U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2001
------------------
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number: 33-95562
BEACH FIRST NATIONAL BANCSHARES, INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 57-1030117
------------------------ -----------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1550 Oak Street, Myrtle Beach, South Carolina 29577
(Address of principal executive offices)
(843) 626-2265
(Issuer's telephone number)
Not Applicable
------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
On November 5, 2001, 1,318,368 shares of the issuer's common stock, par
value $1.00 per share were issued and outstanding.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Balance Sheets
September 30, December 31,
2001 2000 2000
---- ----- ----
(unaudited) (unaudited) (audited)
ASSETS
Cash and due from banks $ 1,920,025 $ 1,560,665 $ 1,359,158
Federal funds sold and short term investments 9,842,819 9,291,503 6,919,000
Investment securities available for sale 6,530,987 8,440,763 8,186,033
Loans, net 60,317,784 40,473,581 45,052,910
Premises and equipment, net 2,503,571 1,414,720 1,546,447
Other assets 662,693 694,565 706,468
--------------- ---------------- ----------------
Total assets $ 81,777,879 $ 61,875,797 $ 63,770,016
=============== ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits $ 11,356,230 $ 7,502,870 $ 5,525,253
Interest bearing deposits 56,956,418 47,500,753 51,201,258
--------------- --------------- ---------------
Total deposits 68,312,648 55,003,623 56,726,511
Other liabilities 433,490 351,221 314,835
--------------- --------------- ---------------
Total liabilities 68,746,139 55,354,844 57,041,346
--------------- --------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares
authorized; 1,318,368 shares issued and outstanding 1,318,368 735,868 737,368
Paid-in capital 11,814,253 6,476,481 6,489,981
Accumulated retained deficit (187,453) (515,991) (457,176)
Accumulated other comprehensive income (loss) 86,572 (175,405) (41,503)
--------------- ---------------- ----------------
Total shareholders' equity 13,031,740 6,520,953 6,728,670
--------------- --------------- ---------------
Total liabilities and shareholders' equity $ 81,777,879 $ 61,875,797 $ 63,770,016
=============== =============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 3,709,434 $ 2,679,675 $ 1,347,536 $ 972,861
Investment securities 420,438 448,487 167,339 143,796
Federal funds sold and short term investments 135,271 175,042 27,727 141,545
------------ ------------- ------------- -------------
Total interest income 4,265,143 3,303,204 1,542,602 1,258,202
INTEREST EXPENSE
Deposits 2,112,111 1,651,373 695,603 685,615
Other borrowings 13,140 53,406 2,843
------------ ------------- ------------ -------------
Total interest expense 2,125,251 1,704,779 698,446 685,615
Net interest income 2,139,892 1,598,425 844,156 572,587
PROVISION FOR POSSIBLE LOAN
LOSSES 356,000 163,107 171,500 51,375
------------ ------------- ------------ -------------
Net interest income after provision
for possible loan losses 1,783,892 1,435,318 672,656 521,212
------------ ------------- ------------ -------------
NONINTEREST INCOME
Service fees on deposit accounts 215,605 184,775 65,388 66,430
Loss on sale of investment securities (9,746) (6,825) (1,996) (721)
Other income 62,062 30,692 34,927 11,947
------------ ------------- ------------ -------------
Total noninterest income 267,921 208,642 98,319 77,656
------------ ------------- ------------ -------------
NONINTEREST EXPENSES
Salaries and wages 856,760 680,696 316,228 225,458
Employee benefits 82,433 65,559 28,575 24,439
Supplies and printing 56,312 35,886 28,396 13,212
Advertising and public relations 48,508 48,507 14,183 15,345
Professional fees 57,038 99,791 31,071 34,860
Depreciation and amortization 156,043 127,472 71,519 35,178
Occupancy 70,769 37,243 34,931 13,378
Data processing fees 115,271 70,742 42,573 25,057
Other operating expenses 255,672 204,952 109,095 64,455
------------ ------------- ------------ -------------
Total noninterest expenses 1,698,806 1,370,848 676,571 451,382
------------ ------------- ------------ -------------
Income before income taxes 353,007 273,112 94,404 147,486
INCOME TAX EXPENSE 83,285 101,205 (9,974) 54,567
------------ ------------- ------------- -------------
Net income $ 269,722 $ 171,907 $ 104,378 $ 92,919
============ ============= ============ =============
BASIC NET INCOME PER COMMON SHARE $ .20 $ .23 $ .08 $ .13
============ ============= ============ =============
DILUTED NET INCOME PER COMMON SHARE $ .19 $ .21 $ .07 $ .11
============ ============= ============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
Beach First National Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited) Accumulated
Other Total
Common stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Deficit Loss Equity
------ ------ ------- ------- ---- ------
BALANCE, DECEMBER 31, 1999 735,868 $735,868 $ 6,476,481 $ (687,898) $(211,138) $ 6,313,313
Net income -- -- -- 171,907 -- 171,907
Other comprehensive loss, net of income taxes:
Unrealized loss on investment securities -- -- -- -- 31,433 31,433
Less reclassification adjustments for losses
