U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-KSB

For the fiscal year ended December 31, 2004

For the transition period from __________ to __________

Commission file number: 0-27702

BANK OF SOUTH CAROLINA CORPORATION

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

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

Common Stock
(Title of Class)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained to the best of the registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB.
Not applicable

Issuer’s revenues for its most recent fiscal year: $10,602,615

Aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price of such stock on February 25, 2005 was: $24,164,322

As of February 25, 2005, the Registrant has outstanding 2,805,610 shares of common stock.

Transitional Small Business Disclosure Format (check one): Yes o      No þ

BANK OF SOUTH CAROLINA CORPORATION
AND SUBSIDIARY

Table of Contents

PART I

Item 1. Description of Business

The Bank of South Carolina (the “Bank”) is a FDIC insured, state-chartered financial institution, which was organized on October 22, 1986, and opened for business on February 26, 1987. The Bank is a wholly-owned subsidiary of Bank of South Carolina Corporation (the “Company”). The reorganization of The Bank of South Carolina into a subsidiary of a one-bank holding company became effective on April 17, 1995. Each issued and outstanding share of the Bank was exchanged for two shares of Bank of South Carolina Corporation stock. Since the primary asset of the Company is its wholly-owned subsidiary, the majority of the following discussion relates to the Bank.

The Bank serves Berkeley, Charleston and Dorchester counties (the “Tri-County Area”) as an independent, community-oriented commercial bank concentrating on individuals and small and medium-sized businesses desiring a high level of personalized services.

The Bank offers a full range of deposit services. Checking account services include regular non-interest bearing checking accounts as well as interest bearing negotiable order of withdrawal (“NOW”) accounts. Savings and certificate of deposit accounts include accounts ranging from a daily maturity (regular savings and also money market accounts) to longer term certificates as authorized by regulation. The Bank offers tiered interest to its customers on both money market and NOW accounts. In addition, Individual Retirement Accounts are available. 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 lending for land acquisition, land development or open-end construction loans. The types of personal loans that are available include secured and unsecured loans for such purposes as financing automobiles, home improvements, education, lot acquisition, construction, home equity loans and personal investments. In the fourth quarter of 1993, a residential mortgage lending department was opened with mortgage loans being provided through correspondent relationships. The Bank originates, processes and closes the loan and sells (each individually) to a correspondent.

The Bank offers credit cards (through correspondent banking services) including MasterCard (TM) and Visa (TM) along with a personal checking account related line of credit. The line of credit is available for both protection against unexpected overdrafts and also for the convenience of having a pre-arranged loan that can be activated simply by a check drawn on a personal checking account. Other services offered, but not limited to, include safe deposit boxes, letters of credit, travelers checks, direct deposit of payroll, social security and dividend payments and automatic payment of insurance premiums and mortgage loans. The Bank does not have a proprietary automated teller machine but participates in a national ATM network through the Visa Debit Card Program. This service is called “Check Card” by the Bank and also offers purchases by the cardholder where Visa debit cards are accepted worldwide using a direct charge to their checking account. The Bank operates a courier service and ACH organization service as part of its deposit services for commercial customers. During 2001, the Bank introduced Internet Banking. This service is called “ESafe” by the Bank and 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. All banking services are available through four banking house locations, 256 Meeting Street, Charleston, SC, 100 N. Main Street, Summerville, SC, 1337 Chuck Dawley Boulevard, Mt. Pleasant, SC, and 2027 Sam Rittenberg Boulevard, Charleston, SC.

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The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended and as such, is under the supervisory and regulatory authority of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company 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). As a bank holding company registered under the laws of the South Carolina Bank Holding Company Act, the Company is also subject to regulation by the South Carolina State Board of Financial Institutions. Thus, the Company is required to file annual reports and other information with the Federal Reserve and the South Carolina State Board of Financial Institutions regarding its financial condition, results of operations, management and intercompany relationships and transactions between the Company and its subsidiaries.

The Company’s subsidiary bank, The Bank of South Carolina, is a state chartered financial institution, and as such, is subject to various statutory requirements, supervision and regulation, of which regular bank examinations are a part, promulgated and enforced primarily by the Federal Deposit Insurance Corporation and the South Carolina State Board of Financial Institutions.

The Company’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”.

The Company was authorized by its Board of Directors at its December 1995, board meeting to repurchase up to 84,700 shares of its common stock on the open market from time to time, and, at its October, 1999 Board meeting, to repurchase up to 27,500 shares of its common stock on the open market from time to time, and, at its October, 2001 Board meeting, to repurchase up to 33,000 shares of its common stock on the open market from time to time. As of this date, 145,092 shares have been repurchased by the Company.

