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: March 31, 2003
--------------
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 May 5, 2003, 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 Condensed Balance Sheets
March 31, December 31,
2003 2002 2002
---- ---- ----
(unaudited) (unaudited) (audited)
-------
ASSETS
Cash and due from banks $ 4,123,657 $ 1,625,858 $ 4,457,614
Federal funds sold and short-term investments 13,696,000 2,990,000 5,429,214
Investment securities available for sale 12,527,987 6,447,304 7,552,282
Loans, net 101,415,012 68,573,079 92,024,574
Federal Reserve Bank stock 164,700 164,700 164,700
Federal Home Loan Bank stock 325,000 160,300 200,000
Premises and equipment, net 4,679,225 2,411,855 4,577,770
Other assets 4,309,860 946,989 4,002,671
------------- ------------ -------------
Total assets $ 141,241,441 $ 83,320,085 $ 118,408,825
============= ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits $ 15,575,039 $ 11,230,026 $ 19,316,292
Interest bearing deposits 103,867,686 58,146,229 80,549,745
------------- ------------ -------------
Total deposits 119,442,725 69,376,255 99,866,037
Advances from Federal Home Loan Bank 6,500,000 - 4,000,000
Other liabilities 1,229,738 648,967 614,420
------------- ------------ -------------
Total liabilities 127,172,463 70,025,222 104,480,457
------------- ------------ -------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares
authorized; 1,318,368 issued and outstanding 1,318,368 1,318,368 1,318,368
Paid-in capital 11,787,899 11,787,899 11,787,899
Retained earnings 912,318 167,112 709,390
Accumulated other comprehensive income 50,393 21,484 112,711
------------- ------------ -------------
Total shareholders' equity 14,068,978 13,294,863 13,928,368
------------- ------------ -------------
Total liabilities and shareholders' equity $ 141,241,441 $ 83,320,085 $ 118,408,825
============= ============ =============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
Beach First National Bancshares, Inc, and Subsidiary
Myrtle Beach, South Carolina
Consolidated Condensed Statements of Income
(unaudited)
Three Months Ended
March 31
--------
2003 2002
---- ----
INTEREST INCOME
Interest and fees on loans $ 1,723,473 $ 1,322,069
Investment securities 113,298 92,547
Federal funds sold 8,124 22,780
----------- -----------
Total interest income 1,844,895 1,437,396
INTEREST EXPENSE
Deposits 562,633 516,271
Other borrowings 44,812 -
----------- -----------
Total interest expense 607,445 516,271
Net interest income 1,237,450 921,125
PROVISION FOR POSSIBLE LOAN
LOSSES 68,000 84,000
----------- -----------
Net interest income after provision for possible
loan losses 1,169,450 837,125
----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 121,382 85,661
Gain on sale of investment securities 73,639 487
Other income 87,634 34,558
----------- -----------
Total noninterest income 282,655 120,706
----------- -----------
NONINTEREST EXPENSES
Salaries and wages 483,130 313,144
Employee benefits 98,852 57,873
Supplies and printing 29,444 20,515
Advertising and public relations 41,928 7,313
Professional fees 34,736 23,655
Depreciation and amortization 104,997 73,344
Occupancy 86,772 54,369
Data processing fees 66,841 39,320
Other operating expenses 183,296 106,983
----------- -----------
Total noninterest expenses 1,129,996 696,516
----------- -----------
Income before income taxes 322,109 261,315
INCOME TAX EXPENSE 119,181 96,322
----------- -----------
Net income $ 202,928 $ 164,993
=========== ===========
BASIC NET INCOME PER COMMON SHARE $ .15 $ .13
=========== ===========
DILUTED NET INCOME PER COMMON SHARE $ .15 $ .12
=========== ===========
Weighted average common shares outstanding - basic 1,318,368 1,318,368
Weighted average common shares outstanding - diluted 1,327,305 1,320,765
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
Beach First National Bancshares, Inc. and Subsidiary
Consolidated Condensed Statements of Changes in Shareholders' Equity
(Unaudited)
Accumulated
Other Total
Common stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
------ ------ ------- -------- ------ ------
BALANCE, DECEMBER 31, 2001 1,318,368 $1,318,368 $ 11,787,899 $ 2,119 $ 40,444 $13,148,830
Net income - - - 164,993 - 164,993
Other comprehensive income, net of taxes:
Unrealized loss on investment securities - - - - (18,960) (18,960)
Less reclassification adjustments for losses
included in net income - - - - - -
----------
Comprehensive income - - - - - 146,033
