U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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: 333-95562
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BEACH FIRST NATIONAL BANCSHARES, INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 57-1030117
------------------------ -----------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1550 Oak Street, Myrtle Beach, South Carolina 29577
---------------------------------------------------
(Address of principal executive offices)
(843) 626-2265
--------------
(Issuer's telephone number)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
On November 8, 2002, 1,318,368 shares of the issuer's common stock, par
value $1.00 per share were issued and outstanding.
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Balance Sheets
September 30, December 31,
2002 2001 2001
---- ---- ----
(unaudited) (unaudited) (audited)
ASSETS
Cash and due from banks $ 4,717,941 $ 1,920,025 $ 3,387,066
Federal funds sold and short term investments 2,572,433 9,842,819 5,679,291
Investment securities available for sale 8,249,910 6,222,187 5,681,980
Loans, net 80,854,581 60,317,784 62,352,421
Federal Reserve Bank stock 164,700 164,700 164,700
Federal Home Loan Bank stock 200,000 144,100 144,100
Premises and equipment, net 2,830,590 2,503,571 2,568,475
Other assets 3,832,917 662,693 806,782
------------- -------------- --------------
Total assets $ 103,423,072 $ 81,777,879 $ 80,784,815
============= ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits $ 14,592,449 $ 11,356,230 $ 11,968,934
Interest bearing deposits 69,885,295 56,956,418 55,164,034
------------- ------------- -------------
Total deposits 84,477,744 68,312,648 67,132,968
Other borrowings 4,000,000 -- --
Other liabilities 1,164,650 433,491 503,017
------------- ------------- -------------
Total liabilities 89,642,394 68,746,139 67,635,985
------------- ------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares
authorized; 1,318,368 shares issued and outstanding 1,318,368 1,318,368 1,318,368
Paid-in capital 11,787,899 11,814,253 11,787,899
Retained earnings (deficit) 550,425 (187,453) 2,119
Accumulated other comprehensive income 123,986 86,572 40,444
------------- ------------- -------------
Total shareholders' equity 13,780,678 13,031,740 13,148,830
------------- ------------- -------------
Total liabilities and shareholders' equity $ 103,423,072 $ 81,777,879 $ 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 Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 4,251,053 $ 3,709,434 $ 1,515,803 $ 1,347,536
Investment securities 296,076 420,438 117,426 167,339
Federal funds sold and short term
investments 84,457 135,271 14,229 27,727
------------ ------------- ------------- -------------
Total interest income 4,631,586 4,265,143 1,647,458 1,542,602
INTEREST EXPENSE
Deposits 1,505,346 2,112,111 472,658 695,603
Other borrowings 34,543 13,140 34,352 2,843
------------ ------------- ------------ -------------
Total interest expense 1,539,889 2,125,251 507,010 698,446
Net interest income 3,091,697 2,139,892 1,140,448 844,156
PROVISION FOR POSSIBLE LOAN
LOSSES 314,000 356,000 132,000 171,500
------------ ------------- ------------ -------------
Net interest income after provision
for possible loan losses 2,777,697 1,783,892 1,008,448 672,656
------------ ------------- ----------- -------------
NONINTEREST INCOME
Service fees on deposit accounts 300,797 215,605 110,294 65,388
Loss on sale of investment securities 525 (9,746) 333 (1,996)
Other income 142,887 62,062 72,160 34,927
------------ ------------- ------------ -------------
Total noninterest income 444,209 267,921 182,787 98,319
------------ ------------- ------------ -------------
NONINTEREST EXPENSES
Salaries and wages 1,041,756 856,760 372,301 316,228
Employee benefits 180,272 82,433 65,513 28,575
Supplies and printing 58,850 56,312 17,183 28,396
Advertising and public relations 67,331 48,508 31,571 14,183
Professional fees 108,338 57,038 44,099 31,071
Depreciation and amortization 234,987 156,043 69,432 71,519
Occupancy 161,360 70,769 55,729 34,931
Data processing fees 156,091 115,271 63,369 42,573
Other operating expenses 338,766 255,672 128,743 109,095
------------ ------------- ------------ -------------
Total noninterest expenses 2,347,751 1,698,806 847,940 676,571
------------ ------------- ------------ -------------
Income before income taxes 874,155 353,007 343,293 94,404
INCOME TAX EXPENSE 325,848 83,285 127,115 (9,974)
------------ ------------- ------------ --------------
Net income $ 548,307 $ 269,722 $ 216,178 $ 104,378
============ ============= ============ =============
BASIC NET INCOME PER COMMON SHARE $ .42 $ .20 $ .16 $ .08
============ ============= ============ =============
DILUTED NET INCOME PER COMMON SHARE $ .41 $ .19 $ .16 $ .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 - - - 269,722 - 269,722
