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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, 1998
------------------
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
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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 N. 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 October 31, 1998, 735,868 shares of the issuer's common stock, par
value $1.00 per share, were issued and outstanding.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31,
1998 1997 1997
---- ---- ----
ASSETS
Cash and due from banks $ 867,852 $ 1,833,568 $ 1,539,044
Federal funds sold 2,470,000 2,600,000 1,210,000
Investment securities available for sale 13,573,643 9,276,308 10,883,516
Loans, net 16,780,851 8,042,481 11,118,604
Premises and equipment, net 1,523,287 1,732,713 1,682,316
Other assets 923,538 327,612 504,764
----------- ----------- -----------
Total assets $36,139,171 $23,812,682 $26,938,244
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Non-interest bearing deposits $ 4,159,976 $ 3,840,818 $ 3,974,419
Interest bearing deposits 25,008,005 13,143,442 16,097,502
----------- ----------- -----------
Total deposits 29,167,981 16,984,260 20,071,921
Other liabilities 366,238 116,355 155,788
----------- ----------- -----------
Total liabilities 29,534,219 17,100,615 20,227,709
----------- ----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000
shares authorized; 735,868 shares issued and
outstanding 735,868 735,868 735,868
Paid-in capital 6,476,481 6,476,481 6,476,481
Retained deficit (635,568) (504,867) (507,636)
Net unrealized gain (loss) on investment
securities available for sale, net of income taxes 28,171 4,586 5,822
----------- ----------- -----------
Total shareholders' equity 6,604,952 6,712,068 6,710,535
----------- ----------- -----------
Total liabilities and shareholders' equity $36,139,171 $23,812,682 $26,938,244
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 374,513 $ 177,328 $ 996,363 $ 352,543
Investment securities 180,498 131,972 510,132 384,537
Federal funds sold 56,629 26,821 105,397 87,985
--------- --------- ----------- ---------
Total interest income 611,640 336,121 1,611,892 825,065
INTEREST EXPENSE
Deposits and borrowings 311,435 135,671 808,334 315,809
--------- --------- ----------- ---------
Net interest income 300,205 200,450 803,558 509,256
PROVISION FOR POSSIBLE LOAN LOSSES 27,500 34,500 92,500 120,000
--------- --------- ----------- ---------
Net interest income after provision
for possible loan losses 272,705 165,950 711,058 389,256
--------- --------- ----------- ---------
NONINTEREST INCOME
Service fees on deposit accounts 33,195 9,846 98,341 10,844
Other income 5,117 5,121 15,355 16,528
--------- --------- ----------- ---------
Total noninterest income 38,312 14,967 113,696 27,372
NONINTEREST EXPENSES
Salaries and wages 140,043 108,459 398,052 284,625
Employee benefits 25,925 18,842 67,863 51,010
Supplies and printing 16,405 14,717 35,799 39,655
Advertising and public relations 15,082 29,155 31,734 52,825
Professional fees 43,165 17,497 103,773 38,502
Depreciation and amortization 48,839 46,472 145,907 82,927
Other operating expenses 80,295 43,203 200,876 110,704
--------- --------- ----------- ---------
Total noninterest expenses 369,754 278,345 984,004 660,248
--------- --------- ----------- ---------
Loss before income taxes (58,737) (97,428) (159,250) (243,620)
INCOME TAX BENEFIT 10,320 0 31,320 0
--------- --------- ----------- ---------
Net loss $ (48,417) $ (97,428) $ (127,930) $(243,620)
========= ========= =========== =========
NET LOSS PER COMMON SHARE $ (.07) $ (.13) $ (.17) $ (.33)
========= ========= =========== =========
The Company paid no cash dividends
during these periods.
