þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

South Carolina		57-1021355
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification Number)
256 Meeting Street, Charleston, SC		29401
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number: (843) 724-1500

Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ 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. o Yes þ 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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price of such stock on June 30, 2008 was: $35,677,620

As of February 27, 2009, the Registrant has out standing 3,976,599 shares of common stock.

 

 

BANK OF SOUTH CAROLINA CORPORATION
AND SUBSIDIARY

Table of Contents

		Page
PART I
Item 1. Business			3
Item 1A. Risk Factors			4
Item 1B. Unresolved Staff Comments			4
Item 2. Description of Properties			5
Item 3. Legal Proceedings			5
Item 4. Submission of Matters to a Vote of Security Holders			5
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities			6
Item 6. Selected Financial Data			8
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 7A Quantitative and Qualitative Disclosures About Market Risk			16
Item 8. Financial Statements and Supplementary Data			28
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure			59
Item 9A(T).Controls and Procedures			59
Item 9B. Other Information			59
PART III
Item 10. Directors, Executive Officers, and Corporate Governance of the Registrant			60
Item 11. Executive Compensation			63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			68
Item 13. Certain Relationships and Related Transactions and Director Independence			71
Item 14. Principal Accountant Fees and Services			71
Part IV
Item 15. Exhibits, Financial Statement Schedules			72
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1. Business

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.

The Company, a bank holding company within the meaning of the Bank Holding Company Act of 1956, (the “BHCA”), as amended, is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). In addition the Company is registered under the laws of the South Carolina Bank Holding Company Act, and therefore is also subject to regulation by the South Carolina State Board of Financial Institutions. The Company is required to file annual reports and other information with the Federal Reserve and the South Carolina State Board of Financial Institutions regarding its financial condition, results of operations, management and intercompany relationships and transactions between the Company and its subsidiaries. Compliance with federal, state and local provisions regulating the discharge of materials into the environment had no material effect on the capital expenditures, earnings and competitive position of the Bank in fiscal year ended December 31, 2008.

The Company’s subsidiary bank, The Bank of South Carolina, is an FDIC insured state chartered financial institution, and as such, is subject to various statutory requirements, supervision and regulation, of which regular bank examinations are a part, promulgated and enforced primarily by the Federal Deposit Insurance Corporation (FDIC), through which the Bank is insured, and the South Carolina State Board of Financial Institutions. Since the primary asset of the Company is its wholly-owned subsidiary, the majority of the following discussion relates to the Bank.

The Bank serves Berkeley, Charleston and Dorchester counties (the “Tri-County Area”) as an independent, community-oriented commercial bank concentrating on individuals and small and medium-sized businesses desiring a high level of personalized services. The four banking house locations of the Bank include: 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. The business of the Bank is not considered to be seasonal nor is the Bank’s business dependent on any one industry.

The Bank offers a full range of deposit services. Checking account services include regular non-interest bearing checking accounts as well as interest bearing negotiable order of withdrawal (“NOW”) accounts. Savings and certificate of deposit accounts include accounts ranging from a daily maturity (regular savings and also money market accounts) to longer term certificates as authorized by regulation. The Bank offers tiered interest to its customers on both money market and NOW accounts. In addition, Individual Retirement Accounts are available. During 2006, the bank added health savings accounts to its deposit services. All deposit accounts are insured by the FDIC to the full amount permitted by law. Deposit accounts are solicited from individuals, businesses, professional organizations and governmental authorities.

Lending services include a full range of commercial, personal and mortgage loans. The Bank’s primary focus is on business lending. The types of commercial loans that are available include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of machinery and equipment. From time to time the Bank may make real estate loans for land acquisition, land development or construction loans. The types of personal loans that are available include secured and unsecured loans for such purposes as financing automobiles, home improvements, education, lot acquisition, construction, home equity loans and personal investments. The Bank offers a personal checking account related line of credit. This line of credit is available for both protection against unexpected overdrafts and also for the convenience of having a pre-arranged loan that can be activated simply by a check drawn on a personal checking account. In the fourth quarter of 1993, a residential mortgage lending department was opened with mortgage loans being provided through correspondent relationships. The Bank originates, processes and closes the loan and sells (each individually) to investors on a list preapproved by the Board.

The Bank offers credit cards (through correspondent banking services) including MasterCard(TM) and Visa(TM). The Bank does not have a proprietary automated teller machine but participates in a national ATM network through the Visa Debit Card Program. This service is called “Check Card” by the Bank and also offers purchases by the cardholder where Visa debit cards are accepted worldwide using a direct charge to their checking account. Other services offered, but not limited to, include safe deposit boxes, letters of credit, travelers checks, direct deposit of payroll, social security and dividend payments and automatic payment of insurance premiums and mortgage loans. The Bank offers a courier service and ACH origination service as part of its deposit services for commercial customers. Internet Banking called “ESafe” by the Bank, offers twenty-four hour information, up-to-the minute account activity, automatic transfers or one-time transfers between accounts, actual images of customer checks, and statement viewing. The Bank began offering internet “Bill Pay” services in 2008 on personal accounts and will be adding this feature for business accounts in 2009 through a new product “eCorp”.

The Company (“BKSC”) is publicly traded on the National Association of Securities Dealers Automated Quotations (NASDAQ), and is under the reporting authority of the Securities and Exchange Commission (“SEC”). All of the Company’s electronic filings with the SEC, including its Annual Report on Form 10-K, Quarterly Reports on Form 10Q, 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 the Bank’s website, www.banksc.com. through the “Investor Relations” link. The Company’s filings are also available through the SEC’s web site at www.sec.gov or by calling 1-800-SEC-0330.

The Company’s accounting policies are discussed in Item 7, Note 1 to the Consolidated Financial Statements. Of these significant accounting policies, the Company considers its policies regarding the allowance for loan losses to be its most critical accounting policy due to the significant degree of management judgment. For additional discussion concerning the Company’s allowance for loan losses and related matters, see Item 6, “Allowance for Loan Losses”.

Since January 1, 1986, South Carolina law has permitted regional interstate banking. Pursuant to such law, several of the banks in the Tri-County Area have been acquired by banks with headquarters outside the State of South Carolina. In addition, South Carolina laws permit statewide branching by banks and savings and loan associations. As a result, the Bank encounters strong competition from local and national financial institutions as well as consumer and commercial finance companies, insurance companies, brokerage firms, some of which are not subject to the same degree of regulation and restrictions as the Bank. Many of these competitors have substantially greater resources and lending limits than the Bank has and offer certain services, such as trust and international banking services, which the Bank is not providing. The Bank does, however, provide a means for clearing international checks and drafts through a third party or correspondent bank.

At year- end 2008, the Bank employed 68 people, 4 of whom are considered part time employees, none of whom are subject to a collective bargaining agreement. The Bank provides a variety of benefit programs including an Employee Stock Ownership Plan and Trust, health, life, disability and other insurance. Management believes its relationship with its employees is excellent.

Item 1A. Risk Factors

Not applicable

Item 1B. Unresolved Staff Comments

Not applicable

Item 2. Description of Properties

The Bank’s headquarters and main office facility is located at 256 Meeting Street in downtown Charleston, South Carolina. The Bank currently leases this facility. On June 30, 1995 the Bank renegotiated its lease for one hundred forty (140) months with two additional ten-year terms. Base rent was $26,432 monthly payable in advance for the first twenty (20) months and the remaining one hundred twenty (120) months of the term (which began March 1, 1997) and for the two (2) extensions of the original term is $24,801 per month in advance and is adjustable by 4% of the base rent every two years. The rent, payable in equal monthly installments of $30,175, will increase to $31,382 in March 2009. In addition, the Bank leases adjacent parking facilities at $3,042 per month.

