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: June 30, 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)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
On August 5, 2002, 1,318,368 shares of the issuer's common stock, par value
$1.00 per share, were issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Balance Sheets
June 30, December 31,
2002 2001 2001
---- ---- ----
(unaudited) (unaudited) (audited)
Cash and due from banks $ 2,345,181 $ 3,352,067 $ 3,387,066
Federal funds sold and short term investments 4,692,000 2,709,371 5,679,291
Investment securities available for sale 6,955,589 6,626,313 5,681,980
Loans, net 73,228,372 57,087,439 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 2,383,556 2,426,436 2,568,475
Other assets 935,371 674,813 806,782
------------ ------------ -------------
Total assets $ 90,865,069 $ 73,185,239 $ 80,784,815
============ ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits $ 12,461,006 $ 11,091,844 $ 11,968,934
Interest bearing deposits 64,025,840 54,707,388 55,164,034
------------ ------------ -------------
Total deposits 76,486,846 65,799,232 67,132,968
Other liabilities 837,792 427,900 503,017
------------ ------------ -------------
Total liabilities 77,324,638 66,227,132 67,635,985
------------ ------------ -------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares authorized;
1,318,368 shares issued and outstanding at June 30, 2002
and December 31,2001, 737,368 at June 30, 2001
1,318,368 737,368 1,318,368
Paid-in capital 11,787,899 6,489,981 11,787,899
Retained earnings (deficit) 334,247 (291,832) 2,119
Accumulated other comprehensive income (loss) 99,917 (22,589) 40,444
------------ ------------ -------------
Total shareholders' equity 13,540,431 6,958,106 13,148,830
------------ ------------ -------------
Total liabilities and shareholders' equity $ 90,865,069 $ 73,185,239 $ 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 Statements of Income
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 2,735,250 $ 2,361,898 $ 1,413,181 $ 1,231,491
Investment securities 190,543 253,099 97,996 116,379
Fed funds sold & short term 34,300 107,544 11,521 23,591
investments ----------- ------------ ----------- ----------
Total interest income 2,960,093 2,722,541 1,522,698 1,371,462
INTEREST EXPENSE
Deposits 1,008,653 1,416,508 492,383 683,769
Other borrowings 190 10,297 190 8,707
----------- ------------ ----------- ----------
Total interest expense 1,008,843 1,426,805 492,573 692,476
Net interest income 1,951,250 1,295,736 1,030,125 678,986
PROVISION FOR POSSIBLE LOAN
LOSSES 182,000 184,500 98,000 114,500
----------- ------------ ----------- ----------
Net interest income after provision
for possible loan losses 1,769,250 1,111,236 932,125 564,486
----------- ------------ ----------- ----------
NONINTEREST INCOME
Service fees on deposit accounts 190,504 150,217 104,843 78,816
Gain (Loss) on sale of investment securities 192 (7,749) (295) (4,725)
Other income 70,726 27,135 36,168 13,356
----------- ------------ ----------- ----------
Total noninterest income 261,422 169,603 140,716 87,447
----------- ------------ ----------- ----------
NONINTEREST EXPENSES
Salaries and wages 669,455 540,532 356,311 299,910
Employee benefits 114,760 53,858 56,887 30,868
Supplies and printing 43,724 27,917 21,152 16,173
Advertising and public relations 35,761 35,684 28,448 19,322
Legal and Professional fees 64,240 25,067 40,584 12,128
Depreciation and amortization 165,554 84,524 92,210 48,360
Occupancy 105,631 35,838 51,262 21,496
Data processing fees 92,722 72,698 53,403 41,415
Other operating expenses 207,964 146,118 103,038 77,985
----------- ------------ ----------- ----------
Total noninterest expenses 1,499,811 1,022,236 803,295 567,658
----------- ------------ ----------- ----------
Income before income taxes 530,861 258,603 269,546 84,275
INCOME TAX EXPENSE 198,733 93,259 102,411 28,714
----------- ------------ ----------- ----------
Net income $ 322,128 $ 165,344 $ 167,135 $ 55,561
=========== ============ =========== =========
BASIC NET INCOME PER COMMON
SHARE $ .25 $ .22 $ .13 $ .08
=========== ============= ============ =========
DILUTED NET INCOME PER COMMON
SHARE $ .25 $ .20 $ .12 $ .07
=========== ============= ============ =========
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) $ (41,503) $ 6,728,670
Net income - - - 165,344 - 165,344
Other comprehensive income, net of taxes:
Unrealized loss on investment securities - - - - 69,206 69,206
Less reclassification adjustments for losses
included in net income
Comprehensive income - - - - (5,114) (5,114)
BALANCE, JUNE 30, 2001 ------- -------- ---------- --------- --------- -----------
737,368 $737,368 $6,489,981 (291,832) $ 22,589 $ 6,958,106
======= ======== ========== ========= ========= ===========