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 735,868 735,868 735,868 735,868
========= ========= =========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
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BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Net loss $(48,417) $(97,428) $(127,930) $(243,620)
Other comprehensive income, net of tax
Net change in unrealized gains (losses) on
securities available for sale 5,002 25,995 22,349 (5,081)
-------- -------- --------- ---------
Total other comprehensive income 5,002 25,995 22,349 (5,081)
-------- -------- --------- ---------
Comprehensive loss $(43,415) $(71,433) $(105,581) $(248,701)
======== ======== ========= =========
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BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net loss $ (127,930) $ (243,620)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred income taxes (31,320) --
Provisions for loan losses 92,500 120,000
Depreciation and amortization 145,907 82,927
Loss on sale of investment securities 10,729 (4,255)
(Increase) decrease in other assets 311,478 (262,445)
Increase (decrease) in other liabilities 210,450 30,772
------------ ------------
Net cash provided by/(used in) operating activities 611,814 (276,621)
------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities (9,224,387) (7,775,219)
Maturities or calls of securities 5,778,125 3,577,702
Decrease (increase) in Federal funds sold (1,260,000)
(40,000)
Increase in loans, net (5,662,247)
(6,964,584)
Purchase of premises and equipment (10,557) (1,327,243)
------------ ------------
Net cash used in investing activities (10,379,066) (12,529,344)
------------ ------------
FINANCING ACTIVITIES
Increase in deposits 9,096,060 13,966,604
------------ ------------
Net cash provided by financing activities 9,096,060 13,966,604
------------ ------------
Net change in cash and cash equivalents (671,192) 1,833,568
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,539,044 672,929
------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 867,852 $ 1,160,639
============ ============
CASH PAID FOR
Interest $ 778,198 $ 226,956
------------ ------------
Income taxes $ -0- $ -0-
------------ ------------
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BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 (b)
of Regulation S-B of the Securities and Exchange Commission. Accordingly they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, please refer to the consolidated financial
statements and footnotes thereto for the Company's fiscal year ended December
31, 1997, included in the Company's Form 10-KSB for the year ended December 31,
1997.
NOTE 2 - SUMMARY OF ORGANIZATION
Beach First National Bancshares, Inc., Myrtle Beach, South Carolina
(the "Company"), was incorporated July 28, 1995 under the laws of the State of
South Carolina for the purpose of operating as a bank holding company with
respect to a then proposed de novo bank, Beach First National Bank, Myrtle
Beach, South Carolina (the "Bank").
The Company offered its common stock for sale to the public under an
initial public offering price of $10 per share. As of December 31, 1996, when
the offering was terminated, 735,868 shares were sold, resulting in net proceeds
of $7,212,349.
During 1996, the Company obtained regulatory approval to operate a
national bank in Myrtle Beach, South Carolina. The Bank opened for business on
September 23, 1996, with a total capitalization of $6.3 million. Upon the
opening of the Bank, the Company ceased to be considered as a "development stage
enterprise" as its planned principal operations had commenced. The Bank's
deposits are each insured up to $100,000 by the Federal Deposit Insurance
Corporation.
The Bank is engaged in a general commercial banking business,
emphasizing in it marketing the Bank's local management and ownership. The Bank
offers a full range of banking services designed to meet the basic financial
needs of its customers. These services include checking accounts, NOW accounts,
money market deposit accounts, savings accounts, certificates of deposit and
individual retirement accounts. The Bank also offers short- to medium-term
commercial and personal loans.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements, and the
Company's operating performance each quarter is subject to various risks and
uncertainties that are discussed in detail in the Company's filings with the
Securities and Exchange Commission, including the "Risk Factors" section in the
Company's Registration Statement on Form S-1 (Registration Number 33-95562) as
filed with and declared effective by the Securities and Exchange Commission. The
Bank completed it first full year of operations in 1997 and has grown
substantially since opening in September 1996. Comparisons of the Bank's results
for the periods presented should be made with an understanding of the Bank's
short history.
