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: March 31, 2002
--------------
- -- 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 58-1030117
------------------------ -----------
(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 April 25, 2002,
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
March 31, December 31,
2002 2001 2001
---- ----- ----
(unaudited) (unaudited) (audited)
---------- --------- -------
ASSETS
Cash and due from banks $ 1,625,858 $ 1,727,765 $ 3,387,066
Federal funds sold and short-term investments 2,990,000 6,295,072 5,679,291
Investment securities available for sale 6,447,304 7,215,812 5,681,980
Loans, net 68,573,079 50,881,545 62,352,421
Federal Reserve Bank stock 164,700 164,700 164,700
Federal Home Loan Bank stock 160,300 144,100 144,100
Premises and equipment, net 2,411,855 1,805,794 2,568,475
Other assets 946,989 745,155 806,782
------------ -------------- ------------
Total assets $ 83,320,085 $ 68,979,943 $ 80,784,815
============ =============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits $ 11,230,026 $ 8,111,299 $ 11,968,934
Interest bearing deposits 58,146,229 53,585,656 55,164,034
------------ -------------- ------------
Total deposits 69,376,255 61,696,955 67,132,968
Other liabilities 648,967 389,206 503,017
------------ -------------- ------------
Total liabilities 70,025,222 62,086,161 67,635,985
------------ -------------- ------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares
authorized; 1,318,368 issued and outstanding
as of March 31, 2002 and December 31, 2001,
and 737,368 as of March 31, 2001 1,318,368 737,368 1,318,368
Paid-in capital 11,787,899 6,489,981 11,787,899
Retained earnings (deficit) 167,112 (347,394) 2,119
Accumulated other comprehensive income 21,484 13,827 40,444
------------ -------------- ------------
Total shareholders' equity 13,294,863 6,893,782 13,148,830
------------ -------------- ------------
Total liabilities and shareholders' equity $ 83,320,085 $ 68,979,943 $ 80,784,815
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
Beach First National Bancshares, Inc, and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statement of Income
(unaudited)
Three Months Ended
March 31
2002 2001
---- ----
INTEREST INCOME
Interest and fees on loans $ 1,322,069 $ 1,130,407
Investment securities 92,547 136,720
Federal funds sold 22,780 83,952
-------------- --------------
Total interest income 1,437,396 1,351,079
INTEREST EXPENSE
Deposits 516,271 732,739
Other borrowings 1,590
-------------- --------------
Total interest expense 516,271 734,329
Net interest income 921,125 616,750
PROVISION FOR POSSIBLE LOAN
LOSSES 84,000 70,000
-------------- --------------
Net interest income after provision for possible
loan losses 837,125 546,750
-------------- --------------
NONINTEREST INCOME
Service fees on deposit accounts
85,661 71,401
Loss on sale of investment securities 487 (3,025)
Other income 34,558 13,779
-------------- --------------
Total noninterest income 120,706 82,155
-------------- --------------
NONINTEREST EXPENSES
Salaries and wages 313,144 240,622
Employee benefits 57,873 22,990
Supplies and printing 20,515 11,744
Advertising and public relations 7,313 16,362
Professional fees 23,655 12,938
Depreciation and amortization 73,344 36,164
Occupancy 54,369 14,342
Data processing fees 39,320 31,283
Other operating expenses 106,983 68,133
-------------- --------------
Total noninterest expenses 696,516 454,578
-------------- --------------
Income before income taxes 261,315 174,327
INCOME TAX EXPENSE (96,322) (64,545)
-------------- --------------
Net income $ 164,993 $ 109,782
============== ==============
BASIC NET INCOME PER COMMON SHARE $ .13 $ .15
============== ==============
DILUTED NET INCOME PER COMMON SHARE $ .12 $ .14
============== ==============
Weighted average common shares outstanding - basic 1,318,368 731,880
Weighted average common shares outstanding - diluted 1,320,765 784,157
The accompanying notes are an integral part of these consolidated financial
statements.
