all amounts due according to the terms of the loan agreement be recorded at the loan’s fair value. Fair value may be
determined based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair
value of the collateral less cost to sell, if the loan is collateral dependent.
Additional accounting guidance allows us to use existing methods for recognizing interest income on an impaired loan. The
guidance also requires additional disclosures about how we estimate interest income related to our impaired loans.
38
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 factors such as the methodology used
to determine adequacy and the size of the allowance relative to that of peer institutions and other adequacy tests. In addition,
such regulatory agencies could require us to adjust our allowance based on information available at the time of the examination.
The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is
inherently similar to the methodology used to determine the allowance adjusted for factors specific to binding commitments,
including the probability of funding and historical loss ratio.
Concentration of Credit Risk:
Our primary market consists of the counties of Berkeley, Charleston and Dorchester, South Carolina. As of December 31, 2018,
the majority of the total loan portfolio, as well as a substantial portion of the commercial and real estate loan portfolios, were to
borrowers within this region. No other areas of significant concentration of credit risk have been identified.
Premises, Equipment and Leasehold Improvements and Depreciation:
Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using
the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated
useful lives of the assets ranging from 40 years for buildings and 3 to 15 years for equipment. Leasehold improvements are
amortized over the shorter of the asset’s useful life or the remaining lease term, including renewal periods when reasonably
assured. The cost of maintenance and repairs is charged to operating expense as incurred.
Other Real Estate Owned:
Fair value is based upon independent market prices, appraised values of the collateral, or our estimation of the value of the
collateral. Losses arising from an initial foreclosure are charged against the allowance for loan losses. Subsequent to foreclosure,
other real estate owned (“OREO”) is recorded at the lower of cost or fair value, adjusted for net selling costs. Gains and losses on
the sale of OREO and subsequent write-downs from periodic re-evaluation are charged to net other real estate owned expenses.
Income Taxes:
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net deferred tax
assets are included in other assets in the consolidated balance sheet.
39
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting standards require the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.
These standards also prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an
enterprise’s tax return. We believe that we had no uncertain tax positions for the years ended December 31, 2018 and 2017.
Stock-Based Compensation:
Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of
grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the
required service period, generally defined as the vesting period (10 years).
Income Per Common Share:
Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding.
Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and potential
common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock
method and the average market price of common stock. Earnings per share are restated for all stock splits and stock dividends
through the date of issuance of the financial statements.
Segment Information:
The Company operates and manages itself within one retail banking segment and therefore has not provided segment disclosures.
Interest Rate Lock Commitments and Forward Sale Contracts:
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for
the future delivery of these mortgage loans are accounted for as free-standing derivatives. The fair value of the interest rate lock
is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the
commitments before the loan is funded. In order to hedge the change in interest rates resulting from commitments to fund the
loans, we enter into forward commitments for the future delivery of mortgage loans when the interest rate is locked. Fair values
of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan
is locked. Changes in the fair values of these derivatives are included in income when they occur. As a result of the short-term
nature of mortgage loans held for sale (derivative contract), our derivative instruments were considered to be immaterial as of
December 31, 2018 and 2017.
We had no embedded derivative instruments requiring hedge accounting treatment at December 31, 2018. We do not currently
engage in hedging activities.
Recent Accounting Pronouncements:
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure
of financial information by the Company.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers, Topic 606. The core principle of the new standard is that an entity should recognize
revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives
or expects to receive. This guidance also includes expanded disclosure requirements that result in an entity providing users of
financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows
arising from the entity’s contracts with customers. The guidance became effective January 1, 2018. The amendment does not
apply to revenue associated with financial instruments, such as loans and investment securities available for sale, and therefore
had no material effect on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10); Recognition and Measurement
of Financial Instruments and Financial Liabilities. This update addresses certain aspects of recognition, measurement, presentation,
and disclosure of financial instruments. The amendments became effective on January 1, 2018 and did not have a material effect
on the financial statements. The Company measured the fair value of its loan portfolio as of December 31, 2018 using an exit price
notion and will continue to, prospectively.
40
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED 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 have evaluated the effect that implementation of the new standard
will have on our results of operations and cash flows and found that it will have a material impact on our consolidated balance
sheets but did not have an impact on our consolidated statements of income. The most significant impact was the recognition of
right of use assets and lease liabilities for operating leases of approximately $7.3 million.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent
considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or
more parties. The guidance became effective January 1, 2018. The Company completed an assessment of revenue streams and a
review of related contracts potentially affected by the ASU and, based on this assessment, the Company concluded that the ASU
did not materially change the method in which the Company currently recognizes revenue for these revenue streams. As such, a
cumulative effect adjustment to opening retained earnings was not deemed necessary. The Company derives most of our income
from interest on loans and investment securities that are not within the scope of Topic 606. The Company evaluated its contracts
with customers and determined that further disaggregation of revenue from contracts with customers beyond what is reported in
the Consolidated Statement of Income was not necessary. Performance obligations on its contracts with customers are typically
met as services are rendered and the transactions are charged on a periodic basis or based on activity. The revenue streams
affected by Topic 606 were service charges on deposits, interchange fees, and gains/losses on sales of real estate. The performance
obligation for service charges on deposits is recognized over the period of service provided. Interchange fees are transaction based
fees recognized when the transaction is processed. Gains/losses on sales of real estate financed by the Bank were previously
evaluated on the recognition of the buyer’s initial investment. The primary consideration will be evaluated based on various
factors including the loan to value, credit quality of the borrower, structure of the loan, and any other factors affecting the
collectability of the loan financing the sale. Topic 606 will affect sales of other real estate owned if a significant financing
component is present but did not have an effect on the sale of other real estate owned during the year ended December 31, 2018 or
have a material effect on the consolidated financial statements. The adoption of Topic 606 did not have an impact on the revenue
recognition for these services.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share – Based Payment Accounting, to simplify several aspects of the accounting for share-based payment award transactions
including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the
statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities
allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that
have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified
awards at fair value to measuring them at intrinsic value. The amendments became effective for the Company on January 1, 2017
and this amendment did not have a material effect on its financial statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing, to clarify guidance related to identifying performance obligations and accounting for licenses of
intellectual property. The amendment became effective for the Company January 1, 2018 and did not have a material effect on
the financial statements.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow- Scope Improvements
and Practical Expedients, to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and
transition. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, to change the accounting for credit losses and modify the impairment model for certain debt securities.
The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is
permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect
that implementation of the new standard will have on its financial position, results of operations, and cash flows.
41
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments, to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash
flows. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued
in 2014. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which provided guidance to assist
with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update
is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many
transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The amendments
became effective on January 1, 2018 and did not have a material effect on the financial statements.
In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for
Partial Sales of Nonfinancial Assets, to clarify the scope of established guidance on nonfinancial asset derecognition, issued as
part of ASU 2014-09, Revenue from Contracts with Customers, as well as accounting for partial sales of nonfinancial assets.
The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue
standard. The amendments became effective on January 1, 2018 and did not have a material effect on the financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization of Purchased Callable Debt Securities, which shortens the amortization period for the premium to the earliest call
date. The amendment will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early
adoption is permitted. The Company does not expect this amendment to have a material effect on its financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which requires companies to reclassify
the stranded effects in other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax
Cuts and Jobs Act (the “2017 Tax Act”). The Company early adopted this pronouncement by retrospective application to each
period in which the effect of the change in the tax rate under the 2017 Tax Act is recognized. The impact of the reclassification
from other comprehensive income to retained earnings is included in the Statement of Changes in Shareholders’ Equity for the
year ended December 31, 2017.
In March 2018, the FASB issued ASU 2018-04, Investments—Debt Securities (Topic 320) and Regulated Operations (Topic
980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, which
incorporate into the Accounting Standards Codification recent SEC guidance which was issued in order to make the relevant
interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The
amendments were effective upon issuance and did not have a material effect on the financial statements.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118. The amendments incorporate into the Accounting Standards Codification recent SEC guidance
related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance.
The amendments were effective upon issuance and did not have a material effect on the financial statements.
In May 2018, the FASB amended the Financial Services – Depository and Lending Topic of the ASC to remove outdated guidance
related to Circular 202. The amendments were effective upon issuance and did not have a material effect on the financial statements.
42
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 – Leases. This update clarifies how to
apply certain aspects of the new leases standard. The amendments are effective for reporting periods beginning after December 15,
2018. The Company does not expect these amendments to have a material effect on its financial statements.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which gives entities another option
for transition and to provide lessors with a practical expedient. The amendments are effective for reporting periods beginning
after December 15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement. The amendments remove, modify, and add certain fair value disclosure
requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter
8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed
or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The
Company does not expect these amendments to have a material effect on its financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles and Goodwill and Other-Internal Use Software (Subtopic
350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract),which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The
amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted.
