1
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, 1999
--------------
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 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 April 30, 1999, 735,868 shares of the issuer's common stock, par
value $1.00 per share, were issued and outstanding.
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BEACH FIRST NATIONAL BANCSHARES, INC.
MYRTLE BEACH, SOUTH CAROLINA
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998 1998
------------ ------------ ------------
(unaudited) (unaudited) (Audited)
------------
ASSETS
Cash and due from banks $ 1,674,951 $ 1,327,400 $ 970,349
Federal funds sold 780,000 2,270,000 2,250,000
Investment securities available for sale 9,549,438 10,442,854 11,524,689
Loans, net 23,033,007 13,560,326 20,832,341
Premises and equipment, net 1,500,910 1,590,483 1,530,005
Real estate acquired in settlement of loans 265,961 -- 288,074
Other assets 582,797 783,313 549,164
------------ ------------ ------------
Total assets $ 37,387,064 $ 29,974,376 $ 37,944,622
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Non-interest bearing deposits $ 5,019,869 $ 4,191,325 $ 5,199,610
Interest bearing deposits 25,782,287 18,962,971 25,935,432
------------ ------------ ------------
Total deposits 30,802,156 23,154,296 31,135,042
Other liabilities 171,002 136,959 335,924
------------ ------------ ------------
Total liabilities 30,973,158 23,291,255 31,470,966
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
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 (752,335) (547,853) (740,819)
Net unrealized gain (loss) on investment securities
available for sale, net of income taxes (46,108) 18,625 2,126
------------ ------------ ------------
Total shareholders' equity 6,413,906 6,683,121 6,473,656
------------ ------------ ------------
Total liabilities and shareholders' equity $ 37,387,064 $ 29,974,376 $ 37,944,622
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
BEACH FIRST NATIONAL BANCSHARES, INC.
MYRTLE BEACH, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------
1999 1998
--------- ---------
INTEREST INCOME
Interest and fees on loans $ 501,259 $ 289,825
Investment securities 170,659 163,356
Federal funds sold 8,630 16,267
--------- ---------
Total interest income 680,548 469,448
INTEREST EXPENSE
Deposits and borrowings 328,923 229,258
--------- ---------
Net interest income 351,625 240,190
PROVISION FOR POSSIBLE LOAN LOSSES 31,168 35,000
--------- ---------
Net interest income after provision
for possible loan losses 320,457 205,190
--------- ---------
NONINTEREST INCOME
Service fees on deposit accounts 27,762 27,875
Gain (loss) on sale of investment securities (12,857) (1,809)
Other income 8,154 7,095
--------- ---------
Total noninterest income 23,059 33,161
--------- ---------
NONINTEREST EXPENSES
Salaries and wages 147,724 127,348
Employee benefits 28,279 19,919
Supplies and printing 9,219 7,631
Advertising and public relations 11,200 9,331
Professional fees 29,976 19,987
Depreciation and amortization 50,229 48,521
Occupancy 9,953 10,607
Data processing fees 19,394 7,878
Other operating expenses 52,106 38,545
--------- ---------
Total noninterest expenses 358,080 289,767
--------- ---------
Loss before income taxes $ (14,564) $ (51,416)
INCOME TAX BENEFIT 3,049 11,200
--------- ---------
Net loss $ (11,515) $ (40,216)
========= =========
NET LOSS PER COMMON SHARE $ (.02) $ (.05)
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 735,868 735,868
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
other Total
Common stock Paid-in Retained Comprehensive shareholders'
Shares Amount capital deficit income equity
------- -------- ---------- --------- ------------- -------------
BALANCE, DECEMBER 31, 1997 735,868 $735,868 $6,476,481 $(507,636) $ 5,822 $ 6,710,535
Net loss -- -- -- (40,216) -- (40,216)
Other comprehensive loss, net of income
taxes:
Unrealized loss on investment securities -- -- -- -- 10,994 10,994
Less reclassification adjustments for losses
included in net loss -- -- -- -- 1,809 1,809
-----------
Comprehensive loss -- -- -- -- -- (27,412)
------- -------- ---------- --------- ------- -----------