3
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 Income Equity
------ ------ ------- ------- ------ ------
BALANCE, DECEMBER 31, 2000 737,368 $737,368 $6,489,981 $ (457,175) $ (41,504) $ 6,728,670
Net income - - - 109,781 - 109,781
Other comprehensive income, net of taxes:
Unrealized loss on investment securities - - - - 53,334 53,334
Less reclassification adjustments for losses
included in net income - - - - 1,997 1,997
-----------
Comprehensive income - - - - - 165,112
----------- ---------- ----------- ----------- ------------- -----------
BALANCE, MARCH 31, 2001 737,368 $ 737,368 $ 6,489,981 $ (347,394) $ 13,827 $ 6,893,782
=========== ========== =========== =========== ============= ===========
Accumulated
Other Total
Common stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
------ ------ ------- -------- ------ ------
BALANCE, DECEMBER 31, 2001 1,318,368 $1,318,368 $11,787,899 $ 2,119 $ 40,444 $ 13,148,830
Net income - - - 164,993 - 164,993
Other comprehensive income, net of taxes:
Unrealized loss on investment securities - - - - (18,960) (18,960)
Less reclassification adjustments for losses
included in net income - - - - - -
Comprehensive income - - - - - 146,033
----------- ---------- ----------- ----------- ------------ -----------
BALANCE, MARCH 31, 2002 1,318,368 $1,318,368 $11,787,899 $ 167,112 $ 21,484 $ 13,294,863
=========== ========== =========== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 164,993 $ 109,782
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes 64,687 16,141
Provisions for loan losses 84,000 70,000
Depreciation and amortization 73,344 36,164
Loss on sale of investment securities 8,654 3,025
(Increase) decrease in other assets (96,469) (38,687)
Increase in other liabilities 145,950 74,371
----------------- ---------------
Net cash provided by operating activities 445,159 270,796
----------------- ---------------
INVESTING ACTIVITIES
Purchase of investment securities (1,525,969) --
Purchase of FHLB stock (16,200) (21,900)
Proceeds from sale of investment securities 733,037 683,321
Decrease (increase) in Federal funds sold 2,689,291 623,928
Increase in loans, net (6,304,658) (5,898,635)
Purchase of premises and equipment (25,149) (259,347)
----------------- ---------------
Net cash used in investing activities (4,449,648) (4,872,633)
----------------- ---------------
FINANCING ACTIVITIES
Increase (decrease) in Federal funds purchased -- --
Net increase (decrease) in deposits 2,243,281 4,970,444
----------------- ---------------
Net cash provided by financing activities 2,243,281 4,970,444
----------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,761,208) 368,607
CASH AND DUE FROM BANKS, BEGINNING
OF PERIOD $ 3,387,066 $ 1,359,158
================= ===============
CASH AND DUE FROM BANKS, END OF
PERIOD $ 1,625,858 $ 1,727,765
================= ===============
CASH PAID FOR
Income taxes $ 92,664 $ 6,861
----------------- ---------------
Interest $ 514,731 $ 712,567
----------------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
5
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 three month period ended March 31, 2002 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, 2001.
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 Three Months Ended
March 31, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
Basic EPS $ 164,993 1,318,368 $ 0.13
Effect of Diluted Securities:
Stock options -- 2,397 (.01)
------------ ---------- ------------
Diluted EPS $ 164,993 1,320,765 $ 0.12
6
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.
Results of Operations
EARNINGS REVIEW
Our net income was $164,993, or $0.13 per common share, for the three
months ended March 31, 2002 as compared to $109,782, or $0.15 per common share,
for the three months ended March 31, 2001. The decline in the price per common
share price is attributed to the 581,000 shares sold during the secondary stock
offering conducted in July, 2001. The improvement in net income reflects our
continued growth, as average earning assets increased to $77.7 million during
the first three months of 2002 from $61.7 million during the same period of
2001. The return on average assets for the three month period ended March 31 was
...80% in 2002 compared to .69% in 2001; the return on average equity was 5.0% in
2002 versus 3.32% in 2001.