Compliance with federal, state and local provisions regulating the discharge of materials into the environment had no material effect on the capital expenditures, earnings and competitive position of the Bank in the fiscal year ended December 31, 2004.

At year end 2004, the Bank employed 64 people, 5 of whom are part time employees, none of whom are subject to a collective bargaining agreement. Management believes its relationship with its employees is excellent.

The business of the Bank is not considered to be seasonal nor is the Bank’s business dependent on any one industry.

In the Bank’s primary service area, there are 12 commercial banks, of which four are considered to have their headquarters in the Bank’s service area. Of the 12 commercial banks, three have a large share of the market. These three are Wachovia Bank, N.A., Bank of America, N.A. and First Federal Savings and Loan Association. In addition, there are two savings banks and various credit unions with offices in the Tri-County Area. The Bank encounters strong competition from these financial institutions as well as consumer and commercial finance companies, insurance companies, brokerage firms and other financial institutions, some of which are not subject to the same degree of regulation and restrictions as the Bank. Many of these competitors have substantially greater resources and lending limits than the Bank has and offer certain services, such as trust and international banking services, which the Bank is not providing. The Bank does, however, provide a means for clearing international checks and drafts through a third party or correspondent bank.

Since January 1, 1986, South Carolina law has permitted regional interstate banking. Pursuant to such law, several of the banks in the Tri-County Area have been acquired by banks with headquarters outside the State of South Carolina. In addition, South Carolina laws permit statewide branching by banks and savings and loan associations. Accordingly, the Bank could face increased competition from other banks and savings and loan associations not currently located in the Tri-County Area.

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Item 2. Description of Property

The Bank leases its headquarters and office facilities at 256 Meeting Street in downtown Charleston. Base rent is payable in equal monthly installments of $27,899 in advance to be increased to $29,014 in March 2005. The base rent will increase at the end of each rental year by the lesser of (i) 8% of the base rent or (ii) the percentage increase in the Consumer Price Index, Urban Index, For All Wage Earners, issued by the U.S. Department of Labor.

On June 30, 1995, the Bank was successful in renegotiating its 256 Meeting Street facilities lease for one hundred forty (140) months with two additional ten-year terms. Base rent was $26,432 monthly payable in advance for the first twenty (20) months and the remaining one hundred twenty (120) months of the term (which began March 1, 1997) and 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. In addition, the Bank leases adjacent parking facilities at $2,928 per month.

In October of 1993, the Bank opened an office at 100 N. Main Street, Summerville, SC and entered into a lease agreement on August 9, 1993, with an original termination date of June 30, 1999, and two 5-year options to renew. In June of 2004, the bank was successful in renegotiating its 100 N. Main Street facilities lease beginning July 1, 2004 to an annual rent of $30,725 with an increase of $3,582 each year thereafter until July 1, 2009. The lease was a fixed rate of $2,262 through July 1, 2009, however, the new lease was negotiated so that the bank could remain in its current location with the 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 will be $2,250 per month paid in advance. Rent for years 11 through 15 and each six (6) option periods shall be adjusted to reflect an annualized return determined by multiplying the average yield on five (5) year U.S. Treasury Notes plus 150 basis points times an assumed raw land value of $325,000. The monthly rent, however, shall never be less than the original rent of $2,250 per month.

In the first quarter of 1997, the Bank purchased one acre of land for approximately $838,000 in order to construct a full service banking office and operations center in the West Ashley community of Charleston. In March, 1998, the two-story, 12,000 square foot facility was completed at a cost of approximately $1,334,000 representing construction costs and furnishings. At this same time, the Bank spent approximately $839,000 to upgrade its computer system and to install a new check processing and check imaging system.

The Summerville facility is leased to the Bank by Summerville Solutions, LLC. Summerville Solutions, LLC was formed by Mary B. Graham, sister of Nathaniel I. Ball, III, Executive Vice President and Secretary of the Bank and the Company. No other Bank facilities are affiliated with any of the officers or directors of the Bank or the Company or any stockholders having more than five percent (5%) beneficial ownership of the Common Stock of the Company.

All leased properties are in good order and condition.

Item 3. Legal Proceedings

In the opinion of management, there are no legal proceedings pending other than routine litigation incidental to its business. To the knowledge of management, no proceedings have been instituted or are contemplated by or against any governmental authority against or by the 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, 2004.