BALANCE, MARCH 31, 1998 735,868 $735,868 $6,476,481 $(547,853) $18,625 $ 6,683,121
======= ======== ========== ========= ======= ===========
5
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(continued)
Accumulated
other Total
Common stock Paid-in Retained Comprehensive shareholders'
Shares Amount Capital deficit income equity
------- -------- ---------- --------- ------------- -------------
BALANCE, DECEMBER 31, 1998 735,868 $735,868 $6,476,481 $(740,819) $ 2,126 $ 6,473,656
Net loss -- -- -- (11,515) -- (11,515)
Other comprehensive loss, net of income
taxes:
Unrealized loss on investment securities -- -- -- -- (61,091) (61,091)
Less reclassification adjustments for losses
included in net loss -- -- -- -- 12,857 12,857
-----------
Comprehensive loss -- -- -- -- -- (59,749)
------- -------- ---------- --------- -------- -----------
BALANCE, MARCH 31, 1999 735,868 $735,868 $6,476,481 $(752,335) $(46,108) $ 6,413,906
======= ======== ========== ========= ======== ===========
6
BEACH FIRST NATIONAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
1999 1998
----------- -----------
OPERATING ACTIVITIES
Net loss $ (11,515) $ (40,216)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred income taxes (3,049) (11,200)
Provisions for loan losses 31,168 35,000
Depreciation and amortization 50,229 48,521
Loss on sale of investment securities 12,857 1,809
(Increase) decrease in other assets (6,056) (259,064)
Increase (decrease) in other liabilities (6,010) (18,829)
----------- -----------
Net cash used in operating activities 67,624 (243,979)
----------- -----------
INVESTING ACTIVITIES
Purchase of investment securities -- (1,204,580)
Maturities or calls of securities 1,885,234 1,657,988
Decrease (increase) in Federal funds sold 1,470,000 (1,060,000)
Increase in loans, net (2,231,834) (2,441,722)
Purchase of premises and equipment (16,737) (1,725)
Proceeds from sale of ORE 22,113 --
----------- -----------
Net cash used in investing activities 1,128,776 (3,050,039)
----------- -----------
FINANCING ACTIVITIES
Increase (decrease) in deposits (332,886) 3,082,374
Decrease in borrowed funds (158,912) --
----------- -----------
Net cash provided by financing activities (491,798) 3,082,374
----------- -----------
Net decrease in cash and cash equivalents 704,602 (211,644)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD $ 970,349 $ 1,539,044
=========== ===========
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 1,674,951 $ 1,327,400
=========== ===========
CASH PAID FOR
Income taxes $ -- $ --
----------- -----------
Interest $ 321,147 $ 231,500
----------- -----------
7
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 three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, please refer to the consolidated
financial statements and footnotes thereto for the Company's fiscal year ended
December 31, 1998, included in the Company's Form 10-KSB for the year ended
December 31, 1998.
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.
8
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 its second full year of operations in 1998 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 $11,515, or $0.02 per common share, for the
three months ended March 31, 1999 as compared to a loss of $40,216, or $0.05
per common share, for the three months ended March 31, 1998. The Bank continues
its strong growth trends, as average earning assets increased to $33.7 million
during the first three months of 1999 from $25.0 million during the same period
of 1998. The deficit return on average assets for the period ended March 31 was
(.13)% in 1999 compared to (.59)% in 1998; the deficit return on average equity
was (.72)% in 1999 versus (2.44)% in 1998.
During the first quarter of 1999, net interest income increased to
$351,625 from $240,190 in the first quarter of 1998. The growth in net interest
income resulted from an increase of $211,100 in interest income, partially
offset by an increase in interest expense of $99,665. The net interest spread
was 3.01% in the first quarter of 1999 compared to 2.26% during the first
quarter of 1998. The net interest margin was 4.23% for the period ended March
31, 1999 compared to 3.90% for the same period of 1998.