The Company does not expect these amendments to have a material effect on its financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight
Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which
expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments will be
effective for the Company for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company does
not expect these amendments to have a material effect on its financial statements.
In October 2018, the FASB issued ASU 2018-07, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance
for Variable Interest Entities, determining whether a decision-making fee is a variable interest. The amendments require
organizations to consider indirect interests held through related parties under common control on a proportional basis rather than
as the equivalent of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a
full retrospective approach in which financial statements for each individual prior period presented and the opening balances of
the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does
not expect these amendments to have a material effect on its financial statements.
In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, providing
narrow-scope improvements for lessors, that provides relief in the accounting for sales, use and similar taxes, the accounting for
other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components.
The amendments will be effective for the Company for reporting periods beginning after December 15, 2018. Early adoption is
permitted. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to
have a material impact on our financial position, results of operations or cash flows.
43
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.
INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of investment securities available for sale are summarized as follows.
December 31, 2018
U.S. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-Sponsored Enterprises . . . . . . . . . . . . . . . . . . . .
Municipal Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32,965,693 $
60,684,878
28,267,930
— $
—
112,971
Amortized
Cost
Gross
Unrealized
Gains
Estimated
Fair Value
Gross
Unrealized
Losses
(609,059) $ 32,356,634
59,369,280
27,942,960
(1,315,598)
(437,941)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$121,918,501 $
112,971
$ (2,362,598) $119,668,874
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
64,444,315
40,191,502
$
— $
—
487,545
(411,145) $ 35,559,845
63,556,504
(887,811)
40,133,901
(545,146)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$140,606,807
$
487,545
$ (1,844,102) $139,250,250
The amortized cost and estimated fair value of investment securities available for sale at December 31, 2018 and December 31, 2017,
by contractual maturity are in the following table.
December 31, 2018
December 31, 2017
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in one year to five years . . . . . . . . . . . . . . . . . . . . . . . . .
Due in five years to ten years . . . . . . . . . . . . . . . . . . . . . . . . .
Due in ten years and over . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,246,325
99,753,174
17,504,456
414,546
$
4,249,570
97,915,185
17,128,425
375,694
$ 11,554,040
72,622,056
53,290,088
3,140,623
$ 11,546,968
72,124,395
52,576,036
3,002,851
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$121,918,501
$119,668,874
$140,606,807
$139,250,250
Securities pledged to secure deposits and repurchase agreements at December 31, 2018 and 2017, had a carrying amount of
$41,547,205 and $49,424,692, respectively.
The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities,
aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position,
at December 31, 2018 and 2017. We believe that all unrealized losses have resulted from temporary changes in the interest rate
market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any
of the securities referenced in the table below before recovery of their amortized cost.
44
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less Than 12 Months
12 Months or Longer
Total
#
Fair Value
Gross
Unrealized
Loss
#
Fair Value
Gross
Unrealized
Loss
#
Fair Value
Gross
Unrealized
Loss
$
December 31, 2018
Available for sale
U.S. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-Sponsored Enterprises . . . . . . . . . . . . . .
Municipal Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017
Available for sale
(411,145) — $
U.S. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . . . .
8 $ 35,559,845 $
(462,174)
Government-Sponsored Enterprises . . . . . . . . . . . . . . 12 53,275,064
20 7,815,221
Municipal Securities . . . . . . . . . . . . . . . . . . . . . . . . .
(134,998)
40 $ 96,650,130 $ (1,008,317)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
2 9,967,000
2 1,362,286
4 $ 11,329,286 $
—
(14,302)
(7,547)
(21,849)
7 $ 32,356,634 $ (609,059)
11 49,402,280 (1,301,296)
31 11,840,912
(430,394)
49 $ 93,599,826 $ (2,340,749)
—
— $
(425,637)
3 10,281,440
29 11,056,185
(410,148)
32 $ 21,337,625 $ (835,785)
7 $ 32,356,634 $ (609,059)
13 59,369,280 (1,315,598)
33 13,203,198
(437,941)
53 $ 104,929,112 $ (2,362,598)
8 $ 35,559,845 $ (411,145)
(887,811)
15 63,556,504
49 18,871,406
(545,146)
72 $ 117,987,755 $ (1,844,102)
The table below shows the proceeds received from sales of securities available for sale and gross realized gains and losses.
Gross proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
For the Year Ended December 31,
2017
$ 21,434,634 $ 20,231,265 $ 36,218,087
384,963
(4,059)
154,692
(108,872)
104,634
(99,899)
2016
The tax provision related to these gains was $994 and $15,578 for the year ended December 31, 2018 and 2017, respectively.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans (net of deferred loan fees of $156,309 at December 31, 2018, and $152,047 at December 31, 2017)
are shown in the table below.
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate:
December 31,
2018
December 31,
2017
$ 54,829,078 $ 51,723,237
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,304,300
143,703,401
2,317,857
140,186,324
Consumer:
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,040,077
63,787,411
70,797,973
5,155,249
270,180,640
(3,875,398)
$270,449,936 $266,305,242
274,664,267
(4,214,331)
We had $101.9 million and $113.4 million of loans pledged as collateral to secure funding with the Federal Reserve Bank
(“FRB”) Discount Window at December 31, 2018 and 2017, respectively.
Our portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements
as scheduled. Our internal credit risk grading system is based on experience with similarly graded loans, industry best practices,
and regulatory guidance. Our portfolio is graded in its entirety.
45
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our internally assigned grades pursuant to the Board-approved lending policy are as follows:
• Excellent (1) The borrowing entity has more than adequate cash flow, unquestionable strength, strong earnings and
capital, and where applicable, no overdrafts.
• Good (2) The borrowing entity has dependable cash flow, better than average financial condition, good capital and
usually no overdrafts.
•
Satisfactory (3) The borrowing entity has adequate cash flow, satisfactory financial condition, and explainable overdrafts
(if any).
• Watch (4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical earnings, weak capital, loan
to/from stockholders, and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and
growth.
• OAEM (5) The borrowing entity has marginal cash flow, occasional past dues, and frequent and unexpected working
capital needs.
•
Substandard (6) The borrowing entity has cash flow barely sufficient to service debt, deteriorated financial condition,
and bankruptcy is a possibility. The borrowing entity has declining sales, rising costs, and may need to look for secondary
source of repayment.
• Doubtful (7) The borrowing entity has negative cash flow. Survival of the business is at risk, full repayment is unlikely,
and there are frequent and unexplained overdrafts. The borrowing entity shows declining trends and no operating profits.
• Loss (8) The borrowing entity has negative cash flow with no alternatives. Survival of the business is unlikely.
The following tables illustrate credit risks by category and internally assigned grades at December 31, 2018 and December 31, 2017.
“Pass” includes loans internally graded as excellent, good and satisfactory.
December 31, 2018
Pass . . . . . . . . . . . . . . . . . . . .
Watch . . . . . . . . . . . . . . . . . .
OAEM . . . . . . . . . . . . . . . . . .
Sub-Standard . . . . . . . . . . . . .
Doubtful . . . . . . . . . . . . . . . .
Loss . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . .
Pass . . . . . . . . . . . . . . . . . . .
Watch . . . . . . . . . . . . . . . . . .
OAEM . . . . . . . . . . . . . . . . .
Sub-Standard . . . . . . . . . . . .
Doubtful . . . . . . . . . . . . . . . .
Loss . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . .
Commercial
$ 50,663,356
1,973,675
157,300
2,034,747
—
—
Commercial
Real Estate
Construction
$ 7,304,300
Commercial
Real Estate
Other
$136,804,420
4,938,711
590,294
1,369,976
Consumer
Real Estate
$60,480,317
2,077,341
350,000
879,753
—
—
—
—
—
—
—
—
—
Consumer
Other
$ 4,726,494
226,117
Total
$259,978,887
9,215,844
1,097,594
4,371,942
—
—
$274,664,267
87,466
—
—
—
$ 54,829,078
$ 7,304,300
$143,703,401
$ 63,787,411
$ 5,040,077
December 31, 2017
Commercial
$ 47,456,205
2,403,978
Commercial
Real Estate
Construction
$ 1,936,335
381,522
—
1,863,054
—
—
—
—
—
—
Commercial
Real Estate
Other
$134,401,977
3,605,621
610,806
1,567,920
Consumer
Real Estate
$68,570,298
1,934,802
Consumer
Other
$ 4,933,696
185,746
—
292,873
35,807
—
—
—
—
$ 51,723,237
$ 2,317,857
$140,186,324
$70,797,973
$ 5,155,249
46
Total
$257,298,511
8,511,669
610,806
3,759,654
—
—
$270,180,640
—
—
—
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables include an aging analysis of the recorded investment in loans segregated by class.