During the first three months of 2002, net interest income increased to
$921,125 from $616,750 in the same period of 2001. The growth in net interest
income resulted from an increase of $86,317 in interest income and a decrease in
interest expense of $218,058. As described below under "Net Interest Income,"
interest income increased as a result of our continued growth, yet interest
expense declined due to the declining interest rate environment in 2001. Net
interest spread, the difference between the rate we earn on interest-earning
assets and the rate we pay on interest-bearing liabilities, was 3.89% in the
first three months of 2002 compared to 3.06% during the same period of 2001. The
net interest margin was 4.81% for the three month period ended March 31, 2002
compared to 4.05% for the same period of 2001.
The provision for loan losses was $84,000 for the three month period
ended March 31, 2002, compared to $70,000 for the three month period ended March
31, 2001. Our allowance for loan losses as a percentage of total loans at the
end of the period was 1.35% and 1.24% at March 31, 2002 and 2001, respectively.
There were no charge-offs for the first three months of 2002 and 2001. We had
$63,995 in non-performing loans at March 31, 2002, and $403,863 in
non-performing loans at March 31, 2001.
Noninterest income for the three-month period ended March 31, 2002 was
$120,706, compared to $82,155 in the same period of 2001. This increase is due
primarily to the growth in the number of deposit accounts, the addition of the
VISA check card program and increased fee-related activities of customers.
Total noninterest expense increased to $696,516 for the three month
period ending March 31, 2002 from $454,578 for the three month period ended
March 31, 2001. The increase in noninterest expense reflects an increase in most
expense categories as a result of our growth to $83.3 million in total assets.
Salary, wages and benefits increased $107,405, representing 44% of the total
increase in noninterest expenses, due to the addition of ten full-time
equivalents from this period in 2001. These staffing increases are due to a new
branch opening in Surfside Beach, SC in June 2001. Depreciation and occupancy
costs increased $77,207 due to the expansion into Surfside Beach and the leasing
of additional operational office space.
7
Net Interest Income
The primary source of revenue for the Company 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 three months ended For the three months ended
March 31, 2002 March 31, 2001
-------------- --------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Fed funds sold & S/T Invest $ 5,282,372 $ 22,780 1.75% $ 5,700,039 $ 83,952 5.97%
Investment securities 6,238,246 92,547 6.02 7,898,480 136,720 7.02
Net loans 66,207,233 1,322,069 8.10 48,089,231 1,130,407 9.52
-------------- ------------ --------- -------------- ------------ ---------
Total earning assets $ 77,727,851 $ 1,437,396 7.50% $ 61,687,750 $ 1,351,079 8.87%
============== ============ ========= ============== ============ =========
Interest-bearing deposits $ 58,008,211 $ 516,271 3.61% $ 51,168,767 $ 732,739 5.81%
Other borrowings 100,000 1,590 6.45
-------------- ------------ --------- -------------- ------------ ---------
Total interest-bearing
Liabilities $ 58,008,211 $ 516,271 3.61% $ 51,268,767 $ 734,329 5.81%
============== ============ ========= ============== ============ =========
Net interest spread 3.89% 3.06%
Net interest income/margin $ 921,125 4.81% $ 616,750 4.05%
============ ========= ============ =========
As reflected above, for the first three months of 2002 the average
yield on earning assets amounted to 7.50%, while the average cost of
interest-bearing liabilities was 3.61%. For the same period of 2001, the average
yield on earning assets was 8.87% and the average cost of interest-bearing
liabilities was 5.81%. The decline in the yield on earning assets is attributed
to the declining interest rate environment that occurred in 2001. Average
balances on our net loans increased $18.1 million in the quarter ended March 31,
2002 from the quarter ended March 31, 2001, reflecting our success in continuing
to build our customer base.