The provision for loan losses was $31,168 for the period ended March
31, 1999, down from $35,000 in the period ended March 31, 1998. The Company's
allowance for loan losses as a percentage of its period end loans was 1.24% and
1.48% at March 31, 1999 and 1998, respectively. Net charge-offs totaled $6,115
for the first quarter of 1999. There were no net charge-offs in the same period
of 1998. The Company had no non-performing loans at March 31, 1999 and $73,800
in non-performing loans at March 31, 1998.
Non-interest income for the period ended March 31, 1999 was $23,059,
compared to $33,161 in the same period of 1998. This was due primarily to an
increase in the net loss realized on securities sold from $1,809 in 1998 to
$12,857 in 1999.
Non-interest expense was $358,080 for the period ended March 31, 1999,
which was an increase of $68,313 over the same period of 1997. The increase in
non-interest expense reflects increases in salaries, data processing fees and
other expenses related to the growth of the loans and deposits of the Bank.
9
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.
Presented below are various components of assets and liabilities, interest
income and expense and yields/costs for the periods indicated.
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
March 31, 1999 March 31, 1998
-------------------------------- --------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------- -------- ----- ----------- -------- -----
Federal funds sold $ 718,889 $ 8,630 4.87% $ 1,208,556 $ 16,267 5.46%
Investment securities 10,843,526 170,659 6.38% 10,405,114 163,356 6.37%
Loans 22,164,763 501,259 9.17% 13,384,498 289,825 8.78%
----------- -------- ---- ----------- -------- ----
Total earning assets $33,727,178 $680,548 8.18% $24,998,168 $469,448 7.62%
=========== ======== ==== =========== ======== ====
Interest-bearing deposits $25,621,526 $326,591 5.17% $17,307,863 $228,368 5.35%
Other borrowings 168,343 2,332 5.62% 63,000 890 5.73%
----------- -------- ---- ----------- -------- ----
Total interest-bearing
liabilities $25,789,869 $328,923 5.17% $17,370,863 $229,258 5.35%
=========== ======== ==== =========== ======== ====
Net interest spread 3.01% 2.26%
Net interest income/margin $351,625 4.23% $240,190 3.90%
======== ==== ======== ====
As reflected above, for the first quarter of 1999 the average yield on
earning assets amounted to 8.18%, while the average cost of interest-bearing
liabilities was 5.17%. For the same period of 1998, the average yield on
earning assets was 7.62% and the average cost of interest-bearing liabilities
was 5.35%. 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 average loans of $8.8 million
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 average interest-earning assets. The net
interest margin for the period ended March 31, 1999 was 4.23% and for 1998 was
3.90%. This increase was the result of growth in average earning assets of $8.7
million, or 35%, partially offset by a $8.4 million increase in
interest-bearing liabilities. In addition, the weighted average rates on
earning assets increased by 56 basis points while the rate on deposits declined
18 basis points. The increase 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.
10
ANALYSIS OF CHANGES IN NET INTEREST INCOME
----------------------------------------
March 31, 1999 versus 1998
----------------------------------------
Volume Rate Net change
--------- -------- ----------
Federal funds sold $ (5,878) $ (1,759) $ (7,637)
Investment securities 6,900 403 7,303
Loans 198,567 12,867 211,434
--------- -------- ---------
Total earning assets 199,589 11,511 211,100
Interest-bearing deposits 105,972 (7,749) 98,223
Other borrowings 1,460 (18) 1,442
--------- -------- ---------
Total interest-bearing
Liabilities 107,432 (7,767) 99,665
--------- -------- ---------
Net interest income $ 92,157 $ 19,278 $ 111,435
========= ======== =========
PROVISION FOR LOAN LOSSES
The provision for loan losses was $31,168 for the first three months
of 1999 and $35,000 for the same period of 1998. The decline 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. Management
anticipates loan growth will continue to be strong in 1999 and that it will
continue to increase the amount of the provision for loan losses. See also
"Allowance for Possible Loan Losses" below.
NONINTEREST INCOME
Noninterest income decreased to $23,059 in the first quarter of 1999
from $33,161 in the same period of 1998. While service fees on deposit accounts
remained constant, the net loss on the sale of investment securities increased
to $12,857 from $1,809.