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 - - - 332,128 - 332,128
Other comprehensive income, net of taxes:
Unrealized loss on investment securities - - - - 59,473 59,473
Less reclassification adjustments for losses
included in net income - - - - - ----------
Comprehensive income - - - - - 391,601
--------- ----------- ----------- --------- ---------- ----------
BALANCE, JUNE 30, 2002 1,318,368 $1,318,368 $11,787,899 $334,247 $ 99,917 $13,540,431
========= ========== ========== ========= ========== ===========
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)
Six Months Ended
June 30,
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $332,128 $ 165,344
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes 64,687 -
Provisions for loan losses 182,000 133,448
Depreciation and amortization 165,554 84,524
Loss on sale of investment securities -- 7,749
Increase (decrease) in other assets (193,276) 31,655
Increase (decrease) in other liabilities 334,775 113,065
------- -------
Net cash provided by operating activities 885,868 535,785
------- -------
INVESTING ACTIVITIES
Purchase of investment securities (1,525,969) --
Purchase of Federal Home Loan Bank stock (16,200) --
Proceeds from sale or call of investment securities 311,833 1,305,814
Decrease (increase) in Federal funds sold & short term investments 987,291 4,209,629
Increase in loans, net (11,057,951) (12,167,977)
Purchase of premises and equipment 19,365 (963,063)
Proceeds from sale of ORE -- --
------------ -----------
Net cash used in investing activities (11,281,631) (7,615,597)
------------ -----------
FINANCING ACTIVITIES
Decrease in Federal funds purchased -- --
Net increase in deposits 9,353,878 9,072,721
------------ -----------
Net cash provided by financing activities 9,353,878 9,072,721
----------- ----------
Net increase (decrease) in cash and cash equivalents (1,041,885) 1,992,909
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD $ 3,387,066 $ 1,359,158
============ ============
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 2,345,181 $ 3,352,067
============ ============
CASH PAID FOR
Income taxes $ 195,069 $ 24,299
----------- ----------
Interest $ 1,070,100 $ 1,419,481
----------- ----------
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 six month period ended June 30, 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 intercompany 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 Six Months Ended
June 30, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- ------------------ ----------------
Basic EPS $ 334,128 1,318,368 $ 0.25
Effect of Diluted Securities:
Stock options -- 6,112 (0.00)
------------ --------- ------
Diluted EPS $ 334,128 1,324,480 $ 0.25
6
For the Three Months Ended
June 30, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- ------------------ ----------------
Basic EPS $ 167,135 1,318,368 $ 0.13
Effect of Diluted Securities:
Stock options -- 6,112 (0.01)
------------ ---------- ---------------
Diluted EPS $ 167,135 1,324,480 $ 0.12
Item 2. Management's Discussion and Analysis or Plan of Operations.
The following is our discussion and analysis of certain significant factors that
have affected our financial position and operating results and those of our
subsidiary, Beach First National Bank, during the periods included in the
accompanying financial statements. This commentary should be read in conjunction
with the financial statements and the related notes and the other statistical
information included in this report.
This report contains "forward-looking statements" relating to, 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 "may," "will,"
"anticipate," "should," "would," "believe," "contemplate," "expect," "estimate",
"continue," "may," and "intend," as well as other similar words and expressions
of the future, are intended to identify forward-looking statements. Our 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, without limitation:
o the effects of future economic conditions;
o governmental monetary and fiscal policies, as well as legislative
and regulatory changes;
o changes in interest rates and their effect
on the level and composition of deposits, loan demand, and
the values of loan collateral, securities and other interest-sensitive
assets and liabilities;
o our ability to control costs, expenses, and loan
delinquency rates; and
o the effects of competition from other commercial banks,thrifts,
mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other
mutual funds and other financial institutions operating in our market
area and elsewhere, including institutions operating regionally,
nationally, and internationally, together with such competitors
offering banking products and services by mail, telephone, computer and
the Internet.