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PART II

Item 5. Market for the Company’s Common Equity and Related Stockholder Matters

There were issued and outstanding 2,805,610 shares of the 6,000,000 authorized shares of common stock of the Company at the close of the Company’s fiscal year ended December 31, 2004. These outstanding shares were held by approximately 1,200 shareholders in nominee names and of record on December 31, 2004. The common stock of the Company is traded in the “over-the-counter” (OTC) market by five market making investment banking firms. These firms are The Robinson-Humphrey Company, Inc., Sterne, Agee & Leach, Inc., Scott and Stringfellow, Inc., Nite Securities LP and Speer, Leeds & Kellogg. 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 2004, 2003 and 2002 has been as follows:

The Board of Directors of Bank of South Carolina Corporation declared quarterly dividends in 2004 of $.11 per share to shareholders of record March 31, 2004, payable April 30, 2004; $.11 per share to shareholders of record June 30, 2004, payable July 30, 2004; $.11 per share to shareholders of record September 30, 2004, payable October 29, 2004; $.11 per share to shareholders of record December 31, 2004, payable January 31, 2005.

The Board of Directors of Bank of South Carolina Corporation declared quarterly dividends in 2003 of $.11 per share to shareholders of record March 31, 2003, payable April 30, 2003; 10% stock dividend to shareholders of record as of June 30, 2003, effective July 15, 2003; $.11 per share to shareholders of record June 30, 2003, payable July 31, 2003; $.11 per share to shareholders of record September 30, 2003, payable October 31, 2003; $.11 per share to shareholders of record December 31, 2003, payable January 30, 2004.

The Board of Directors of Bank of South Carolina Corporation declared quarterly dividends in 2002 of $.11 per share to shareholders of record April 1, 2002, payable April 30, 2002; $.11 per share to shareholders of record July 1, 2002, payable July 31, 2002; $.11 per share to shareholders of record September 30, 2002, payable October 31, 2002; $.11 per share to shareholders of record December 31, 2002, payable January 31, 2003 and a special dividend of $.15 per share to shareholders of record December 31, 2002, payable January 31, 2003.

As of January 1, 2005, there were approximately 1,200 shareholders of record with shares held by individuals and in nominee names, and on February 25, 2005, the market price for the common stock of the Company was $14.01. It is the intent of the Company to continue paying dividends in the future.

Cash dividends, when declared, are paid by the Bank to the Company for distribution to shareholders of the Company. Certain regulatory requirements restrict the amount of dividends which the Bank can pay to the Company.

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Consolidated Financial Highlights

All share and per share data have been restated to reflect a 10% stock dividend declared on June 19, 2003.

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

All share and per share data have been restated to reflect a 10% stock dividend declared on June 19, 2003.

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Item 6. Management’s Discussion and Analysis or Plan of Operations

Management’s discussion and analysis is included to provide the shareholders with an expanded narrative of the Company’s results of operations, changes in financial condition, liquidity and capital adequacy. This narrative should be reviewed in conjunction with the audited consolidated financial statements and notes included in this report. 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-KSB. We have used “forward-looking statements” to describe future plans and strategies including our expectations of the Company’s future financial results. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company’s market area and the country as a whole, the ability of the Company to control costs and expenses, the ability of the Company to successfully address competitive products and pricing, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the “forward-looking statements” and undue reliance should not be placed on such statements.

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 critical accounting policy, because it requires many of management’s most subjective and complex judgements. 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”.

OVERVIEW

Earnings for the year were $1,845,623 or basic and diluted earnings per share of $.66 down 3% from 2003’s earnings of $1,904,713 or basic and diluted earnings per share of $.68. Earnings for the fourth quarter of 2004 were $524,929 or basic and diluted earnings per share of $.19, up 23% from fourth quarter 2003 earnings of $425,191 or basic and diluted earnings per share of $.15. Our return on average equity and return on average assets for the year were 9.27% and .96%, respectively, compared to the 2003 return on average equity and return on average assets of 9.70% and 1.09%, respectively.

During 2004, the Company declared 4 regular quarterly cash dividends of $.11 per share, thereby sharing its profits with its owners as it has in prior years.

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COMPARISON OF THE YEAR ENDED DECEMBER 31, 2004 TO DECEMBER 31, 2003

Net income decreased $59,090 from $1,904,713 for 2003, to $1,845,623 for 2004 or 3% decreasing basic and diluted earnings per share to $.66 for 2004, compared to basic and diluted earnings per share of $.68 for 2003. This decrease is primarily due to a decrease in our interest earned on investment securities available for sale, mortgage banking income and service charge fees on business account, offset by an increase in other interest income and the recovery of loan loss reserve. Interest on investment securities available for sale decreased $131,850 from $1,008,160 for 2003 to $876,310 for 2004. This decrease is due to the reinvestment of maturing securities at lower yields. Interest on federal funds sold increased $140,550 from $106,583 to $247,133 or 1.32%. Mortgage banking income decreased $278,555 from $907,608 for 2003 to $629,053 for 2004. The decrease in mortgage banking income is primarily due to the decrease in the volume of mortgage loan originations due to an increase in interest rates and an end to the refinance boom. The recovery of loan losses of ($103,000) was attributable to improvements in classified and delinquent loans. Service charge fees on business accounts decreased $31,950 to $267,423 for 2004 from $299,373 for 2003. The decrease in service charge fees on the business accounts was caused by an increase in the earnings credits and an increase in average balance maintained, which offset the service charges.