NONINTEREST EXPENSE
Total noninterest expense increased from $289,767 for the three months
ended March 31, 1998 to $358,080 for the same period of 1999. The increase in
noninterest expense reflects an increase in most expense categories as a result
of the growth of the Bank to $37.4 million in assets at March 31, 1999 from
$30.0 million at March 31, 1998. Salary and wages increased $20,376 in the
first quarter of 1999 compared to the same period of 1998. Employee benefits
also increased by $8,360 for the same periods. These increases reflected an
increase in the number of full-time equivalent employees to 18 at the end of
March 1999 from 13 at the end of March 1998. Additional staff was hired to
support the internal growth in loans and deposits. Management does not
anticipate any significant additions to staff during the next 12 months.
Professional fees were $29,976 during the first quarter of 1999 compared to
$19,987 in the first quarter of 1998. This increase is attributable to
increases in legal fees, consulting fees and accounting fees associated with
the growth of the Bank. Data processing increased $11,516 from the first
quarter of 1998 to the first quarter of 1999. These fees are directly related
to increases in the volume of loan and deposit accounts and associated
transaction activity.
The increase in the category of other operating expenses to $52,106 in
the first three months of
11
1999 from $38,545 in the same period of 1998 was due to growth in operating
expenses associated with the expansion of loans and deposits.
BALANCE SHEET REVIEW
Investment Securities
At March 31, 1999 and March 31, 1998, the Company's investment
securities portfolio was a significant component of total earning assets.
Investment securities represented 28.3% of total earning assets at March 31,
1999 versus 39.4% at March 31, 1998. Total securities averaged $10.8 million in
the first quarter of 1999 and totaled $9.5 at March 31, 1999. In 1998, total
securities averaged $10.4 million and totaled $10.4 million at March 31, 1998.
At March 31, 1999, the Company's total investment securities portfolio had a
book value of $9,623,800 and a market value of $9,549,438 for an unrealized net
loss of $74,362. The Company primarily invests in U.S. Treasury securities and
securities of other U.S. Government agencies.
Contractual maturities and yields on the Company's investment
securities (all available for sale) at March 31, 1999 are as follows. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Investment Securities Maturity Distribution and Yields
March 31, 1999
After one but After five but
Within one year Within five years Within ten years After ten years
----------------- ------------------- -------------------- --------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- -------- ----- -------- ----- ---------- -----
U.S. Treasury $ -- 0.00% $ -- 0.00% $ -- 0.00% $ -- 0.00%
U.S. Government
Agencies -- 0.00% 498,325 6.16% 100,750 7.10% -- 0.00%
Mortgage-backed -- 0.00% 232,903 6.48% -- 0.00% 8,526,609 5.64%
Other -- 0.00% -- 0.00% -- -- 190,850 6.00%
---- ---- ---- ---- ----
Total $ -- 0.00% $731,228 6.27% $100,750 7.10% $8,717,459 5.65%
==== ==== ==== ====
At March 31, 1999, short-term investments totaled $780,000 compared to
$2,270,000 as of March 31, 1998. These funds are one source of the Bank's
liquidity and are generally invested in an earning capacity on an overnight
basis.
LOANS
At March 31, 1999, net loans (gross loans less the allowance for loan
losses) totaled $23.0 million, an increase of $9.5 million from March 31, 1998.
Average gross loans increased from $13.4 million with a yield of 8.78% in 1998
to $22.2 million with a yield of 9.17% in 1999. 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.
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. Much progress was made in the effort as loans at
March 31, 1999 were 69.4% of earning assets, versus 52.1% at March 31, 1998.
The following table shows the composition of the loan portfolio by
category at December 31, 1998 and 1997.