The net interest margin, computed by subtracting interest expense from
interest income and dividing the resulting figure by average interest-earning
assets, was 4.81% for the three-month period ended March 31, 2002, and 4.05% for
same period of 2001. This increase was the result of our asset and liability
management during the declining interest rate environment that occurred in 2001,
as described below under "Liquidity and Interest Rate Sensitivity."
8
The following table presents the changes in our net interest income as
a result of changes in the volume and rate of interest-earning assets and
interest-bearing liabilities. The change in net interest income is primarily due
to increases in the volume of both loans and deposits rather than changes in
average rates.
Analysis of Changes in Net Interest Income
--------------------------------------------------------------------
Three months ended March 31, 2002 versus 2001
--------------------------------------------------------------------
Volume Rate Net change
------ ---- ----------
Fed funds sold & S/T investments $ (1,801) $ (59,371) $ (61,172)
Investment securities (24,630) (19,543) (44,173)
Loans 360,096 (168,434) 191,662
--------- --------- --------
Total earning assets 333,665 (247,348) 86,317
Interest-bearing deposits 60,871 (277,339) (216,468)
Other borrowings -- (1,590) (1,590)
--------- --------- --------
Total interest-bearing liabilities 60,871 (278,929) (218,058)
--------- --------- --------
Net interest income $ 272,794 $ 31,581 $ 304,375
========= ========= ========
Provision for Loan Losses
The provision for loan losses was $84,000 for the first three months of
2002 and $70,000 for the same period of 2001. The increase was the result of
increased loan activity and management's assessment of the adequacy of the
reserve for possible loan losses given the size, mix and quality of the current
loan portfolio. Management anticipates loan growth will continue to be strong in
2002 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 was $120,706 in the first three months of 2002
compared to $82,155 in the same period of 2001. Service fees on deposit
accounts, the largest component of noninterest income, increased from $71,401 in
2001 to $85,661 in 2002. Other income increased to $34,558 in 2002 from $13,779
in the same period of 2001. Both of these categories of noninterest income
increased due to growth in the number of deposit accounts as well as increased
fee-related activities of customers. The net gain on the sale of investment
securities increased to $487 from $(3,025) for the three month period ended
March 31, 2002 and 2001 respectively. These losses primarily relate to paydowns
on mortgage backed securities, and result from movements in market interest
rates since the securities were acquired.
Noninterest Expense
Total noninterest expense increased from $454,578 for the three months
ended March 31, 2001 to $696,516 for the same period of 2002. The increase in
noninterest expense reflects an increase primarily in salaries and employee
benefits of $107,405, or 44.0% of the total increase. This increase is primarily
due to the addition of ten new staff positions in 2001, seven of which occupy
the new Surfside Branch office. Increased insurance premiums and an increase in
the employer match portion of the company's 401K plan also attributed the
increase in salaries and benefits.
Depreciation and amortization expense increased by $37,180 from the
first quarter of 2001 to the same period of 2002 primarily due to the additional
expenses associated with our new branch office in Surfside Beach. Occupancy
expenses increased by $40,027 from the first quarter of 2001 to this period in
2002 primarily due to the new Surfside branch office and the leasing of
operational office space due to our growth.
For the three month period ended March 31, 2002, data processing
expense increased to $39,320 from $31,283 during the same period of 2001. Data
processing fees are directly related to increases in the volume of loan, deposit
and general ledger accounts and associated transaction activity. The category of
other expenses increased to $106,983 for the first three months of 2002 compared
to $68,133 for the same period of 2001. This increase was primarily due to
9
increased telephone, data communication, postage and other miscellaneous
expenses related primarily to the new branch office and the occupancy of the
leased operations space.