RESULTS OF OPERATIONS
EARNINGS REVIEW
The Company's net loss was $127,930, or $0.17 per common share, for the
nine months ended September 30, 1998 as compared to a loss of $243,620, or $0.33
per common share, for the nine months ended September 30, 1997. The company's
net loss was $48,417, or $0.07 per share for the three months ended September
30, 1998 compared to a loss of $97,428 or $0.13 per share for the three months
ended September 30, 1997. The improvement in net income reflects the Bank's
continued growth, as average earning assets increased from $15.3 million during
the nine months ended September 30, 1997 to $27.8 million for the same period of
1998. The deficit return on average assets for the first nine months of 1998 was
(.55)% compared to (1.88)% for the same period in 1997; the deficit return on
average equity was (2.57)% for first nine months of 1998 versus (4.80%) in the
same period of 1997.
During the first nine months of 1998, net interest income increased to
$803,558 from $509,256 in the same period of 1997. This increase in net interest
income was the result of a $786,827 increase in interest income and a $492,525
increase in interest expense associated with the Bank's continued development of
its deposit and loan base. For the three months ended September 30, 1998, net
interest income increased to $300,205 from $200,450 over the comparable period
in 1997. The net interest spread for the nine months was 2.37% in 1998 compared
to 1.89% in 1997 . The net interest margin was 3.87% for the nine months of 1998
and was 4.44% in the same period of 1997.
The provision for loan losses was $92,500 for the nine month period and
$27,500 for the three month period ended September 30, 1998, down from $120,000
and $34,500 for the nine month and three month periods ended September 30, 1997.
The Company's allowance for loan losses as a percentage of its period end loans
was 1.16% and 1.66% at September 30, 1998 and 1997 respectively. The Company had
no non-performing loans at September 30, 1998 or 1997. Net charge-offs totaled
$63,922 for the first nine months of 1998. There were no net charge-offs in the
same period of 1997.
Non-interest income for the period ended September 30, 1998 was
$113,696, an increase of $86,324 over the same period of 1997. The was due
primarily to an increase in service fees on deposit
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accounts resulting from a $12.2 million growth in deposits from September 30,
1997 to September 30, 1998.
Non-interest expense was $984,004 for the period ended September 30,
1998, which was an increase of $323,756 over the same period of 1997. The
increase in non-interest expense reflects increased costs associated with the
growth of the Bank, legal fees related to a suspected kiting operation and
higher occupancy expenses resulting from the move into the new main office
facility in June 1997.
NET INTEREST INCOME
The primary source of revenue for the Company is net interest income,
which is the difference between income on interest-bearing assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the rates earned on the Company's 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.
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Federal funds sold $ 2,532,051 $ 105,397 5.57% $ 2,194,652 $ 87,985 5.36%
Investment securities 10,732,926 510,132 6.35% 8,111,493 384,537 6.34%
Loans 14,513,120 996,363 9.18% 5,024,600 352,543 9.38%
---------- ------- ---- --------- ------- ----
Total earning assets $27,778,097 $1,611,892 7.76% $15,330,745 $825,065 7.20%
=========== ========== ==== =========== ======== ====
Interest-bearing deposits $19,924,209 $ 797,297 5.35% $ 7,929,282 $314,774 5.31%
Other borrowings 122,495 11,037 12.05% 24,103 1,035 5.74%
---------- ------- ---- --------- ------- ----
Total interest-bearing
Liabilities $20,046,704 $ 808,334 5.39% $ 7,953,385 $315,809 5.31%
=========== ========== ==== =========== ======== ====
Net interest spread 2.37% 1.89%
Net interest income/margin $ 803,558 3.87% $509,256 4.44%
========== ==== ======== ====
As reflected above, for the first nine months of 1998 the average yield
on earning assets amounted to 7.76%, while the average cost of interest-bearing
liabilities was 5.39%. For the same period of 1997, the average yield on earning
assets was 7.20% and the average cost of interest-bearing liabilities was 5.31%.