December 31, 2018
30-59 Days
Past Due
Total
Past Due
$266,567 $ 17,492 $229,395 $ 513,454 $ 54,315,624 $ 54,829,078 $
60-89 Days
Past Due
Current
Total
Loans
Receivable
Greater
Than
90 Days
—
—
—
—
7,304,300
7,304,300
35,000 215,049 571,292
—
—
821,341 142,882,060 143,703,401
—
— 63,787,411 63,787,411
24,621
5,040,077
$326,188 $232,541 $800,687 $1,359,416 $273,304,851 $274,664,267 $
—
—
5,015,456
24,621
December 31, 2017
30-59 Days
Past Due
60-89 Days
Past Due
$
3,531 $192,846 $
Greater
Than
90 Days
Total
Past Due
Current
— $ 196,377 $ 51,526,860 $ 51,723,237 $
Total
Loans
Receivable
—
—
—
—
2,317,857
2,317,857
651,578 139,534,746 140,186,324
—
— 70,797,973 70,797,973
—
10,302
5,155,249
$ 13,833 $192,846 $685,685 $ 892,364 $269,288,276 $270,180,640 $
— 651,578
—
—
— 34,107
5,110,840
44,409
Recorded
(cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:149)
90 Days and
Accruing
—
—
—
—
—
—
Recorded
(cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:149)
90 Days and
Accruing
—
—
—
—
34,107
34,107
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 . . . . . . . . . . . . . . . . .
There were no loans 90 days or more past due and still accruing interest at December 31, 2018. There were two loans 90 days or
more past due and still accruing interest at December 31, 2017.
The following table summarizes the balances of non-accrual loans.
Loans Receivable
on Non-Accrual
December 31,
2018
December 31,
2017
41,651
—
790,208
—
—
$ 823,534 $ 831,859
$ 251,219 $
—
571,292
—
1,023
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the changes in the allowance and an allocation of the allowance by class at December 31, 2018,
2017, and 2016. The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience
adjusted for current economic factors.
Commercial
Real Estate
Construction
Commercial
Real Estate
Other
Commercial
Consumer
Real Estate
Consumer
Other
Total
December 31, 2018
Allowance for Loan Losses:
Beginning Balance . . . . . . . . . . . . . . . .
Charge-offs. . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . .
Provisions. . . . . . . . . . . . . . . . . . . . . . .
Ending Balance . . . . . . . . . . . . . . . . . .
$ 1,403,588 $
(31,250)
14,000
279,075
$ 1,665,413 $
23,638 $ 1,549,755 $ 796,918 $ 101,499 $ 3,875,398
(84,637)
(115,887)
13,581
129,820
325,000
775,668
806,111 $ 4,214,331
—
—
—
45,412
(455,745)
40,238
63,876 $ 1,292,346 $ 386,585 $
—
56,827
(314,236)
Commercial
Real Estate
Construction
Commercial
Real Estate
Other
Commercial
Consumer
Real Estate
Consumer
Other
Total
December 31, 2017
Allowance for Loan Losses
Beginning Balance . . . . . . . . . . . . . . . .
Charge-offs. . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . .
Provisions. . . . . . . . . . . . . . . . . . . . . . .
Ending Balance . . . . . . . . . . . . . . . . . .
$ 1,545,188 $
—
6,000
(147,600)
$ 1,403,588 $
51,469 $ 1,374,706 $ 726,391 $ 153,863 $ 3,851,617
(185,449)
—
154,230
—
(27,831)
55,000
23,638 $ 1,549,755 $ 796,918 $ 101,499 $ 3,875,398
(180,587)
87,030
268,606
(4,862)
1,200
(48,702)
—
60,000
10,527
Commercial
Real Estate
Construction
Commercial
Real Estate
Other
Commercial
Consumer
Real Estate
Consumer
Other
Total
December 31, 2016
Allowance for Loan Losses
Beginning Balance . . . . . . . . . . . . . . . .
Charge-offs. . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . .
Provisions. . . . . . . . . . . . . . . . . . . . . . .
Ending Balance . . . . . . . . . . . . . . . . . .
$ 896,854 $
(33,046)
—
681,380
$ 1,545,188 $
59,861 $ 1,345,094 $ 941,470 $ 174,548 $ 3,417,827
(208,295)
(82,015)
—
72,085
—
—
(8,392)
570,000
(133,064)
51,469 $ 1,374,706 $ 726,391 $ 153,863 $ 3,851,617
(14,934)
7,085
(12,836)
(78,300)
65,000
42,912
48
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross
investment in loans.
Commercial
Commercial
Real Estate
Construction
Commercial
Real Estate
Other
Consumer
Real Estate
Consumer
Other
Total
December 31, 2018
Allowance for Loan Losses
Individually evaluated
for impairment . . . . . . . . . . .
$ 1,132,805 $
— $
37,416 $
— $
21,324 $
1,191,545
Collectively evaluated
for impairment . . . . . . . . . . .
532,608
63,876
1,254,930
386,585
784,787
3,022,786
Total Allowance for
Loan Losses
Loans Receivable
Individually evaluated
$ 1,665,413 $
63,876 $
1,292,346 $
386,585 $
806,111 $
4,214,331
for impairment . . . . . . . . . . .
$ 1,996,579 $
— $
1,280,890 $
879,753 $
21,324 $
4,178,546
Collectively evaluated
for impairment . . . . . . . . . . .
Total Loans Receivable
52,832,499 7,304,300 142,422,511 62,907,658 5,018,753 270,485,721
$54,829,078 $ 7,304,300 $143,703,401 $63,787,411 $ 5,040,077 $274,664,267
Commercial
Commercial
Real Estate
Construction
Commercial
Real Estate
Other
Consumer
Real Estate
Consumer
Other
Total
December 31, 2017
Allowance for Loan Losses
Individually evaluated
for impairment . . . . . . . . . . .
$
832,571 $
— $
99,523 $
43,042 $
34,107 $
1,009,243
Collectively evaluated
for impairment . . . . . . . . . . .
Total Allowance for Losses
Loans Receivable
Individually evaluated
571,017
$ 1,403,588 $
23,638
23,638 $
1,450,232
1,549,755 $
67,392
753,876
796,918 $ 101,499 $
2,866,155
3,875,398
for impairment . . . . . . . . . . .
$ 1,812,461 $
— $
1,584,821 $
292,873 $
34,107 $
3,724,262
Collectively evaluated
for impairment . . . . . . . . . . .
Total Loans Receivable
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
49
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018 and 2017, loans individually evaluated for impairment and the corresponding allowance for loan losses
are presented in the following table.
With no related allowance recorded:
Commercial . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Construction . .
Commercial Real Estate Other. . . . . . .
Consumer Real Estate . . . . . . . . . . . . .
Consumer Other . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Construction . .
Commercial Real Estate Other. . . . . . .
Consumer Real Estate . . . . . . . . . . . . .
Consumer Other . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Commercial . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Construction . .
Commercial Real Estate Other. . . . . . .
Consumer Real Estate . . . . . . . . . . . . .
Consumer Other . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired and Restructured Loans as of the year ended December 31,
2018
2017
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
$ 115,983 $ 115,983 $
—
974,249
879,753
—
$ 1,969,985 $ 1,969,985 $
—
974,249
879,753
—
— $ 152,490 $ 152,490 $
—
—
—
— 1,058,601 1,058,601
249,754
249,754
—
—
—
—
— $ 1,460,845 $ 1,460,845 $
—
—
—
—
—
—
$ 1,880,596 $ 1,880,596 $ 1,132,805 $ 1,659,971 $ 1,659,971 $ 832,571
—
99,523
43,042
34,107
$ 2,308,362 $ 2,208,561 $ 1,191,545 $ 2,363,218 $ 2,263,417 $ 1,009,243
—
626,021
43,119
34,107
—
406,442
—
21,324
—
526,220
43,119
34,107
—
306,641
—
21,324
—
37,416
—
21,324
—
—
1,380,691 1,280,890
879,753
21,324
$ 1,996,579 $ 1,996,579 $ 1,132,805 $ 1,812,461 $ 1,812,461 $ 832,571
—
99,523
43,042
34,107
$ 4,278,347 $ 4,178,546 $ 1,191,545 $ 3,824,063 $ 3,724,262 $ 1,009,243
—
37,416 1,684,622 1,584,821
292,873
292,873
34,107
34,107
879,753
21,324
—
21,324
—
—
50
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.
2018
For the year ended December 31,
2017
2016
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Construction . . . . . . .
Commercial Real Estate Other. . . . . . . . . . . . .
Consumer Real Estate . . . . . . . . . . . . . . . . . . .
Consumer Other . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Construction . . . . . . .
Commercial Real Estate Other. . . . . . . . . . . . .
Consumer Real Estate . . . . . . . . . . . . . . . . . . .
Consumer Other . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Construction . . . . . . .
Commercial Real Estate Other. . . . . . . . . . . . .
Consumer Real Estate . . . . . . . . . . . . . . . . . . .