Other comprehensive income, net of taxes:
Unrealized loss on investment securities - - - - 134,508 134,508
Less reclassification adjustments for losses
included in net income - - - - (6,432) (6,432)
-----------
Comprehensive income - - - - - 397,798
-----------
Issuance of Common Stock 581,000 581,000 5,324,272 - - 5,905,272
---------- ----------- ----------- ---------- ----------- -----------
BALANCE, SEPTEMBER 30, 2001 1,318,368 $ 1,318,368 $11,814,253 $ (187,453) $ 86,572 $13,031,740
========== =========== =========== ========== =========== ===========
Accumulated
Other Total
Common stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Deficit Income Equity
------ ------ ------- ------- ------ ------
BALANCE, DECEMBER 31, 2001 1,318,368 $ 1,318,368 $11,787,899 $ 2,119 $ 40,444 $13,148,830
Net income - - - 548,307 - 548,307
Other comprehensive income, net of taxes:
Unrealized loss on investment securities - - - - 83,542 83,542
Less reclassification adjustments for losses
included in net income - - - - - -----------
Comprehensive income - - - - - 631,849
---------- ----------- ----------- ---------- ----------- -----------
BALANCE, SEPTEMBER 30, 2002 1,318,368 $ 1,318,368 $11,787,899 $ 550,425 $ 123,986 $13,780,678
========== =========== =========== ========== =========== ===========
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)
Nine Months Ended
September 30,
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 548,307 $ 269,722
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes 118,491 -
Provisions for loan losses 314,000 356,000
Depreciation and amortization (234,987) 156,043
Gain (Loss) on sale of investment securities 9,746
Increase (decrease) in other assets (3,144,626) (287,109)
Increase (decrease) in other liabilities 661,632 398,310
------------ ------------
Net cash provided by operating activities 1,737,183 902,712
------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities (2,944,672) -
Proceeds from sale or call of investment securities 404,384 1,824,606
Decrease (increase) in Federal funds sold & short term investments 3,106,858 (2,923,819)
Increase in loans, net (18,816,160) (15,620,874)
Purchase of premises and equipment (27,128) (1,113,167)
------------ ------------
Net cash used in investing activities (18,276,718) (17,833,254)
------------ ------------
FINANCING ACTIVITIES
(Decrease) increase in Federal funds purchased & borrowings 4,000,000 -
Sale of Stock - 5,905,272
Net increase in deposits 17,344,776 11,586,137
------------ ------------
Net cash provided by financing activities 21,344,776 17,491,409
------------ ------------
Net increase in cash and cash equivalents 1,330,875 560,867
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD $ 3,387,066 $ 1,359,158
------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 4,717,941 $ 1,920,025
============ ============
CASH PAID FOR
Income taxes $ 321,301 $ 8,410
------------ ------------
Interest $ 1,551,783 $ 2,152,613
------------ ------------
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 nine month periods ended September 30, 2002 and 2001 are not
necessarily indicative of the results that may be expected for the
entire year. These consolidated financial statements do not include all
disclosures required by generally accepted accounting principles and
should be read in conjunction with the Company's audited consolidated
financial statements and related notes for the year ended December 31,
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 Nine Months Ended
September 30, 2002
Shares Per Share
Income
(Numerator) (Denominator) Amount
--------------- ------------------ ----------------
Basic EPS $ 548,307 1,318,368 $ 0.42
Effect of Diluted Securities:
Stock options -- 6,007 (.01)
-------------- --------- ------------
Diluted EPS $ 548,307 1,324,375 $ 0.41
6
For the Three Months Ended
September 30, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- ------------------ ----------------
Basic EPS $ 216,178 1,318,368 $ 0.16
Effect of Diluted Securities:
Stock options -- 6,007 0.00
------------ ---------- --------------
Diluted EPS $ 216,178 1,324,375 $ 0.16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results 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 $548,307, or $.42 per common share, for the nine months ended
September 30, 2002 as compared to a net income of $269,722, or $.20 per common
share, for the nine months ended September 30, 2001. Our net income was
$216,178, or $.16 per common share, for the three months ended September 30,
2002 as compared to net income of $104,378, 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 $83.3 million during the first
nine months of 2002 from $76.7 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 nine month period ended September 30 was .82%
in 2002 compared to .51% in 2001. The return on average equity was 5.48% in 2002
versus 4.23% in 2001.