included in net loss 4,300 4,300
------------
Comprehensive Income -- -- -- 207,640
--------- ---------- ------------- ----------- --------- -----------
BALANCE, SEPTEMBER 30, 2000 735,868 $ 735,868 $ 6,476,481 $ (515,991) $(175,405) $ 6,520,953
========= ========== ============= ============ ========= ===========
Accumulated
Other Total
Common stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Deficit Loss Equity
------ ------ ------- ------- ---- ------
BALANCE, DECEMBER 31, 2000 737,368 $ 737,368 $ 6,489,981 $ (457,175) $(41,504) $ 6,728,670
Net income -- -- -- 269,722 -- 269,722
Other comprehensive loss, net of income taxes:
Unrealized loss on investment securities -- -- -- -- 134,508 134,508
Less reclassification adjustments for losses
included in net income -- -- -- -- (6,432) (6,432)
------------
Comprehensive Income 397,798
Issuance of Common Stock
less offering expenses of $258,824 581,000 $ 581,000 $ 5,324,272 5,905,272
--------- --------- ------------ ----------- -------- ------------
6,303,070
BALANCE, SEPTEMBER 30, 2001 1,318,368 $1,318,368 $ 11,814,253 $ (187,453) $ 86,572 $ 13,031,740
========= ========== ============= ============ ======== ============
The accompanying notes are an integral part of these consolidated
financial statements.
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2001 2000
---- ----
OPERATING ACTIVITIES
Net income $ 269,722 $ 171,907
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes 97,552
Provisions for loan losses 356,000 124,234
Depreciation and amortization 156,043 127,472
Writedown on real estate acquired in settlement of loans 15,000
Loss on sale of investment securities 9,746 6,825
Increase (decrease) in other assets (287,109) (144,044)
Increase (decrease) in other liabilities 398,310 165,159
------------- -------------
Net cash provided by operating activities 902,712 564,105
------------- -------------
INVESTING ACTIVITIES
Purchase of investment securities (209,313)
Proceeds from sale or call of investment securities 1,824,606 1,099,704
Decrease (increase) in Federal funds sold & short term investments (2,923,819) (9,291,503)
Increase in loans, net (15,620,874) (8,468,701)
Purchase of premises and equipment (1,113,167) (82,576)
Proceeds from sale of ORE 84,820
------------- -------------
Net cash used in investing activities (17,833,254) (16,867,569)
-------------- -------------
FINANCING ACTIVITIES
(Decrease) increase in Federal funds purchased & borrowings (2,820,000)
Sale of Stock 5,905,272
Net increase in deposits 11,586,137 18,167,603
------------- -------------
Net cash provided by financing activities 17,491,409 15,347,603
------------- -------------
Net increase (decrease) in cash and cash equivalents 560,867 (955,861)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD $ 1,359,158 $ 2,516,526
------------- -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 1,920,025 $ 1,560,665
============= =============
CASH PAID FOR
Income taxes $ 8,410 $ 4,250
------------- -------------
Interest $ 2,152,613 $ 1,656,243
------------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
Beach First National Bancshares, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements for Beach
First National Bancshares,Inc. ("Company") were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not
include all disclosures necessary for a complete presentation of
financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. All
adjustments, consisting only of normal recurring accruals, which are,
in the opinion of management, necessary for fair presentation of the
interim consolidated financial statements have been included. The
results of operations for the nine month period ended September 30,
2001 are not necessarily indicative of the results that may be expected
for the entire year. These consolidated financial statements do not
include all disclosures required by generally accepted accounting
principles and should be read in conjunction with the Company's audited
consolidated financial statements and related notes for the year ended
December 31, 2000.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include
the accounts of the Company and its subsidiary, Beach First National
Bank. All significant inter-company items and transactions have been
eliminated in consolidation.
3. Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No.
128, "Earnings Per Share." SFAS No. 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS)
for entities with publicly held common stock or potential common stock
such as options, warrants, convertible securities or contingent stock
agreements if those securities trade in a public market.
This standard specifies computation and presentation requirements for
both basic EPS and, for entities with complex capital structures,
diluted EPS. Basic earnings per share are computed by dividing net
income by the weighted average common shares outstanding. Diluted
earnings per share is similar to the computation of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. The dilutive effect
of options outstanding under the Company's stock option plan is
reflected in diluted earnings per share by application of the treasury
stock method.