12
COMPOSITION OF LOAN PORTFOLIO
MARCH 31, 1999 MARCH 31, 1998
Percent Percent
Amount of Total Amount of Total
------------ -------- ------------ --------
Commercial $ 4,244,887 18.2% $ 2,209,011 16.0%
Real estate - construction 2,187,242 9.4% 2,314,484 16.8%
Real estate - mortgage 13,586,628 58.3% 7,594,886 55.2%
Consumer 3,302,518 14.1% 1,646,447 12.0%
------------ ----- ------------ -----
Loans, gross 23,321,275 100.0% 13,764,828 100.0%
===== =====
Allowance for possible loan losses (288,268) (204,502)
------------ ------------
Loans, net $ 23,033,007 $ 13,560,326
============ ============
The principal component of the Company's loan portfolio at March 31,
1999 and 1998 was mortgage loans, which represented 58.3% and 55.2% of the
portfolio respectively. In the context of this discussion, a "real estate
mortgage loan" is defined as any loan, other than loans for construction
purposes, secured by real estate, regardless of the purpose of the loan. The
Company follows the common practice of financial institutions in the Company's
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,
the Company limits it loan-to-value ratio to 80%. Due to the short time the
portfolio has existed, the current mix may not be indicative of the ongoing
portfolio mix. Management will attempt to maintain a relatively diversified
loan portfolio to help reduce the risk inherent in concentrations of
collateral.
The following table sets forth the maturity distribution, classified
according to sensitivity to changes in interest rates, for selected components
of the Company's loan portfolio as of March 31, 1999.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
March 31, 1999
After one but After
One year within five five
or less Years years Total
---------- ------------- ---------- -----------
Commercial $1,686,161 $ 2,478,853 $ 79,873 $ 4,244,887
Real estate 942,456 10,450,255 2,193,916 13,586,627
Construction 1,837,242 350,000 -- 2,187,242
Consumer 1,191,069 1,760,330 351,120 3,302,519
---------- ----------- ---------- -----------
Total $5,656,928 $15,039,438 $2,624,909 $23,321,275
========== =========== ========== ===========
Fixed Interest Rate $2,377,217 $13,828,381 $2,403,211 $18,608,809
Variable Interest Rate 3,279,711 1,211,057 221,698 4,712,466
---------- ----------- ---------- -----------
Total $5,656,928 $15,039,438 $2,624,909 $23,321,275
========== =========== ========== ===========
13
The information presented in the above table is based on the
contractual maturities of the individual loans, including loans which may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
their maturity. Actual repayments of loans may differ from maturities reflected
above because borrowers may have the right to prepay obligations with or
without prepayment penalties.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
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. 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 valid.
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.
At March 31, 1999, the allowance for possible loan losses was 288,268,
or 1.24% of outstanding loans, compared to an allowance for possible loans
losses of $204,502, or 1.48% of outstanding loans at March 31, 1998. In the
first quarter of 1999, the Bank had net charge-offs of $6,115. There were no
net charge-offs in the same period of 1998. The Company had no non-performing
loans at March 31, 1999 and $73,800 in non-performing loans at March 31, 1998.
14
Allowance for Loan Losses
THREE MONTHS ENDING MARCH 31,
1999 1998
---- ----
Average loans outstanding $ 22,164,763 $13,384,498
Loans outstanding at period end 23,321,275 13,764,828
Total nonperforming loans 0 73,800
Beginning balance of allowance $ 263,215 $ 169,502
Loans charged off (6,115) 0
Total recoveries 0 0
------------ -----------
Net loans charged off (6,115) 0
Provision for loan losses 31,168 35,000
------------ -----------
Balance at period end $ 288,268 $ 204,502
============ ===========
Net charge-offs to average loans 0.03% 0.00%
Allowance as a percent of total loans 1.24% 1.48%
Nonperforming loans as a
Percentage of total loans -- 0.54%
Allowance as a percent of
Nonperforming loans -- 277.1%
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $30.0 million and average interest-bearing
deposits were $25.6 million in the first quarter of 1999. Average total
deposits were $20.8 million and average interest-bearing deposits were $17.3
million in the same period of 1998. The following table sets forth the deposits
of the Company by category as of March 31, 1999 and March 31, 1998.