The increase in the yield on earning assets is attributable to a significant
increase in outstanding loans which earn higher rates than other components of
earning assets. This increase in loans was expected as the Bank continues to
build its customer base. The net interest margin is computed by subtracting
interest expense from interest income and dividing the resulting figure by
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average interest-earning assets. The net interest margin for the nine month
period ended September 30, 1998 was 3.87% and for 1997 was 4.44%. This decline
was partially the result of an increase in interest-bearing deposits of $12.0
million, offset somewhat by an increase in earning assets of $12.4 million. In
addition, the weighted average rates on earning assets increased by 56 basis
while the rate on deposits only increased 8 basis points. The increases in
outstanding balances was predicted since the Bank is expanding its core base of
loans and deposits.
The following table presents the changes in the Company's net interest
income as a result of changes in the volume and rate of its interest-earning
assets and interest-bearing liabilities. The change in net interest income is
primarily due to increases in the volume of both loans and deposits rather than
changes in average rates.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
For the Nine Months Ended
September 30, 1998 versus 1997
------------------------------
Volume Rate Net change
------ ---- ----------
Federal funds sold $ 14,044 $ 3,368 $ 17,412
Investment securities 124,596 999 125,595
Loans 651,411 (7,591) 643,820
-------- ------- --------
Total earning assets 790,051 (3,224) 786,827
Interest-bearing deposits 479,995 2,528 482,523
Other borrowings 8,865 1,137 10,002
-------- ------- --------
Total interest-bearing
liabilities 488,860 3,665 492,525
-------- ------- --------
Net interest income $301,191 $(6,889) $294,302
======== ======= ========
PROVISION FOR LOAN LOSSES
The provision for loan losses was $92,500 for the first nine months of
1998 and $120,000 for the same period of 1997. The decline was the result of
management's assessment of the adequacy of the reserve for possible loans losses
given the size, mix and quality of the current loan portfolio. Management seeks
to determine the appropriate amount of loan loss provision for the condition of
the loan portfolio by continuously assessing general loan loss risk, asset
quality, current and predicted economic conditions and loan delinquencies.
However, management's judgment but the adequacy of the allowance is based upon a
number of assumptions about future events which it believes to be reasonable,
but which may or may not be accurate. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional increases in the loan loss allowance will not be required.
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NONINTEREST INCOME
Noninterest income increased from $27,372 in the first nine months of
1997 to $113,696 in the same period of 1998, and from $14,967 in the three
months ended September 30, 1997 to $38,312 in the same period of 1998. Service
fees on deposit accounts, the largest component of noninterest income, increased
from $10,844 to $98,341 in 1998 as the result of an increase in deposits of
$12.2 million. This growth in deposits was expected as the Bank moved into a
new, more convenient facility in June 1997. By relocating to a full-service
branch, the Bank was able to increase its customer base by offering more
convenient banking services.
NONINTEREST EXPENSE
Total noninterest expense increased from $660,248 for the nine months
ended September 30, 1997 to $984,004 for the same period in 1998, and from
$278,345 in the three months ended September 30, 1997 to $369,754 in the same
period of 1998. The increase in non-interest expense reflects an increase in
most expense categories as a result of the Company's growth from $23.8 million
in assets at the end of the September 1997 to $36.1 million at September 30,
1998. Salary and wages expense increased by $113,426 during the nine months and
$31,584 during the three months ended September 30, 1998 compared to the same
periods in 1997, and employee benefits increased by $16,853 and $7,083 during
these periods. These increases reflected an increase in the number of full-time
equivalent employees increased to 15 at the end of September 1998 from 13 at the
end of September 1997 as the Company added additional staff to support its
growth in loans and deposits. Management does not anticipate any significant
additions to staff during the next 12 months. Professional fees were $103,773
during the nine months and $43,165 during the three months ended September 30,
1998, compared to $38,502 and $17,497 during the comparable periods of 1997. The
1998 figure includes costs associated with the Bank's Year 2000 project and also
includes a $35,000 addition (during the nine month period) to the reserve
established for potential costs of collecting monies due that are related to a
suspected kiting operation. (See Part II, Item 1)
Depreciation and amortization increased $62,980 during the nine months
ended September 30, 1998 compared to the same period of 1997, and increased
$2,367 during the three month period ended September 30, 1998 compared to the
same period of 1997. The increase for the nine month period was directly related
to the completion of the new main office facility and the purchase of additional
furniture, equipment and computer hardware and software. The increase in the
category of other operating expenses to $200,876 in the period ended September
30, 1998 from $110,704 in 1997 was principally due to an increase in operating
expenses related to the new main office building and growth in data processing
fees and other expenses associated with the expansion of loan and deposits.