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF THE BASIC
AND DILUTED EPS COMPUTATIONS:
For the Nine Months Ended
September 30, 2001
Shares Per Share
Income
(Numerator) (Denominator) Amount
--------------- ------------------ ----------------
Basic EPS $ 269,722 1,318,368 $ 0.20
Effect of Diluted Securities:
Stock options -- 73,406 (.01)
------------ ---------- ------------
Diluted EPS $ 269,722 1,391,774 $ 0.19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion contains forward-looking statements that
involve risks and uncertainties. "Forward-looking statements" relate to items
including, without limitation, future economic performance, plans and objectives
of management for future operations, and projections of revenues and other
financial items that are based on the beliefs of management, as well as
assumptions made by and information currently available to management. The words
"expect," "anticipate," and "believe," as well as similar expressions, are
intended to identify forward-looking statements. The company's actual results
may differ materially from the results discussed in the forward-looking
statements, and our operating performance each quarter is subject to various
risks and uncertainties that are discussed in detail in our filings with the
Securities and Exchange Commission, including the "Risk Factors" section in our
Registration Statement on Form S-2 (Registration Number 333-57120) as filed with
the Securities and Exchange Commission.
The terrorist attacks that occurred in New York City and Washington,
D.C. on September 11, 2001, and the United States' subsequent response to these
events have resulted in a general economic slowdown that may adversely affect
our banking business. Economic slowdowns or recessions in our primary market
area may be accompanied by reduced demand for credit, decreasing interest
margins and declining real estate values, which may in turn result in a decrease
in net earnings and an increased possibility of potential loan losses in the
event of default. Any sustained period of decreased economic activity, increased
delinquencies, foreclosures or losses could limit our growth and negatively
affect our results of operations. We cannot predict the extent or duration of
these events or their effect upon our business and operations. We will, however,
closely monitor the effect of these events upon our business, and make
adjustments to our business strategy as we deem necessary.
Results of Operations
EARNINGS REVIEW
Our net income was $269,722, or $.20 per basic common share, for the
nine months ended September 30, 2001 as compared to a net income of $171,907, or
$.23 per basic common share, for the nine months ended September 30, 2000. For
the three months ended September 30, 2001, our net income was $104,378, or $.08
per basic common share, compared to net income of $92,919, or $.13 per basic
common share, for the same period of 2000. The improvement in net income
reflects our bank's continued growth, with average earning assets increasing to
$76.7 million during the first nine months of 2001 from $58.8 million during the
same period of 2000. These figures represent a 56.9% increase in net income and
a 53.8% increase in earnings per share.
During the first nine months of 2001, net interest income increased to
$2,139,892 from $1,598,425 in the same period of 2000. The growth in net
interest income resulted from an increase of $961,939 in interest income,
partially offset by an increase in interest expense of $420,472. For the three
months ended September 30, 2001, net interest income increased to $844,156 from
$572,587 during the same period of 2000. The net interest spread was 3.12% in
the first nine months of 2001 compared to 3.05% during the same period of 2000.
The net interest margin was 4.26% for the nine month period ended September 30,
2001 compared to 4.23% for the same period of 2000.
The provision for loan losses was $356,000 for the nine month period
and $171,500 for the three month period ended September 30, 2001, compared to
$163,107 and $51,375 for the nine month and three month periods ended September
30, 2000. Our allowance for loan losses as a percentage of our period end loans
was 1.25% and 1.30% at September 30, 2001 and 2000, respectively. Net
charge-offs totaled $164,091 for the first nine months of 2001. In the same
period of 2000, there were $38,873 in net charge offs. We had three loans
totaling $151,170 in non-performing loans at September 30, 2001 and a loan
totaling $39,056 at September 30, 2000.
Noninterest income for the nine month period ended September 30, 2001
was $267,921, compared to $208,642 in the same period of 2000. This increase
primarily resulted from the 24.2% increase in deposits from September 30, 2000
to September 30, 2001. For the three month periods ended September 30, 2000 and
1999, noninterest income was $98,319 and $77,656, respectively.
Noninterest expense was $1,698,806 for the nine month period ended
September 30, 2001, which was an increase of $327,958 over the same period of
2000. For the three months ended September 30, noninterest expense was $676,571
in 2001 and $451,382 in 2000. These increases in noninterest expense primarily
reflect increases in salaries,
benefits, data processing fees, and other expenses related to the growth of the
bank with the largest impact coming from the opening of our first branch office
in Surfside Beach, SC in June 2001. Additionally, we realized a tax valuation
allowance during this reporting period that reduced our tax liability.
Net Interest Income
The primary source of revenue is net interest income, which is the
difference between income on interest-bearing assets and interest paid on
deposits and borrowings used to support such assets. Net interest income is
determined by the rates earned on our interest-earning assets and the rates paid
on our interest-bearing liabilities as well as the relative amounts of
interest-bearing assets and interest-bearing liabilities. Presented below are
various components of assets and liabilities, interest income and expense, and
yields/costs for the periods indicated.