BALANCE SHEET REVIEW
Investment Securities
Total securities averaged $6.2 million in the first three months of
2002 and totaled $6.8 million at March 31, 2002. In the same period of 2001,
total securities averaged $7.9 million and totaled $7.5 million at March 31,
2001. At March 31, 2002, the Company's total investment securities portfolio
had a book value of $6.7 million and a market value of $6.8 million for an
unrealized net gain of $31,408. We primarily invest in U.S. Government Agency
and U. S Agency mortgage backed securities.
At March 31, 2002, short-term investments totaled $3.0 million,
compared to $6.3 million at March 31, 2001. 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.
Contractual maturities and yields on our investment securities (all
available for sale) at March 31, 2002 are set forth on the following table.
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
March 31, 2002
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 295,305 2.05% 930,173 3.86% 499,278 6.51% ---- ----
Mortgage-backed ---- ---- ---- ---- ---- ---- 4,722,548 6.43%
Other ---- ---- ---- ---- ---- ---- 325,000 6.13%
--------- ------- --------- ----- --------- ----- ---------- -----
Total $ 295,305 2.05% $ 930,173 3.86% $ 499,278 6.51% $5,047,548 6.43%
========= ======= ========= ===== ========= ===== ========== =====
Loans
At March 31, 2002, net loans (total loans less the allowance for loan
losses) totaled $68.6 million, an increase of $17.7 million from March 31, 2001.
Average total loans increased from $48.2 million with a yield of 9.52% in the
first three months of 2001 to $66.2 million with a yield of 8.10% in 2002. 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.
At March 31, 2002, we had issued commitments to extend credit of $5.2
million through various types of commercial lending arrangements. The
commitments expire over next 36 months. Past experience indicates that many of
these commitments to extend credit will expire unused. We believe that we have
an adequate source of liquidity to fund commitments that are drawn upon by the
borrower.
Since loans typically provide higher yields than other types of earning
assets, one of our goals is for loans to represent the largest category of
earning assets. As of March 31, 2002 loans were 87.5% of earning assets,
compared to 79.0% at March 31, 2001.
11
The following table shows the composition of the loan portfolio by
category at March 31, 2002 and 2001.
Composition of Loan Portfolio
March 31, 2002 March 31, 2001
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
Commercial $ 15,430,053 22.3% $ 11,147,921 21.6%
Real estate - construction 4,832,998 7.0% 3,890,557 7.5%
Real estate - mortgage 42,088,935 60.5% 30,546,949 59.2%
Consumer 7,086,801 10.2% 6,017,713 11.7%
------------ -------- ----------- ------
Loans, gross 69,513,787 100.0% 51,603,140 100.0%
======== ======
Unearned income (80,486) (82,350)
Allowance for possible loan losses (935,222) (639,245)
------------ ------------
Loans, net $ 68,573,079 $ 50,881,545
============ ============
The principal component of our loan portfolio at March 31, 2002 and
2001 was mortgage loans, which represented 60.5% and 59.2% 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%.
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 March 31, 2002.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
March 31, 2002
After one but After
One year Within five Five
or less Years Years Total
-------- ------------- ------- --------
Commercial $ 8,406,887 $ 6,536,200 $ 561,966 $ 15,505,053
Real estate 10,373,860 27,730,285 3,984,788 42,088,933
Construction 3,499,878 1,333,121 --- 4,832,999
Consumer 2,732,016 4,119,388 235,398 7,086,802
------------ --------------- ------------ ---------------
Total gross loans $ 25,012,641 $ 39,718,994 $ 4,782,152 $ 69,513,787
============ =============== ============ ===============
Fixed Interest Rate $ 15,813,040 $ 37,739,742 $ 3,722,950 $ 57,275,732
Variable Interest Rate 9,199,601 1,979,252 1,059,202 12,238,055
------------ --------------- ------------ ---------------
Gross loans $ 25,012,641 $ 39,718,994 $ 4,782,152 $ 69,513,787
============ =============== ============ ===============
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
12
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 March 31, 2002, the allowance for possible loan losses was $935,222,
or 1.35% of outstanding loans, compared to an allowance for possible loan losses
of $639,245, or 1.24% of outstanding loans, at March 31, 2001. In the first
three months of 2002 and 2001, we had no charge-offs. We had a non-performing
loan of $63,995 at March 31, 2002 and $403,863 at March 31, 2001. While there
can be no assurances, we currently do not expect to incur any losses relating to
this non-performing loan.