NET LOSS PER SHARE
Basic net loss per common share is computed on the basis of the
weighted average number of common shares outstanding in accordance with SFAS No.
128, "Earnings on Share". The treasury stock method is used to compute the
effect of stock options on the weighted average number of common shares
outstanding for the diluted method. No dilution occurs under the treasury stock
method as the exercise price of stock options equals or exceed the market value
of the stock.
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BALANCE SHEET REVIEW
INVESTMENT SECURITIES
At September 30, 1997, the Company's investment securities portfolio
was the largest component of the Company's total earning assets. However, by
September 30, 1998, investment securities had declined from 52.9% of average
earning assets to 39.6%. Total securities averaged $10.7 million in the first
nine months of 1998 compared to $8.1 million during this period in 1997. At
September 30, 1998, total securities were $13.6 million and totaled $9.3 million
at September 30, 1997. The Company primarily invests in securities of U.S.
Government agencies.
At September 30, 1998, short-term investments totaled $2,470,000
compared to $2,600,000 as of September 30, 1997. These funds are one source of
the Bank's liquidity and are generally invested in an earning capacity on an
overnight basis.
LOANS
At September 30, 1998, net loans totaled $16.8 million, an increase of
$8.7 million from September 30, 1997. The composition of the Company's loan
portfolio at September 30, 1998 was as follows: commercial and commercial real
estate, 65.0%; consumer, 13.9%; residential mortgage; 12.9%; and construction,
8.2%. Due to the short time the portfolio has existed, the current mix may not
be indicative of the ongoing portfolio mix. Management will attempt to maintain
a relatively diversified loan portfolio to help reduce the risks inherent in
concentrations of collateral.
Average gross loans increased from $5.0 million with a yield of 9.38%
in the first half of 1997 to $14.5 million with a yield of 9.18% in 1998. 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.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Management maintains an allowance for possible loan losses which it
believes is adequate to cover inherent losses in the loan portfolio. However,
management's judgment is based upon a number of assumptions about future events
which are believed to be reasonable, but which may or may not prove accurate.
Thus, there can be no assurance that charge-offs in future periods will not
exceed the allowance for possible loan losses or that additional increases in
the allowance for possible loan losses will not be required.
The allowance for possible loan losses is established through charges
in the form of a provision for loan losses. Loan losses and recoveries are
charged or credited directly to the allowance. The amount charged to the
provision for loan losses by the Company is based on management's judgment about
the amount required to maintain an allowance adequate to provide for potential
losses in the Company's loan portfolio. The level of this allowance is dependent
upon the total amount of past due loans, general economic conditions and
management's assessment of potential losses.
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At September 30, 1998, the allowance for possible loan losses was
$198,079, or 1.16% of outstanding loans, compared to an allowance for possible
loans losses of $136,502, or 1.66% of outstanding loans, at September 30, 1997.
Net charge-offs totaled $63,922 for the first nine months of 1998. There were no
net charge-offs in the same period of 1998. There were no non-accrual,
restructured or other non-performing loans at September 30, 1998 or 1997.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average total deposits were $24.0 million and average interest-bearing
deposits were $19.9 million in the nine months of 1998. Average total deposits
were $10.4 million and average interest-bearing deposits were $7.9 million in
the same period of 1997. Internal growth, resulting primarily from special
promotions and increased customer convenience of the new main office facility,
generated the new deposits.
Core deposits, which exclude certificates of deposit of $100,000 or
more, provide a relatively stable funding source for the Company's loan
portfolio and other earning assets. The Company's core deposits were $24.1
million at September 30, 1998 compared to $14.9 million at September 30, 1997. A
stable base of deposits is expected to be the Company's primary source of
funding to meet both its short-term and long-term liquidity needs in the future.