Results of Operations
EARNINGS REVIEW
Our net income was $332,128, or $.25 per common share, for the six months ended
June 30, 2002 as compared to a net income of $165,344, or $.22 per common share,
for the six months ended June 30, 2001. Our net income was $167,135, or $.13 per
common share, for the three months ended June 30, 2002 as compared to net income
of $55,561, or $.08 per common share, for the same period of 2001. The
improvement in net income reflects the bank's continued growth, as average
earning assets increased to $80.0 million during the first six months of 2002
from $62.7 million during the same period of 2001. This continued growth is the
result of our local ownership and management and the expansion into the Surfside
Beach, South Carolina market in June of 2001. The return on average assets for
the six month period ended June 30 was .79% in 2002 compared to .50% in 2001.
The return on average equity was 5.03% in 2002 versus 4.83% in 2001.
7
Net Interest Income
During the first half of 2002, net interest income increased to $1,951,250,
from $1,295,736 in the same period of 2001. The growth in net interest income
resulted from an increase of $237,552 in interest income, and a decrease in
interest expense of $417,962 due to the reduction of interest rates. For the
three months ended June 30, 2001, net interest income increased to $1,030,125
from $678,986 during the comparable period of 2001. The net interest spread was
4.01% in the first six months of 2002 compared to 3.15% during the same period
of 2001. The net interest margin was 4.92% for the six month period ended June
30, 2002 compared to 4.17% for the same period of 2001.
Our 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 its
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 six months ended For the six months ended
June 30, 2002 June 30, 2001
------------- -------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
$ 4,119,346 $ 34,300 1.68% $ 3,740,486 $ 107,544 5.80%
Federal funds sold & short
term investments
Investment securities 6,664,491 190,543 5.77% 7,552,118 253,099 6.76%
Loans 69,239,339 2,735,250 7.97% 51,364,735 2,361,898 9.27%
---------- ----------- ---- ----------- ---------- -----
Total earning assets $80,023,176 $ 2,960,093 7.46% $62,657,339 $2,722,541 8.76%
=========== =========== ===== =========== ========== =====
Interest-bearing deposits $59,036,495 $ 1,008,653 3.45% $50,804,184 $1,416,508 5.62%
Other borrowings 18,066 190 2.12% 439,464 10,297 4.72%
----------- ----------- ---- ----------- ---------- ------
Total interest-bearing
Liabilities $59,054,561 $ 1,008,843 3.44% $51,243,648 $1,426,805 5.61%
=========== =========== ===== =========== ========== =====
Net interest spread 4.01% 3.15%
Net interest income/margin $ 1,951,250 4.92% $1,295,736 4.17%
=========== ===== ========== =====
As reflected above, for the first half of 2002 the average yield on earning
assets amounted to 7.46%, while the average cost of interest-bearing liabilities
was 3.44%. For the same period of 2001, the average yield on earning assets was
8.76% and the average cost of interest-bearing liabilities was 5.61%. The
decrease in the yield on earning assets is attributable to the declining rate
environment that began in 2001 and has continued through this period.
The net interest margin, computed by subtracting interest expense from interest
income and dividing the resulting figure by average interest-earning assets, was
4.92% and for the six-month period ended June 30, 2002, and 4.17% for the 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 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 a decrease in average
rates.