--------- ---------- ----------- -------- --------- -----------
BALANCE, MARCH 31, 2002 1,318,368 $1,318,368 $11,787,899 $167,112 $ 21,484 $13,294,863
========= ========== =========== ======== ========= ===========
Accumulated
Other Total
Common stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
------ ------ ------- -------- ------ ------
BALANCE, DECEMBER 31, 2002 1,318,368 $1,318,368 $11,787,899 $ 709,390 $ 112,711 $13,928,368
Net income - - - 202,928 - 202,928
Other comprehensive income, net of taxes:
Unrealized loss on investment securities - - - - (62,318) (62,318)
Less reclassification adjustments for losses
included in net income - - - - - -
-----------
Comprehensive income - - - - - 140,610
--------- ---------- ----------- -------- --------- -----------
BALANCE, MARCH 31, 2003 1,318,368 $1,318,368 $11,787,899 $912,318 $ 50,393 $14,068,978
========= ========== =========== ======== ========= ===========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
---------
2003 2002
---- ----
OPERATING ACTIVITIES
Net income $ 202,928 $ 164,993
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred income taxes 133,710 64,687
Provisions for loan losses 68,000 84,000
Depreciation and amortization 104,997 73,344
Loss (Gain) on sale of investment securities (73,639) 487
(Increase) decrease in other assets (293,622) (96,469)
Increase in other liabilities 175,178 154,117
------------ -----------
Net cash provided by operating activities 317,552 445,159
------------ -----------
INVESTING ACTIVITIES
Purchase of investment securities (8,750,866) (1,525,969)
Purchase of FHLB stock (125,000) (16,200)
Proceeds from sale of investment securities 3,639,204 733,037
Decrease (increase) in Federal funds sold (8,266,786) 2,689,291
Increase in loans, net (9,458,438) (6,304,658)
Purchase of premises and equipment (206,452) (25,149)
------------ -----------
Net cash used in investing activities (23,168,338) (4,449,648)
------------ -----------
FINANCING ACTIVITIES
Advances from Federal Home Loan Bank 2,500,000 -
Net increase (decrease) in deposits 20,016,829 2,243,281
------------ -----------
Net cash provided by financing activities 22,516,829 2,243,281
------------ -----------
Net increase (decrease) in cash and cash equivalents (333,957) (1,761,208)
CASH AND DUE FROM BANKS, BEGINNING
OF PERIOD $ 4,457,614 $ 3,387,066
============ ===========
CASH AND DUE FROM BANKS, END OF
PERIOD $ 4,123,657 $ 1,625,858
============ ===========
CASH PAID FOR
Income taxes $ 119,181 $ 92,664
------------ -----------
Interest $ 607,445 $ 514,731
------------ -----------
The accompanying notes are an integral part of these
consolidated financial statements.
5
Beach First National Bancshares, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements for Beach
First National Bancshares, Inc. ("Company") were prepared in accordance
with instructions for Form 10-QSB and, therefore, do not include all
disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. All adjustments, consisting
only of normal recurring accruals, which are, in the opinion of
management, necessary for fair presentation of the interim consolidated
financial statements have been included. The results of operations for
the three month period ended March 31, 2003 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, 2002.
2. Principles of Consolidation
---------------------------
The accompanying unaudited consolidated condensed financial statements
include the accounts of the Company and its subsidiary, Beach First
National Bank. All significant inter-company items and transactions
have been eliminated in consolidation.
3. Earnings Per Share
------------------
The Company calculates earnings per share in accordance with SFAS No.
128, "Earnings Per Share." SFAS No. 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS)
for entities with publicly held common stock or potential common stock
such as options, warrants, convertible securities or contingent stock
agreements if those securities trade in a public market.
This standard specifies computation and presentation requirements for
both basic EPS and, for entities with complex capital structures,
diluted EPS. Basic earnings per share are computed by dividing net
income by the weighted average common shares outstanding. Diluted
earnings per share is similar to the computation of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. The dilutive effect
of options outstanding under the Company's stock option plan is
reflected in diluted earnings per share by application of the treasury
stock method.