Allowance for Loan Losses
Three months ending March 31,
2002 2001
---- ----
Average loans outstanding $ 66,207,233 $ 48,174,187
Total loans outstanding at period end 69,508,301 51,520,790
Total nonperforming loans 63,995 403,863
Beginning balance of allowance $ 851,222 $ 569,245
Loans charged off 0 0
Total recoveries 0 0
--------------- ---------------
Net loans charged off 0 0
Provision for loan losses 84,000 70,000
--------------- ---------------
Balance at period end $ 935,222 $ 639,245
=============== ===============
Net charge-offs to average loans 0.00% 0.00%
Allowance as a percent of total loans 1.35% 1.24%
Nonperforming loans as a
Percentage of total loans .09% .78%
Nonperforming loans as a
Percentage of allowance 6.84% 63.20%
13
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $68.3 million and average interest-bearing
deposits were $58.0 million in the first quarter of 2002. Average total deposits
were $57.3 million and average interest-bearing deposits were $51.2 million in
the same period of 2001. The following table sets forth our deposits by category
as of March 31, 2002 and March 31, 2001.
Deposits
March 31, 2002 March 31, 2001
Percent of Percent of
Amount Deposits Amount Deposits
------ ----------- ------ -----------
Demand deposit accounts $ 11,230,026 16.2% $ 8,111,299 13.2%
Interest Bearing Checking accounts 3,469,511 5.0% 2,090,577 3.4%
Money market accounts 20,705,872 29.9% 11,418,243 18.5%
Savings accounts 3,504,811 5.1% 3,149,500 5.1%
Time deposits less than $100,000 17,223,536 24.8% 23,969,670 38.8%
Time deposits of $100,000 or over 13,242,499 19.1% 12,957,666 21.0%
-------------- ----------- -------------- -----------
Total deposits $ 69,376,255 100.0% $ 61,696,955 100.0%
============== =========== ============== ===========
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 $56.1 million at March 31, 2002
compared to $48.8 million at March 31, 2001. 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 in the future. Core deposits as a percentage of total deposits
were approximately 81% at March 31, 2002 and 79% at March 31, 2001. Our
loan-to-deposit ratio was 96.7% at March 31, 2002 versus 83.5% at March 31,
2001. The average loan-to-deposit ratio was 93.5% during the first three months
of 2002 and 84.0% during the same period of 2001.
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, we are 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, we 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 March 31, 2002.
14
Analysis of Capital
March 31, 2002
(Amounts in thousands)
Required Actual Excess
-------- ------ ------
Amount % Amount % Amount %
------ - ------ - ------ -
The Bank:
Tier 1 risk-based capital 2,835 4.0% 10,463 14.8% 7,628 10.8%
Total risk-based capital 5,670 8.0% 11,350 16.0% 5,680 8.0%
Tier 1 leverage 3,281 4.0% 10,643 12.8% 7,362 8.8%
We believe we have sufficient capital to fund our activities on an
on-going basis.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Primary sources of liquidity for us are core deposits, scheduled
repayments on our loans, and interest on and maturities of its investments. All
securities of the Company have been classified as available for sale.
Occasionally, we might sell investment securities in connection with the
management of its interest sensitivity gap or to manage cash availability. We
may also utilize its 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 $7,000,000. We believe our
liquidity and ability to manage assets will be sufficient to meet 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. Management
generally attempts to maintain a balance between rate sensitive assets and
liabilities to minimize 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. Managing 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 March 31, 2002 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.