DEPOSITS
MARCH 31, 1999 MARCH 31, 1998
Percent of Percent of
Amount Deposits Amount Deposits
----------- ---------- ----------- ----------
Demand deposit accounts $ 5,019,869 16.3% $ 4,191,325 18.2%
NOW accounts 847,481 2.8% 890,639 3.8%
Money market accounts 3,518,609 11.4% 1,876,568 8.1%
Savings accounts 4,222,366 13.7% 5,359,124 23.1%
Time deposits less than $100,000 12,275,130 39.8% 6,801,105 29.4%
Time deposits of $100,000 or over 4,918,701 16.0% 4,035,535 17.4%
----------- ----- ----------- ------
Total deposits $30,802,156 100.0% $23,154,296 100.00%
=========== ===== =========== ======
15
Internal growth, resulting primarily from special promotions and
increased customer convenience of the main office facility opened in June 1997,
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 $25.9
million at March 31, 1999 compared to $19.1 million at March 31, 1998. 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 84% at both March
31, 1999 and March 31, 1998. The Company's loan-to-deposit ratio was 75.7% at
March 31, 1999 versus 59.4% at March 31, 1998. The average loan-to-deposit
ratio was 73.9% during the first quarter of 1999 and 64.5% during the same
period of 1998.
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 March 31, 1999.
ANALYSIS OF CAPITAL
March 31, 1999
(Amounts in thousands)
Required Actual Excess
--------------- ------------------ ------------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
The Bank:
Tier 1 risk-based capital 1,045 4.00% 5,543 21.2% 4,498 17.2%
Total risk-based capital 2,090 8.00% 5,831 22.3% 3,741 14.3%
Tier 1 leverage 1,449 4.00% 5,543 15.3% 4,094 11.3%
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 gross proceeds after offering
expenses of $7,212,349 and $6,300,000 of this amount was used 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.
16
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.
17
The interest rate sensitivity position at March 31, 1999 is presented
below. Since all rates and yields do not adjust at the same velocity, the gap
is only a general indicator of rate sensitivity.
INTEREST SENSITIVITY ANALYSIS
MARCH 31, 1999
After three but After one but
Within three within twelve within five After five
months months years years Total
------------ --------------- ------------- ---------- -----------
ASSETS
Earnings assets:
Federal funds sold $ 780,000 $ -- $ -- $ -- $ 780,000
Investment securities 4,111,794 731,228 4,706,416 9,549,438
Loans 5,460,525 1,629,158 13,828,381 2,403,211 23,321,275
------------ ----------- ----------- ---------- -----------
Total earning assets $ 6,240,525 $ 5,740,952 $14,559,609 $7,109,627 $33,650,713
============ =========== =========== ========== ===========
LIABILITIES
Interest-bearing
liabilities
Money market and NOW $ 4,366,091 $ -- $ -- $ -- $ 4,366,091
Regular savings deposits 484,412 484,412
Prime savings deposits 3,737,955 3,737,955
Time deposits 2,298,411 7,230,546 7,664,872 -- 17,193,829
------------ ----------- ----------- ---------- -----------
Total interest-bearing
liabilities $ 10,886,869 $ 7,230,546 $ 7,664,872 $ -- $25,782,287
============ =========== =========== ========== ===========
Period gap $ (4,646,344) $(1,489,594) $ 6,894,737 $7,109,627 $ 7,868,426
Cumulative gap $ (4,646,344) $(6,135,938) $ 758,799 $7,868,426 $ 7,868,426
Ratio of cumulative gap
to total earning assets (13.8)% (18.2)% 2.3% 23.4%
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. The Company
currently is liability sensitive in time frames less than one 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 repricing opportunities, without
taking into consideration that changes in interest rates do not affect all
assets and liabilities equally. Net interest income is also impacted by other
significant factors, including changes in the volume and mix of earning assets
and interest-bearing liabilities.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as 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.
18
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. The Company cannot
predict whether any of these proposals will be adopted or, it adopted, how
these proposals will affect the Company.
YEAR 2000 ISSUES
Some computers, software, and other equipment include programming
codes in which calendar year data is abbreviated to only two digits. As a
result of this design decision, some of these systems could fail to operate or
fail to product correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the "Year
2000 Problem."
Assessment
The year 2000 Problem could affect computers, software, and other
equipment that the Company uses. Accordingly, the Company has developed a plan
that provides for, among other things, the replacement or modifications of
existing information systems as necessary. Because the primary hardware and
software systems which the Company uses are presently certified by their
vendors as Year 2000 compliant, the Company has not incurred significant costs
to date relating to software modifications or new installations for the other
systems. Most systems are made compliant through periodic software upgrades
provided by the various vendors as part of the license agreements. However,
while the Company does not expect the cost of these efforts to be material to
its financial position or any year's operating results, there can be no
assurance to this effect.