Core deposits as a percentage of total deposits were approximately 82.4% at
September 30, 1998, down slightly from 87% at September 30, 1997. The Company's
loan-to-deposit ratio was 57.5% at September 30, 1998 versus 47.4% at September
30, 1997. The average loan-to-deposit ratio was 61.0% during the first half of
1998 and 48.2% during the same period of 1997.
CAPITAL
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
shareholder's equity, qualifying perpetual preferred stock, and minority
interest in equity accounts of consolidated subsidiaries, less goodwill. In
addition, the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital
to total average assets) of at least 4%. The "well-capitalized" standard for the
Tier 1 leverage ratio is 5%. The following chart reflects the risk-based
regulatory capital ratios of the Bank at September 30, 1998.
ANALYSIS OF CAPITAL
(Amounts in thousands)
September 30, 1998
Required Actual Excess
Amount % Amount % Amount %
The Bank:
Tier 1 risk-based capital 832 4.00% 5,642 27.1% 4,810 23.1%
Total risk-based capital 1,663 8.00% 5,840 28.1% 4,177 20.1%
Tier 1 leverage 1,343 4.00% 5,642 16.8% 4,299 12.8%
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A condition of the original offering was that a minimum of 525,000
shares be subscribed to and fully paid for. There were a total of 735,868 shares
sold during the offering period with net proceeds after offering expenses of
$7,212,349, and the Company used $6,300,000 of this amount to capitalize the
Bank. The Company believes that this amount is sufficient to fund the activities
of the Bank in its initial stages of operations, and that the Bank will generate
sufficient income from operations to fund its activities on an on-going basis.
The remaining offering proceeds will be used to provide working capital,
including additional capital for investment in the Bank, if needed.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Primary sources of liquidity for the Company are a stable base of
deposits, scheduled repayments on the Company's loans and interest on and
maturities of its investments. All securities of the Company have been
classified as available for sale. Occasionally, the Company might sell
investment securities in connection with the management of its interest
sensitivity gap or to manage cash availability. The Company may also utilize its
cash and due from banks, security repurchase agreements and federal funds sold
to meet liquidity requirements as needed. In addition, the Company has the
ability, on a short-term basis, to purchase federal funds from other financial
institutions. Presently, the Company has made arrangements with commercial banks
for short-term unsecured advances of up to $3,000,000. The Company believes that
its liquidity and ability to manage assets will be sufficient to meet its cash
requirements over the near term.
The Company monitors and manages the pricing and maturity of its assets
and liabilities in order to lessen the potential impact that interest rate
movements could have on its net interest margin. To minimize the effect of these
margin swings, the balance sheet should be structured so that repricing
opportunities exist for both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals Imbalances in these pricing
opportunities at any point in time constitute interest rate risk.
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of rate
sensitive assets and liabilities at any given time interval. Management
generally attempts to maintain a balance between rate sensitive assets and
liabilities to minimize 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.
The Company generally would benefit from increasing market rates of
interest when it has an asset sensitive gap and generally would benefit from
decreasing market rates of interest when it is liability sensitive. At September
30, 1998, the Company had a cumulative gap ratio of (17.6)% in time frames of
one year or less. The Company currently is liability sensitive in time frames
less than one
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year and asset sensitive after that. However, the Company's gap analysis is not
a precise indicator of its interest sensitivity position. The analysis presents
only a static view of the timing of maturities and re-pricing 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 the Company and the Bank are primarily monetary
in nature. Therefore, interest rates have a more significant impact on the
Company's performance than do the effects of changes in the general rate of
inflation and changes in prices. In addition, interest rates do not necessarily
move in the same magnitude as the prices of goods and services. As discussed
previously, management seeks to manage the relationships between interest
sensitive assets and liabilities in order to protect against wide rate
fluctuations, including those resulting from inflation.