15
Interest Sensitivity Analysis
March 31, 2002
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 $ 2,990,000 $ - $ -- $ -- $ 2,990,000
Investment securities 786,359 368,864 2,065,562 3,226,519 6,447,304
Total Loans 18,057,430 39,098,261 8,558,975 3,718,635 69,433,301
-------------- -------------- -------------- ------------- ---------------
Total earning assets $ 21,834,115 $ 39,467,125 $ 10,624,537 6,945,154 $ 78,870,931
============== ============== ============== ============= ===============
Liabilities
Interest-bearing liabilities
Money market and IBCA $ 24,175,383 $ -- -- $ -- $ 22,906,733
Savings deposits 3,504,811 -- -- -- 3,504,811
Time deposits 10,885,924 15,021,051 4,362,273 196,787 30,466,035
Other borrowings -- -- -- -- --
-------------- -------------- -------------- ------------- ---------------
Total interest-bearing
liabilities $ 38,566,118 $ 15,021,051 $ 4,362,273 $ 196,787 $ 58,146,229
============== ============== ============== ============= ===============
Period gap $ (16,732,003) $ 24,446,074 $ 6,262,264 $ 6,748,367 $ 20,724,702
Cumulative gap $ (16,732,003) $ 7,714,071 $ 13,976,335 $ 20,724,702 $ 20,724,702
Ratio of cumulative gap to
total earning assets (21.2)% 9.8% 17.7% 26.3%
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 the timeframe within three months 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 affected by other significant factors, including changes
in the volume and mix of earning assets and interest-bearing liabilities.
OFF BALANCE SHEET RISK
In the ordinary course of business, and to meet the financing needs of our
customers, we are party to various financial instruments with off balance sheet
risk. These financial instruments, which include commitments to extend credit
and standby letters of credit, involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the balance
sheets. The contract amount of those instruments reflects the extent of
involvement the Company has in particular classes of financial instruments.
Our exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual amounts of those instruments.
We use the same credit policies in making commitments and conditional
obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any material condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. At March 31, 2002, unfunded commitments to
extend credit were $5,226,147, of which $674,756 was at fixed rates and
$4,551,391 was at variable rates. We evaluate each customer's credit worthiness
16
on a case-by-case basis. 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 varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate.
At March 31, 2002, there was a $1,415,352 commitment under a letter of credit.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral varies but
may include accounts receivable, inventory, equipment, marketable securities and
property. Since most of the letters of credit are expected to expire without
being drawn upon, they do not necessarily represent future cash requirements.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Company and the Bank are primarily monetary
in nature. Therefore, interest rates have a more significant impact on the
Company's 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.
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of our financial statements. Our significant accounting policies
are described in the footnotes to the consolidated financial statements at
December 31, 2001 as filed on our annual report on Form 10-KSB.
Certain accounting policies involve significant judgments and
assumptions by us which have a material impact on the carrying value of certain
assets and liabilities. We consider these accounting policies to be critical
accounting policies. The judgments and assumptions we use are based on
historical experience and other factors, which we believe to be reasonable under
the circumstances. Because of the nature of the judgments and assumptions we
make, actual results could differ from these judgments and estimates which could
have a material impact on our carrying values of assets and liabilities and our
results of operations.
We believe the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
preparation of our consolidated financial statements. Refer to the portion of
this discussion that addresses our allowance for loan losses for a description
of our processes and methodology for determining our allowance for loan losses.
17
PART II
- -------
OTHER INFORMATION
- -----------------
Item 1. Legal Proceedings.
- --------------------------
There are no material legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their 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.
- --------------------------
Not applicable.
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 March 31,
2002.
18
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEACH FIRST NATIONAL BANCSHARES, INC.
Date: May 8, 2002 By: /s/ Walter E. Standish, III
------------- --------------------------------------
Walter E. Standish, III
President/Chief Executive Officer
/s/ Richard N. Burch
--------------------------------------
Richard N. Burch
Chief Financial and
Principal Accounting Officer
19