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF THE BASIC AND
DILUTED EPS COMPUTATIONS:
For the Three Months Ended
March 31, 2003
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 202,928 1,318,368 $ 0.15
Effect of Diluted Securities:
Stock options - 8,937 (.00)
--------- --------- -------
Diluted EPS $ 202,928 1,327,305 $ 0.15
6
4. Stock Compensation Plan
-----------------------
The Company has a stock-based employee compensation plan which is
accounted for under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all stock
options granted under these plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per
share as if we had applied the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") SFAS No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.
Three Months ended March 31
---------------------------
2003 2002
---- ----
Net income, as reported $ 202,928 $ 164,993
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects 4,020 3,196
---------- ----------
Pro forma net income $ 198,908 $ 161,797
========== ==========
Earnings per share:
Basic - as reported $ 0.15 $ 0.12
========== ==========
Basic - pro forma $ 0.15 $ 0.12
========== ==========
Diluted - as reported $ 0.15 $ 0.12
========== ==========
Diluted - pro forma $ 0.15 $ 0.12
========== ==========
7
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 significant increases in competitive pressure in the banking and
financial services industries;
o changes in the interest rate environment which could reduce anticipated
or actual margins;
o the cost of defending and the risk of loss in connection with
litigation involving customers of and activities in our trust
department;
o changes in political conditions or the legislative or regulatory
environment;
o general economic conditions, either nationally or regionally and
especially in primary service area, becoming less favorable than
expected resulting in, among other things, a deterioration in credit
quality;
o changes occurring in business conditions and inflation;
o changes in technology;
o the level of allowance for loan loss;
o the rate of delinquencies and amounts of charge-offs;
o the rates of loan growth;
o adverse changes in asset quality and resulting credit risk-related
losses and expenses;
o changes in monetary and tax policies;
o changes in the securities markets; and
o other risks and uncertainties detailed from time to time in our filings
with the Securities and Exchange Commission.
Results of Operations
- ---------------------
EARNINGS REVIEW
Our net income was $202,928, or $0.15 per common share, for the three
months ended March 31, 2003 as compared to $164,993, or $0.13 per common share,
for the three months ended March 31, 2002. The improvement in net income
reflects the Bank's continued growth, as average earning assets increased to
$111.1 million during the first
8
three months of 2003 from $77.7 million during the same period of 2002. The
improvement also reflects a gain on sale of investment securities of $73,639
during the quarter ended March 31, 2003, compared to a gain of $487 during the
quarter ended March 31, 2002. The return on average assets for the three month
period ended March 31 was .66% in 2003 compared to .80% in 2002; this decline is
due in part to a 49.6% increase in average assets from 2002. The return on
average equity was 5.8% in 2003 versus 5.0% in 2002.
Net Interest Income
During the first three months of 2003, net interest income increased to
$1,237,450 from $921,125 in the same period of 2002. The growth in net interest
income resulted from an increase of $407,499 in interest income. Interest income
increased as a result of our continued growth, as average total loans increased
from $66.2 million in the first three months of 2002 to $98.5 million in the
same period in 2003. Net interest spread, the difference between the rate we
earn on interest-earning assets and the rate we pay on interest-bearing
liabilities, was 4.12% in the first three months of 2003 compared to 3.89%
during the same period of 2002. The net interest margin was 4.52% for the three
month period ended March 31, 2003 compared to 4.81% for the same period of 2002.
Provision for Loan Losses
The provision for loan losses was $68,000 for the first three months of
2003 and $84,000 for the same period of 2002. The decrease was 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. See also
"Allowance for Possible Loan Losses" below.
Non Interest Income
Noninterest income was $282,655 in the first three months of 2003 compared
to $120,706 in the same period of 2002. Service fees on deposit accounts,
generally the largest component of noninterest income, increased from $85,661 in
2002 to $121,382 in 2003. Other income increased to $87,633 in 2003 from $34,558
in the same period of 2002. Gains on sale of investment securities were $73,639
for the first quarter of 2003 compared to $487 in this period of 2002. Service
fees on deposit accounts increased due to growth in the number of deposit
accounts as well as increased fee-related activities of customers. Other income
increased due to the bank's purchase of bank owned life insurance to help fund
employee and director benefits programs.