INDUSTRY DEVELOPMENTS
Proposed legislation could have an effect on both the costs of doing
business and the competitive factors facing the financial services industry. Due
to continued changes in the regulatory environment, additional legislation
related to the banking industry is likely to continue. While the potential
effects of legislation currently under consideration cannot be measured, the
Company is unaware of any pending legislation or regulatory reform which would
materially affect its financial position or operating results in the foreseeable
future.
Like many financial institutions, the Company and the Bank rely upon
computers for the daily conduct of their business and for information systems
processing. There is concern among industry experts that on January 1, 2000
computers will be unable to "read" the new year and there may be widespread
computer malfunctions. The Company and the Bank generally rely on software and
hardware developed by independent third parties to provide the information
systems used by the Company and the Bank. Presently the Company is obtaining and
assessing test results from these third parties to determine reliability and
adequacy towards satisfying Year 2000 related requirements. Based on information
currently available, management does not believe that the Company or the Bank
will incur significant costs in connection with the year 2000 issue. Management
at this time estimates that direct project costs should not exceed $20,000.
However, Year 2000 costs are difficult to estimate, particularly since the
Company relies largely on outside service providers for its computer hardware
and software products, and total costs could exceed this amount substantially.
Nevertheless, there can be no assurances that all hardware and software that
either the Company or the Bank uses will be Year 2000 compliant, and the Company
cannot predict with any certainty the costs the Company or the Bank will incur
to respond to any Year 2000 issues. Further, the business of many of the Bank's
customers may be negatively affected by the Year 2000 issue, and any financial
difficulties incurred by the Bank's customers in solving Year 2000 issues could
negatively affect such customer's ability to repay any loans which the Bank may
have extended. Therefore, even if the Company and the Bank do not incur
significant direct costs in connection with responding to the year 2000 issue,
there can be no assurance that the failure or delay of the Bank's customers or
other third parties in addressing the Year 2000 issue or the costs involved in
such process will not have a material adverse effect on the Bank's business,
financial condition and results of
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operation. The Bank is currently working to enhance its Testing Methodology and
Y2K Contingency Plan and all testing is expected to be completed by mid 1999.
The Bank has engaged an outside consultant to assist in the Y2K project and one
senior management member devotes approximately 10% of her time to this project.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income (FASB 130), was issued, and established
standards for reporting and displaying comprehensive income and its components,
as recognized under accounting standards, to be displayed in a financial
statement with the same prominence as other financial statements. Accordingly,
the Consolidated Statements of Comprehensive Income (Loss) have been included in
the financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 requires that a public business
enterprise report financial and descriptive information about its reportable
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS 131 required that a public enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
segment assets, information about the way that the operating segments are
determined and other items. The Statement is effective for fiscal years
beginning after December 15, 1997, The Company does not anticipate that adoption
of SFAS 131 will have a material effect on its financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instrument and Hedging Activities." All derivatives are to be measured at fair
value and recognized in the statement of financial position as assets or
liabilities. The statement is effective for fiscal years and quarters beginning
after June 15, 1999. Because the Company has limited use of derivative
transactions at this time, management does not expect that this standard would
have a significant effect on the Company.
In April 1998, the FASB issued SFAS 132, "Employers' Disclosures about
pensions and Other Postretirement Benefits." The new Statement revises the
required disclosures for employee benefit plans, but it does not change the
measurement or recognition of such plans. While the new standard requires some
additional information about benefit plans, it helps preparers of financial
statements by eliminating certain disclosures and by standardizing the
disclosures for pensions and other postretirement benefits to the extent
practicable. SFAS 132 supersedes the disclosure requirements in SFAS 87,
"Employers' Accounting for Pensions, " SFAS 88, "Employers Accounting for
Settlements and Curtailment of Defined Benefit Pension Plans and for Termination
Benefits," and SFAS 106, "Employers' Accounting for Postretirement Benefits
Other then Pensions." The new disclosures are effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 132 will not have an
impact on the financial statements of the Company due to the disclosure only
requirements.