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. Net interest income decreased $44,187 from $7,090,514 for 2003 to $7,046,327 for 2004. This decrease is primarily due to a decrease in interest earned on investment securities and an increase on interest paid on interest bearing liabilities, which resulted in a decline in our net interest margin and a change in asset mix from a decrease in loans and mortgage loans held for sale and an increase in lower earning federal funds sold and investment securities. Net interest margin decreased from 4.36% for the year ended December 31, 2003 to 3.93% for the year ended December 31, 2004.

Total interest and fee income increased .62% or $48,967 to $7,904,128 at year ended December 31, 2004 from $7,855,161 at year ended December 31, 2003. This increase in interest and fee income is due to an increase in average earning assets. Average interest earning assets increased from $162,542,476 for the year ended December 31, 2003 to $179,171,857 for the year ended December 31, 2004 primarily due to an increase in average investments available for sale of $13,606,056 between periods. The yield on interest earning assets decreased 42 basis points between years to 4.41% for the year ended December 31, 2004 compared to 4.83% for the year ended December 31, 2003. The decrease in yield on average interest earning assets is due to a decrease in the yield on average investments available for sale of 223 basis points to 2.52% for the year ended December 31, 2004 compared to 4.75% for the year ended December 31, 2003.

Total interest expense increased 12.18% or $93,154 to $857,801 at December 31, 2004 from $764,647 at year end December 31, 2003. The increase in interest expense is primarily due to an increase in the interest bearing liabilities. Interest paid on deposits for the year ended December 31, 2004, was $851,053 compared to $757,755 for the year ended December 31, 2003, an increase of $93,298 or 12.31%. Total interest bearing deposits averaged approximately $117,249,815 for the year ended December 31, 2004 compared to $105,977,713 for the year ended December 31, 2003. The average cost of interest bearing liabilities was .73% and .72% for the years ended December 31, 2004 and 2003, respectively.

The total recovery of loan losses for 2004 was ($103,000) compared to a provision for loan losses of $9,230 for 2003. The decrease in the provision is attributable to improvements in classified and delinquent loans. The allowance for loan losses as a percentage of total loans decreased from .93% in 2003 to .81% in 2004. Management believes the allowance for loan losses is adequate to absorb probable losses in the loan portfolio based on an evaluation at December 31, 2004; however, assessing adequacy of the allowance is a process that requires considerable judgement. For further discussion, see “Non-accrual and Past Due Loans” and “Allowance for Loan Losses.”

Total other income decreased from $2,096,959 for 2003, to $1,748,715 for 2004. This decrease is attributable to a decrease in service charges, fees and commissions, a decrease in mortgage banking income, as well as a decrease in other non-interest income. Service charges, fees and commissions decreased $33,681 or 3.00% to $1,090,395 for the year ended December 31, 2004, from $1,124,076 for the year ended December 31, 2003 due to a decrease in service charges. The

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decrease in service charges on the business accounts was caused by an increase in the earnings credits and an increase in average balance maintained, which offset the service charges. Mortgage banking income decreased $278,555 or 30.69% to $629,053 for the year ended December 31, 2004, from $907,608 for the year ended December 31, 2003, due to a decrease in the volume of mortgage loan originations. Gain on the sale of other real estate owned was $36,312 in 2003 and $0 in 2004.

Salaries and employee benefits decreased $114,759 or 3.19% to $3,483,438 for the year ended December 31, 2004 from $3,598,197 for the year ended December 31, 2003. This decrease is primarily due to a decrease in salaries and employee benefits as a result of the resignation of a loan officer whose position the Company decided not to fill at this time and another officer currently on an extended medical leave of absence.

Net occupancy expense decreased $30,975 from $1,233,608 for 2003 to $1,202,633 for 2004. This decrease is primarily due to a decrease in depreciation expense on furniture and fixtures and equipment and on automobiles. Depreciation expense decreased due to several assets, which are still in use, becoming fully depreciated during 2004.

Total other expense decreased $187,573 from $6,261,182 for 2003 to $6,073,609 for 2004. Other operating expenses decreased $41,839 or 2.93% to $1,387,538 for the year ended December 31, 2004 from $1,429,377 for the year ended December 31, 2003. This decrease is primarily due to a decrease in expenses associated with postage, packages and non-postal shipments and mileage.