In October of 1993, the Bank opened an office at 100 N. Main Street, Summerville, SC. The lease on this facility began on August 9, 1993, with an original termination date of June 30, 1999, with two 5-year options to renew. In June of 2004, the bank was successful in renegotiating this lease. Under the new lease beginning July 1, 2004, rent increased from a fixed rate of $2,262 monthly to $30,725 annually with an increase of $3,582 each year thereafter until July 1, 2009. The new lease was negotiated so that the bank could remain in its current location with an option to expand. At the end of the five year term (June 30, 2009) The Bank of South Carolina will have three (3) ten (10) year options for renewal. During the renewal periods, the annual rent will be adjusted by the current Consumer Price Index (CPI) capped at 3% annually.

On November 1, 1995, the Bank entered into an agreement with an individual to lease property for construction of a new banking facility at 1337 Chuck Dawley Boulevard, Mt. Pleasant, SC. The original term of the lease is for fifteen (15) years with six (6) additional terms of five (5) years each. The base rent for the first ten (10) years was $2,250 per month paid in advance. Rent for years 11 through 15 and each six (6) option periods shall be adjusted to reflect an annualized return determined by multiplying the average yield on five (5) year U.S. Treasury Notes plus 150 basis points times an assumed raw land value of $325,000. The monthly rent, however, shall never be less than the original rent of $2,250 per month. As of February 26, 2009, the rent has not increased based on the above formula.

In the first quarter of 1997, the Bank purchased one acre of land for approximately $838,000 in order to construct a full service banking office and operations center in the West Ashley community of Charleston. In March, 1998, the two-story, 12,000 square foot facility was completed at a cost of approximately $1,334,000 representing construction costs and furnishings.

All leased properties are in good order and condition.

Item 3. Legal Proceedings

In the opinion of management, there are no legal proceedings pending other than routine litigation incidental to its business involving amounts which are not material to the financial condition of the Company and the Bank. To the knowledge of management, no proceedings have been instituted or are contemplated by or against any governmental authority against or by the Company or the Bank.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2008.

There were issued and outstanding 3,976,599 shares of the 12,000,000 authorized shares of common stock of the Company at the close of the Company’s fiscal year ended December 31, 2008. These outstanding shares were held by approximately 1,200 shareholders in nominee names and of record on December 31, 2008. The common stock of the Company is traded in the “capital market” by twenty market making investment banking firms. These firms are Alternate Display Facility, Archipelago Stock Exchange, Automated Trading Desk, Chicago Board Options Exchange, Citadel Derivative Group, LLC, Domestic Securities, Inc., Hill, Thompson, Magid and Company, Howe Barnes Investments, Hudson Securities, Inc., International Securities Exchange, Knight Equity Markets, LP, Merrill Lynch, Monroe Securities Inc., Morgan Keegan & Company, Inc., Nasdaq Execution Services, LLC, Sandler O’Neill & Partners, Scott & Stringfellow, Inc., Susquehanna Financial Group, LLLP, Susquehanna Financial Group and USB Securities, LLC. Stock quotations are available through the National Association of Securities Dealers Automated Quotations (NASDAQ) where the Bank’s shares are listed as BKSC.

According to information supplied by The Nasdaq Stock Market, the range of high and low bid quotations for each quarterly period in the fiscal years 2008, 2007 and 2006 has been as follows:

		2008								2007								2006
		High				Low				High				Low				High				Low
First Quarter			15.00				13.50				17.00				15.54				16.79				14.00
Second Quarter			15.01				12.90				16.37				15.10				17.60				15.03
Third Quarter			14.64				11.31				16.48				15.10				17.21				14.80
Fourth Quarter			13.49				9.10				16.30				13.82				17.21				15.63

The Board of Directors of Bank of South Carolina Corporation declared a quarterly dividend of $.16 per share to shareholders of record March 31, 2008, payable April 30, 2008; $.16 per share to shareholders of record July 1, 2008, payable July 31, 2008; $.16 per share to shareholders of record October 1, 2008, payable October 31, 2008; $.16 per share to shareholders of record December 31, 2008, payable January 30, 2009.

The Board of Directors of Bank of South Carolina Corporation declared a quarterly dividend of $.14 per share to shareholders of record March 30, 2007, payable April 30, 2007; $.16 per share to shareholders of record July 2, 2007, payable July 31, 2007; $.16 per share to shareholders of record October 1, 2007, payable October 31, 2007; $.16 per share to shareholders of record December 31, 2007, payable January 31, 2008.

The Board of Directors of Bank of South Carolina Corporation declared a quarterly dividend of $.15 per share to shareholders of record March 31, 2006, payable April 28, 2006; 25% stock dividend to shareholders of record April 28, 2006, payable May 15, 2006; $.14 per share to shareholders of record June 30, 2006, payable July 31, 2006; $.14 per share to shareholders of record October 2, 2006, payable October 31, 2006; $.14 per share and a special $.10 per share to shareholders of record December 29, 2006, payable January 31, 2007.

As of January 1, 2008, there were approximately 1,200 shareholders of record with shares held by individuals and in nominee names, and on February 27, 2009, the market price for the common stock of the Company was $12.50.

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 which the Bank can pay to the Company. Dividends paid by the Bank to the Company totaled $2,240,000 for the year ended December 31, 2008. The continuation by the Corporation of payment of a $.16 per share quarterly dividend will be evaluated by the Board of Directors of the Company and a dividend will be paid as justified by the earnings of the Bank, net of reserves.

The Company was authorized by its Board of Directors at its December 1995 board meeting to repurchase up to 116,462 shares of its common stock on the open market from time to time, and, at its October, 1999 Board meeting, to repurchase up to 37,812 shares of its common stock on the open market from time to time, and, at its September, 2001 Board meeting, to repurchase up to 45,375 shares of its common stock on the open market from time to time. As of this date, 199,501 shares have been repurchased by the Company with 148 shares remaining that are authorized to be repurchased. At the Annual Meeting April 2007, the shareholders’ voted to increase the number of authorized shares from 6,000,000 to 12,000,000. As of February 27, 2009, there are 4,176,100 shares of common stock issued and 3,976,599 shares of common stock outstanding.

THE BANK OF SOUTH CAROLINA EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

During 1989, the Board of Directors of the Bank adopted an Employee Stock Ownership Plan and Trust Agreement to provide retirement benefits to eligible employees of the Bank for long and faithful service. The Board of Directors of the Bank approved the cash contribution of $288,000 to The Bank of South Carolina Employee Stock Ownership Plan for the fiscal year ended December 31, 2008. The contribution was made during 2008. An amendment and restatement was made to the Employee Stock ownership plan effective January 1, 2007, approved by the Board of Directors January 18, 2007. An employee of the Bank is eligible to become a participant in the ESOP upon reaching 21 years of age and credited with one year of service (1,000 hours of service). The employee may enter the plan on the January 1^st that occurs nearest the date on which the employee first satisfies the age and service requirements described above. No contributions by employees are permitted. The amount and time of contributions are at the sole discretion of the Board of Directors of the Bank. The contribution for all participants is based solely on each participant’s respective regular or base salary and wages paid by the Bank including commissions, bonuses and overtime, if any.

A participant becomes vested in the ESOP based upon the employees 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 Bank is the Plan Administrator. Thomas C. Stevenson, III, Sheryl G. Sharry and Hugh C. Lane, Jr., currently serve as the Plan Administrative Committee and as Trustees for the Plan. The Plan currently owns 226,533 shares of common stock of Bank of South Carolina Corporation.

		2008				2007				2006				2005				2004
For December 31:
Net Income		$	2,939,297			$	3,831,244			$	3,928,263			$	3,185,006			$	1,845,623
Selected Year End Balances:
Total Assets			243,665,930				225,157,090				243,472,740				222,517,526				201,235,286
Total Loans (1)			183,538,172				158,329,035				162,557,288				159,338,650				129,107,437
Investment Securities Available for Sale			37,896,250				35,840,019				40,897,855				39,833,240				45,638,694
Federal Funds Sold and Resale Agreements			13,352,303				18,357,674				26,857,657				10,600,904				15,476,959
Interest Bearing Deposits in Other Banks			8,212				8,109				7,990				7,872				7,783
Earning Assets			234,794,937				212,534,837				230,320,790				209,780,666				190,230,873
Deposits			214,786,515				197,346,458				215,316,901				197,847,314				179,070,078
Shareholders’ Equity			26,808,064				25,692,570				23,640,431				21,505,794				19,990,716
Weighted Average Shares Outstanding-Diluted			3,977,714				3,971,349				3,945,928				3,913,119				3,868,448
For the Year:
Selected Average Balances:
Total Assets			228,987,689				236,019,185				232,257,502				225,939,657				192,034,402
Total Loans (1)			165,905,847				162,006,962				159,659,211				147,844,856				123,923,761
Investment Securities Available for Sale			37,210,126				38,810,306				39,330,090				38,596,553				34,808,745
Federal Funds Sold and Resale Agreements			14,475,859				22,548,768				19,893,084				26,109,498				20,431,597
Interest Bearing Deposits in Other Banks			510,894				8,049				7,931				7,824				7,754
Earning Assets			218,102,726				223,374,085				218,890,316				212,558,731				179,171,857
Deposits			200,955,703				209,104,665				207,459,557				203,645,606				171,036,567
Shareholders’ Equity			26,470,992				24,841,050				22,841,402				20,867,968				19,904,862
Performance Ratios:
Return on Average Equity			11.10	%			15.42	%			17.20	%			15.26	%			9.27	%
Return on Average Assets			1.28	%			1.62	%			1.69	%			1.41	%			.96	%
Average Equity to Average Assets			11.56	%			10.53	%			9.83	%			9.24	%			10.37	%
Net Interest Margin			4.71	%			5.13	%			5.24	%			4.58	%			3.93	%
Net (Recoveries) Charge-offs to Average Loans			.06	%			(0.01	)%			(0.02	)%			0.03	%			0.02	%
Allowance for Loan Losses as a Percentage of Total Loans (excluding mortgage loans held for sale)			.79	%			.85	%			.82	%			.65	%			.82	%
Per Share:
Basic Earnings		$	0.74			$	0.97			$	1.01			$	0.83			$	0.48
Diluted Earnings			0.74				0.96				1.00				0.81				0.48
Year End Book Value			6.74				6.50				6.02				5.56				5.18
Cash Dividends Declared			0.64				0.62				0.67				0.51				0.44
Dividend Payout Ratio			86.44	%			61.89	%			63.76	%			48.39	%			66.89	%
Full Time Employee Equivalents			67				68				67				64				64

All share and per share data have been restated to reflect a 10% stock distribution declared on April 12, 2005 and a 25% stock dividend declared on April 11, 2006.

The following tables, as well as the previously presented consolidated financial highlights, set forth certain selected financial information concerning the Company and its wholly owned subsidiary. The information was derived from audited consolidated financial statements. The information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and the audited consolidated financial statements and notes which are presented elsewhere in this report.

		For Years Ended
		December 31,
		2008				2007				2006				2005				2004
Operating Data:
Interest and fee income		$	12,146,820			$	16,482,178			$	16,169,958			$	12,383,548			$	7,904,128
Interest expense			1,878,778				5,023,086				4,696,492				2,646,198				857,801
Net interest income			10,268,042				11,459,092				11,473,466				9,737,350				7,046,327
Provision (recovery) for loan losses			192,000				40,000				240,000				12,000				(103,000	)
Net interest income after provision (recovery) for loan losses			10,076,042				11,419,092				11,233,466				9,725,350				7,149,327
Other income			1,472,854				1,543,869				1,467,393				1,788,472				1,748,715
Other expense			7,181,641				7,085,401				6,703,716				6,529,267				6,073,609
Income before income taxes			4,367,255				5,877,560				5,997,143				4,984,555				2,824,433
Income tax expense			1,427,958				2,046,316				2,068,880				1,799,549				978,810
Net income		$	2,939,297			$	3,831,244			$	3,928,263			$	3,185,006			$	1,845,623
Basic income per share		$	.74			$	.97			$	1.01			$	0.83			$	0.48
Diluted income per share		$	.74			$	.96			$	1.00			$	0.81			$	0.48
Weighted average common shares-basic			3,966,193				3,943,067				3,900,707				3,859,351				3,857,411
Weighted average common shares — diluted			3,977,714				3,971,349				3,945,928				3,913,119				3,868,448
Dividends per common share		$	0.64			$	0.62			$	0.67			$	0.51			$	0.44

		As of
		December 31,
		2008				2007				2006				2005				2004
Balance Sheet Data:
Investment securities available for sale		$	37,896,250			$	35,840,019			$	40,897,855			$	39,833,240			$	45,638,694
Total loans (1)			183,538,172				158,329,035				162,557,288				159,338,650				129,107,437
Allowance for loan losses			1,429,835				1,355,099				1,294,994				1,017,175				1,043,901
Total assets			243,665,930				225,170,090				243,472,740				222,157,526				201,235,286
Total deposits			214,786,515				197,346,458				215,316,901				197,847,314				179,070,078
Shareholders’ equity			26,808,064				25,692,570				23,640,431				21,505,794				19,990,716

All share and per share data have been restated to reflect a 10% stock distribution declared on April 12, 2005, and a 25% stock dividend declared on April 11, 2006.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis is included to assist the shareholders in understanding the Company’s financial condition, results of operations, and cash flow. This discussion should be read 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.

DISCUSSION OF FORWARD-LOOKING STATEMENTS

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other portions of this annual report contain certain “forward-looking statements” concerning the future operations of the Bank of South Carolina Corporation. Management desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1996 and is including this statement for the express purpose of availing the Company of protections of such safe harbor with respect to all “forward-looking statements” contained in this Form 10-K. We have used “forward-looking statements” to describe future plans and strategies including our expectations of the Company’s future financial results. The following are cautionary statements. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. A variety of factors may affect the operations, performance, business strategy and results of the Company, including, but not limited to 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, change in the mix or type of deposit products and services;
	•		Continued availability of senior management;
	•		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;
	•		Current disarray in the financial service industry.

Such forward looking statements speak only as of the date on which such statements are made and shall be deemed to be updated by any future filings made by the Company with the SEC. The Company will undertake no obligation to update any forward looking statement after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings by the Company with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company, which are not statements of historical fact, constitute forward looking statements.

OVERVIEW

Bank of South Carolina Corporation (the “Company”) is a financial institution holding company headquartered in Charleston, South Carolina, with $243.7 million in assets as of December 31, 2008 and net income of $783,862 and $2,939,297, respectively, for the three and twelve months ended December 31, 2008. The Company offers a broad range of financial services through its wholly-owned subsidiary, The Bank of South Carolina (the “Bank”). The Bank is a state-chartered commercial bank which operates principally in the Charleston, Dorchester and Berkeley counties of South Carolina. The Bank’s original and current business plan is to be a full service financial institution specializing in personal service, responsiveness, attention to detail, and long standing relationships.

The following is a discussion of the Company’s financial condition and the results of operations as of December 31, 2008 as compared to December 31, 2007 and December 31, 2007 as compared to December 31, 2006. The discussion and analysis identifies significant factors that have affected the Company’s financial position and operating results and should be read in conjunction with the financial statements and the related notes included in this report.

The Company derives most of its income from interest on loans and investments (interest bearing assets). The primary source of funding for making these loans and investments is the Company’s deposits (interest bearing liabilities). One of the key measures of the Company’s success is the net interest spread which depends upon the volume and rates associated with interest earning assets and interest bearing liabilities.

There are risks inherent in all loans; therefore, the Company maintains an allowance for loan losses to absorb estimated losses on existing loans that may become uncollectible. For a detailed discussion on the allowance for loan losses see “Provision for Loan Losses”.

The Company’s results of operations depend not only on the level of its net interest income from loans and investments, but also on its non-interest income and its operating expenses. Net interest income depends upon the volumes, rates and mix associated with interest earning assets and interest bearing liabilities which result in the net interest spread. The Company’s net interest margin for the twelve months ended December 31, 2008 was 4.71% compared to 5.13% for the twelve months ended December 31, 2007. Non-interest income includes fees and other expenses charged to customers. A more detailed discussion of interest income, non-interest income and operating expenses follows.

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are set forth in Note One of the consolidated financial statements. Of these policies, the Company considers its policy regarding the allowance for loan losses to be its most subjective accounting policy due to the significant degree of management judgement. The Company has developed what it believes 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 its loan portfolio. The Company’s 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 by management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Company’s allowance for loan losses and related matters, see “Allowance for Loan Losses”.

Net income decreased $891,947 from $3,831,244 for the year ended December 31, 2007, to $2,939,297 for the year ended December 31, 2008, a decrease of 23.28%. Basic and diluted earnings per share decreased from $.97 and $.96, respectively in 2007 to $.74 and $.74, respectively for the year ended December 31, 2008. The decrease in net income is primarily due to a decrease in interest and fees on loans and a decrease in interest on federal funds sold.

Net interest income, the major component of the Company’s net income, decreased 10.39% to $10,268,042 for the year ended December 31, 2008, from $11,459,092 for the year ended December 31, 2007. Total interest and fee income decreased 26.30% or $4,335,358, to $12,146,820 for the year ended December 31, 2008, from $16,482,178 for the year ended December 31, 2007. This decrease is due to a decrease in interest and fees on loans and a decrease in interest on federal funds sold. Recent decreases in the Federal Reserve short-term rates and the resulting decrease in the yields generated on earning assets (from variable rate loan repricing and new loans at lower rates) contributed to this decrease. Total interest and fees on loans decreased $3,350,564 or 24.69% to $10,219,052 for the year ended December 31, 2008, from $13,569,616 for the year ended December 31, 2007. Interest on federal funds sold decreased $800,790 or 71.53% to $318,695 for the year ended December 31, 2008. As of December 31, 2008, the federal funds target rate, the rate at which banks lend balances at the Federal Reserve to other depository institutions (federal funds sold), was ..25%. The federal funds target rate at December 31, 2007 was 4.25%. Net interest income depends upon the volume of and rates associated with interest earning assets and interest bearing liabilities, which result in net interest spread. The average net interest spread increased from 4.12% at December 31, 2007 to 4.30% for the year ended December 31, 2008.

Average interest earning assets decreased $5,271,359, from $223,374,085 for the year ended December 31, 2007 to $218,102,726 for the year ended December 31, 2008. This decrease was primarily due to a decrease in the average balances of federal funds sold of $8,072,909 and investment securities available for sale of $1,600,180. Average loans including mortgage loans held for sale increased $3,898,885, offsetting the decrease in average federal funds sold. The yield on interest earning assets decreased 181 basis points between periods to 5.57% for the year ended December 31, 2008, from 7.38 for the year ended December 31, 2007. This decrease is primarily due to the decrease in the yield on average loans of 222 basis points and the decrease of 291 basis points on federal funds sold to 6.16% and 2.05%, respectively. Average interest bearing liabilities decreased $6,185,251 to $147,787,052 for the year ended December 31, 2008, from $153,972,303 for the year ended December 31, 2007. This decrease is primarily due to a decrease in average transaction accounts and average savings accounts. Average interest-bearing transaction accounts decreased $2,866,890 and average savings accounts decreased $2,130,883 for the year ended December 31, 2008. The yield on average transaction accounts and average savings accounts at December 31, 2008 was ..57% and .61%, respectively, compared to 2.82% and 2.59%, respectively, for the year ended December 31, 2007. The yield on average interest bearing liabilities of 1.27% at December 31, 2008 is a decrease of 199 basis points from 3.26% at December 31, 2007.

Total interest expense decreased $3,144,308 or 62.60% to $1,878,778 for the year ended December 31, 2008 from $5,023,086 for the year ended December 31, 2007. The decrease in interest expense is primarily due to the decrease in the average cost of deposits. As noted above average interest bearing liabilities decreased $6,185,251 for the year ended December 31, 2008. Interest expense on deposit accounts decreased $3,113,269 or 62.48% to $1,869,655 for the year ended December 31, 2008, from $4,982,924 for the year ended December 31, 2007.

Total provision for loan losses for the year ended December 31, 2008 was $192,000 compared to $40,000 for the year ended December 31, 2007. Management believes the allowance for loan losses at December 31, 2008, is adequate to cover estimated losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which 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 management’s 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 the operating results of the Company.

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 the Company to adjust its Allowance based on information available to them at the time of their examination. For further discussion, see “Non Accrual and Past Due Loans” and “Allowance for Loan Losses”.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that 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 third quarter of the year ended December 31, 2007, Management determined that $20,796 of the allowance for loan loss represented the reserve for unfunded lending commitments and as such this amount was moved from the allowance for loan loss to the allowance for unfunded loans and commitments. In addition $1,507 was added to the provision of unfunded loans and commitments, for the year ending December 31, 2007, based on the methodology referred to above. During the year ended December 31, 2008, the provision for unfunded commitments was decreased by $1,478 bringing the balance to $20,825 at December 31, 2008.

Total non interest income decreased $71,015 or 4.60% to $1,472,854 for the year ended December 31, 2008 from $1,543,869 for the year ended December 31, 2007. This decrease was primarily due to a decrease of $82,628 or 14.89% in mortgage banking income. The decrease in mortgage banking income is the result of the slowdown in the real estate market locally and nationally. Mortgage loan origination fees and discount fees earned decreased from $534,395 for the year ended December 31, 2007 to $311,130 for the year ended December 31, 2008, a decrease of 41.78%.

During the year ended December 31, 2007, a security was sold at a gain of $69,792, whereas during the year ended December 31, 2008 a municipal bond was sold at a loss of $238, resulting in a decrease of $70,030 or 100.34% in other income.

Service charges, fees and commissions increased $95,145 or 10.85% from $877,155 for the year ended December 31, 2007 to $972,300. This increase resulted primarily from an increase in service charges on business accounts of $65,821 and an increase of $25,133 in overdraft fees. The increase in service charges on business accounts is due to a decrease in the earnings credit and the decrease in average balances maintained.

Banking overhead increased $96,240 or 1.36% to $7,181,641 for the year ended December 31, 2008 from $7,085,401 for the year ended December 31, 2007. Other operating expenses increased $103,679 or 6.65% to $1,663,891 for the year ended December 31, 2008 from $1,560,212 for the year ended December 31, 2007. This increase is primarily due to the increase in professional fees and insurance paid to the FDIC which increased $58,727 and $63,304, respectively, for the year ended December 31, 2008. Professional audit and legal fees increased $36,603 due to compliance with Sarbanes Oxley. The increase in insurance paid to the FDIC is due to the FDIC Insurance Reform Legislation. This Legislation allows the FDIC to price deposit insurance according to risk for all insured institutions regardless of the level of the reserve ratio. In 2007 the Company had a credit with the FDIC that was used toward payment of this assessment. These increases were offset by a decrease in salaries and employee benefits of $13,441 due to non replacement of employees who terminated with the Bank during 2008.

Income tax expense decreased $618,358 or 30.22% to $1,427,958 for the year ended December 31, 2008 from $2,046,316 for the year ended December 31, 2007. The company’s effective tax rate was approximately 32.70% for the year ended December 31, 2008 compared to 34.82% for the year ended December 31, 2007.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2007 TO DECEMBER 31, 2006

Net income decreased $97,019 from $3,928,263 for the year ended December 31, 2006, to $3,831,244 for the year ended December 31, 2007, a decrease of 2.47%. Basic and diluted earnings per share decreased from $1.01 and $1.00, respectively, for 2006 to $.97 and $.96, respectively for the year ended December 31, 2007. The decrease in net income is primarily due to an increase in other operating expenses. Sundry losses increased $15,586. During 2007, the Company suffered a loss due to a robbery at its Summerville Branch. Additional operating expenses that increased were check and ACH clearing fees by $10,838, data processing fees by $9,682, contributions by $16,234 and professional audit and legal fees increased $10,982 and $19,041, respectively.

Net interest and fee income decreased .13% to $11,459,092 in 2007 from $11,473,466 in 2006. Net interest income depends upon the volume of and rates associated with interest earning assets and interest bearing liabilities, which result in the net interest spread. The average net interest spread decreased from 4.26% for the year ended December 31, 2006, to 4.12% for the year ended December 31, 2007. Average interest bearing assets increased $4,483,769 to $223,374,085 for the year ended December 31, 2007, from $218,890,316 in 2006. This increase was primarily due to an increase in average loans, including mortgage loans held for sale, and an increase in average federal funds sold. Average loans including mortgage loans held for sale increased $2,347,751 to $162,006,962 for the year ended December 31, 2007, from $159,659,211 in 2006. Average federal funds sold increased $2,655,684 to $22,548,768 for the year ended December 31, 2007, compared to $19,893,084 for the year ended December 31, 2006. The yield on average loans of 8.38% for the year ended December 31, 2007, remained the same as the yield for the year ended December 31, 2006. Average interest bearing liabilities increased $3,934,744 to $153,972,303 for the year ended December 31, 2007 compared to $150,037,559 in 2006. This increase is primarily due to an increase in average transaction accounts and time deposits offset by a decrease in average savings accounts. Average interest-bearing transaction accounts and average time deposits increased $1,243,331 and $4,950,835, respectively. Average savings accounts decreased $2,384,977 for the year ended December 31, 2007. The yield on average interest bearing liabilities increased from 3.13% for the year ended December 31, 2006, to 3.26% for the year ended December 31, 2007. The net interest margin decreased from 5.24% for the year ended December 31, 2006, to 5.13% for the year ended December 31, 2007.

Total interest and fee income earned on interest bearing assets increased $312,220 to $16,482,178 for the year ended December 31, 2007, from $16,169,958 for the year ended December 31, 2006. As noted above average loans increased $2,347,751. As a result interest and fees earned on loans increased $199,672 or 1.49% to $13,569,616 for the year ended December 31, 2007 form $13,369,944 in 2006. The increase on average federal funds sold led to an increase of $132,313 in interest earned to $1,119,485 for the year ended December 31, 2007, from $987,172 for the year ended December 31, 2006. Interest and dividends on investment securities decreased $19,765 to $1,793,077 for the year ended December 31, 2007, from $1,812,842 in 2006. The decrease in interest and dividends on investment securities is primarily due to a decline in average investments which resulted from the sale of investment securities, decreasing the average investment securities by $519,784. A gain of $69,792 was recognized on the sale of the investment securities compared to a loss on sale of securities of $22,950 in 2006.

Total interest expense increased $326,594 or 6.95% to $5,023,086 from $4,696,492. As noted above average time deposits increased $4,950,835 to $40,580,931 for the year ended December 31, 2007, from $35,630,096 for the year ended December 31, 2006. This resulted in an increase of $378,480 in the cost paid on time deposits. The cost on average interest bearing liabilities increased from 3.13% for the year ended December 31, 2006, to 3.26% for the year ended December 31, 2007.

During the third quarter of 2007, the methodology used by management in the analysis of the allowance for loan losses (the “Allowance”) was modified to conform to regulatory guidance. The new methodology is discussed more fully in “Allowance for Loan Losses”. Total provision for loan losses for the year ended December 31, 2007 was $40,000 compared to $240,000 for the year ended December 31, 2006. Management believes the allowance for loan losses at December 31, 2007, is adequate to cover estimated losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which 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 management’s 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 the operating results of the Company.

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 the Company to adjust its Allowance based on information available to them at the time of their examination. For further discussion, see “Non Accrual and Past Due Loans” and “Allowance for Loan Losses”.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that 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 third quarter of the year ended December 31, 2007, Management determined that $20,796 of the allowance for loan loss represented the reserve for unfunded lending commitments. This amount was moved from the allowance for loan loss to the allowance for unfunded loans and commitments. In addition $1,507 was added to the provision of unfunded loans and commitments, for the year ending December 31, 2007, based on the methodology referred to above.

Total non interest income increased $76,476 or 5.21% to $1,543,869 for the year ended December 31, 2007, from $1,467,393 at December 31, 2006. This increase was primarily due to a gain of $69,792 on the sale of securities. During 2006 there was a loss of $22,950 on the sale of securities which makes the total increase due to the gain in 2007, $92,742 or 404.10%. This increase was offset by a decrease in mortgage banking income of $35,378 or 5.99%. This decrease is primarily due to the slow down in the real estate market.

Banking overhead increased $381,685 or 5.69% to $7,085,401 for the year ended December 31, 2007 from $6,703,716 for the year ended December 31, 2006. This increase was primarily due to an increase in salaries and employee benefits and net occupancy expense as well as other operating expenses. Salaries and employee benefits increased $173,829 or 4.34% to $4,181,712 for the year ended December 31, 2007 from $4,007,883 for the year ended December 31, 2006. Salaries increased $182,071 or 5.60% due to annual merit increases and the hiring of a loan officer. Insurance increased $25,572 and payroll taxes increased $17,384. These increases were offset by a $60,000 decrease in the ESOP contribution. Total occupancy expense increased $114,074 or 9.29% to $1,341,970 for the year ended December 31, 2007 from $1,227,896 for the year ended December 31, 2006. Insurance on the properties increased $52,198 or 109.79% to $99,740 for the year ended December 31, 2007 from $47,542 for the year ended December 31, 2006. In addition, rent on the buildings increased $15,188 or 3.95%, property taxes increased $13,049 or 15.18% and depreciation on furniture fixtures and equipment increased $19,281 or 11.82%. Other operating expenses increased $92,275 or 6.29% to $1,560,212 for the year ended December 31, 2007 from $1,467,937 in 2006. This increase included $19,041 in legal fees and $10,982 in audit fees, which included an increase due to compliance with Sarbanes Oxley. Data processing fees increased $9,682, check and ACH clearing fees increased $10,838, contributions increased $16,234 and sundry losses increased $15,586.

Income tax expense decreased $22,564 or 1.09% to $2,046,316 for the year ended December 31, 2007 from $2,068,880 for the year ended December 31, 2006. The Company’s effective tax rate was approximately 34.82% for the year ended December 31, 2007 compared to 34.50% for the year ended December 31, 2006.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

ASSET AND LIABILITY MANAGEMENT

The assets and liabilities of the Company are managed to provide a consistent level of liquidity to accommodate normal fluctuations in loans and deposits. At year end 2008, total assets were $243,665,930 an increase of 8.22% from year end 2007, total deposits were $214,786,515, an increase of 8.84% from the end of the previous year, while short-term borrowings, consisting of Demand Notes Issued to U.S. Treasury, increased $72,127 or 7.77% to $1,000,000 for the year ended December 31, 2008 from $927,873 for the year ended December 31, 2007.

At December 31, 2008, approximately 96.36% of the Company’s assets were earning assets composed of U.S. Treasury, Government Sponsored Enterprises and Municipal Securities in the amount of $37,896,250, Federal Funds Sold and interest bearing deposits in other banks in the amount of $13,360,515 and total loans including mortgage loans held for sale in the amount of $183,538,172.

The yield on a majority of the Company’s earning assets adjusts simultaneously with changes in the general level of interest rates. Some of the Company’s liabilities are issued with fixed terms and can be repriced only at maturity. During 2004 deposits grew at a faster rate than loans and the net interest margin decreased 43 basis points from January to December. In 2005 the Bank’s loans grew 23.42% compared to an increase of 10.49% in deposits. As a result the net interest margin increased 65 basis points to 4.58% at December 31, 2005 compared to 3.93% for the year ended December 31, 2004. In 2006, net interest margin increased 66 basis points to 5.24% for the year ended December 31, 2006, from 4.58% at December 31, 2005, as a result of an increase in loan growth. The Bank’s net interest margin decreased 11 basis points from 5.24% at December 31, 2006 to 5.13% at December 31, 2007 due to a decrease in interest rates and a decrease in loan growth. During the year ended December 31, 2008 the net interest margin decreased from 5.13% for the year ended December 31, 2007 to 4.71%.

MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and rates. For the Company, this risk is constituted primarily of interest rate risk in its lending and investing activities as they relate to their funding by deposit and borrowing activities.

The Bank’s policy is to minimize interest rate risk between interest bearing assets and liabilities at various maturities and to attempt to maintain an asset positive position over a 6 month period. In adhering to this policy, unless there is a sudden extraordinary drop in the interest rate, it is anticipated that the Bank’s net interest margins will not be materially affected by changes in interest rates. The average net interest rate spread for 2008 increased to 4.30% from 4.12% for 2007 and the average net interest margin for 2008 decreased to 4.71% from 5.13% for 2007. Management will continue to monitor its asset sensitive position.

Since the rates on most of the Bank’s interest bearing liabilities can vary on a daily basis, management continues to maintain a loan portfolio priced predominately on a variable rate basis; however, in an effort to protect future earnings in a declining rate environment, the Bank offers certain fixed rates and terms primarily associated with real estate transactions. The Bank seeks stable, long-term deposit relationships to fund its loan portfolio.

At December 31, 2008, the average maturity of the investment portfolio was 2 years 7.4 months with an average yield of 4.38% compared to 2 year 9.2 months with an average yield of 4.51% at December 31, 2007.

The Company does not take foreign exchange or commodity risks. In addition the Company does not own mortgage-backed securities, nor does it have any exposure to the sub-prime market or any other distressed debt instruments.

The following table summarizes the Bank’s interest sensitivity position as of December 31, 2008:

										3 Months				6 Months				1 Year
						Less				to Less				to Less				to Less												Estimated
						Than 3				Than 6				Than 1				Than 5				5 years								Fair
		1 Day				Months				Months				Year				Years				or More				Total				Value
Earning Assets
(in 000’s)
Loans (1)		$	124,143			$	12,601			$	7,639			$	5,373			$	33,549			$	298			$	183,603			$	189,497
Investment securities			—				830				—				9,864				18,711				7,068				36,473				37,896
Short term investments			8				—				—				—				—				—				8				8
Federal funds sold			13,352				—				—				—				—				—				13,352				13,352
Total		$	137,503			$	13,431			$	7,639			$	15,237			$	52,260			$	7,366			$	233,436			$	240,753
Interest Bearing Liabilities (in 000’s)
CD’s and other time deposits 100,000 and over		$	—			$	15,570			$	7,928			$	3,308			$	551			$	—			$	27,357			$	27,452
CD’s and other time deposits under 100,000			112				6,949				3,501				3,575				1,561				—				15,698				15,829
Money market and interest bearing demand accounts			110,782				—				—				—				—				—				110,782				110,782
Savings			8,290				—				—				—				—				—				8,290				8,290
Short term borrowings			1,000				—				—				—				—				—				1,000				1,000
		$	120,184			$	22,519			$	11,429			$	6,883			$	2,112			$	—			$	163,127			$	163,343
Net		$	17,319			$	(9,088	)		$	(3,790	)		$	8,354			$	50,148			$	7,366			$	70,309			$	77,410
Cumulative						$	8,231			$	4,441			$	12,795			$	62,943			$	70,309

Historically, the Company has maintained its 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, 2008:

		Payment Due by Period
						Less than				1-5				After 5
		Total				1 Year				Years				Years
Contractual Obligations (in 000’s)
Time deposits		$	43,055			$	40,943			$	2,112			$	—
Short-term borrowings			1,000				1,000				—				—
Operating leases			3,645				462				1,738				1,445
Total contractual cash obligations		$	47,700			$	42,405			$	3,850			$	1,445

The Bank manages its assets and liabilities to ensure that there is sufficient liquidity to enable management to fund deposit withdrawals, loan demand, capital expenditures, reserve requirements, operating expenses, dividends and to manage daily operations on an ongoing basis. Funds are primarily provided by the Bank through customer’s deposits, principal and interest payments on loans, mortgage loan sales, the sale or maturity of securities, temporary investments and earnings.

Proper liquidity management is crucial to ensure that the Company is able to take advantage of new business opportunities as well as meet the demands of its customers. Investment securities are an important tool in the Company’s liquidity management. Securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates, liquidity needs and/or significant prepayment risk. A significant portion of the Company’s securities are pledged as collateral for TT&L borrowings and public funds deposits. All of the securities presently owned by the Bank are classified as Available for Sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity for the Company. At December 31, 2008, the Bank had unused short-term lines of credit totaling approximately $18,000,000 (which are withdrawable at the lender’s option). Management believes that these sources, including the Federal Reserve Discount Window, are adequate to meet its liquidity needs. Liquidity at the Company level is provided through cash dividends from the Bank and the capacity of the Company to raise additional borrowed funds as needed.

Composition of Average Assets

		2008				2007				2006				2005				2004
Loans (1)		$	165,905,847			$	162,006,962			$	159,659,211			$	147,844,856			$	123,923,761
Investment securities available for sale			37,210,126				38,810,306				39,330,090				38,596,553				34,808,745
Federal funds sold and other investments			14,986,753				22,556,817				19,901,015				26,117,322				20,439,351
Non-earning assets			10,884,963				12,645,100				13,367,186				13,380,926				12,862,545
Total average assets		$	228,987,689			$	236,019,185			$	232,257,502			$	225,939,657			$	192,034,402

Average earning assets decreased by $5,271,359 from 2007 to 2008. Average earning assets decreased primarily as a result of a decrease in average federal funds sold. Average federal funds sold decreased $8,072,909 or 35.81% from $22,548,768 at December 31, 2007 to $14,475,859 at December 31, 2008.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

The following table shows changes in interest income and expense based upon changes in volume and changes in rates:

		2008 vs. 2007												2007 vs. 2006												2006 vs. 2005
										Net Dollar												Net Dollar												Net Dollar
		Volume				Rate				Change (1)				Volume				Rate				Change (1)				Volume				Rate				Change (1)
Loans (2)		$	319,364			$	(3,669,928	)		$	(3,350,564	)		$	196,646			$	3,026			$	199,672			$	870,323			$	2,198,109			$	3,068,432
Investment securities available for sale			(72,076	)			(111,928	)			(184,004	)			(24,006	)			4,241				(19,765	)			24,094				543,643				567,737
Federal funds sold and and other investments			(289,842	)			(510,948	)			(800,790	)			131,835				478				132,313				(232,314	)			382,555				150,241
Interest Income		$	(42,554	)		$	(4,292,804	)		$	(4,335,358	)		$	304,475			$	7,745			$	312,220			$	662,103			$	3,124,307			$	3,786,410
Interest-bearing transaction accounts		$	(78,764	)		$	(2,224,793	)		$	(2,303,557	)		$	35,140			$	(9,146	)		$	25,994			$	94,708			$	1,133,240			$	1,227,948
Savings			(46,710	)			(184,617	)			(231,327	)			(62,831	)			(21,002	)			(83,833	)			14,469				162,438				176,907
Time deposits			(41,587	)			(536,798	)			(578,385	)			213,789				164,691				378,480				2,463				627,862				630,325
Federal funds purchased			64				0				64				0				0				0				(825	)			0				(825	)
Demand notes issued to U.S. Treasury			(9,429	)			(21,674	)			(31,103	)			6,029				(76	)			5,953				4,052				11,887				15,939
Interest expense		$	(176,426	)		$	(2,967,882	)		$	(3,144,308	)		$	192,127			$	134,467			$	326,594			$	114,867			$	1,935,427			$	2,050,294
Increase (decrease) in net interest income										$	(1,191,050	)										$	(14,374	)										$	1,736,116

		2008												2007												2006
						Interest				Average								Interest				Average								Interest				Average
		Average				Paid/				Yield/				Average				Paid/				Yield/				Average				Paid/				Yield/
		Balance				Earned				Rate (1)				Balance				Earned				Rate (1)				Balance				Earned				Rate (1)
Interest-Earning Assets
Loans (2)		$	165,905,847			$	10,219,052				6.16	%		$	162,006,962			$	13,569,616				8.38	%		$	159,659,211			$	13,369,944				8.38	%
Investment securities available for sale			37,210,126				1,609,073				4.32	%			38,810,306				1,793,077				4.62	%			39,330,090				1,812,842				4.61	%
Federal funds sold			14,475,859				296,145				2.05	%			22,548,768				1,119,366				4.96	%			19,893,084				987,054				4.96	%
Other investments			510,894				22,550				4.41	%			8,049				119				1.49	%			7,931				118				1.49	%
Total earning assets		$	218,102,726			$	12,146,820				5.57	%		$	223,374,085			$	16,482,178				7.38	%		$	218,890,316			$	16,169,958				7.39	%
Interest-Bearing Liabilities:
Interest bearing transaction accounts		$	98,697,073			$	564,989				.57	%		$	101,563,963			$	2,868,546				2.82	%		$	100,320,632			$	2,842,552				2.83	%
Savings			8,860,083				53,701				.61	%			10,990,966				285,028				2.59	%			13,375,943				368,861				2.76	%
Time deposits			39,638,075				1,250,965				3.16	%			40,580,931				1,829,350				4.51	%			35,630,096				1,450,870				4.07	%
Federal funds purchased			2,732				64				2.34	%			—				—				—				—				—				—
Demand notes issued to U.S. Treasury			589,089				9,059				1.54	%			836,443				40,162				4.80	%			710,888				34,209				4.81	%
Total interest bearing liabilities		$	147,787,052			$	1,878,778				1.27	%		$	153,972,303			$	5,023,086				3.26	%		$	150,037,559			$	4,696,492				3.13	%
Net interest spread											4.30	%											4.12	%											4.26	%
Net interest margin											4.71	%											5.13	%											5.24	%
Net interest income						$	10,268,042											$	11,459,092											$	11,473,466

The following is a schedule of the Bank’s investment portfolio as of December 31, 2008, as compared to December 31, 2007, and December 31, 2007 to December 31, 2006:

		DECEMBER 31, 2008
						GROSS				GROSS				ESTIMATED
		AMORTIZED				UNREALIZED				UNREALIZED				FAIR
		COST				GAINS				LOSSES				VALUE
U.S. Treasury Notes		$	2,964,269			$	262,137			$	—			$	3,226,406
Government-Sponsored Enterprises			21,018,811				998,158				—				22,016,968
Municipal Securities			12,489,652				183,123				19,899				12,652,876
Total		$	36,472,731			$	1,443,418			$	19,899			$	37,896,250

		DECEMBER 31, 2007
						GROSS				GROSS				ESTIMATED
		AMORTIZED				UNREALIZED				UNREALIZED				FAIR
		COST				GAINS				LOSSES				VALUE
U.S. Treasury Bills		$	2,948,002			$	148,091			$	—			$	3,096,093
Government-Sponsored Enterprises			21,873,129				466,859				—				22,339,988
Municipal Securities			10,336,322				89,464				21,848				10,403,938
Total		$	35,157,453			$	704,414			$	21,848			$	35,840,019

		DECEMBER 31, 2006
						GROSS				GROSS				ESTIMATED
		AMORTIZED				UNREALIZED				UNREALIZED				FAIR
		COST				GAINS				LOSSES				VALUE
U.S. Treasury Bills		$	5,968,555			$	8,045			$	—			$	5,976,600
Other U.S. Treasury Obligations			5,869,713				61,287				—				5,931,000
Government-Sponsored Enterprises			23,798,027				64,356				69,083				23,793,300
Municipal Securities			5,228,611				29,344				61,000				5,196,955
Total		$	40,864,906			$	163,032			$	130,083			$	40,897,855

The Bank’s investment portfolio had a weighted average yield of 4.38%, 4.51% and 4.69% at December 31, 2008, 2007 and 2006, respectively.

LOAN PORTFOLIO COMPOSITION

The following is a schedule of the Bank’s loan portfolio, excluding mortgage loans held for sale, as of December 31, 2008, as compared to December 31, 2007, 2006, 2005 and 2004:

		Book Value (in 000’s)
Type		2008				2007				2006				2005				2004
Commercial and industrial loans		$	46,840			$	51,443			$	53,609			$	52,373			$	44,829
Real estate loans			127,405				98,738				99,932				98,619				76,094
Loans to individuals for household, family and other personal expenditures			5,667				5,507				4,872				4,941				6,256
All other loans (including overdrafts)			226				709				259				170				225
Total Loans (excluding unearned income)		$	180,138			$	156,397			$	158,672			$	156,103			$	127,404

As a Bank with a mission to serve its community, there is a geographic concentration of loans in Charleston, Dorchester and Berkeley Counties.

The Bank had no foreign loans or loans to fund leveraged buyouts (LBO’s) during 2008, 2007, 2006, 2005 or 2004.

SELECTED LOAN MATURITY (IN 000’S)

		One year or				Over one but less				Over five
Type		less				than five years				years				Total
Commercial and industrial loans		$	26,283			$	16,620			$	3,937			$	46,840
Real estate loans			41,380				43,550				42,475				127,405
Loans to individuals for household, family and other personal expenditures			2,900				2,412				355				5,667
All other loans (including overdrafts)			160				66				—				226
Total Loans (excluding unearned income)		$	70,723			$	62,648			$	46,767			$	180,138

IMPAIRED AND RESTRUCTURED LOANS

The Bank had impaired loans totaling $1,802,291 as of December 31, 2008 compared to $882,269, $10,864, $80,852 and $65,751 as of December 31, 2007, 2006, 2005 and 2004, respectively. The impaired loans include non-accrual loans with balances at December 31, 2008, 2007, 2006, 2005, and 2004 of $75,486, $761,748, $10,864, $80,852 and $65,751, respectively. The Bank had no restructured loans at December 31, 2008, one restructured loan at December 31, 2007, in the amount of $10,567, no restructured loans at December 31, 2006, one restructured loan included in non accrual loans at December 31, 2005 in the amount of $3,394 and no restructured loans at December 31, 2004. Management does not know of any loans, which will not meet their contractual obligations that are not otherwise discussed herein.

NON-ACCRUAL AND PAST DUE LOANS

The Bank had $75,486 in non-accrual loans as of December 31, 2008, compared to $761,748, $10,864, $80,852 and $65,751 as of December 31, 2007, 2006, 2005 and 2004, respectively. There were no loans at December 31, 2008 that was over 90 days past due still accruing interest compared to one loan at December 31, 2007 over 90 days past due still accruing interest in the amount of $1,288.

The accrual of interest is generally discontinued on loans, which become 90 days past due as to principal or interest. The accrual of interest on some loans, however, may continue even though they are 90 days past due if the loans are well secured, in the process of collection, and management deems it appropriate. If non-accrual loans decrease their past due status to 30 days for a period of six months, they are reviewed individually by management to determine if they should be returned to accrual status.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio. The adequacy of the allowance for loan losses (the “Allowance”) is reviewed monthly by the Loan Committee and on a quarterly basis by the Board of Directors. 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. The methodology employed for this analysis was modified in the third quarter of 2007 and again in the fourth quarter of 2008 to conform to regulatory guidance. The new 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 SFAS 114 “Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statements No. 5 and 15.”
	2)		General reserve analysis applying historical loss rates based on SFAS No 5 “Accounting for Contingencies.”
	3)		Qualitative or environmental factors.

Loans are reviewed for impairment which is measured in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statements No. 5 and 15.” Impaired loans can either be secured or unsecured, not including large groups of smaller balance loans that are collectively evaluated. Impairment is measured by the difference between the loan amount and the present value of the future cash flow discounted at the loan’s effective interest rate, or, alternatively 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 individually reviewed loans, but not impaired loans, and excluded individually reviewed impaired loans, based on SFAS No. 5 “Accounting for Contingencies.” Historical losses are segregated into risk-similar groups and a loss ratio is determined for each group over a five year period. The five year average loss ratio by type is then used to calculate the estimated loss based on the current balance of each group.

Qualitative and environmental factors include external risk factors that Management believes are representative of the overall lending environment of the Bank. Management believes that the following factors create a more comprehensive system of controls in which the Bank can monitor the quality of the loan portfolio.

	1)		Portfolio 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)		Industry conditions
	6)		Effects of changes in credit concentrations
	7)		Loan and credit administration 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. Management is satisfied with the stability of the past due and non-performing loans and believes there has been no decline in the quality of the loan portfolio due to any trend in delinquent or adversely classified loans. Although the aggregate total of classified loans has increased, Management is confident in the adequacy of the sources of repayment. Sizable unsecured principal balances on a non-amortizing basis are monitored.

Management revised the credit rating matrix in order to rate all extensions of credit providing a more specified picture of the risk each loan poses to the quality of the loan portfolio. There are eight possible ratings based on ten different qualifying characteristics. The ten characteristics are: cash flow, collateral quality, guarantor strength, financial condition, management quality, operating performance, the relevancy of the financial statements, historical loan performance, debt service coverage and the borrower’s leverage. A weighted average method is used to determine the loan grade with cash flow and financial statements being weighted double. The matrix is designed to meet management’s standards and expectations of loan quality. In addition to the rating matrix, the Company rates its credit exposure on the basis of each loan and the quality of each borrower.

Occasional extensions of credit occur beyond the policy thresholds of the Company’s normal collateral advance margins for real estate lending. The aggregate of these loans represents 9.90% of the Company’s total loans. These loans are monitored and the balances reported to the Board every quarter. An excessive level of this practice could result in additional examiner 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. Management often requests additional collateral to bring the loan to value ratio within the policy guidelines and also require a strong secondary source of repayment in addition to the primary source of repayment.

National and local economic trends and conditions are constantly changing and results in both positive and negative impact on borrowers. Most macroeconomic conditions are not controllable by the Company and are incorporated into the qualitative risk factors. Natural disasters, wars and the recent fallout of the subprime lending market as well as problems in the traditional mortgage market are a few of the trends and conditions that are currently affecting our national and local economy.

The quality of the Bank’s loan portfolio is contingent upon our risk selection and underwriting practices. Every credit with over $100,000 in exposure is summarized by the Bank’s Credit Department and reviewed by the Loan Committee on a monthly basis. The Board of Directors review credits over $500,000 monthly with an annual credit analysis conducted on credits in excess of $350,000 upon the receipt of updated financial information. Prior to any extension of credit, every significant commercial loan goes through sound credit underwriting. The Credit Department conducts detailed cash flow analysis on each proposal using the most current financial information. Relevant trends and ratios are evaluated.

The Bank has over 250 years of lending management experience among nine members of lending staff. In addition to the lending staff the Bank has an Advisory Board for each branch comprised of business and community leaders from the specific branch’s market area. Management meets with these boards quarterly to discuss the trends and conditions in each respective market.

There has been an influx of new banks within the Company’s geographic area. This increase has decreased the local industry’s overall margins as a result of pricing competition. Management believes that the borrowing base of the Bank is well established and therefore unsound price competition is not necessary.

The risk associated with the effects of changes in credit concentration includes loan concentration, geographic concentration and regulatory concentration.

As of December 31, 2008, there were only four Standard Industrial Code groups that comprised more than three percent of the Bank’s total outstanding loans. The four groups are non-residential building operations, offices and clinics of doctors, real-estate agents and managers and legal services.

The Company is located along the coast and on an earthquake fault, increasing the chances that a natural disaster may impact the Bank and its borrowers. The Company has a Disaster Recovery Plan in place; however, the amount of time it would take for our customers to return to normal operations is unknown.

Loan and credit administration risk includes collateral documentation, insurance risk and maintaining financial information risk.

The majority of the Bank’s loan portfolio is collateralized with a variety of its borrower’s assets. The execution and monitoring of the documentation to properly secure the loan lies with the Bank’s lenders and Loan Department. The Bank requires insurance coverage naming the Bank 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 and the borrower’s financial condition may change; therefore, keeping financial information up to date is important to the Bank. The policy of the Bank is that all new loans, regardless of the customer’s history with the Bank, should have updated financial information, as long as exposure is greater than $10,000.

Based on the evaluation described above, the Company recorded a provision for loan loss of $192,000 for the year ended December 31, 2008 compared to $40,000 for the year ended December 31, 2007. At December 31, 2008 the five year average loss ratios were: .051% Commercial, .0352% Consumer, .000% 1-4 Residential, .000% Real Estate Construction and .032% Real Estate Mortgage. At December 31, 2007 the five year average loss ratios were: .024% Commercial, .015% Consumer, .022% 1-4 Residential, .000% Real Estate Construction and .004% Real Estate Mortgage.

During the year ended December 31, 2008 charge-offs of $114,313 and recoveries of $17,049 were recorded to the allowance for loan losses, resulting in an allowance for loan losses of $1,429,835 or 0.79% of total loans at December 31, 2008, compared to charge-offs of $29,702 and recoveries of $50,603 resulting in an allowance for loan losses of $1,335,099 or .85% of total loans at December 31, 2007.

Net charge-offs were $97,264 as compared to net recoveries were $20,901 for the year ended December 31, 2007. Uncertainty in the economic outlook still exists, making charge-off levels in future periods less predictable; however, loss exposure in the portfolio is identified, reserved and closely monitored to ensure that changes are promptly addressed in the analysis of reserve adequacy.

The Company had $16,387 in unallocated reserves at December 31, 2008 related to other inherent risk in the portfolio compared to unallocated reserves of $90,046 at December 31, 2007. Management believes the allowance for loan losses at December 31, 2008, is adequate to cover estimated losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which 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 management’s 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 the operating results of the Company. 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 the Company to adjust its 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 that 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 third quarter of the year ended December 31, 2007, Management determined that $20,796 of the allowance for loan loss represented the reserves for unfunded lending commitments. This amount was moved from the allowance for loan loss to the allowance for unfunded loans and commitments. In addition $1,507 was added to the provision of unfunded loans and commitments, for the year ending December 31, 2007, based on the methodology referred to above with $1,478 recovered in 2008, leaving a balance of $20,825 at December 31, 2008.

		SUMMARY OF LOAN LOSS EXPERIENCE
		Year Ended
		December 31,
		2008				2007				2006				2005				2004
Allowance for loan losses, beginning of year		$	1,335,099			$	1,294,994			$	1,017,175			$	1,043,901			$	1,169,627
Charge-offs:
Commercial			34,878				14,535				9,164				—				89,308
Consumer			3,470				4,336				15,692				45,982				6,457
Real estate			75,965				—				—				—				—
Other			—				10,831				—				410				2,890
Total charge-offs			114,313				29,702				24,856				46,392				98,655
Recoveries:
Commercial			10,173				164				50,227				5,461				63,443
Consumer			570				49,756				4,233				2,145				12,486
Real estate			6,306				—				—				—				—
Other			—				683				8,215				60				—
Total recoveries			17,049				50,603				62,675				7,666				75,929
Net charge-offs (recoveries)			97,264				(20,901	)			(37,819	)			38,726				22,726
Additions (recovery) to reserve through provision expense			192,000				40,000				240,000				12,000				(103,000	)
Adjustment for unfunded lending commitments			—				(20,796	)			—				—				—
Allowance for loan losses, end of year		$	1,429,835			$	1,335,099			$	1,294,994			$	1,017,175			$	1,043,901
Ratio of net charge-offs (recoveries)during the period to average loans outstanding during the period			.059	%			(.013	)%			(.024	)%			.026	%			(.083	)%
Reserve for unfunded lending commitments		$	22,303			$	—			$	—			$	—			$	—
Adjustment for unfunded lending commitments			—				20,796				—				—				—
(Recovery) provisions for unfunded lending commitments			(1,478	)			1,507				—				—				—
Reserve for unfunded lending commitments, end of year		$	20,825			$	22,303			$	—			$	—			$	—