In March 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which provided
guidance as to when it is or is not appropriate to capitalize the cost
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of software developed or obtained for internal use. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998 with
early adoption encouraged. The Company does not anticipate that Adoption of SOP
98-1 will have a material impact on its financial statements.
In October 1998, the FASB issued SFAS 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". The new statement establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises. The statement is effective for the first quarter beginning after
December 15, 1998. The statement will have no effect on the financial statements
of the Bank.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Bank is involved in various legal proceedings
which management considers to be incidental to the normal conduct of the Bank's
business. The Bank is involved in one such case involving a suspected kiting
operation in which the total estimated loss exposure is $625,000. Management
believes that the Bank has multiple defenses and recovery options which it
intends to pursue aggressively. Management has charged $62,000 to operations at
December 31, 1997 (and another $35,000 at September 30, 1998) for professional
fees to establish a reserve for this case. Any unfavorable developments in this
matter could have a material adverse effect on the short-term operating results
of the Bank.
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 were no matters submitted to a vote of shareholders during the
three months ended September 30, 1998.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
- ------ -----------
1.1. Selling Agent Agreement, dated October 16, 1995, by and
between Capital Investment Group, Inc. and the Company
(incorporated by reference to Exhibit 1.1 to the Company's
Registration Statement No. 33-95562 on Form S-1).
3.1. Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement No.
33-95562 on Form S-1).
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Exhibit
Number Description
- ------ -----------
3.2. Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement No. 33-95562 on Form S-1).
4.1. Provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement No. 33-95562 on Form S-1).
4.2. Form of Certificate of Common Stock (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement No.
33-95562 on Form S-1).
10.1. Contract of Sale, dated April 27, 1995, by and between Nadim
Baroody, Mary Baroody, Jean P. Saad, and Miray Saad, as
sellers, and Orvis Bartlett Buie, as purchaser (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement No. 33-95562 on Form S-1).
10.2. Line of Credit Note, dated April 24, 1995, by Sea Group, Ltd.
to The Bankers Bank (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement No. 33-95562 on Form
S-1).
10.3. Employment Agreement, dated August 23, 1995, by and between
the Company and William Gary Horn (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement No.
33-95562 on Form S-1).*
10.4. Form of Amended and Restated Escrow Agreement, dated November
1995, by and among The Bankers Bank, Capital Investment Group,
Inc., and the Company (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement No. 33-95562 on
Form S-1).
10.5. Amended and Restated Escrow Agreement, dated December 1, 1995,
by and among The Bankers Bank, Capital Investment Group, Inc.,
and the Company (incorporated by reference to Exhibit 10.5 of
the Company's Form 10-KSB for the fiscal year ended December
31, 1995).
10.6. Amendment to Employment Agreement, dated January 9, 1996, by
and between the Company and William Gary Horn (incorporated by
reference to Exhibit 10.6 of the Company's Form 10-KSB for the
fiscal year ended December 31, 1995).*
10.7. Stock Option Plan dated as of April 30, 1997 (incorporated by
reference to Exhibit 10.7 of the Company's Form 10-KSB for the
fiscal year ended December 31, 1996).
13 Annual Report to Shareholders for the year ended December 31,
1997 (incorporated by reference to Exhibit 13 of the Company's
Form 10-K for the year ended December 31, 1997)
16 Letter of Francis & Company, dated November 6, 1997 to the
Securities and Exchange Commission (incorporated by reference
to Exhibit 16 of the Company's Current Report on Form 8-K
filed on November 13, 1997)
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Exhibit
Number Description
- ------ -----------
21.1. Subsidiaries of the Company. (incorporated by reference to
Exhibit 21.1 of the Company's Form 10-QSB for the quarter
ended March 30, 1996).
27.1. Financial Data Schedule. (for SEC use only).
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* Denotes executive compensation contract or arrangement.
(b) Reports on Form 8-K.
None.
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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 6, 1998 By: /s/ William Gary Horn
----------------------- ---------------------------------
William Gary Horn
President
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