Consumer Other . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
$ 133,413 $
—
982,078
879,753
—
7,416 $ 267,747 $ 12,282
8,637 $ 173,964 $
—
—
81,582
40,174 1,275,402
22,111
451,025
51,520
—
—
—
$1,995,244 $ 100,331 $1,900,391 $ 47,438 $3,777,550 $ 115,975
—
23,084 2,267,288
16,938 1,242,515
—
—
—
$1,915,139 $ 100,395 $1,711,259 $ 76,544 $1,087,559 $ 49,985
—
—
16,138
930,420
1,514
43,119
5,533
36,056
$2,358,022 $ 112,776 $2,720,854 $ 84,626 $2,273,344 $ 73,170
—
5,367 1,047,685
43,155
1,296
94,945
1,419
—
416,569
—
26,314
—
10,999
—
1,382
—
—
—
1,398,647
879,753
26,314
$2,048,552 $ 109,032 $1,885,223 $ 83,960 $1,355,306 $ 62,267
—
—
97,720
51,173 2,205,822
23,625
494,144
51,520
5,533
36,056
1,382
$4,353,266 $ 213,107 $4,621,245 $ 132,064 $6,050,894 $ 189,145
—
28,451 3,314,973
18,234 1,285,670
94,945
1,419
—
In general, the modification or restructuring of a debt is considered a troubled debt restructuring (“TDR”) if we, for economic
or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise
consider. As of December 31, 2018, there were no TDRs compared to one TDR with a balance of $33,300 as of December 31,
2017 and two TDRs with a total balance of $378,392 as of December 31, 2016. These TDRs were granted extended payment
terms with no principal reduction. All TDRs were performing as agreed as of December 31, 2017. No TDRs that were modified
within the previous twelve months defaulted during the following year for the years ended December 31, 2018, 2017, and 2016.
5. CONCENTRATIONS OF CREDIT RISK
We grant short to intermediate term commercial and consumer loans to customers throughout our primary market area of
Charleston, Berkeley and Dorchester counties of South Carolina. Our primary market area is heavily dependent on tourism and
medical and legal services. Although we have a diversified loan portfolio, a substantial portion of our debtors’ ability to honor
their contracts is dependent upon the stability of the economic environment in their primary market. The majority of the loan
portfolio is located in our immediate market area with a concentration in real estate related activities and offices, medical offices,
and attorneys’ offices.
51
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our loans were concentrated in the following categories.
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Real Estate Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Premises, Equipment and Leasehold Improvements
Premises, equipment and leasehold improvements are summarized in the table below.
Bank buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2018
December 31,
2017
19.96%
2.67%
52.32%
23.22%
1.83%
100.00%
19.14%
0.86%
51.89%
26.20%
1.91%
100.00%
December 31,
2018
December 31,
2017
838,075
30,000
709,520
120,849
$ 1,861,237 $ 1,824,613
838,075
30,000
690,212
11,754
3,526,404 3,405,686
7,086,085 6,800,340
(4,750,878) (4,555,815)
$ 2,335,207 $ 2,244,525
Depreciation and amortization on our bank premises and equipment charged to operating expense totaled $195,063 in 2018,
$193,298 in 2017, and $189,188 in 2016.
We entered into agreements to lease parking and office facilities under non-cancellable operating lease agreements expiring on
various dates through 2039. We may, at our option, extend the lease of our Summerville office at 100 North Main Street for two
additional ten-year periods; as well as extend the land lease where our Mt. Pleasant office is located for five additional five-
year periods.
We rent office space at 1071 Morrison Drive, Charleston, South Carolina, from a related party, to house our Mortgage Department.
Rent expense for this lease was $60,840, $54,720, and $51,690 for the years ended December 31, 2018, 2017, and 2016,
respectively. This lease expires June 30, 2019.
We own the land and improvements at our West Ashley office located at 2027 Sam Rittenberg Boulevard, Charleston,
South Carolina.
Management intends to exercise its option on all lease agreements. Lease payments below include the lease renewals. Minimum
rental commitments for these leases as of December 31, 2018 are presented in the table below.
2019
2020
2021
2022
2023 and thereafter
Total
$
619,492
589,492
589,492
589,492
8,603,721
$10,991,689
Total rental expense was $622,396, $612,717, and $594,567 in 2018, 2017 and 2016, respectively.
52
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 28, 2014, we signed a lease to open a banking office located on Highway 78, North Charleston, South Carolina (copy
of the lease incorporated as Exhibit 10.8 in the 2013 10-K and copy of the Assignment and Assumption of Lease incorporated
as Exhibit 10.9, First Amendment to the Lease incorporated as Exhibit 10.10 and Second Amendment to the Lease incorporated
as Exhibit 10.11 in the 2015 10-K). The original lease agreement was terminated and a new lease agreement was executed on
July 31, 2017 for the same location (copy of lease incorporated as Exhibit 10.13 in the June 30, 2017 10Q). The building is
expected to be completed in the second half of 2019. Rental payments do not commence until we take control of our space. As of
December 31, 2018, we have spent $120,849 towards the construction of this office.
7. OTHER REAL ESTATE OWNED
The following table summarizes the activity in other real estate owned at December 31, 2018 and December 31, 2017.
Balance, beginning of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions - foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-downs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2018
435,479 $
—
(411,842)
(23,637)
— $
December 31,
2017
521,943
90,832
(90,832)
(86,464)
435,479
$
$
As of December 31, 2018, there were no properties classified as OREO. One property valued at $411,842 was sold at a loss of
$33,476 during 2018. As of December 31, 2017, we had one property with a balance of $435,479 classified as OREO. Another
property valued at $90,832 and classified as OREO during 2017 was sold at a loss of $1,477.
8. DEPOSITS
As of December 31, 2018 and 2017, certificates of deposit of $250,000 or more totaled approximately $15,909,991 and
$18,624,924, respectively.
The scheduled maturities of certificates of deposit as of December 31, 2018 are presented in the table below:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,319,817
675,338
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
579,684
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
402,255
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
491,631
$34,468,725
As of December 31, 2018, deposits with a deficit balance of $43,118 were re-classified as other loans.
9. SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase with customers mature on demand. At December 31, 2018 and 2017, there were
no securities sold under agreements to repurchase. There was no amount outstanding at any month-end during 2018 and 2017.
At December 31, 2018 and 2017, we had no outstanding federal funds purchased. We have a Borrower-In-Custody arrangement
with the Federal Reserve. This arrangement permits the Company to retain possession of loans pledged as collateral to secure
advances from the Federal Reserve Discount Window. Under this agreement, we may borrow up to $79.3 million. We established
this arrangement as an additional source of liquidity. There have been no borrowings under this arrangement.
At December 31, 2018 and 2017, the Bank had unused short-term lines of credit totaling approximately $23.0 million (which are
withdrawable at the lender’s option).
53
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018, 2017 and 2016 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
$ 1,108,982 $ 2,814,634 $ 1,688,433
2018
2016
(192,280)
(939,482)
$ 916,702 $ 2,698,627 $ 748,951
(116,007)
For the year ended December 31,
2017
2016
2018
—
$ 1,326,619 $ 2,538,272 $ 2,438,687
—
1,326,619 2,538,272 2,438,687
(750,254)
$ 1,108,982 $ 2,814,634 $ 1,688,433
(217,637)
276,362
—
The differences between actual income tax expense and the amounts computed by applying the U.S. federal income tax rate of
21% to pretax income from continuing operations for the periods indicated are reconciled in the table below.
For the year ended December 31,
2017
$ 1,686,702 $ 2,623,595 $ 2,358,069
2016
2018
—
196,477
15,205
7,538
38,938
(226,578)
(454,985)
(154,315)
—
163,411
26,012
4,314
(203,854)
(319,525)
—
(339,994)
$ 1,108,982 $ 2,814,634 $ 1,688,433
666,674
163,411
24,378
16,952
(4,768)
(329,412)
—
(346,196)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2018 and 2017 are presented below.
December 31,
2018
December 31,
2017
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (loss) on securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Passthrough income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonaccrual interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
647,190
472,421
68,438
74,791
27,956
—
6,155
$ 850,964 $ 782,714
488,052
284,877
70,603
67,253
19,209
18,157
5,214
2,147,915 1,736,079
(67,253)
2,073,124 1,668,826
(74,791)
(39,294)
(32,825)
(56,481)
(210)
(128,810)
(36,424)
(31,930)
(53,591)
(210)
(122,155)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,944,314 $ 1,546,671
In 2018, the Company invested in a Federal Rehabilitation Credit. The tax credit was used during the year ended December 31,
2018. Amortization expense recognized for the year ended December 31, 2018 was $354,888. In 2016, the Company invested
in a South Carolina Rehabilitation Credit. The tax credit is included in deferred tax assets and is being amortized. Amortization
expense recognized for the years ended December 31, 2018 and 2017 was $306,105, and is included in other operating expense
on the statement of operations.