Analysis of Changes in Net Interest Income
--------------------------------------------------------------------
Six months ended June 30, 2002 versus 2001
--------------------------------------------------------------------
Volume Rate Net change
------ ---- ----------
Federal funds sold & short term investments $ 3,155 $ (76,398) $ (73,243)
Investment securities (25,378) (37,178) 62,556)
Loans 706,123 (332,771) 373,352
--------- --------- ---------
Total earning assets 683,900 (446,347) 237,553
Interest-bearing deposits 140,651 (548,506) (407,855)
Other borrowings (4,432) (5,675) (10,107)
--------- --------- ---------
Total interest-bearing liabilities 136,219 (554,181) (417,962)
--------- --------- ---------
Net interest income $ 547,681 $ 107,834 $ 655,515
========== ========= =========
Provision for Loan Losses
To keep pace with the growth in the loan portfolio, the provision for loan
losses was $182,000 for the first six months of 2002 compared to $184,500 for
the same period of 2001. For the three month periods ending June 30, 2002 and
2001, these figures were $98,000 and $114,500, respectively. The increases were
the result of management's assessment of the adequacy of the reserve for
possible loan losses given the size, mix and quality of the current loan
portfolio. We anticipate 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 increased to $261,230 in the first six months of 2002 from
$169,603 in the same period of 2001. For the three months ended June 30, 2002,
noninterest income was $140,716 as compared to $87,447 in 2001. Service fees on
deposit accounts, the largest component of noninterest income, increased from
$150,217 for the first six months of 2001 to $190,504 during the same period of
2002. This category 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 was $192 at June 30, 2002 and
$(7,749) for June 30, 2001.
Noninterest Expense
Total noninterest expense increased from $1,022,236 for the six months ended
June 30, 2001 to $1,499,811 for the same period of 2002, and from $567,658 for
the three months ended June 30, 2001 to $803,295 in the same period of 2002.
The increase in noninterest expense reflects an increase in most expense
categories as a result of the growth of our assets to $90.9 million at June 30,
2002 from $73.2 million at June 30, 2001. Salary and wages increased by $128,923
during the six months ended June 30, 2002 and $56,401 during the three months
ended June 30, 2002 compared to the same periods in 2001. Additionally, employee
benefits increased by $60,902 and $26,019 during these periods. The increases in
salaries and wages in 2002 is a result of hiring more employees to support our
growth, including the opening of a new branch in June 2001 that expands our
presence in the southern part of our market.
Due to the opening of the new branch, occupancy expense increased by $69,793,
and printing and supplies increased by $15,807 during the six months ended June
30, 2002 compared to the same period in 2001. Depreciation and amortization
expense increased by $81,030 from the first half of 2001 to the same period of
2002. This increase is due to the Surfside Beach branch office and leased space
used for our operations department. We expect these expenses to increase as the
depreciation expense for furniture, fixtures and equipment purchased for the
North Myrtle Beach branch, scheduled to open in early January 2003, is recorded.
9
For the six month period ended June 30, 2002, data processing expense increased
to $92,722 from $72,698 during the same period of 2001. During the three month
period ended June 30, 2002, data processing expense increased to $53,402 in 2002
from $41,415 during the same period in 2001. 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 $207,965 for
the first six months of 2002 compared to $146,118 for the same period of 2001,
and increased to $103,038 during the three month period ended June 30, 2002 from
$77,985 in the same period of 2001. This increase was due to the growth of
operating expenses associated with the expansion of loans and deposits. The
increases in the noninterest expenses noted above are primarily due to the
continued expansion of our franchise.
BALANCE SHEET REVIEW
Loans
At June 30, 2002, net loans (total loans less the allowance for loan losses)
totaled $73.2 million, an increase of $16.1 million from June 30, 2001. Average
gross loans increased from $51.4 million with a yield of 9.27% in the first six
months of 2001 to $69.3 million with a yield of 7.97% during the same 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.
Because 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. At June 30, 2002, loans were 86.4% of earning assets, versus
82.0% at June 30, 2001.
The following table shows the composition of the loan portfolio by
category at June 30, 2002 and 2001.
Composition of Loan Portfolio
June 30, 2002 June 30, 2001
Percent Percent
Amount of Total Amount of Total
------- --------- -------- --------
Commercial $15,832,686 21.3% $12,368,546 21.4%
Real estate - construction 2,613,757 3.5% 3,910,412 6.8%
Real estate - mortgage 40,220,154 54.1% 34,585,350 59.7%
Consumer 15,658,455 21.1% 7,026,780 12.1%
------------ ------ ------------ -----
Loans, gross 74,325,052 100.0 % 57,891,088 100.0%
====== =====
Unearned income (93,231) (100,956)
Allowance for possible loan losses (1,003,449) (702,693)
----------- ----------
Loans, net $73,228,372 $57,087,439
=========== ===========
The principal component of our loan portfolio at June 30, 2002 and 2001 was
mortgage loans, which represented 54.1% and 59.7% 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%.