Internal Infrastructure
The Company utilizes an outsourced data processing system for most of
its accounting functions. The Company's primary systems have been tested by
proxy with the vendor, which has tested in environments with like software and
hardware systems as the Company. Banking regulators have approved this type of
testing as a valid means of testing. The Company has received the vendor's Year
2000 test results. Based on this review, the Company does not believe that the
data processing system has material Year 2000 issues. The Company believes that
it has also identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption of its business. The Company is in the
process of upgrading and testing the systems that it has determined are not
prepared for the Year 2000. The Company believes that the remediation of all
systems will be completed by June 30, 1999. The Company has spent approximately
$18,000 to get all of its systems Year 2000 compliant. The Company does not
believe that the cost related to these efforts will be material to its
business.
Systems Other Than Information Technology Systems
In addition to computers and related systems, the operation of the
Company's office and facilities equipment, such as fax machines, photocopiers,
telephone switches, security systems, and
19
other devices, may be affected by the Year 2000 Problem. The company has
completed its assessment of the potential effect of, and the costing of
remediating, the year 2000 Problem on this equipment. The Company estimates
that its total cost of completing any required modification, upgrades, or
replacement of these internal systems will not have a material effect on its
businesses.
Suppliers and Other Third Parties
The company has been gathering information from and has initiated
communications with its suppliers and other third parties to identify and, to
the extent possible, resolve issues involving the Year 2000 Problem. The
Company believes that the information systems and software it uses, and the
network connections it maintains, are programmed to comply with Year 2000
requirement. However, there is a risk that they are not.
Customers
The Company believes that the largest Year 2000 Problem exposure to most banks
is the preparedness of the customers of the banks. Management is addressing
with its customers the possible consequences of not being prepared for Year
2000. Should large borrowers not sufficiently address this issue, the Company
may experience an increase in loan defaults. The amount of potential loss from
this issues is not quantifiable. Management is attempting to reduce this
exposure by educating its customers. In addition, during the loan underwriting
process, management required documentation from commercial borrowers that they
are taking all necessary measures to assure that their information systems
technology is in compliance with the Year 2000 requirements.
Most Likely Consequences of year 2000 Problems
The Company expects to identify and resolve all year 2000 Problems
that could materially adversely affect its business, financial condition, or
operating results. However, the Company believes that it is not possible to
determine with complete certainty that all Year 2000 Problems affecting it have
been identified or corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition, the
Company cannot accurately predict how may failures related to the Year 2000
Problem will occur with its suppliers, customers, or other third parties or the
severity, duration, or financial consequences of such failures. As a result,
the Company expects that it could possible suffer the following consequences:
- A number of operations inconveniences and inefficiencies for
the Company, its service providers, or its customers that may
divert the Company's time and attention and financial and
human resources from its ordinary business activities;
- System malfunctions that may require significant efforts by
the Company or its service providers or customers to prevent
or alleviate material business disruptions.
Contingency Plans
The Company is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company completed its contingency plans
during the first quarter of 1999. Depending on the systems effected, these
plans include (a) accelerated replacement of affected equipment or software;
(b) short term use of backup equipment and software; (c) increased work hours
for the Company's personnel or use of contract
20
personnel to correct on an accelerated schedule any year 2000 Problems which
arise; and (d) other similar approaches. If the Company is required to
implement any of these contingency plans, these plans could have a material
adverse effect on its business, financial condition, or operating results.
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 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.
21
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.
22
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.
There were no matters submitted to a vote of shareholders during the
three months ended March 31, 1999.
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).
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).
23
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)
24
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).
- ----------------------
* Denotes executive compensation contract or arrangement.
(b) Reports on Form 8-K.
None.
25
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: May 14, 1999 By: /s/ William Gary Horn
------------- ----------------------------------------
William Gary Horn
President