Non Interest Expense
Total noninterest expense increased to $1,129,996 for the three month
period ending March 31, 2003 from $696,516 for the three month period ended
March 31, 2002. The increase in noninterest expense reflects an increase in most
expense categories as a result of our growth to $141.2 million in total assets.
Salary, wages and benefits increased $210,965, representing 49% of the total
increase in noninterest expenses, due to the expansion of branch offices and
asset growth over this period in 2002. We added twelve full time equivalents due
to new branch openings in North Myrtle Beach, South Carolina in November 2002
and Hilton Head Island, South Carolina in February 2003.
Depreciation and amortization expense increased by $31,653 from the first
quarter of 2002 to the same period of 2003 primarily due to the additional
expenses associated with our new branch offices in North Myrtle Beach and Hilton
Head Island, South Carolina. Occupancy expense increased by $32,403 from the
first quarter of 2002 to the first quarter of 2003, primarily due to the opening
of two new branch offices.
Advertising and public relations expenses increased $34,615 due to our
expansion into two new markets, North Myrtle Beach and Hilton Head Island, South
Carolina. Other operating expenses increased $74,233, primarily due to our new
branch expansion, home equity loan closing costs program and the expansion of
the VISA debit card program.
For the three month period ended March 31, 2003, data processing expense
increased to $66,841 from $39,320 during the same period of 2002. 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 $183,296 for the first three months of 2003 compared to
$106,983 for the same period of 2002. This increase was primarily due to
increased telephone, data communication, postage and other miscellaneous
expenses related primarily to the new branch offices and the growth of the
company.
9
BALANCE SHEET REVIEW
Loans
At March 31, 2003, net loans (total loans less the allowance for loan
losses) totaled $101.4 million, an increase of $32.8 million from March 31,
2002. Average total loans increased from $66.2 million with a yield of 8.10% in
the first three months of 2002 to $98.5 million with a yield of 7.10% in 2003.
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 March 31, 2003 and 2002.
Composition of Loan Portfolio
March 31, 2003 March 31, 2002
Percent Percent
Amount of Total Amount Of Total
------ -------- ------ --------
Commercial $ 26,713,931 26.0% $ 15,745,060 22.6%
Real estate - construction 6,363,341 6.2 3,077,577 4.4
Real estate - mortgage 61,845,641 60.1 43,709,931 62.8
Consumer 8,004,996 7.7 7,056,219 10.2
------------ ----- ------------ -----
Loans, gross 102,927,909 100.0% 69,588,787 100.0%
===== =====
Unearned income (169,815) (80,486)
Allowance for possible loan losses (1,343,082) (935,222)
------------ ------------
Loans, net $ 101,415,012 $ 68,573,079
============= ============
The principal component of our loan portfolio at March 31, 2003 and 2002
was mortgage loans, which represented 60.1% and 62.8% 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%.
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. 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 March 31, 2003, the bank had issued commitments to extend credit of
$15.1 million through various types of lending arrangements. The commitments
expire over the 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.
10
In addition to commitments to extend credit, we also issue standby
letters of credit which are assurances to a third party that they will not
suffer a loss if our customer fails to meet its contractual obligation to the
third party. Standby letters of credit totaled $2.2 million at March 31, 2003.
Past experience indicates that many of these standby letters of credit will
expire unused. However, through our various sources of liquidity, we believe
that we will have the necessary resources to meet these obligations should the
need arise.
Since loans typically provide higher yields than other types of earning
assets, one of the bank's goals is for loans to represent the largest category
of earning assets. As of March 31, 2003, loans were 88.6% of earning assets,
compared to 87.5% at March 31, 2002.
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 income. We
evaluate the allowance for loan losses on an overall portfolio basis, as well as
allocating the allowance to loan categories. We consider a number of factors in
determining the level of this allowance, including our total amount of
outstanding loans, our amount of past due loans, our historic loan loss
experience, general economic conditions, and our assessment of potential losses,
classified and criticized loans, concentrations of credit and internal credit
risk ratings. Our evaluation is inherently subjective as it requires estimates
that are susceptible to significant change. In addition, regulatory agencies
periodically review our allowance for loan losses as part of their examination
process, and they may require us to record additions to the allowance based on
their judgment about information available to them at the time of their
examinations. Our losses will undoubtedly vary from our estimates, and there is
a possibility that charge-offs in future periods will exceed the allowance for
loan losses as estimated at any point in time.