7
Net Interest Income
During the first nine months of 2002, net interest income increased to
$3,091,697, from $2,139,892 in the same period of 2001. The growth in net
interest income resulted from an increase of $366,443 in interest income, and a
decrease in interest expense of $585,362 due to the reduction of interest rates.
For the three months ended September 30, 2002, net interest income increased to
$1,140,448 from $844,156 during the comparable period of 2001. The net interest
spread was 4.12% in the nine months of 2002 compared to 2.86% during the same
period of 2001. The net interest margin was 4.96% for the nine month period
ended September 30, 2002 compared to 4.13% for the same period of 2001.
Provision for Loan Losses
The provision for loan losses was $314,000 for the first nine months of 2002 and
$356,000 for the same period of 2001. For the three month period ending
September 30, 2002 and 2001, the provision was $132,000 and $171,500,
respectively. The decrease in the provision for the nine month period ending
September 30, 2002 was the result of reduced charge offs during this period
compared to 2001. The increase for the three month period was increased loan
demand and our management's assessment of the adequacy of the reserve for
possible loan losses given the size, mix and quality of the current loan
portfolio. Our management anticipates loan growth will continue to be strong in
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 $444,209 in the first nine months of 2002 from
$267,921 in the same period of 2001. For the three months ended September 30,
2002, noninterest income was $182,787 as compared to $98,319 for the same period
in 2001. Service fees on deposit accounts, the largest component of noninterest
income, increased from $215,605 for the first nine months of 2001 to $300,797
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 our customers. The net gain on the sale of investment securities
was $525 compared to a loss of $9,746 for the nine month period ended September
30, 2002 and 2001, respectively.
Noninterest Expense
Total noninterest expense increased from $1,698,806 for the nine months ended
September 30, 2001 to $2,347,751 for the same period of 2002, and from $676,571
for the three months ended September 30, 2001 to $847,940 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 $103.4 million at
September 30, 2002 from $81.8 million at September 30, 2001. Salary and wages
increased by $184,996 during the nine months ended September 30, 2002 and
$56,073 during the three months ended September 30, 2002 compared to the same
periods in 2001. Employee benefits increased by $97,839 and $36,938 during these
periods. The increases in salaries and wages in 2002 is a result of additional
employees to support our growth, including the opening of a new branch in June
2001 that expanded our presence in the southern part of our market.
Due to the opening of the new branch, occupancy expense increased by $90,591 for
the nine months ended September 30, 2002 as compared to the same period in 2001.
Depreciation and amortization expense increased by $78,944 during the first nine
months of 2002 compared to the same period of 2001. 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
brick and mortar, furniture, fixtures and equipment purchased for the North
Myrtle Beach branch, scheduled to open in early November 2002, is recorded.
For the nine month period ended September 30, 2002, data processing expense
increased to $156,091 from $115,271 during the same period of 2001. During the
three month period ended September 30, data processing expense increased to
$63,369 in 2002 from $42,573 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 $338,766 for
the first nine months of 2002 compared to $255,672 for the same period of 2001,
and increased to $128,743 during the three month period ended September 30, 2002
from $109,095 in the same period of 2001. This increase was due to the
8
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 September 30, 2002, net loans (gross loans less unearned fees and the
allowance for loan losses) totaled $80.9 million, an increase of $20.5 million
from September 30, 2001. Average total loans increased from $54.1 million with a
yield of 9.16% in the first nine months of 2001 to $72.1 million with a yield of
7.88% 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.
The following table shows the composition of the loan portfolio by category
at September 30, 2002 and 2001.