Income tax expense decreased from $1,012,348 for 2003 to $978,810 for 2004 due to lower income levels. The Company’s effective tax rate was approximately 35% for the year ended December 31, 2004 and 35% for the year ended December 31, 2003.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 TO DECEMBER 31, 2002

Net income increased $46,394 from $1,858,319 for 2002, to $1,904,713 for 2003 or 2.50% increasing basic and diluted earnings per share to $.68 for 2003, compared to basic and diluted earnings per share of $.66 for 2002. This increase is primarily due to an increase in our service charges, mortgage banking income and a gain on the sale of other real estate owned.

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. Net interest income decreased $110,224 from $7,200,738 for 2002 to $7,090,514 for 2003. This decrease is primarily due to a decline in interest rates, which resulted in a decline in our net interest margin. The net interest margin decreased to 4.36% in 2003 from 4.76% in 2002.

Total interest and fee income decreased 8.29% or $710,381 in 2003. This decrease in interest and fee income is due to a decrease in average yield of interest earning assets. Average interest earning assets increased from $151,391,038 for the year ended December 31, 2002 to $162,542,476 for the year ended December 31, 2003 primarily due to an increase in average loans of $12,402,085 between periods. The yield on interest earning assets decreased 83 basis points between years to 4.83% for the year ended December 31, 2003 compared to 5.66% for the year ended December 31, 2002. The decrease in yield on average interest earning assets is due to a decrease in the yield on average loans of 72 basis points to 5.18% for the year ended December 31, 2003 compared to 5.90% for the year ended December 31, 2002, as well as a decrease in the yield on average securities available for sale of 151 basis points, a decrease in the yield on average federal funds sold of 58 basis points and a decrease in the yield on other average short term investments of 74 basis points. The decrease in yield on average loans is due to the fact that the majority of the Bank’s loans reprice with the Bank’s prime rate. The Bank’s prime rate was 4.125% and 4.25% at December 31, 2003 and 2002, respectively.

Total interest expense decreased 43.97% or $600,157 in 2003. The decrease in interest expense is primarily due to the decrease

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in the average cost of funds. Interest paid on deposits for the year ended December 31, 2003, was $757,755 compared to $1,325,507 for the year ended December 31, 2002, a decrease of $567,752 or 42.83%. Total interest bearing deposits averaged approximately $105,977,713 for the year ended December 31, 2003 compared to $98,344,569 for the year ended December 31, 2002. The average cost of deposits decreased 63 basis points from 1.35% for the year ended December 31, 2002 to .72% for the year ended December 31, 2003. Interest on short-term borrowings decreased $32,405 or 82.46% to $6,892 for the year ended December 31, 2003, from $39,297 for the year ended December 31, 2002. Short-term borrowings consist of federal funds purchased, demand notes to the U. S. Treasury and securities sold under agreement to repurchase. Short-term borrowings averaged approximately $798,383 for the year ended December 31, 2003 compared to approximately $3,423,874 for the year ended December 31, 2002. The average cost of interest bearing liabilities was .72% and 1.34% for the years ended December 31, 2003 and 2002, respectively.

The provision for loan losses decreased from $195,000 for 2002 to $9,230 for 2003. The decrease in the provision is attributable to improvements in classified and delinquent loans. The allowance for loan losses as a percentage of total loans decreased from 1.06% in 2002 to .93% in 2003. Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio based on an evaluation at December 31, 2003. For further discussion, see “Non-accrual and Past Due Loans” and “Allowance for Loan Losses.”

Total other income increased from $1,888,010 for 2002, to $2,096,959 for 2003. This increase is attributable to an
increase in service charges, fees and commissions, an increase in mortgage banking income, as well as a gain on the sale of other real estate owned. Service charges, fees and commissions increased $65,468 or 6.18% to $1,124,076 for the year ended December 31, 2003, from $1,058,608 for the year ended December 31, 2002 due to an increase in fees charged on accounts and an increase in average deposits. The mortgage banking income increased $116,151 or 14.68% to $907,608 for the year ended December 31, 2003, from $791,457 for the year ended December 31, 2002, due to an increase in the volume of mortgage loan originations. Other non-interest income increased $62,335 to $65,275 for the year ended December 31, 2003, from $2,940 for the year ended December 31, 2002, due to a $36,311 gain on the sale of other real estate.

Total other expense increased $172,321 from $6,088,861 for 2002 to $6,261,182 for 2003. Other operating expenses increased $47,419 or 3.43% to $1,429,377 for the year ended December 31, 2003 from $1,381,958 for the year ended December 31, 2002. This increase is primarily due to an increase in expenses associated with business development and professional audit fees.