At March 31, 2003, the allowance for possible loan losses was $1,343,082,
or 1.31% of outstanding loans, compared to an allowance for possible loan losses
of $935,222, or 1.35% of outstanding loans, at March 31, 2002. In the first
three months of 2003, we had one charge-off totaling $696, and in 2002, we had
no charge-offs. We had non-performing loans totaling $416,462 at March 31, 2003
and $63,995 at March 31, 2002. While there can be no assurances, we do not
expect significant losses relating to these non-performing loans.
11
Allowance for Loan Losses
Three months ending March 31,
2003 2002
---- ----
Average loans outstanding $ 98,472,098 $ 66,207,233
Total loans outstanding at period end 102,727,909 69,508,301
Total nonperforming loans 416,462 63,995
Beginning balance of allowance $ 1,275,778 $ 851,222
Loans charged off 696 0
Total recoveries 0 0
------------- ------------
Net loans charged off 696 0
Provision for loan losses 68,000 84,000
------------- ------------
Balance at period end $ 1,343,082 935,222
============= ============
Net charge-offs to average loans 0.00% 0.00%
Allowance as a percent of total loans 1.31% 1.35%
Nonperforming loans as a
Percentage of total loans .41% .09%
Nonperforming loans as a
Percentage of allowance 31.01% 6.84%
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 March 31, 2003
--------------------
Residential real estate..... $ 59,598 4.44%
Commercial construction..... 51,030 3.80
Commercial real estate...... 185,955 13.85
Commercial.................. 269,020 20.03
Consumer.................... 96,900 7.21
Other....................... 765 0.06
Unallocated................. 510,748 38.02
Special Allocated........... $ 169,066 12.59
----------- -----
Total allowance for
Loan losses............ $ 1,343,082 100.0%
=========== =====
Investment Securities
Total securities averaged $9.6 million in the first three months of 2003
and totaled $12.5 million at March 31, 2003. In the same period of 2002, total
securities averaged $6.2 million and totaled $6.4 million at March 31, 2002.
12
At March 31, 2003, our total investment securities portfolio had a book value of
$12.9 million and a market value of $12.9 million for an unrealized net gain of
$76,353. We primarily invest in U.S. Government Agency and U. S. Agency mortgage
backed securities.
At March 31, 2003, short-term investments totaled $13.7 million, compared
to $3.0 million at March 31, 2002. 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. The increase between the two periods is attributable to the
increase in deposits from a certificate of deposit special offer run during the
first quarter.
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $107.9 million and average interest-bearing
deposits were $88.1 million in the first quarter of 2003. Average total deposits
were $68.3 million and average interest-bearing deposits were $58.0 million in
the same period of 2002. The following table sets forth our deposits by category
as of March 31, 2003 and March 31, 2002.
Deposits
March 31, 2003 March 31, 2002
Percent of Percent of
Amount Deposits Amount Deposits
------ -------- ------ --------
Demand deposit accounts $ 15,575,039 13.0% $ 11,230,026 16.2%
Interest Bearing Checking accounts 3,501,372 2.9% 3,469,511 5.0%
Money market accounts 24,192,361 20.3% 20,705,872 29.8%
Savings accounts 3,112,735 2.6% 3,504,811 5.1%
Time deposits less than $100,000 39,358,851 32.9% 17,223,536 24.8%
Time deposits of $100,000 or over 33,702,367 28.3% 13,242,499 19.1%
------------- ----- ------------ -----
Total deposits $ 119,442,725 100.0% $ 69,376,255 100.0%
============= ===== ============= =====
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 $85.7 million at March 31, 2003 compared
to $56.1 million at March 31, 2002. We expect a stable base of deposits to be
our primary source of funding to meet both our short-term and long-term
liquidity needs in the future. Core deposits as a percentage of total deposits
were approximately 72% at March 31, 2003 and 82% at March 31, 2002. Our
loan-to-deposit ratio was 85.1% at March 31, 2003 versus 96.7% at March 31,
2002. The average loan-to-deposit ratio was 96.9% during the first three months
of 2003 and 93.5% during the same period of 2002.