Composition of Loan Portfolio
September 30, 2002 September 30, 2001
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
Commercial $ 17,925,953 21.8% $ 12,580,834 20.6%
Real estate - construction 4,922,955 6.0% 2,596,684 4.2%
Real estate - mortgage 51,536,176 62.8% 39,049,265 63.8%
Consumer 7,696,228 9.4% 6,952,868 11.4%
--------------- -------- --------------- --------
Loans, gross 82,081,312 100.0% 61,179,651 100.0%
=============== ======== =============== ========
Unearned income (104,675) (100,713)
Allowance for possible loan losses (1,122,056) (761,154)
--------------- ---------------
Loans, net $ 80,854,581 $ 60,317,784
=============== ===============
The principal component of our loan portfolio at September 30, 2002 and 2001 was
mortgage loans, which represented 62.8% and 63.8% of the portfolio,
respectively. In the context of this discussion, a "real estate mortgage loan"
is defined as any loan, other than loans for construction purposes, secured by
real estate, regardless of the purpose of the loan. We follow the common
practice of financial institutions in our market area of obtaining a security
interest in real estate whenever possible, in addition to any other available
collateral. The collateral is taken to reinforce the likelihood of the ultimate
repayment of the loan and tends to increase the magnitude of the real estate
loan portfolio component. Generally, we limit the loan-to-value ratio to 80%.
Due to the short time the portfolio has existed, the current mix may not be
indicative of the ongoing portfolio mix. Our management will attempt to maintain
a relatively diversified loan portfolio to help reduce the risk inherent in
concentrations of collateral.
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 September 30,
2002, we had issued commitments to extend credit of $15.1 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.
9
At September 30, 2002, the bank had issued commitments to extend credit of $3.1
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 it has adequate sources of
liquidity to fund commitments that are drawn upon by the borrower.
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 September 30, 2002, total loans were 88.2% of earning assets,
versus 79.0% at September 30, 2001.
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.
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 September 30, 2002, the allowance for possible loan losses was $1,122,056, or
1.37% of total outstanding loans, compared to an allowance for possible loan
losses of $761,154, or 1.25% of total outstanding loans, at September 30, 2001.
We increased the allowance for possible loan losses by $360,902 over the
September 30, 2001 allowance in order to keep pace with the approximately $20.5
million growth of our loan portfolio during the period.
In the first nine months of 2002, we had net charge-offs of $43,167. In the same
period of 2001, there were $164,091 in net charge offs. We had three
non-performing loans in the amount of $473,150 at September 30, 2002.
Non-performing loans were $151,170 at September 30, 2001.
10
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 nine
months ending September 30, 2002 and 2001.
Allowance for Loan Losses
Nine months ending September 30,
2002 2001
---- ----
Average total loans outstanding $ 72,119,482 $ 54,146,709
Total loans outstanding at period end 81,976,637 61,078,937
Total nonperforming loans 473,150 151,170
Beginning balance of allowance $ 851,222 $ 569,245
Loans charged off (44,076) (166,634)
Total recoveries 909 2,543
--------------- ---------------
Net loans charged off (43,167) (164,091)
Provision for loan losses 314,000 356,000
--------------- ---------------
Balance at period end $ 1,122,056 $ 761,154
=============== ===============
Net charge-offs to average total loans .05% .27%
Allowance as a percent of total loans 1.37% 1.25%
Nonperforming loans as a
percentage of total loans .58% .25%
Non performing loans as a
percentage of allowance 42.17% 19.86%
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 September 30, 2002
------------------------------
%
Residential real estate..... $ 37,048 3.30
Commercial construction..... 36,923 3.29
Commercial real estate...... 183,925 16.39
Commercial.................. 179,130 15.96
Consumer.................... 92,563 8.25
Other....................... 1,185 0.11
Unallocated................. 543,183 48.41
Special Allocated........... $ 48,100 4.29
------ -----
Total allowance for
Loan losses............ $ 1,122,056 100.0%
========= ======
11
Investment Securities
Total securities averaged $7.4 million in the first nine months of 2002 and
totaled $8.6 million at September 30, 2002. In the same period of 2000, total
securities averaged $7.2 million and totaled $6.5 million at September 30, 2001.
At September 30, 2002, our total investment securities portfolio had a book
value of $8,426,749 and a market value of $8,614,889 for an unrealized net gain
of $188,140. We invest in U.S. Government Agencies and U.S. Government Mortgage-
backed securities.
At September 30, 2002, short-term investments totaled $2,572,433 compared to
$9,842,819 as of September 30, 2001. This decrease is mainly attributed to the
increase loan demand that occurred during the nine month period ending September
30, 2002 compared to 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.
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $73.5 million and average interest-bearing
deposits were $60.9 million in the first nine months of 200. Average total
deposits were $61.6 million and average interest-bearing deposits were $52.6
million in the same period of 2001.
The following table sets forth our deposits by category as of September
30, 2002 and September 30, 2001.