Average Balances, Income and Expenses, and Rates
For the nine months ended For the nine months ended
September 30, 2001 September 30, 2000
------------------ ------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Federal funds sold & short $ 5,842,552 $ 135,271 3.10% $ 3,492,419 $ 175,042 6.68%
term investments
Investment securities 9,302,211 420,438 6.04% 8,894,087 448,487 6.72%
Loans 54,145,709 3,709,434 9.16% 37,940,301 2,679,675 9.41%
-------------- ------------ ---------- -------------- ------------ ----------
Total earning assets $ 69,290,472 $ 4,265,143 8.23% $ 50,326,807 $ 3,303,204 8.74%
============== ============ ========== ============== ============ ==========
Interest-bearing deposits $ 52,652,788 $2,112,111 5.36% $ 38,685,561 $ 1,651,373 5.69%
Other borrowings 291,366 13,140 6.03% 1,193,029 53,406 5.96%
-------------- ------------ ---------- -------------- ------------ ----------
Total interest-bearing
liabilities $ 52,944,154 $ 2,125,251 5.37% $ 39,878,590 $ 1,704,779 5.69%
============== ============ ========== ============== ============ ==========
Net interest spread 2.86% 3.05%
Net interest income/margin $ 2,139,892 4.13% $ 1,598,425 4.23%
============ ========== ============ ==========
As reflected above, for the first nine months of 2001 the average yield
on earning assets amounted to 8.23%, while the average cost of interest-bearing
liabilities was 5.37%. For the same period of 2000, the average yield on earning
assets was 8.74% and the average cost of interest-bearing liabilities was 5.69%.
The decrease in the yield on earning assets is attributable to lower rates
earned on federal funds sold and adjustable rate loans due to the declining
interest rate environment.
The net interest margin is computed by subtracting interest expense
from interest income and dividing the resulting figure by average
interest-earning assets. The net interest margin for the nine month period ended
September 30, 2001 was 4.13% and for the same period of 2000 was 4.23%. This
slight decline in the net interest margin was the result of lowering interest
rates during this reporting period. A contributing factor in the deposits is the
beginning runoff or repricing of higher priced certificates of deposits that
were part of a marketing campaign during this time last year.
The following table presents the changes in our net interest income as
a result of changes in the volume and rate of our interest-earning assets and
interest-bearing liabilities. The change in net interest income is due to
increases in the volume of both loans and deposits and in changes in average
rates.
Analysis of Changes in Net Interest Income
Nine months ended September 30, 2001 versus 2000
--------------------------------------------------------------------
Volume Rate Net change
Federal funds sold & short term investments $ 54,412 $ (94,183) $ (39,771)
Investment securities (95,937) 67,888 (28,049)
Loans 1,110,206 (80,447) 1,029,759
-------------- ------------ -----------
Total earning assets 1,068,681 (106,742) 961,939
-------------- ------------ -----------
Interest-bearing deposits 560,281 (99,543) 460,738
Other borrowings (40,663) 397 (40,266)
--------------- ----------- ------------
Total interest-bearing liabilities 519,618 (99,146) 420,472
-------------- ------------ -----------
Net interest income $ 549,063 $ (7,596) $ 541,467
============== ============ ===========
Provision for Loan Losses
To keep pace with the loan portfolio, the provision for loan losses was
$356,000 for the first nine months of 2001 and $163,107 for the same period of
2000. For the three month period ending September 30, 2001 and 2000, the
provision was $171,500 and $51,375 respectively. The increases were the result
of our management's assessment of the adequacy of the reserve for possible loan
losses given the size, mix and quality of the current loan portfolio. Our
management anticipates loan growth will continue to be strong in 2001 and that
it will continue to increase the amount of the provision for loan losses as the
portfolio grows. See also "Allowance for Possible Loan Losses" below.
Noninterest Income
Noninterest income increased to $267,921 in the first nine months of
2001 from $208,642 in the same period of 2000. For the three months ended
September 30, 2001, noninterest income was $98,319 in 2001 and $77,656 in 2000.
Service fees on deposit accounts, the largest component of noninterest income,
increased from $184,775 for the first nine months of 2000 to $215,605 during the
same period of 2001. The category of noninterest income increased due to growth
in the number of deposit accounts as well as increased fee-related activities of
our customers. The net loss on the sale of investment securities increased
slightly to $(9,746) from $(6,825) for the nine month period ended September 30,
2001 and 2000, respectively.
Noninterest Expense
Total noninterest expense increased from $1,370,848 for the nine months
ended September 30, 2000 to $1,698,806 in the same period of 2001, and from
$451,382 for the three months ended September 30, 2000 to $676,571 in the same
period of 2001. The increase in noninterest expense reflects an increase in most
expense categories as a result of the growth of the assets of our company to
$82.1 million at September 30, 2001 from $61.9 million at September 30, 2000 and
the opening of our first branch office in June 2001. Salaries and wages expense
increased by $176,064 during the nine months ended September 30, 2001 and
$90,770 during the three months ended September 30, 2001 compared to the same
periods in 2000. Employee benefits increased by $16,874 and $4,136 during these
same periods. These increases are primarily the result of hiring more employees
to support the growth of our assets, including the opening of a new branch
office in June 2001 to expand our presence into the southern part of our market.