We will attempt to maintain a relatively diversified loan portfolio to help
reduce the risk inherent in concentrations of collateral.
10
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 June 30, 2002.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
June 30, 2002
After one but After
One year Within five Five
or less Years Years Total
----------- ------------ ------- ------
Commercial $ 8,794,350 $ 6,357,892 $ 503,333 $ 15,655,575
Real estate 11,809,291 29,707,233 5,397,439 46,913,963
Construction 2,952,336 1,316,783 -- 4,269,119
Consumer 2,763,840 4,378,115 251,210 7,393,165
------------ ------------ --------- ---------
Total gross loans $ 26,319,817 $ 41,760,023 $6,151,982 $ 74,231,822
============ ============ ========== ==========
Fixed Interest Rate 17,080,763 38,968,797 4,088,031 60,044,360
Variable Interest Rate 9,239,054 2,791,226 2,157,182 14,187,462
----------- ----------- ---------- ----------
Total gross loans $ 26,319,817 $ 41,760,023 $ 6,245,213 $ 74,231,822
============ ============ =========== ============
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.
Off Balance Sheet Risk
Through the operations of our bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At June 30, 2002,
we had issued commitments to extend credit of $9.4 million through various types
of commercial and consumer lending arrangements. We evaluate each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by us upon extension of credit, is based on our credit
evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate. We manage the credit risk on these commitments by subjecting them
to normal underwriting and risk management processes.
At June 30, 2002, the bank had issued commitments to extend credit of $2.0
million through various types of 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 adequate sources of
liquidity to fund commitments that are drawn upon by the borrower.
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.
11
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.
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.
At June 30, 2002, the allowance for possible loan losses was $1,003,449, or
1.35% of total outstanding loans, compared to an allowance for possible loan
losses of $702,693, or 1.22% of total outstanding loans, at June 30, 2001. We
increased the allowance for possible loan losses by $300,756 over the June 30,
2001 allowance in order to keep pace with the approximately $16.1 million growth
of our loan portfolio during the period.
In the first six months of 2002, we had net charge-offs of $29,773. In the same
period of 2001, there were $51,052 in net charge offs. We had two non-performing
loans in the amount of $77,150 at June 30, 2002. Non-performing loans were
$271,046 at June 30, 2001. While there can be no assurances, we currently do not
expect to incur any losses relating to these non-performing loans.
The following table sets forth certain information with respect to our allowance
for loan losses and the composition of charge-offs and recoveries for the six
months ended June 30, 2002 and 2001.
Allowance for Loan Losses
Six months ending June 30,
2002 2001
---- ----
Average total loans outstanding $ 69,239,339 $ 51,364,735
Total loans outstanding at period end 74,231,822 57,790,132
Total nonperforming loans 77,150 271,046
Beginning balance of allowance $851,222 $569,245
Loans charged off (30,000) (51,702)
Total recoveries 227 650
-------- --------
Net loans charged off (29,772) (51,052)
Provision for loan losses 182,000 184,500
------- -------
Balance at period end $ 1,003,449 $ 702,693
============ ==========
Net charge-offs to average total loans .04% .10%
Allowance as a percent of total loans 1.35% 1.22%
Nonperforming loans as a
percentage of total loans 0.10% 0.47%
Nonperforming loans as a
percentage of allowance 7.69% 38.57%
12
The following table sets forth the breakdown of the allowance for loan losses by
loan category and the percentage of loans in each category to total loans for
the periods indicated. We believe that the allowance can be allocated by
category only on an approximate basis. The allocation of the allowance to each
category is not necessarily indicative of further losses and does not restrict
the use of the allowance to absorb losses in any category.