Deposits
September 30, 2002 September 30, 2001
Percent of Percent of
Amount Deposits Amount Deposits
------ -------- ------ --------
Demand deposit accounts $ 14,592,449 17.4% $ 11,356,231 16.6%
Interest bearing checking accounts 4,073,852 4.8% 3,964,473 5.8%
Money market accounts 19,807,338 23.4% 14,735,106 21.6%
Savings accounts 3,062,296 3.6% 3,390,196 5.0%
Time deposits less than $100,000 20,795,799 24.6% 24,146,463 35.3%
Time deposits of $100,000 or over 22,146,010 26.2% 10,720,179 15.7%
-------------- ----------- -------------- -----------
Total deposits $ 84,477,744 100.0% $ 68,312,648 100.0%
============== =========== ============== ===========
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 $62.3 million at September 30, 2002
compared to $60.7 million at September 30, 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. Core deposits as a percentage of total deposits were
approximately 74% at September 30, 2002 and 84% at September 30, 2001. Our
loan-to-deposit ratio was 94.2% at September 30, 2002 versus 89.4% at September
30, 2001. The average loan-to-deposit ratio was 94.2% during the first nine
months of 2002 and 86.7% 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, the bank is required to maintain a
minimum total risk-based capital ratio of 8%, with at least 4% being Tier 1
capital. To be considered "well-capitalized," banks must meet regulatory
standards of 10% for total risk-based capital and 6% for Tier
12
1 capital. Tier 1 capital consists of common shareholders' equity, qualifying
perpetual preferred stock, and minority interest in equity accounts of
consolidated subsidiaries, less goodwill. In addition, the bank must maintain
a minimum Tier 1 leverage ratio (Tier 1 capital to total average assets) of at
least 4%. The "well-capitalized" standard for the Tier 1 leverage ratio is 5%.
The bank's Tier 1 risk-based capital ratio, total risk-based capital ratio and
Tier 1 leverage ratio was 12.5%, 13.8% and 11.1%, respectively at September 30,
2002 compared to 15.9%, 17.2% and 12.7%, respectively at September 30, 2001.
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. Our ability to maintain and
expand our deposit base and borrowing capabilities also serves as a source of
liquidity. Our loan to deposit ratio at September 30, 2002 was 94.2%. 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 believe that
our existing stable base of core deposits and other funding sources along with
continued growth in our deposit base, are adequate to meet our operating needs
and we are not aware of any events which may result in a significant adverse
impact on liquidity.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as our company and bank are primarily monetary in nature.
Therefore, interest rates have a more significant impact on our performance than
do the effects of changes in the general rate of inflation and changes in
prices. In addition, interest rates do not necessarily move in the same
magnitude as the prices of goods and services. As discussed previously,
management seeks to manage the relationships between interest sensitive assets
and liabilities in order to protect against wide rate fluctuations, including
those resulting from inflation.
Item 3. Controls and Procedures
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC reports. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
13
PART II -- OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings.
- ---------------------------
There are no material legal proceedings to which we or any of our
subsidiaries is a party or of which any of our property is the subject.
Item 2. Changes in Securities.
- -------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- -----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable.
Item 5. Other Information.
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits: 10.1 Description of the Director Deferred
Compensation Plan
10.2 Description of the Executive Deferred
Compensation Plan
10.3 Description of the Split Dollar Life
Insurance Plan
(b) Reports on Form 8-K.
The following reports were filed on Form 8-K during the third quarter
ended September 30, 2002.
99.1 The Company filed a Form 8-K on August 12, 2002 to disclose that the
Chief Executive Officer, Walter E. Standish, III, and the Chief
Financial Officer, Richard N. Burch, each furnished to the SEC the
certification required pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
14
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEACH FIRST NATIONAL BANCSHARES, INC.
Date: November 13, 2002
By: /s/ Walter E. Standish, III
------------------------------------
Walter E. Standish, III
President and Chief Executive Officer
By: /s/ Richard N. Burch
------------------------------------
Richard N. Burch
Chief Financial and Principal
Accounting Officer
15
Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Walter E. Standish, III, President and C.E.O., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Beach First
National Bancshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
that entity, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002
-----------------
/s/ Walter E. Standish, III
--------------------------------------
Walter E. Standish, III, President and C.E.O.
(Principal Executive Officer)
16
Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard N. Burch, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Beach First
National Bancshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
that entity, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002
-----------------
/s/ Richard N. Burch
-----------------------------------------
Richard N. Burch, Chief Financial Officer
(Principal Financial and Accounting Officer)
17