Occupancy expense increased by $33,526, printing and supplies increased
by $20,426 and depreciation and amortization expense increased $28,571 as a
result of opening our first branch office. Professional fees decreased $42,753
due to an accrual reversal in legal fees attributed to the final settlement of
pending legal action relating to check kiting scheme.
For the nine month period ended September 30, 2001, data processing
expense increased to $115,271 from $70,742 during the same period of 2000.
During the three month period ended September 30, data processing expense
increased to $42,573 in 2001 from $25,057 in 2000. Data processing fees are
directly related to increases in the volume of loan and deposit accounts and
associated transaction activity. The category of other expenses increased to
$255,672 for the first nine months of 2001 compared to $204,952 for the same
period of 2000, a $50,720 increase, and increased to $109,095 during the three
month period ended September 30, 2001 from $64,455 in the same period of 2000.
This increase was due to the start up operating expenses associated with opening
the Surfside branch office, and $15,158 in fraud losses.
BALANCE SHEET REVIEW
Investment Securities
Total securities averaged $7.2 million in the first nine months of 2001
and totaled $6.5 million at September 30, 2001. In the same period of 2000,
total securities averaged $8.9 million and totaled $8.4 million at September 30,
2000. At September 30, 2001, our total investment securities portfolio had a
book value of $6,398,919 and a market value of $6,530,987 for an unrealized net
gain of $132,068. We primarily invest in U.S. Government Agency Mortgage- backed
securities.
Contractual maturities and yields on our investment securities (all
available for sale) at September 30, 2001 are as follows. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Investment Securities Maturity Distribution and Yields
September 30, 2001
After one but After five but
Within one year Within five years Within ten years After ten years
--------------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
U.S. Treasury $ -- --% $ -- --% $ -- --% $ -- --%
U.S. Govt Agencies -- -- -- -- 199,428 8.01% -- --
Mortgage-backed -- -- -- -- -- -- 5,890,691 5.84%
Other -- -- -- -- -- -- 308,800 6.56%
-------- ----------- -------- --------- -------- ------------ ---------
Total $ -- 0.00% $ -- 0.00% 199,428 8.01% $ 6,199,491 6.20%
======== ===== =========== ========== ========= ======= =========== =========
At September 30, 2001, short-term investments totaled $9,842,819
compared to $9,291,503 as of September 30, 2000. These funds are one source of
our bank's liquidity and are generally invested in an earning capacity on an
overnight or short-term basis.
Loans
At September 30, 2001, net loans (gross loans less unearned fees and
the allowance for loan losses) totaled $60.3 million, an increase of $19.8
million from September 30, 2000. Average gross loans increased from $37.9
million with a yield of 9.41% in the first nine months of 2000 to $54.1 million
with a yield of 9.16% in 2001. The interest rates charged on loans vary with the
degree of risk and the maturity and amount of the loan. Competitive pressures,
money market rates, availability of funds and government regulations also
influence interest rates.
Since loans typically provide higher yields than other types of earning
assets, one of our bank's goals is for loans to represent the largest category
of earning assets. As was expected, the success of our third quarter marketing
campaign resulted in deposit growth that outpaced the seasonal demand for loans
in our market. Since our loan demand normally increases during the fall and
winter months, we expect to use these funds, which are currently invested in
short term instruments, to fund loan requests at higher rates.
The following table shows the composition of the loan portfolio by
category at September 30, 2001 and 2000.
Composition of Loan Portfolio
September 30, 2001 September 30, 2000
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
Commercial $ 12,580,834 20.6% $ 7,538,440 18.3%
Real estate - construction 2,596,684 4.2% 3,569,270 8.7%
Real estate - mortgage 39,049,265 63.8% 25,068,324 61.1%
Consumer 6,952,868 11.4% 4,909,315 11.9%
--------------- ------ --------------- ------
Loans, gross 61,179,651 100.0% 41,085,349 100.0%
=============== ====== ============= ======
Unearned income (100,713) (78,656)
Allowance for possible loan losses (761,154) (533,112)
---------------- ----------------
Loans, net $ 60,317,784 $ 40,473,581
=============== ===============
The principal component of our loan portfolio at September 30, 2001 and
2000 was mortgage loans, which represented 63.8% and 61.1% of the portfolio,
respectively. In the context of this discussion, a "real estate mortgage loan"
is defined as any loan, other than loans for construction purposes, secured by
real estate, regardless of the purpose of the loan. We follow the common
practice of financial institutions in our market area of obtaining a security
interest in real estate whenever possible, in addition to any other available
collateral. The collateral is taken to reinforce the likelihood of the ultimate
repayment of the loan and tends to increase the magnitude of the real estate
loan portfolio component. Generally, we limit the loan-to-value ratio to 80%.
Due to the short time the portfolio has existed, the current mix may not be
indicative of the ongoing portfolio mix. Our management will attempt to maintain
a relatively diversified loan portfolio to help reduce the risk inherent in
concentrations of collateral.
The following table sets forth the maturity distribution, classified
according to sensitivity to changes in interest rates, for selected components
of our loan portfolio as of September 30, 2001.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
September 30, 2001
After one but After
One year Within five Five
Or less Years Years Total
----------- -------------- ----------- --------------
Commercial $ 5,421,587 $ 6,985,337 $ 575,674 $ 12,982,598
Real estate 7,679,238 25,782,464 3,860,770 37,322,472
Construction 2,303,301 1,771,782 0 4,075,083
Consumer 2,358,665 4,128,096 312,737 6,799,498
--------------- --------------- --------------- ------------------
Total gross loans $ 17,762,791 $ 38,667,679 $ 4,749,181 $ 61,179,651
=============== =============== =============== ==================
Fixed Interest Rate 9,763,220 36,521,796 4,182,334 50,467,350
Variable Interest Rate 7,999,571 2,145,883 566,847 10,712,301
--------------- --------------- --------------- ------------------
Total gross loans $ 17,762,791 $ 38,667,679 $ 4,749,181 $ 61,179,651
=============== =============== =============== ==================
The information presented in the above table is based on the
contractual maturities of the individual loans, including loans which may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
their maturity. Actual repayments of loans may differ from maturities reflected
above because borrowers may have the right to prepay obligations with or without
prepayment penalties.
Allowance for Possible Loan Losses
There are risks inherent in making all loans, including risks with
respect to the period of time over which loans may be repaid, risks resulting
from changes in economic and industry conditions, risks inherent in dealing with
individual borrowers, and, in the case of a collateralized loan, risks resulting
from uncertainties about the future value of the collateral. To address these
risks, we have developed policies and procedures to evaluate the overall quality
of our credit portfolio and the timely identification of potential problem
loans. We maintain an allowance for possible loan losses which we establish
through charges in the form of a provision for loan losses. We charge loan
losses and credit recoveries directly to this allowance.
We attempt to maintain the allowance at a level that will be adequate
to provide for potential losses in our loan portfolio. To maintain the allowance
at an adequate level, we periodically make additions to the allowance by
charging an expense to the provision for loan losses on our statement of
operations. We evaluate the allowance for loan losses on an overall portfolio
basis, as well as allocating the allowance to loan categories. We consider a
number of factors in determining the level of this allowance, including our
total amount of outstanding loans, our amount of past due loans, our historic
loan loss experience, general economic conditions, and our assessment of
potential losses, classified and criticized loans, concentrations of credit and
internal credit risk ratings. Our evaluation is inherently subjective as it
requires estimates that are susceptible to significant change. In addition,
regulatory agencies periodically review our allowance for loan losses as part of
their examination process, and they may require us to record additions to the
allowance based on their judgment about information available to them at the
time of their examinations. Our losses will undoubtedly vary from our estimates,
and there is a possibility that charge-offs in future periods will exceed the
allowance for loan losses as estimated at any point in time.
At September 30, 2001, the allowance for possible loan losses was
$761,154, or 1.25% of outstanding loans, compared to an allowance for possible
loan losses of $533,112 or 1.30% of outstanding loans, at September 30, 2000. In
the first nine months of 2001, the bank had net charge-offs of $164,091. In the
same period of 2000, there were $38,873 in net charge-offs. We had three
non-performing loans totaling $151,170 at September 30, 2001 and $39,056
non-performing loans as September 30, 2000. While there can be no assurances, we
currently do not expect to incur any losses relating to these non-performing
loans.
Allowance for Loan Losses
Nine months ending September 30,
2001 2000
---- ----
Average loans outstanding $ 54,146,709 $ 37,940,301
Loans outstanding at period end 61,179,651 41,085,349
Total nonperforming loans 151,170 39,056
Beginning balance of allowance $ 569,245 $ 408,878
Loans charged off (166,634) (38,873)
Total recoveries 2,543 0
--------------- ---------------
Net loans charged off (164,091) (38,873)
Provision for loan losses 356,000 163,107
--------------- ---------------
Balance at period end $ 761,154 $ 533,112
=============== ===============
Net charge-offs to average loans .30% .10%
Allowance as a percent of total loans 1.25% 1.30%
Nonperforming loans as a
percentage of total loans .25% .10%
Non performing loans as a
percentage of allowance 19.86% 7.33%
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $61.6 million and average interest-bearing
deposits were $52.6 million in the first nine months of 2001. Average total
deposits were $45.7 million and average interest-bearing deposits were $38.7
million in the same period of 2000. The following table sets forth our deposits
by category as of September 30, 2001 and September 30, 2000.