Allocation of the Allowance for Loan Losses
As of June 30, 2002
-------------------------
Residential
Real estate........ $ 542,866 54.1%
Construction....... 35,120 3.5%
Commercial.............. 213,734 21.3%
Consumer................ 211,729 21.1%
------- -----
Total allowance for
Loan losses........ $ 1,003,449 100.0%
Investment Securities
Total securities averaged $6.7 million in the first six months of 2002 and
totaled $7.0 million at June 30, 2002. In the same period of 2001, total
securities averaged $7.6 million and totaled $6.7 million at June 30, 2001. At
June 30, 2002, our total investment securities portfolio had a book value of
$7.0 million and a market value of $7.3 million for an unrealized net gain of
$319,825. We primarily invest in U.S. Government Agency and Mortgage- backed
securities.
At June 30, 2002, short-term investments totaled $4.7 million compared to $2.7
million as of June 30, 2001. These funds are one source of our 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 June 30, 2002 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
June 30, 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 296,820 2.04% 753,673 3.87% 499,304 6.51% ---- ----
Mortgage-backed ---- ---- 500,000 3.50% 500,000 5.25% 4,080,794 6.22%
Other ---- ---- ---- ---- ---- ---- 325,000 5.63%
---- ---- ---- ---- ---- ---- --------- -----
Total $296,820 2.04% $ 1,253,673 3.69% $ 999,304 5.88% $4,405,794 5.93%
======== ===== =========== ===== =========== ===== =========== =====
13
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $70.5 million and average interest-bearing deposits
were $59.0 million in the first half of 2002. Average total deposits were $58.4
million and average interest-bearing deposits were $58.4 million in the same
period of 2001. The following table sets forth our deposits by category as of
June 30, 2002 and June 30, 2001.
Deposits
June 30, 2002 June 30, 2001
Percent of Percent of
Amount Deposits Amount Deposits
------- -------- ------ --------
Demand deposit accounts $ 12,366,845 16.2% $ 11,091,844 16.9%
Interest bearing checking accounts 3,866,951 5.1% 2,463,498 3.7%
Money market accounts 23,361,018 30.5% 9,270,253 14.1%
Savings accounts 3,162,440 4.1% 3,240,602 4.9%
Time deposits less than $100,000 16,470,314 21.5% 26,234,450 39.9%
Time deposits of $100,000 or over 17,259,278 22.6% 13,498,585 20.5%
------------- ----- ------------- -----
Total deposits $ 76,486,846 100.0% $ 65,799,232 100.0%
============== ===== ============ =====
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 $59.2 million at June 30, 2002 compared
to $52.3 million at June 30, 2001. A stable base of deposits is expected 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 77.4% at June 30, 2002 and 80% at June 30, 2001. Our
loan-to-deposit ratio was 94.1% at June 30, 2002 versus 87.8% at June 30, 2001.
The average loan-to-deposit ratio was 93.75% during the first six months of 2002
and 88.1% during the same period of 2001.
CAPITAL
Under the capital guidelines of the Office of the Comptroller of the Currency
and the Federal Reserve, we are required to maintain a minimum total risk-based
capital ratio of 8%, with at least 4% being Tier 1 capital. The Federal Reserve
guidelines also contain an exemption from the capital requirements for bank
holding companies with less than $150 million in consolidated assets. Because we
have less than $150 million in assets, our holding company is not currently
subject to these guidelines. However, the bank falls under these rules as set by
bank regulatory agencies. 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%.
At June 30, 2002, our bank's total shareholders' equity was $11.6 million. We
were considered to be "well capitalized" at the bank level for regulatory
purposes at June 30, 2002, as our Tier 1 capital ratio was 14.1%, our total
risk-based capital ratio was 15.4%, and our Tier 1 leverage ratio was 12.3%.
14
The following chart reflects the risk-based regulatory capital ratios of the
bank at June 30, 2002.
Analysis of Capital
June 30, 2002
(Amounts in thousands)
Required Actual Excess
-------- ------ ------
Amount % Amount % Amount %
------ - ------ - ------ -
The bank:
Tier 1 risk-based capital 3,015 4.0% 10,637 14.1% 7,622 10.1%
Total risk-based capital 4,669 8.0% 11,580 15.4% 6,911 7.4%
Tier 1 leverage 3,469 4.0% 10,637 12.3% 7,168 8.3%
We believe that we have sufficient capital to fund our activities
on an on-going basis.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Our primary sources of liquidity are core 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 $6,000,000 and secured advances of approximately
$7,000,000 through the Federal Home Loan Bank.