In addition to deposits, we obtained funds from the Federal Home Loan Bank
to help fund our loan growth. Average borrowings from the Federal Home Loan Bank
were $5.9 million during the first quarter of 2003 and totaled $6.5 million at
March 31, 2003. We currently have two fixed rate advances, one for $4.0 million
obtained in July 2002 at a rate of 3.69% maturing in July 2005 and a $2.5
million advance obtained in February 2003 at a rate of 1.83% maturing in
February 2004.
CAPITAL
We are subject to various regulatory capital requirements administered by
our federal bank regulators. As long as we have less than $150 million in total
assets, our capital levels are measured for regulatory purposes only at the bank
level, not at the holding company level. Under the capital guidelines of the
Office of the Comptroller of the Currency, the bank is required to maintain a
minimum total risk-based capital ratio of 8%, with at least 4% being Tier 1
capital. To be considered "well-capitalized," banks must meet regulatory
standards of 10% for total risk-based capital and 6% for Tier 1 capital. Tier 1
capital consists of common shareholders' equity, qualifying perpetual preferred
stock, and
13
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
10.3%, 11.5% and 9.2%, respectively at March 31, 2003 compared to 14.7%, 16.0%
and 12.7%, respectively at March 31, 2002.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Our primary sources of liquidity are core deposits, scheduled repayments on
our loans, advances from the Federal Home Loan Bank 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
$9.5 million. We also have a line of credit with the Federal Home Loan Bank to
borrow up to 75% of our 1 to 4 family loans, resulting in an availability of
funds of $8.0 million at March 31, 2003. At March 31, 2003, we had borrowed $6.5
million on this line. We believe that its liquidity and ability to manage assets
will be sufficient to meet its cash requirements over the near term.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the company and the bank are primarily monetary in nature.
Therefore, interest rates have a more significant impact on 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.
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the footnotes to the consolidated financial statements at December 31, 2002
as filed on our annual report on Form 10-KSB. Certain accounting policies
involve significant judgments and assumptions by us which have a material impact
on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and
assumptions we use are based on historical experience and other factors, which
we believe to be reasonable under the circumstances. Because of the nature of
the judgments and assumptions we make, actual results could differ from these
judgments and estimates which could have a material impact on our carrying
values of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in preparation of our
consolidated financial statements. Refer to the portion of this discussion that
addresses our allowance for loan losses for a description of our processes and
methodology for determining our allowance for loan losses.
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.
14
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.
PART II
- -------
OTHER INFORMATION
- -----------------
Item 1. Legal Proceedings.
- ---------------------------
There are no material legal proceedings to which the company or any of
its subsidiaries is a party or of which any of their property is the subject.
Item 2. Changes in Securities.
- -------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- -----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable
Item 5. Other Information.
- ---------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits - See Exhibit Index attached hereto.
Exhibit Description
------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K- The following reports were filed on Form 8-K
during the quarter ended March 31, 2003.
99.1 The Company filed a Form 8-K on March 20, 2003 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.
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEACH FIRST NATIONAL BANCSHARES, INC.
Date: May 12, 2003 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
16
Certification
-------------
I, Walter E. Standish, III, certify that:
I have reviewed this quarterly report on Form 10-QSB of Beach First National
Bancshares, Inc.;
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;
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;
The registrant's other certifying officers 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 subsidiaries, is made known to us by others within
those entities, 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 date
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;
The registrant's other certifying officers 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 (or persons performing the equivalent function):
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
The registrant's other certifying officers and I have indicated in this
quarterly report whether or not 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: May 12, 2003
/s/ Walter E. Standish, III
- -----------------------------------
Walter E. Standish, III
President and Chief Executive Officer
17
Certification
I, Richard N. Burch, certify that:
I have reviewed this quarterly report on Form 10-QSB of Beach First National
Bancshares, Inc.;
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;
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;
The registrant's other certifying officers 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 subsidiaries, is made known to us by others within
those entities, 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 date
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;
The registrant's other certifying officers 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 (or persons performing the equivalent function):
(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
The registrant's other certifying officers and I have indicated in this
quarterly report whether or not 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: May 12, 2003
/s/ Richard N. Burch
- ---------------------------
Richard N. Burch
Principal Accounting and Chief Financial Officer
18
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
19