Salaries and employee benefits increased $156,959 or 4.56% to $3,598,197 for the year ended December 31, 2003 from $3,441,238 for the year ended December 31, 2002. This increase is primarily due to an increase in salaries and employee benefits as a result of annual merit increases.

Income tax expense increased from $946,568 for 2002 to $1,012,348 for 2003. The Company’s effective tax rate was approximately 35% for the year ended December 31, 2003 and 34% for the year ended December 31, 2002.

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 2004, total assets were $201,235,286 an increase of 7.42% from the end of the previous year, and total deposits were $179,070,078, an increase of 7.78% from the end of the previous year, while short-term borrowings, consisting of Demand Notes Issued to U.S. Treasury, increased $507,975 or 53.25% to $1,461,929 for the year ended December 31, 2004 from $953,954 for the year ended December 31, 2003.

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At December 31, 2004, approximately 95% of the Company’s assets were earning assets composed of U.S. Treasury, Federal Agency and municipal securities in the amount of $45,638,694, Federal Funds Sold and interest bearing deposits in other banks in the amount of $15,484,742, and loans in the amount of $129,107,437.

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 2002 and 2003 loans continued to grow at a faster rate than deposits, however, our net interest margin declined by 29 basis points from January to December 2002 and 40 basis points from January to December 2003 with the decline in interest rates. During 2004 deposits grew at a faster rate than loans and our net interest margin decreased 43 basis points from January to December.

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 net interest rate spread for 2004 decreased to 3.68% from 4.12% for 2003 and the net interest margin for 2004 decreased to 3.93% from 4.36% for 2003. 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. The Bank seeks stable, long-term deposit relationships to fund its loan portfolio.

At December 31, 2004, the average maturity of the investment portfolio was 4 months with an average yield of 2.53% compared to 7 months with an average yield of 3.11% at December 31, 2003.

The Bank does not own, nor has it ever purchased, derivative financial instruments. The Company does not take foreign exchange or commodity risks.

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The following table summarizes the Bank’s interest sensitivity position as of December 31, 2004:

LIQUIDITY

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, 2004:

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 and 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

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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 may be sold in response to changes in interest rates, liquidity needs and/or significant prepayment risk. 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, 2004, the Bank had unused short-term lines of credit totaling approximately $18,500,000 (which are withdrawable at the lender’s option). Management believes that these sources are adequate to meet its liquidity needs. Liquidity at the parent company level is provided through cash dividends from the Bank and the capacity of the parent company to raise additional borrowed funds as needed.

Composition of Average Assets

Average earning assets increased by $16,629,381 from 2003 to 2004 while average non-earning assets increased by $1,250,114. Average earning assets increased primarily as a result of investment securities available for sale and federal funds sold and other investments.

Average investment securities available for sale for 2004 were up $13,606,056 or 64.17% from 2003. The majority of the increase is primarily due to an increase in deposits and a decrease in loans during 2004.

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:

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YIELDS ON AVERAGE EARNING ASSETS AND RATES ON AVERAGE INTEREST-BEARING LIABILITIES

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INVESTMENT PORTFOLIO

The following is a schedule of the Bank’s investment portfolio as of December 31, 2004, as compared to December 31, 2003, 2002:

The Bank’s investment portfolio had a weighted average yield of 2.53%, 3.11% and 6.26% at December 31, 2004, 2003 and 2002, respectively.

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LOAN PORTFOLIO COMPOSITION

     The following is a schedule of the Bank’s loan portfolio as of December 31, 2004, as compared to December 31, 2003, 2002, 2001 and 2000:

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

The Bank had no foreign loans or loans to fund leveraged buyouts (LBO’s) during 2004, 2003, 2002, 2001 or 2000.

IMPAIRED AND RESTRUCTURED LOANS

The Bank had impaired loans totaling $65,751 as of December 31, 2004 compared to $128,504, $198,309, $169,807 and $294,030 as of December 31, 2003, 2002, 2001 and 2000, respectively. The impaired loans include non-accrual loans with balances at December 31, 2004, 2003, 2002, 2001 and 2000 of $65,751, $102,588, $198,309, $161,500 and $283,323, respectively. The Bank had no restructured loans at December 31, 2004, one restructured loan in the amount of $25,916 at December 31, 2003, no restructured loans at December 31, 2002, one restructured loan in the amount of $8,307 at December 31, 2001 and one restructured loan in the amount of $10,707 at December 31, 2000. Management does not know of any loans, which will not meet their contractual obligations that are not otherwise discussed herein.

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NON-ACCRUAL AND PAST DUE LOANS

The Bank had $65,751 in non-accrual loans as of December 31, 2004, compared to $102,588, $198,309, $161,500 and $283,323 as of December 31, 2003, 2002, 2001 and 2000, respectively. There were no loans over 90 days past due still accruing interest at December 31, 2004 compared to $163,202 as of December 31, 2003.