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. An imbalance in these pricing opportunities at any point
in time constitutes 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. We generally attempt 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. 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.
15
The interest rate sensitivity position at June 30, 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.
Interest Sensitivity Analysis
June 30, 2002
After three After one but
but within five
Within three Within twelve Years After five
months months years Total
----- ------ ------- ----- -----
Assets
Earning assets:
Federal funds sold $ 4,694,384 $ -- $ -- $ -- $ 4,694,384
Investment securities 654,087 873,167 2,278,135 3,470,025 7,275,414
Total loans 19,771,297 11,457,706 38,919,917 4,082,902 74,231,822
---------- ---------- ---------- --------- ----------
Total earning assets $ 25,119,768 $ 12,330,873 $ 41,198,052 $ 7,552,927 $ 86,201,620
============ ============ ============ =========== ============
Liabilities
Interest-bearing liabilities
Money market and IBCA $ 29,441,045 $ -- $ -- $ -- $ 29,441,045
Savings deposits 3,162,440 -- -- -- 3,162,440
Time deposits 14,759,023 15,062,844 3,731,466 176,259 33,729,592
---------- ---------- --------- ------- ----------
Total interest-bearing
liabilities $ 47,362,508 $ 15,062,844 $ 3,731,466 $ 176,259 $ 66,333,077
============ ============ =========== ========== ============
Period gap $ (22,242,740) $ (2,731,971) $37,466,586 $ 7,376,668 $ 19,868,543
Cumulative gap $ (22,242,746) $ (24,974,711) $12,491,875 $19,868,543 $ 19,868,543
Ratio of cumulative gap to
Total earning assets (25.80)% (28.97)% 14.49% 23.05%
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 are currently 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 ours 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, we seek to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide rate fluctuations, including those resulting from inflation.
16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to which we are 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.
There was one matter submitted to a vote of security holders during the three
months ended June 30, 2002 at the company's annual meeting of shareholders held
on April 17, 2002:
The election of four members of the board of directors as Class I
directors for a three-year term and one new member of the board of directors,
Leigh Ammons Meese, as a Class III director for a two-year term.
Our board of directors is divided into three classes with each class
to be as nearly equal in number as possible. The three classes of directors
have staggered terms, so that the terms of only approximately one-third
of the board members will expire at each annual meeting of shareholders.
The current Class I directors are Raymond E. Cleary, III, Joe N. Jarrett,
Jr., Richard E. Lester and Don J. Smith. The current Class II directors
are Michael Bert Anderson, Orvis Bartlett Buie, Michael D. Harrington,
Rick H. Seagroves, and Walter E. Standish, III. The current Class III
directors are Leigh Ammons Meese, Samuel Robert Spann, Jr., B. Larkin
Spivey, and James C. Yahnis. The Class I directors and one Class III
director were up for reelection at this year's annual meeting held April
17, 2002. Each of the existing Class I directors and the one Class III
director were reelected at the annual meeting. For Mr. Cleary, 1,019,257
votes were cast in favor of his reelection as director, 200 votes were
withheld and 800 votes abstained. For Mr. Jarrett, 1,053,657 votes were
cast in favor of his reelection as director, 200 votes were withheld and 800
votes abstained. For Mr. Lester, 1,053,757 votes were cast in favor of his
reelection as director, 200 votes were withheld and 800 votes abstained.
For Mr. Smith, 1,053,757 votes were cast in favor of his reelection
as director, 200 votes were withheld and 800 votes abstained. For Ms. Meese,
1,053,757 votes were cast in favor of her reelection as director,
200 votes were withheld and 800 votes abstained. The terms of the Class
II directors will expire at the 2003 annual shareholders meeting,
and the terms of the Class III directors will expire at the 2004
annual shareholders meeting.
There were no other matters voted on by the company's shareholders at our annual
meeting held on April 17, 2002.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Employment Agreement between Beach First National Bancshares, Inc.
and Beach First National Bank and Walter E. Standish, III dated March
20, 2002.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period ended June 30,
2002.
17
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: August 12, 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
18
Exhibit List:
10.1 Employment Agreement between Beach First National Bancshares, Inc.
and Beach First National Bank and Walter E. Standish, III dated
March 20, 2002.