There was a $74,791 valuation allowance for deferred tax assets at December 31, 2018 associated with the Company’s state
net operating loss. In assessing the realization of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred income tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible and prior to their expiration governed by the income tax code. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income over the periods during which the deferred income
tax assets are expected to be deductible, management believes it is more likely than not the Company will realize the benefits of
these deductible differences, net of the existing valuation allowance at December 31, 2018. The amount of the deferred income
tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry
forward period are reduced.
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the
temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were
remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a $666,674
increase in income tax expense for the year ended December 31, 2017 and a corresponding $666,674 decrease in net deferred tax
assets as of December 31, 2017.
55
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability
related to uncertain tax positions in accordance with applicable regulations.
Tax returns for 2015 and subsequent years are subject to examination by taxing authorities.
11. COMMITMENTS AND CONTINGENCIES
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of
our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit
is essentially the same as that involved in extending loan facilities to customers. We use the same credit policies in making
commitments and conditional obligations as we do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of
a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. If deemed necessary, the amount of collateral obtained upon extension of
credit is based on our credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, negotiable
instruments, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines of
credit, amounted to $96,115,504 and $92,869,285 at December 31, 2018 and 2017, respectively.
Standby letters of credit represent our obligation to a third party contingent upon the failure by our customer to perform under
the terms of an underlying contract with the third party or obligates us to guarantee or stand as surety for the benefit of the third
party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment
of goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be
drawn only when the underlying event fails to occur as intended. We can seek recovery of the amounts paid from the borrower.
Commitments under standby letters of credit are usually for one year or less. At December 31, 2018 and 2017, we have recorded
no liability for the current carrying amount of the obligation to perform as a guarantor; as such amounts are not considered
material. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31,
2018 and 2017 was $1,169,644 and $1,219,644, respectively.
12. RELATED PARTY TRANSACTIONS
In the opinion of management, loans to our executive officers and directors are made on substantially the same terms, including
interest rates and collateral, as those terms prevailing at the time for comparable loans with persons not related to the lender that
do not involve more than the normal risk of collectability. There were no past due loans to our executive officers as of December
31, 2018 and 2017.
The table below summarizes related party loans.
Balance at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans or advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,569,780 $ 3,944,140
1,428,098 2,879,435
(1,596,169) (2,253,795)
$ 4,401,710 $ 4,569,780
At December 31, 2018 and 2017, total deposits held by related parties were $8,914,967 and $7,180,958, respectively.
The Company also leased office space from a related party as discussed in the Premises, Equipment and Leasehold Improvements
footnote.
December 31,
2018
December 31,
2017
56
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of federal tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14. Stock Incentive Plan
$
2018
12,217 $
85,984
175,520
43,866
459,348
579,666
183,867
54,044
306,106
354,888
697,957
For the year ended December 31,
2017
10,844 $
75,965
207,526
44,613
451,882
585,497
165,280
82,907
306,105
—
587,118
2016
16,159
94,006
194,853
42,192
431,424
594,550
242,926
96,823
325,000
—
601,843
$2,953,463 $2,517,737 $2,639,776
Note Number HeadingWe have a Stock Incentive Plan which was approved in 1998 with 180,000 (329,422 adjusted for five 10%
stock dividends and a 25% stock dividend) shares reserved and a Stock Incentive Plan which was approved in 2010 with 300,000
(363,000 adjusted for two 10% stock dividends) shares reserved. Under both plans, options are periodically granted to employees
at a price not less than the fair market value of the shares at the date of grant. Employees become 20% vested after five years
and then vest 20% each year until fully vested. The right to exercise each such 20% of the options is cumulative and will not
expire until the tenth anniversary of the date of the grant. All employees are eligible to participate in this plan if the Executive/
Long-Range Committee, in its sole discretion, determines that such person has contributed or can be expected to contribute to
our profits or growth.
Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the
date of grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-
Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of our
common stock. The expected term of the options granted shall not exceed ten years from the date of grant (the amount of time
options granted are expected to be outstanding). The risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant.
The fair value of options granted was determined using the following weighted-average assumptions as of grant date:
Risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2.88% 2.43% 2.33%
2016
7.5
7.5
10
33.69% 34.20% 27.95%
3.61% 4.00% 3.47%
There are currently no options to purchase or shares exercisable under the 1998 Omnibus Stock Incentive Plan as of
December 31, 2018.
57
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the activity under the 1998 and 2010 Omnibus Stock Incentive Plans for the years
ended December 31.
2018
2017
2016
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Outstanding, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, December 31. . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at year end . . . . . . . . . . . . . . . . . . . . . . . . . .
117,191 $
11,275
—
(24,056)
(1,650)
102,760 $
32,219 $
—
10.79 154,085 $
18.23 10,175
—
8.96 (36,454)
20.02 (10,615)
11.89 117,191 $
8.81 31,694 $
—
10.19 201,151 $
20.72 11,000
—
9.57 (43,100)
15.83 (14,966)
10.79 154,085 $
8.77 13,882 $
9.97
14.54
—
9.51
12.28
10.19
10.35
Information has been retroactively adjusted for the 2018 10% stock dividends as applicable.
The following table presents information pertaining to options outstanding at December 31, 2018.
December 31, 2018
Exercise
Price
Number
of Options
Outstanding
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
$
$
$
$
$
$
$
$
$
$
$
$
$
8.61
8.90
9.18
9.65
9.92
12.26
12.40
13.05
13.62
14.54
18.23
19.00
19.82
41,075
2,541
7,199
2,420
1,815
5,444
2,419
14,217
3,630
5,500
10,450
2,750
3,300
102,760
6.33
1.75
3.50
2.25
3.75
5.59
5.00
6.33
6.50
7.25
9.25
8.17
8.09
6.26
$
$
$
$
$
$
$
$
$
$
$
$
$
$
8.61
8.90
9.18
9.65
9.92
12.26
12.40
13.05
13.62
14.54
18.23
19.00
19.82
11.71
Intrinsic
Value of
Options
Outstanding
353,656
$
22,615
$
66,087
$
23,353
$
18,005
$
66,743
$
29,996
$
185,532
$
49,441
$
79,970
$
190,504
$
52,250
$
65,406
$
$ 1,203,558
Number
of Options
Exercisable
Weighted
Average
Exercise
Price
Intrinsic
Value of
Options
Exercisable
$
24,645
$
2,033
$
2,880
$
1,452
$
726
$
—
$
484
$
—
$
—
$
—
$
—
—
$
— $
$
32,220
8.61
8.90
9.18
9.65
9.92
12.26
12.40
13.05
13.62
14.54
18.23
19.00
19.82
11.71
$
$
$
$
$
$
$
$
$
$
$
$
$
$
277,504
22,300
30,783
14,840
7,224
—
3,614
—
—
—
—
—
—
356,265
All relevant information has been retroactively adjusted for the 2018 10% stock dividends as applicable.
The total intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016, were $262,415,
$311,836, and $273,979, respectively.
We recognized compensation cost for the years ended December 31, 2018, 2017 and 2016 in the amount of $72,408, $71,701, and
$76,529, respectively, related to the granted options.
As of December 31, 2018, there was a total of $248,027 in unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted average period of
4.19 years.
58
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
We established an Employee Stock Ownership Plan (“ESOP”) effective January 1, 1989. Any employee of the Bank is eligible to
become a participant in the ESOP upon reaching 21 years of age and credited with one-year of service (1,000 hours of service).
The employee may enter the Plan on the January 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
$420,000, $375,000, and $345,000 during the years ended December 31, 2018, 2017, and 2016, respectively. The plan currently
owns 308,613 shares of common stock of Bank of South Carolina Corporation.
A participant vests in the ESOP based upon the participant’s credited years of service. The vesting schedule is as follows:
•
•
•
•
•
1 Year of Service
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
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 $3.8 million,
$2.7 million, and $2.3 million to the Company during the years ended December 31, 2018, 2017 and 2016, respectively.
On April 10, 2018, the Company’s Board of Directors declared a ten percent stock dividend to our shareholders. The record date
was April 30, 2018 and the distribution date was May 31, 2018. Earnings per share and average shares outstanding have been
adjusted for all periods presented to retroactively reflect the stock dividend in our consolidated financial statements. Total shares
outstanding increased by 499,095 shares.
17. INCOME PER COMMON SHARE
Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding.
Diluted income per share is computed by dividing net income by the weighted-average number of common shares and potential
common shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock
method and the average market price of common stock. Earnings per share and average shares outstanding have been adjusted for
all periods presented to retroactively reflect the ten percent stock dividend declared on April 10, 2018.
59
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,922,934
$4,901,825
$5,247,063
2018
2017
2017
Denominator:
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding - diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,500,027 5,471,001 5,428,884
132,855
5,589,012 5,568,493 5,561,739
97,492
88,985
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.26 $
1.24 $
0.90 $
0.88 $
0.97
0.94
18. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company and the Bank’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the assets, liabilities, and certain off balance sheet items as calculated under regulatory
accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Current quantitative measures established by regulation to ensure capital adequacy require that we maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined)
and to average assets. We believe that the Company and the Bank meet all capital adequacy requirements to which they were
subject at December 31, 2018 and 2017.