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 provision for loan losses is based on management’s and the Loan Committee’s review and evaluation of the loan portfolio and general economic conditions on a monthly basis and by the Board of Directors on a quarterly basis. Management’s review and evaluation of the allowance for loan losses is based on an analysis of historical trends, significant problem loans, current market value of real estate or collateral and certain economic and other factors affecting loans and real estate or collateral securing these loans. Loans are charged off when, in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance and subsequent recoveries are added to the allowance.

The allowance for loan losses is subject to periodic evaluation by various regulatory authorities and may be subject to adjustment based upon information that is available at the time of their examination.

All loan relationships are reviewed and classified in accordance with the Company’s loan policy. The Company’s classifications are generally based on regulatory definitions of classified assets for other loans especially mentioned, substandard loans, doubtful loans and loss loans. The Company annually reviews its overall Loan Policy.

The allowance for loan losses consists of an estimated reserve for classified loans and an estimated reserve for unclassified loans. Classified loans are assigned a loss estimate in the allowance for loan loss model based on their risk grade. The loss estimate is based on regulatory guidelines which the Company believes is an appropriate measure of the estimated loss on its classified loans. The loss estimate for classified loans is 5% for other loans especially mentioned and 15% for substandard loans. The loss estimate for doubtful and loss loans is 50% and 100%, respectively. Unclassified loans are assigned a loss ratio in the allowance for loan loss model based on the Company’s average historical loss experience for the previous five years, adjusted quarterly. The Company believes the five year historical loss ratio is a reasonable estimate of the existing losses in the unclassified loan portfolio. In addition, the reserve includes unclassified past due loans greater than 30 days at 2.5%. During the quarter ending September 30, 2004, the Company reviewed its allowance for loan loss model and made changes to better reflect the risk in the portfolio. The changes included adding a loss estimate of 1.5% for the loans on the watch list and a loss estimate of 1.0% for certain real estate loans. Before September 30, 2004, both the watch list loans and real estate loans were included in the unclassified category. In addition, the loss ratio on unclassified loans was adjusted to a five year historical loss ratio from a three year historical ratio to better reflect the Company’s credit cycle and to conform with regulatory practices. The Company has unallocated reserves totaling $64,460 and $55,697 at December 31, 2004 and 2003 respectively, related to other inherent losses in the portfolio.

Based on the evaluation described above, the Company recorded a recovery of ($103,000) of loan losses for the year ended December 31, 2004 compared to a provision for loan losses of $9,230 for the year ended December 31, 2003. The decrease in the provision for loan losses is due to a decrease in the historical loss ratio used to estimate losses in the unclassified portfolio and a decrease in classified assets between periods. The historical loss ratio used at December 31, 2003 was .280% and was based on a three-year historical average. The historical loss ratio used at December 31, 2004 was .236% and was based on a five-year historical average. The Company believes that the five year historical average is more representative of the loss cycle of their portfolio based on their review of the timing of large losses in their portfolio and the fact that such losses would not be captured in the average loss ratio using a three-year period. Classified assets were $2.2 million at December 31, 2004 compared to $3.2 million at December 31, 2003. The decrease in the average historical loss ratio and the decrease in classified assets caused a decrease in the required allowance for loan loss per the allowance for loan loss model of approximately $295,000. This was somewhat offset by the additional reserves estimated for watch list loans and certain real estate loans

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which increased the required allowance for loan loss per the allowance for loan loss model by approximately $161,000.

Net charge-offs were $22,726 in 2004 or .02% of average loans as compared to $201,041 in 2003 or .15% of average loans. The decrease in charge-offs is mainly due to two large relationships totaling $189,189, which were charged off during 2003. 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 allowance for loan losses decreased $125,726 or 10.75% to $1,043,901 or .81% of total loans at December 31, 2004 from
$1,169,627 or .93% of total loans at December 31, 2003. Management believes the allowance for loan losses at December 31, 2004 is adequate to cover probable 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.

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DEPOSITS

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, 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. Such transactions are used by the Company for general corporate purposes or for customer needs. 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’s requests for funding.

The Company’s off-balance sheet arrangements, consist principally of commitments to extend credit described below. At December 31, 2004 and 2003, the Company 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 management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to $39,274,635 and $27,367,788 at December 31, 2004 and 2003 respectively.

Standby letters of credit represent an obligation of the Company to a third party contingent upon the failure of the Company’s customer to perform under the terms of an underlying contract with the third party or obligates the Company 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. The Company can seek recovery of the amounts paid from the borrower. The majority of these standby letters of credit are unsecured. Commitments under standby letters of credit are usually for one year or less. At December 31, 2004 and 2003, the Company has 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, 2004 and 2003 was $410,374 and 572,932, respectively.