Deposits
September 30, 2001 September 30, 2000
Percent of Percent of
Amount Deposits Amount Deposits
--------- ----------- --------- -----------
Demand deposit accounts $ 11,356,231 16.6% $ 7,502,870 13.6%
Interest bearing checking accounts 3,964,473 5.8% 1,738,915 3.2%
Money market accounts 14,735,106 21.6% 7,376,434 13.4%
Savings accounts 3,390,196 5.0% 3,517,560 6.4%
Time deposits less than $100,000 24,146,463 35.3% 22,154,574 40.3%
Time deposits of $100,000 or over 10,720,179 15.7% 12,713,270 23.1%
-------------- ----------- -------------- -----------
Total deposits $ 68,312,648 100.0% $ 55,003,623 100.0%
============== =========== ============== ===========
Internal growth, resulting primarily from special promotions and increased
advertising, generated the new deposits.
Core deposits, which exclude certificates of deposit of $100,000 or
more, provide a relatively stable funding source for our loan portfolio and
other earning assets. Our core deposits were $60.7 million at September 30, 2001
compared to $42.3 million at September 30, 2000. We expect a stable base of
deposits to be our primary source of funding to meet both our short-term and
long-term liquidity needs. Core deposits as a percentage of total deposits were
approximately 84% at September 30, 2001 and 77% at September 30, 2000. Our
loan-to-deposit ratio was 89.4% at September 30, 2001 versus 74.6% at September
30, 2000. The average loan-to-deposit ratio was 86.7% during the first nine
months of 2001 and 83.0% during the same period of 2000.
CAPITAL
We are subject to various regulatory capital requirements administered
by our federal bank regulators. As long as we have less than $150 million in
total assets, our capital levels are measured for regulatory purposes only at
the bank level, not at the holding company level. Under the capital guidelines
of the Office of the Comptroller of the Currency, the bank is required to
maintain a minimum total risk-based capital ratio of 8%, with at least 4% being
Tier 1 capital. To be considered "well-capitalized," banks must meet regulatory
standards of 10% for total risk-based capital and 6% for Tier 1 capital. Tier 1
capital consists of common shareholders' equity, qualifying perpetual preferred
stock, and minority interest in equity accounts of consolidated subsidiaries,
less goodwill. In addition, the bank must maintain a minimum Tier 1 leverage
ratio (Tier 1 capital to total average assets) of at least 4%. The
"well-capitalized" standard for the Tier 1 leverage ratio is 5%. The following
chart reflects the risk-based regulatory capital ratios of the bank at September
30, 2001.
Analysis of Capital
September 30, 2001
(Amounts in thousands)
Required Actual Excess
Amount % Amount % Amount %
------ - ------ - ------ -
The Bank:
Tier 1 risk-based capital 2,529 4.0% 10,116 15.9% 7,587 11.9%
Total risk-based capital 5,059 8.0% 10,877 17.2% 5,818 9.2%
Tier 1 leverage 3,201 4.0% 10,116 12.7% 6,915 8.6%
On July 24, 2001, we issued 520,000 shares of common stock in
connection with our underwritten public offering registered with the SEC on Form
S-2. We received $5.56 million in gross proceeds in connection with the
issuance. On August 13, 2001, we issued an additional 61,000 shares of common
stock for gross proceeds of $652,000 in connection with the exercise of the
overallotment option for this offering. Taking into account these proceeds, we
believe that we have sufficient capital to fund our current activities on an
on-going basis.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Primary sources of liquidity for our core are deposits, scheduled
repayments on our loans, and interest on and maturities of our investments. All
of our securities have been classified as available for sale. Occasionally, we
might sell investment securities in connection with the management of our
interest sensitivity gap or to manage cash availability. We may also utilize our
cash and due from banks, security repurchase agreements, and federal funds sold
to meet liquidity requirements as needed. In addition, we have the ability, on a
short-term basis, to purchase federal funds from other financial institutions.
Presently, we have made arrangements with commercial banks for short-term
unsecured advances of up to $3,500,000.
Additionally, we are eligible to receive advances from the Federal Home
Loan Bank of Atlanta, subject to its approval, and have received and repaid such
advances on two occasions in the past two fiscal years. In July 2001, we were
approved to participate in the Federal Home Loan Bank Blanket Lien Program where
the Bank can borrow up to 75% of its outstanding loan balances on 1 to 4 family
residences. Taking into account the $5.9 million in net proceeds
we raised in our underwritten public offering, we believe that our liquidity and
ability to manage assets will be sufficient to meet our cash requirements over
the near term.
We monitor and manage the pricing and maturity of our assets and
liabilities in order to lessen the potential impact that interest rate movements
could have on our net interest margin. To minimize the effect of these margin
swings, the balance sheet should be structured so that repricing opportunities
exist for both assets and liabilities in roughly equivalent amounts at
approximately the same time intervals. Imbalances in these pricing opportunities
at any point in time constitute interest rate risk.
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of rate
sensitive assets and liabilities at any given time interval. Our management
generally attempts to maintain a balance between rate sensitive assets and
liabilities to minimize the company's interest rate risks. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity, or
by adjusting the interest rate during the life of an asset or liability.
Balancing the amount of assets and liabilities repricing in the same time
interval helps to hedge the risk and minimize the impact on net interest income
of rising or falling interest rates.
The interest rate sensitivity position at September 30, 2001 is
presented below. Since all rates and yields do not adjust at the same velocity,
the gap is only a general indicator of rate sensitivity.
Interest Sensitivity Analysis
September 30, 2001
After three but After one but
Within three Within twelve within five After five
month months Years years Total
------------- --------------- -------------- ------------ ---------
Assets
Earning assets:
Federal funds sold
& short term investments 9,644,819 $ 198,000 $ -- $ -- $ 9,842,819
Investment securities 868,358 217,990 819,145 4,625,495 6,530,988
Loans 12,689,708 7,752,104 36,461,680 4,175,445 61,078,937
------------- --------------- -------------- -------------- ------------
Total earning assets $ 23,202,885 $ 8,168,094 $ 37,280,825 $ 8,800,940 $ 77,452,744
============= =============== ============== ============== ============
Liabilities
Interest-bearing liabilities
Money market and NOW $ 20,875,571 $ -- $ -- $ -- $ 20,875,571
Savings deposits 3,390,196 -- -- -- 3,390,196
Time deposits 8,143,997 17,457,151 8,621,746 643,747 34,866,641
------------- --------------- -------------- -------------- ------------
Total interest-bearing
liabilities $ 32,409,764 $ 17,457,151 $ 8,621,746 $ 643,747 $ 59,132,408
============= =============== ============== ============== ============
Period gap $ (9,206,879) $ (9,289,057) $ 28,659,079 $ 8,157,193 $ 18,320,336
Cumulative gap $ (9,206,879) $ (18,495,936) $ 10,163,143 $ 18,320,336 $ 18,320,336
Ratio of cumulative gap
to Total earning assets (11.89)% (23.88)% 13.12% 23.65%
We generally would benefit from increasing market rates of interest
when we have an asset sensitive gap and generally would benefit from decreasing
market rates of interest when we are liability sensitive. We currently are
liability sensitive in time frames less than one year and asset sensitive after
that. However, our gap analysis is not a precise indicator of our interest
sensitivity position. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration that
changes in interest rates do not affect all assets and liabilities equally. Net
interest income is also impacted by other significant factors, including changes
in the volume and mix of earning assets and interest-bearing liabilities.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as our company and bank are primarily monetary in
nature. Therefore, interest rates have a more significant impact on our
performance than do the effects of changes in the general rate of inflation and
changes in prices. In addition, interest rates do not necessarily move in the
same magnitude as the prices of goods and services. As discussed previously,
management seeks to manage the relationships between interest sensitive assets
and liabilities in order to protect against wide rate fluctuations, including
those resulting from inflation.
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Our Company's articles of incorporation authorize us to issue up to 10,000,000
shares of common stock. We issued 735,868 shares in our initial public offering
in 1996, and an additional 581,000 shares in our second public offering that
became effective on July 18, 2001. As of August 13, 2001, we had 1,318,368
shares of common stock outstanding. Please see Item 5 of Part II of this Form
10-QSB for more information.
All of our outstanding shares of common stock are entitled to share equally in
dividends from funds legally available therefor, when, as and if declared by the
Board of Directors. We do not plan to declare any dividends in the immediate
future.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to which we or any of our
subsidiaries is a party or of which any of our property is the subject.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
On July 24, 2001, we issued 520,000 shares of common stock in connection with
our underwritten public offering registered with the SEC on Form S-2. We
received $5.56 million in gross proceeds in connection with the issuance. On
August 13, 2001, we issued an additional 61,000 shares of common stock for gross
proceeds of $652,000 in connection with the exercise of the overallotment option
for this offering. Our net proceeds after offering expenses and underwriter's
discount were approximately $5.9 million.
On August 15, 2001 Leigh Meese was appointed as a director.
Richard N. Burch was appointed as Chief Financial Officer.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - See Exhibit Index attached hereto.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period ended September 30,
2001.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEACH FIRST NATIONAL BANCSHARES, INC.
Date: November 5, 2001
By: /s/ Walter E. Standish, III
----------------------------------
Walter E. Standish, III
President
By: /s/ Richard N. Burch
----------------------------------
Richard N. Burch
Chief Financial and Principal
Accounting Officer