On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s
(“BCBS”) capital guidelines for U.S. banks (“Basel III”). Following the actions by the Federal Reserve, the FDIC also approved
regulatory capital requirements on July 9, 2013. The FDIC’s rule is identical in substance to the final rules issued by the Federal
Reserve Bank.
Basel III became effective on January 1, 2015. The purpose is to improve the quality and increase the quantity of capital for all
banking organizations. The minimum requirements for the quantity and quality of capital were increased. The rule includes a
new common equity Tier 1 capital to risk-weighted assets ratio of 4.50% and a common equity Tier 1 capital conservation buffer
of 2.50% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00%
to 6.00% and requires a minimum leverage ratio of 4.00%. In addition, the rule also implements strict eligibility criteria for
regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. All
final rule requirements will be phased in over a multi-year schedule. The capital conservation buffer in effect for the year ended
December 31, 2018 was 8.39%.
At December 31, 2018, the Bank was categorized as “well capitalized” under Basel III. To be categorized as “well capitalized”
the Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital and Tier 1 leverage
ratios of 10.00%, 8.00%, 6.50%, and 5.00%, respectively, and to be categorized as “adequately capitalized,” the Bank must
maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 risk based capital, and Tier 1 leverage ratios of
8.00%, 6.00%, 4.50%, and 4.00%, respectively.
60
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the actual and required capital amounts and ratios for the Company and Bank at December 31, 2018
and 2017:
(in thousands)
Total capital to risk-weighted assets:
December 31, 2018
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$50,657 16.69 % $24,280 8.00 % N/A N/A
$49,695 16.39 % $24,262 8.00 % $30,328 10.00 %
Tier 1 capital to risk-weighted assets:
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,864 15.44 % $18,210 6.00 % N/A N/A
$45,898 15.13 % $18,197 6.00 % $24,262 8.00 %
Tier 1 capital to average assets:
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,864 10.76 % $17,428 4.00 % N/A N/A
$45,898 10.54 % $17,419 4.00 % $21,773 5.00 %
Common equity Tier 1 capital:
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,864 15.44 % $13,658 4.50 % N/A N/A
$45,898 15.13 % $13,647 4.50 % $13,647 4.50 %
(in thousands)
Total capital to risk-weighted assets:
December 31, 2017
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,986 15.97% $23,213 8.00% N/A N/A
$47,100 15.69% $24,020 8.00% $30,025 10.00%
Tier 1 capital to risk-weighted assets:
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,253 14.73% $17,410 6.00% N/A N/A
$43,344 14.44% $18,015 6.00% $24,020 8.00%
Tier 1 capital to average assets:
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,253 10.01% $16,738 4.00% N/A N/A
$43,344 9.82% $17,661 4.00% $22,077 5.00%
Common equity Tier 1 capital:
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,253 14.73% $13,058 4.50% N/A N/A
$43,344 14.44% $13,511 4.50% $19,516 6.50%
61
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a
recurring or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the
principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly
transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing
activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. GAAP
establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the
use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent
sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed
based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would
use in pricing an asset or liability.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy
is broken down into three levels based on the reliability of inputs as follows:
• Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
• Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market
prices for identical or similar instruments traded in markets that are not active and model-based valuation
techniques for which all significant assumptions are observable in the market or can be corroborated by
market data.
• Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar
techniques that use significant assumptions not observable in the market. These unobservable assumptions
reflect estimates of assumptions that market participants would use in determining fair value.
Fair value estimates are made at a specific point of time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could result from offering for sale our entire holdings of
a particular financial instrument. Because no active market exists for a significant portion of our financial instruments, fair value
estimates are based on judgements regarding future expected loss experience, current economic conditions, current interest rates
and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value also would affect significantly the estimates. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates
and have not been considered in any of these estimates.
The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a
recurring basis:
Investment Securities Available for Sale
Investment securities are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices
are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as
the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such
as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange,
or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by
government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-
backed securities in less liquid markets.
Derivative Instruments
Derivative instruments include interest rate lock commitments and forward sale commitments. These instruments are valued
based on the change in the value of the underlying loan between the commitment date and the end of the period. We classify these
instruments as Level 3.
62
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We had no embedded derivative instruments requiring separate accounting treatment. We had freestanding derivative instruments
consisting of fixed rate conforming loan commitments with interest rate locks and commitments to sell fixed rate conforming
loans on a best efforts basis. We do not currently engage in hedging activities. Based on the short-term fair value of mortgage
loans held for sale (derivative contract), our derivative instruments were immaterial to our consolidated financial statements as
of December 31, 2018 and 2017.
Assets and liabilities measured at fair value on a recurring basis at December 31, 2018 and 2017 are in the following table.
U.S. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-Sponsored Enterprises . . . . . . . . . . . . . . . . . . . . . . .
Municipal Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-Sponsored Enterprises . . . . . . . . . . . . . . . . . . . . . . .
Municipal Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2018
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
Quoted
Market Price
in Active
Markets
Level 1
$32,356,634 $
— $ 32,356,634
— $
— 59,369,280
— 59,369,280
— 21,701,005 6,241,955 27,942,960
$32,356,634 $81,070,285 $ 6,241,955 $119,668,874
Balance as of December 31, 2017
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
Quoted
Market Price
in Active
Markets
Level 1
$35,559,845 $
— $ 35,559,845
— $
— 63,556,504
— 63,556,504
— 28,675,012 11,458,889 40,133,901
$35,559,845 $92,231,516 $11,458,889 $139,250,250
There were no liabilities recorded at fair value on a recurring basis as of December 31, 2018 or 2017.
The following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) for the years ended December 31, 2018 and 2017.
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total realized/unrealized gains (losses)
December 31,
2018
December 31,
2017
$11,458,889 $13,977,857
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
150,993
—
137,751
(5,367,927) (2,656,719)
—
—
$ 6,241,955 $11,458,889
There were no transfers between fair value levels in 2018 or 2017.
The following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a
nonrecurring basis:
OREO
Loans, secured by real estate, are adjusted to the lower of the recorded investment in the loan or the fair value of the real estate
upon transfer to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon
independent market prices, appraised values of the collateral or our estimation of the value of the collateral. When the fair value
of the collateral is based on an observable market price or a current appraisal, we record the asset as nonrecurring Level 2. When
an appraised value is not available or we determine the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, we record the asset as nonrecurring Level 3.
63
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans
Impaired loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs
to sell is the most frequently used method. Typically, we review the most recent appraisal and if it is over 12 to 18 months old we
may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location
of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan,
we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically,
as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary market
area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming
or immediately following the determination that the loan is impaired.
However, as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and
surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an
internal analysis whereby the previous appraisal value would be reviewed considering recent current conditions, and known
recent sales or listings of similar properties in the area, and any other relevant economic trends. This analysis may result in the
call for a new appraisal. These valuations are reviewed and updated on a quarterly basis.
In accordance with ASC 820, Fair Value Measurement, impaired loans, where an allowance is established based on the fair value
of collateral, require classification in the fair value hierarchy. At December 31, 2018 and December 31, 2017, substantially all
of the impaired loans were evaluated based on the fair value of the collateral. These impaired loans are classified as Level 3.
Impaired loans measured using discounted future cash flows are not deemed to be measured at fair value.
Mortgage Loans to be Sold
Mortgage loans to be sold carried at the lower of cost or market value. The fair values of mortgage loans to be sold are based on
current market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates
fair value. These loans are classified as Level 2.
Certain assets and liabilities are measured at fair value on a ongoing basis; that is, the instruments are not measured at fair value
on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of
impairment). The following tables present information about certain assets and liabilities measured at fair value on a nonrecurring
basis at December 31, 2018 and 2017.
December 31, 2018
Quoted Market
Price in Active
Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
—
—
— $
— $
—
1,199,438
1,199,438 $
2,223,028 $
—
—
2,223,028 $
December 31, 2017
Quoted Market
Price in Active
Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . .
Mortgage loans to be sold . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
—
—
— $
— $
—
2,093,723
2,093,723
$
1,735,051 $
435,479
—
2,170,530 $
Total
2,223,028
—
1,199,438
3,422,466
Total
1,735,051
435,479
2,093,723
4,264,253
64
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2018 or 2017.
The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at
December 31, 2018:
Impaired Loans . . . . . . . . . . . . . . . . .
Valuation Technique
Appraisal Value/
Comparison Sales/
Other Estimates
Inputs
Unobservable Input
Appraisals and/or
Sales of Comparable
Properties
General Range of Inputs
Appraisals Discounted 10% to
20% for Sales Commissions and
Other Holding Costs
Other Real Estate Owned. . . . . . . . . .
Appraisal Value/
Comparison Sales/
Other Estimates
Appraisals and/or
Sales of Comparable
Properties
Appraisals Discounted 10%
to 20% for Sales Commissions
and Other Holding Costs
Accounting standards require disclosure of fair value information for all of our assets and liabilities that are considered financial
instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate fair value.
Under the accounting standard, fair value estimates are based on existing financial instruments without attempting to estimate
the value of anticipated future business and the value of the assets and liabilities that are not financial instruments. Accordingly,
the aggregate fair value amounts of existing financial instruments do not represent the underlying value of those instruments on
our books.
The following paragraphs describe the methods and assumptions we use in estimating the fair values of financial instruments:
a. Cash and due from banks, interest-bearing deposits at the Federal Reserve Bank
The carrying value approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.
b. Investment securities available for sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon
quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or
other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating,
prepayment assumptions and other factors such as credit loss assumptions.
c. Loans
During the first quarter of 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and
Liabilities. The amendments included within this standard, which are applied prospectively, require the Company to measure and
disclose fair value of balance sheet financial instruments using an exit price notion. Prior to adopting the amendments included
in the standard, the Company measured fair value under an entry price notion. The entry price notion previously applied by the
Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial
instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk,
illiquidity risk, and market factors that sometimes exist in exit prices in dislocated markets.
As of December 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar
procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured
by the previously applied entry price notion. The fair value of the Company’s loan portfolio has always included a credit risk
assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value
that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued
using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired
loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new
guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model
to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the
use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk
provides an estimated exit price for the Company’s loan portfolio.
65
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying
values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying
collateral.
As of December 31, 2017, the fair value of the Company’s loan portfolio included a credit risk assumption in the determination of
the fair value of its loans. This credit risk assumption was intended to approximate the fair value that a market participant would
realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach.
The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The
results are then adjusted to account for credit risk. For variable-rate loans that reprice frequently and have no significant change
in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow
models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow
models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values
derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit
risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price as of December 31, 2017.
d. Deposits
The estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is
estimated by discounting contractual cash flows, using interest rates currently being offered on the deposit products. The fair
value estimates for deposits do not include the benefit that results from the low cost funding provided by the deposit liabilities as
compared to the cost of alternative forms of funding (deposit base intangibles).
e. Accrued interest receivable and payable
Since these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments
are deemed a reasonable estimate of fair value.
f. Loan commitments
Estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements
and the credit standing on the counterparties.
The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments
as of December 31, 2018 and 2017, respectively.
Carrying
Amount
Fair Value Measurements at December 31, 2018
Estimated
Fair Value
Level 1
Level 2
Financial Assets:
Cash and due from banks . . . . . . . . . . .
Interest-bearing deposits at the
$ 6,325,457 $ 6,325,457 $ 6,325,457 $
— $
Federal Reserve . . . . . . . . . . . . . . .
25,506,784 25,506,784 25,506,784
—
Level 3
—
—
Investment securities available
for sale . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans to be sold. . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable. . . . . . . . . .
Financial Liabilities:
119,668,874 119,668,874 32,356,634 81,070,285
1,199,438
1,199,438
1,199,438
270,449,936 263,780,751
1,561,915
1,561,915
6,241,955
—
263,780,751
—
1,561,915
—
—
—
Demand deposits. . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . .
Accrued interest payable. . . . . . . . . . . .
347,909,663 347,909,663
34,468,725 38,747,898
163,876
163,876
— 347,909,663
— 38,747,898
163,876
—
—
—
—
66
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carrying
Amount
Fair Value Measurements at December 31, 2017
Estimated
Fair Value
Level 2
Level 1
Financial Assets:
Cash and due from banks . . . . . . . . . . .
Interest-bearing deposits at the
$
8,486,025 $
8,486,025 $
8,486,025 $
— $
Federal Reserve . . . . . . . . . . . . . . .
24,034,194 24,034,194 24,034,194
—
Level 3
—
—
Investment securities available
for sale . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans to be sold. . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable. . . . . . . . . .
Financial Liabilities:
2,093,723
139,250,250 139,250,250 35,559,845 92,231,516 11,458,889
—
— 265,277,204
—
2,093,723
266,305,242 265,277,204
1,720,920
—
—
—
1,720,920
1,720,920
2,093,723
Demand deposits. . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . .
Accrued interest payable. . . . . . . . . . . .
360,967,884 360,967,884
41,920,416 40,722,870
96,190
96,190
— 360,967,884
— 40,722,870
96,190
—
—
—
—
20. BANK OF SOUTH CAROLINA CORPORATION - PARENT COMPANY
The Company’s principal source of income is dividends from the Bank. Certain regulatory requirements restrict the amount of
dividends which the Bank can pay to the Company. The Company’s principal asset is its investment in its Bank subsidiary. The
Company’s condensed statements of financial condition as of December 31, 2018 and 2017, and the related condensed statements
of income and cash flows for the years ended December 31, 2018, 2017 and 2016, are as follows:
Condensed Statements of Financial Condition
2018
2017
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in wholly-owned bank subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,007,501
45,103,068
178,629
$ 46,289,198
$
947,216
42,437,503
127,274
$ 43,511,993
Liabilities and shareholders’ equity
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
826,637
45,462,561
$ 46,289,198
$
747,358
42,764,635
$ 43,511,993
Condensed Statements of Income
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends received from bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67
For the years ended December 31,
2017
2016
2018
$
484 $
(189,872)
1,157 $
(224,316)
571
(177,612)
3,775,000 2,685,000 2,340,000
3,371,093 2,406,213 3,084,104
$ 6,922,934 $ 4,901,825 $ 5,247,063
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows
For the years ended December 31,
2017
2018
2016
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) Increase in other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71,701
72,408
$ 6,922,934 $ 4,901,825 $ 5,247,063
76,529
(3,371,093) (2,406,213) (3,084,104)
(55,923)
—
3,566,561 2,516,267 2,183,565
(51,197)
151
(51,355)
(6,333)
(3,699,845) (2,832,489) (2,613,715)
405,749
(3,506,276) (2,491,646) (2,207,966)
193,569
340,843
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at the beginning of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at the end of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,285
947,216
$ 1,007,501 $
24,621
922,595
947,216 $
(24,401)
946,996
922,595
Supplemental disclosure for non-cash investing and financing activity
Change in dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
85,615 $
53,340 $
74,706
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below represent the quarterly results of operations for the years ended December 31, 2018 and 2017, respectively:
Fourth
Third
Second
First
2018
Total interest and fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . . . . . . . . . . . .
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95,000
249,425
195,434
139,697
100,000
$4,727,449 $4,665,586 $4,423,867 $4,320,009
109,830
4,478,024 4,470,152 4,284,170 4,210,179
55,000
4,383,024 4,370,152 4,209,170 4,155,179
447,945
2,970,411 2,816,474 2,651,515 2,641,834
1,945,504 2,012,371 2,112,751 1,961,290
349,060
$1,806,194 $1,778,153 $1,726,357 $1,612,230
555,096
234,218
532,891
139,310
386,394
458,693
75,000
Basic income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.33 $
0.32 $
0.32 $
0.32 $
0.31 $
0.31 $
0.29
0.29
68
BANK OF SOUTH CAROLINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fourth
Third
Second
First
2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,500
20,000
110,625
109,934
106,522
$4,327,409 $4,117,032 $3,933,285 $3,791,421
96,782
4,217,475 4,006,407 3,826,763 3,694,639
2,500
4,214,975 3,986,407 3,796,763 3,692,139
551,874
538,236
2,696,005 2,484,538 2,590,123 2,471,630
2,057,206 1,983,751 1,903,119 1,772,383
1,208,507
546,295
$ 848,699 $1,440,653 $1,386,385 $1,226,088
481,882
516,734
696,479
543,098
30,000
Basic income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.15 $
0.15 $
0.26 $
0.26 $
0.25 $
0.25 $
0.22
0.22
69
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, 2018 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, 2018, 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, 2018, 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,
2018. Based on this assessment, management believes that as of December 31, 2018, 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, 2018, 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.
Item 9B.
Other Information
There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2018 that was not reported.
70
PART III
Item 10.
Directors, Executive Officers, Promoters and Corporate Governance
The information required by this item contained under the sections captioned “Proposal 1: To elect eighteen 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 in the Company’s definitive Proxy Statement for its Annual
Meeting of Shareholders to be held on April 9, 2019, 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 eighteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2019 Annual Meeting of
Shareholders,” included in 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 of Directors, 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 15 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 of Directors and President/Chief Executive Officer be held by the same person and(ii) provide that the
President/Chief Executive Officer will report to the Chairman of the Board of Directors.
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 in the Proxy Statement.
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 in the Proxy Statement.
71
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 in 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
eighteen Directors of Bank of South Carolina Corporation to serve until the Company’s 2020 Annual Meeting of Shareholders” and
“Meetings and Committees of the Board of Directors and Corporate Governance Matters”, included in the Proxy Statement.
Item 14.
Principal Accounting Fees and Services
The information required by this item is incorporated in this document by reference to “Proposal 4: To ratify 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, 2019” and “Auditing and Related Fees”, included in the Proxy Statement.
72
Item 15.
Exhibits and Financial Statement Schedules
PART IV
The Consolidated Financial Statements and Report of Independent Auditors are included in this Form 10-K and listed on pages
as indicated.
1. The Consolidated Financial Statements and Report of Independent Auditors are included in this Form 10-K and listed on pages
as indicated.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
31
32
33
34
35
36
37 - 69
2. Exhibits
2.0
3.0
3.1
3.2
4.0
10.0
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
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-3 on June 23, 2011)
2019 Proxy Statement (Filed with 2018 10-K)
Lease Agreement for 256 Meeting Street (Filed with 1995 10-KSB)
Sublease Agreement for Parking Facilities at 256 Meeting Street (Filed with 1995 10-KSB)
Lease Agreement for 100 N. Main Street, Summerville, SC (Filed with 1995 10-KSB)
Lease Agreement for 1337 Chuck Dawley Blvd., Mt. Pleasant, SC (Filed with 1995 10-KSB)
Lease Agreement for 1071 Morrison Drive, Charleston, SC (Filed with 2010 10-K)
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)
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)
Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC (Filed with 2013 10-K)
Assignment and Assumption of Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC
(Filed with 2015 10-K)
First Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC
(Filed with 2015 10-K)
Second Amendment to Lease Agreement for Highway 78 Ingleside Boulevard North Charleston, SC
(Filed with 2015 10-K)
Extension to Lease Agreement for 256 Meeting Street (Filed with September 30, 2017 10-Q)
10.12
10.13 North Charleston Lease Agreement (Filed with June 30, 2017 10-Q)
10.14
13.0
14.0
21.0
Sublease Amendment for Parking Facilities at 256 Meeting Street (Filed with September 30, 2017 10-Q)
2018 10-K (Incorporated herein)
Code of Ethics (Filed with 2004 10-KSB)
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)
Certification pursuant to Rule 13a-14(a)/15d-14(a) by the Principal Executive Officer
Certification pursuant to Rule 13a-14(a)/15d-14(a) by the Principal Financial Officer
Certification pursuant to Section 1350
Certification pursuant to Section 1350
31.1
31.2
32.1
32.2
73
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.
SIGNATURES
Date: March 4, 2019
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
74
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 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
March 4, 2019
/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
/s/ Sheryl G. Sharry
Sheryl G. Sharry, Director
/s/ Steve D. Swanson
Steve D. Swanson, Director
/s/ Susanne K. Boyd
Chief Operating Officer/Executive Vice President, Director
/s/ Eugene H. Walpole, IV
Chief Financial Officer/Executive Vice President, Director
75
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
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 4, 2019
/s/ Fleetwood S. Hassell
Fleetwood S. Hassell
President/Chief Executive Officer
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
I, Eugene H. Walpole, IV, 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 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
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 4, 2019
/s/ Eugene H. Walpole, IV
Eugene H. Walpole, IV
Chief Financial Officer/Executive Vice President
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, 2018 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 4, 2019
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,
2018 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 4, 2019
By: /s/ Eugene H. Walpole, IV
Eugene H. Walpole, IV
Chief Financial Officer/Executive Vice President
Five-Year Financial Performance
Years Ended December 31
2018
2017
2016
2015
2014
Net Income
$ 6,922,934
$ 4,901,825
$ 5,247,063
$ 4,884,288
$ 4,398,820
Performance Ratios:
Return on Average Equity
Return on Average Assets
Average Equity to Average Assets
Net Interest Margin
Net (Recoveries) Charge-offs to
Average Loans
Allowance for Loan Losses as a
Percentage of Total Loans (1)
Per Share Data:
Basic Income (2)
Diluted Income (2)
Year-End Book Value (2)
Cash Dividends Declared
Dividend Payout Ratio
Selected Average Balances:
Total Assets
Total Loans(3)
Total Deposits
15.85%
1.61%
10.15%
4.15%
11.37%
1.14%
10.07%
3.76%
12.65%
1.28%
10.10%
3.71%
12.64%
1.29%
10.18%
3.72%
12.12%
1.23%
10.11%
3.70%
(0.01)%
0.01%
0.05%
0.04%
0.02%
1.53%
1.43%
1.48%
1.41%
1.42%
$ 1.26
$ 1.24
$ 8.25
$ 0.58
54.68%
$ 0.90
$ 0.88
$ 7.79
$ 0.58
58.87%
$ 0.97
$ 0.94
$ 7.45
$ 0.54
50.86%
$ 0.90
$ 0.88
$ 7.24
$ 0.52
49.94%
$ 0.81
$ 0.79
$ 7.49
$ 0.62
62.88%
$ 430,495,412 $ 428,174,359
$ 410,581,560 $ 379,527,104 $ 358,774,284
$ 277,223,600 $ 264,881,222 $ 265,151,258 $ 243,729,630 $ 232,281,473
$ 386,025,147 $ 384,524,305 $ 367,822,900 $ 337,969,217 $ 319,131,466
Total Shareholders’ Equity
$ 43,691,359 $ 43,121,778 $ 41,479,755
$ 38,631,718 $ 36,283,441
(1) Excluding mortgage loans to be sold
(2) Adjusted to retroactively reflect 10% stock dividend
(3) Including mortgage loans to be sold
Annual Earnings & Cash Dividend History
Total Earnings: $77,788,707
Total Cash Dividends: $43,683,667
Earnings
Cash Dividends
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
7
8
9
1
8
8
9
1
9
8
9
1
0
9
9
1
1
9
9
1
2
9
9
1
3
9
9
1
4
9
9
1
5
9
9
1
6
9
9
1
7
9
9
1
8
9
9
1
9
9
9
1
0
0
0
2
1
0
0
2
2
0
0
2
3
0
0
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4
0
0
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5
0
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6
0
0
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7
0
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8
0
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9
0
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6
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7
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2
8
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2
These statements have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.
Board of Directors
Eugene H. Walpole, IV
Hugh C. Lane, Jr.
Fleetwood S. Hassell
Alan I. Nussbaum, MD
Glen B. Haynes, DVM
Linda J. Bradley McKee, PhD, CPA
Douglas H. Sass
Karen J. Phillips
Susanne K. Boyd
Sheryl G. Sharry
Steve D. Swanson
Elizabeth M. Hagood
Charles G. Lane
David W. Bunch
Graham M. Eubank, Jr.
William L. Hiott, Jr.
Richard W. Hutson, Jr.
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
Emily P. Bailey
Compliance Officer
Rhett D. Bearden
Senior Vice President
Patricia S. Black
Assistant Vice President
W. Heyward Bonner
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
Assistant Vice President
*Officers of the Corporation and of the Bank.
Other Officers are Officers of the Bank only.
David R. Gregorie
Loan Officer
Robert M. Hollings, III
Assistant Vice President
Lawson L. Johnson, III
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
Suzanne B. Olvera
Operations Officer
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
Malcolm M. Rhodes, MD
Edmund Rhett, Jr., MD
Employees
Susan Alford
Nicole Allston
Tammy Barker
Stender Bergmann
Allison Bussells
Markita Chisolm
Michael Ciappa
Anna Cockfield
Molly Dargan
John Daughtridge
Kelly Finocchio
Rebecca Foster
Tammy Fowler
Susan Getz
Bree Greer
Maggie Harken
Lacey Harris
Nancy Herndon
Rio Hirsch
Bryn Hite
Eugenia Hollington
Ally Jenkins
Gail Johanson
Parker Lee
Brittany Liles
Jessica Little
Jo-Chi Mao
Nicole McCarson
Lisa Morgan
Sandy Osborne
Brittany Ossa
Sarah Pearson
Liz Ryan
Mark Shannon
Traci Stone
Kathy Sutler
Lindsay Weber
Kelly Welch
Scott Weller
Laura Wells
Susan West
Appreciation
for
2018 Retirees
WILLETTE M. PARKER
Senior Vice President
31 Years of Service
ORIANNA S. GREGORIE
Senior Vice President
30 Years of Service
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P R O F I T A B I L I T Y.
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256 Meeting Street, Charleston, SC 29401
P: 843-724-1500 // F: 843-724-1513
100 North Main Street, Summerville, SC 29483
P: 843-832-7100 // F: 843-832-7115
1337 Chuck Dawley Blvd., Mt. Pleasant, SC 29464
P: 843-971-3300 // F: 843-971-3315
2027 Sam Rittenberg Blvd., Charleston, SC 29407
P: 843-958-1041 // F: 843-958-1050
COMING IN 2019
9403 Highway 78, North Charleston, SC 29456
Bank of South Carolina Corporation’s common stock trades on the NASDAQ Stock Market under the symbol “BKSC”
Visit www.banksc.com
ANNUAL REPORT
2018
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