The Company originates certain fixed rate residential loans and commits these loans for sale. The commitments to originate fixed rate residential loans and the sales commitments are freestanding derivative instruments. The fair value of these commitments was not significant at December 31, 2004 and 2003. The Company had forward sales commitments, totaling $1.7 million at December 31, 2004, to sell loans held for sale of $1.7 million. At December 31, 2003, the Company had forward sales commitments of $1.6 million. The fair value of these commitments was not significant at December 31, 2004 or 2003. The Company has no embedded derivative instruments requiring separate accounting treatment.

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EFFECT OF INFLATION AND CHANGING PRICES

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and results of operations in terms of historical dollars without consideration of changes in the relative purchasing power over time due to inflation.

Unlike most other industries, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does the effect of inflation.

CAPITAL RESOURCES

The capital needs of the Company have been met to date through the $10,600,000 in capital raised in the Bank’s initial
offering, the retention of earnings less dividends paid and the exercising of stock options of $124,000 in 1995, 1996, 1997 and 1998 for a total shareholders’ equity at December 31, 2004, of $19,990,716. The rate of asset growth from the Bank’s inception has not negatively impacted this capital base. Effective December 31, 1990, regulatory authorities adopted risk based capital guidelines for financial institutions. These risk based guidelines are designed to highlight differences in risk profiles among financial institutions and to account for off balance sheet risk. The guidelines established require a risk based capital ratio of 8% for bank holding companies and banks. The risk based capital ratio at December 31, 2004, for the Bank was 13.69% and at December 31, 2003, was 14.65%. The Company’s management does not know of any trends, events or uncertainties that may result in the Company’s capital resources materially increasing or decreasing.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and to average assets. Management believes, as of December 31, 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

At December 31, 2004 and 2003, the Company and the Bank are categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Company and the Bank must maintain minimum total risk based, Tier 1 risk based and Tier 1 leverage ratios of 10%, 6% and 5% and to be categorized as “adequately capitalized,” the Company and the Bank must maintain minimum total risk based, Tier 1 risk based and Tier 1 leverage ratios of 8%, 4% and 4%, respectively. There are no current conditions or events that management believes would change the Company’s or the Bank’s category.

Please see “Notes to Consolidated Financial Statements” for the Company’s and the Bank’s various capital ratios at December 31, 2004.

ACCOUNTING AND REPORTING CHANGES

In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. Fin 46R replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, which was issued in January 2003. The Company was required to apply FIN 46R as of December 31, 2004. The Company had no variable interests in variable interest entities and did not have any impact upon adoption.

In December 2004, the FASB issued Statement No. 123 (revised December 2004), “Share-Based Statement”. Statement 123R sets accounting requirements for “share-based” compensation to employees, including employee-stock-purchase-plans

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(ESPPs). It carries forward prior guidance on accounting for awards to nonemployees. Accounting for employee-stock-ownership-plan transactions (ESOPs) will continue to be accounted for in accordance with SOP 93-6. Awards to most nonemployee directors will be accounted for as employee awards. Statement 123R replaces FASB Statements No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. The Company is not required to apply No. 123R until the beginning of the first annual reporting period after December 15, 2005.

In March 2004, the FASB issued EITF No. 03-1 (EITF 03-1), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, which provided guidance for evaluating whether an investment is other-than-temporarily impaired and its application to investments classified as either available for sale or held to maturity under SFAS No. 115, “Accounting for Certain Investment in Debt and Equity Securities,” and investment accounted for under the cost or equity method of accounting. In September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, which partially delayed EITF 03-01 until the FASB issues further guidance. It is not possible at this time to determine whether or when any changes to existing accounting guidance may occur.

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 $180,000 to The Bank of South Carolina Employee Stock Ownership Plan for the fiscal year ended December 31, 2004. The contribution was made during 2004. An amendment and restatement of the Employee Stock Ownership Plan effective January 1, 2001, was approved by the Board of Directors on February 17, 2002. The Bank is the Plan Administrator. T. Dean Harton, Sheryl G. Sharry and Nathaniel I. Ball, III, currently serve as the Plan Administrative Committee and as Trustees for the Plan. The Plan currently owns 184,653 shares of common stock of Bank of South Carolina Corporation.

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Item 7. Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors
Bank of South Carolina Corporation and subsidiary
Charleston, South Carolina

We have audited the accompanying consolidated balance sheets of Bank of South Carolina Corporation and subsidiary (the “Corporation”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bank of South Carolina Corporation and subsidiary at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

Greenville, South Carolina
March 1, 2005

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BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS