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: September 30, 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 October 29, 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
September 30, December 31,
1999 1998 1998
---- ---- ----
(audited) (unaudited) (unaudited)
---------
ASSETS
Cash and due from banks $ 2,788,325 $ 867,852 $ 970,349
Federal funds sold 850,000 2,470,000 2,250,000
Investment securities available for sale 9,627,456 13,573,643 11,524,689
Loans, net 30,352,189 16,780,851 20,832,341
Premises and equipment, net 1,407,341 1,523,287 1,530,005
Real estate acquired in settlement of loans 163,153 288,074
161,012
Other assets 748,243 762,526 549,164
------------ ------------ ------------
Total assets $ 45,936,707 $ 36,139,171 $ 37,944,622
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits $ 7,910,392 $ 4,159,976 $ 5,199,610
Interest bearing deposits 29,590,315 25,008,005 25,935,432
------------ ------------ ------------
Total deposits 37,500,707 29,167,981 31,135,042
Other borrowings 1,900,000 159,465 0
Other liabilities 217,213 206,773 335,924
------------ ------------ ------------
Total liabilities 39,617,920 29,534,219 31,470,966
------------ ------------ ------------
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 (701,259) (635,568) (740,819)
Accumulated other comprehensive income (loss) (192,303) 28,171 2,126
------------ ------------ ------------
Total shareholders' equity 6,318,787 6,604,952 6,473,656
------------ ------------ ------------
Total liabilities and shareholders' equity $ 45,936,707 $ 36,139,171 $ 37,944,622
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
3
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 1,730,038 $ 996,363 $ 653,022 $ 374,513
Investment securities 468,938 510,132 156,842 180,498
Federal funds sold 36,692 105,397 18,005 56,629
----------- ----------- --------- ---------
Total interest income 2,235,668 1,611,892 827,869 611,640
INTEREST EXPENSE
Deposits 1,028,616 797,297 367,507 308,078
Other borrowings 4,478 11,037 4,478 3,357
----------- ----------- --------- ---------
Total interest expense 1,033,094 808,334 371,985 311,435
Net interest income 1,202,574 803,558 455,884 300,205
PROVISION FOR POSSIBLE LOAN
LOSSES 119,168 92,500 49,500 27,500
----------- ----------- --------- ---------
Net interest income after provision
for possible loan losses 1,083,406 711,058 406,384 272,705
----------- ----------- --------- ---------
NONINTEREST INCOME
Service fees on deposit accounts 108,294 98,341 42,851 33,195
Loss on sale of investment securities (29,573) (10,729) (6,403) (6,238)
Other income 23,491 15,355 6,934 5,117
----------- ----------- --------- ---------
Total noninterest income 102,212 102,967 43,382 32,074
----------- ----------- --------- ---------
NONINTEREST EXPENSES
Salaries and wages 477,226 398,052 173,725 140,043
Employee benefits 88,467 67,863 31,404 25,925
Supplies and printing 26,837 35,799 8,936 16,405
Advertising and public relations 36,888 31,734 14,019 15,082
Professional fees 105,865 103,773 47,499 43,165
Depreciation and amortization 154,620 145,907 52,609 48,839
Occupancy 33,841 33,970 13,056 11,355
Data processing fees 53,247 31,826 18,079 11,877
Other operating expenses 161,894 124,351 57,708 50,825
----------- ----------- --------- ---------
Total noninterest expenses 1,138,885 973,275 417,035 363,516
----------- ----------- --------- ---------
Income (loss) before income taxes 46,733 (159,250) 32,731 (58,737)
INCOME TAX EXPENSE (BENEFIT) 7,173 (31,320) 5,358 (10,320)
----------- ----------- --------- ---------
Net income (loss) $ 39,560 $ (127,930) $ 27,373 $ (48,417)
=========== =========== ========= =========
NET INCOME (LOSS) PER COMMON
SHARE $ .05 $ (.17) $ .04 $ (.07)
=========== =========== ========= =========
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.
3
4
BEACH FIRST NATIONAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Accumulated
other Total
Common stock Paid-in Retained comprehensive shareholders'
Shares Amount capital Deficit income Equity
------ ------ ------- ------- ------ ------
BALANCE, DECEMBER 31, 1997 735,868 $ 735,868 $ 6,476,481 $ (507,636) $ 5,822 $ 6,710,535
Net loss -- -- -- (127,930) -- (127,930)
Other comprehensive loss, net of income taxes:
Unrealized gain on investment securities -- -- -- -- 13,766 11,620
Less reclassification adjustments for losses
included in net loss -- -- -- -- 8,583 10,729
------------
Comprehensive loss -- -- -- -- -- (105,581)
--------- --------- ----------- ---------- ---------- ------------
BALANCE, SEPTEMBER 30, 1998 735,868 $ 735,868 $ 6,476,481 $ (635,568) $ 28,171 $ 6,604,952
========= ========= =========== ========== ========== ============
Accumulated
Other Total
Common stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Deficit Loss Equity
------ ------ ------- ------- ---- ------
BALANCE, DECEMBER 31, 1998 735,868 $ 735,868 $ 6,476,481 $ (740,819) $ 2,126 $ 6,473,656
Net income -- -- -- 39,560 -- 39,560
Other comprehensive loss, net of income taxes:
Unrealized loss on investment securities -- -- -- -- (224,002)
(218,087)
Less reclassification adjustments for losses
included in net income -- -- -- -- 23,658 29,573
------------
Comprehensive loss -- -- -- -- -- (154,869)
--------- --------- ----------- ---------- ---------- ------------
BALANCE, SEPTEMBER 30, 1999 735,868 $ 735,868 $ 6,476,481 $ (701,259) $ (192,303) $ 6,318,787
========= ========= =========== ========== ========== ============
The accompanying notes are an integral part of these
consolidated financial statements
4
5
BEACH FIRST NATIONAL BANCSHARES, INC.
MYRTLE BEACH, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 39,560 $ (127,930)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Deferred income taxes 7,173 (31,320)
Provisions for loan losses 119,168 92,500
Depreciation and amortization 154,620 145,907
Loss on sale of investment securities 29,573 10,729
(Increase) decrease in other assets (64,996) 311,478
Increase (decrease) in other liabilities 40,201 210,450
------------ ------------
Net cash provided by operating activities 325,299 611,814
------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities (2,790,691) (9,224,387)
Maturities or calls of securities 2,000,000 5,778,125
Sales of securities 2,348,270 --
Decrease (increase) in Federal funds sold 1,400,000
(1,260,000)
Increase in loans, net (9,639,016)
(5,662,247)
Purchase of premises and equipment (57,560) (10,557)
Proceeds from sale of ORE 124,921 --
------------ ------------
Net cash used in investing activities (6,614,076) (10,379,066)
------------ ------------
FINANCING ACTIVITIES
Increase in deposits 6,365,665 9,096,060
Increase in borrowed funds 1,741,088 --
------------ ------------
Net cash provided by financing activities 8,106,753 9,096,060
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,817,976 (671,192)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD $ 970,349 $ 1,539,044
============ ============
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 2,788,325 $ 867,852
============ ============
CASH PAID FOR
Income taxes $ 1,000 $ --
------------ ------------
Interest $ 1,022,965 $ 778,198
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
5
6
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 profit was $39,560, or $0.05 per common share, for
the nine months ended September 30, 1999 as compared to a loss of $127,930, or
$0.17 per common share, for the nine months ended September 30, 1998. The
Company's net profit was $27,373, or $.04, per common share, for the three
months ended September 30, 1999 as compared to a loss of $48,417, or $.07, for
the same period of 1998. The improvement in net income reflects the Bank's
continued strong growth trends, as average earning assets increased to $36.2
million during the first nine months of 1999 from $27.8 million during the same
period of 1998. The return on average assets for the six month period ended
June 30 was .13% in 1999 compared to (.55)% in 1998; the return on average
equity was .83% in 1999 versus (2.57)% in 1998.
During the first nine months of 1999, net interest income increased to
$1,202,574 from $803,558 in the same period of 1998. The growth in net interest
income resulted from an increase of $623,776 in interest income, partially
offset by an increase in interest expense of $224,760. For the three months
ended September 30, 1999, net interest income increased to $455,884 from
$300,205 over the comparable period of 1998. The net interest spread was 3.19%
in the first nine months of 1999 compared to 2.37% during the same period of
1998. The net interest margin was 4.44% for the nine month period ended
September 30, 1999 compared to 3.87% for the same period of 1998.
The provision for loan losses was $119,168 for the nine month period
and $49,500 for the three month period ended September 30, 1999, compared to
$92,500 and $27,500 for the nine month and three month periods ended September
30, 1998. The Company's allowance for loan losses as a percentage of its period
end loans was 1.22% and 1.16% at September 30, 1999 and 1998, respectively. Net
charge-offs totaled $6,115 for the first nine months of 1999. In the same
period of 1998, there were $63,923 in net charge offs. The Company had no
non-performing loans at September 30, 1999 and 1998.
Noninterest income for the nine month period ended September 30, 1999
was $102,212, compared to $102,967 in the same period of 1998. For the three
month periods ended September 30, 1999 and 1998, noninterest income was $43,382
and $32,074 respectively.
Noninterest expense was $1,138,885 for the nine month period ended
September 30, 1999, which was an increase of $165,610 over the same period of
1998. For the three months ended September 30, noninterest expense was $417,035
in 1999 and $363,516 in 1998. These increases in noninterest expense reflect
increases in salaries, data processing fees and other expenses related to the
growth of the loans and deposits of the Bank.
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.
6
7
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
For the nine months ended For the nine months ended
September 30, 1999 September 30, 1998
------------------ ------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Federal funds sold $ 947,399 $ 36,692 5.18% $ 2,532,051 $ 105,397 5.57%
Investment securities 9,851,546 468,938 6.36% 10,732,926 510,132 6.35%
Net loans 25,373,742 1,730,038 9.12% 14,513,120 996,363 9.18%
-------------- ------------ --------- -------------- ------------ ---------
Total earning assets $ 36,172,687 $ 2,235,668 8.26% $ 27,778,097 $ 1,611,892 7.76%
============== ============ ========= ============== ============ =========
Interest-bearing deposits $ 27,102,130 $ 1,028,616 5.07% $ 19,924,209 $ 797,297 5.35%
Other borrowings 110,809 4,478 5.40% 122,495 11,037 12.05%
-------------- ------------ --------- -------------- ------------ ---------
Total interest-bearing
Liabilities $ 27,212,939 $ 1,033,094 5.08% $ 20,046,704 $ 808,334 5.39%
============== ============ ========= ============== ============ =========
Net interest spread 3.19% 2.37%
Net interest income/margin $ 1,202,574 4.44% $ 803,558 3.87%
============ ========= ============ =========
As reflected above, for the nine months of 1999 the average yield on
earning assets amounted to 8.26%, while the average cost of interest-bearing
liabilities was 5.08%. For the same period of 1998, the average yield on
earning assets was 7.76% and the average cost of interest-bearing liabilities
was 5.39%. 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 $10.9 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 nine month period ended September 30, 1999 was 4.44%
and for same period of 1998 was 3.87%. This increase was the result of growth
in average earning assets of $8.4 million, partially offset by a $7.1 million
increase in interest-bearing liabilities. In addition, the weighted average
rates on earning assets increased by 50 basis points while the rate on deposits
declined 31 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.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
------------------------------------------------
Nine months ended September 30, 1999 versus 1998
------------------------------------------------
Volume Rate Net change
------ ---- ----------
Federal funds sold $ (61,372) $ (7,333) $ (68,705)
Investment securities (41,954) 760 (41,194)
Loans 740,502 (6,827) 733,675
---------- ----------- -----------
Total earning assets 637,176 (13,400) 623,776
Interest-bearing deposits 272,426 (41,107) 231,319
Other borrowings (472) (6,087) (6,559)
---------- ---------- -----------
Total interest-bearing liabilities 271,954 (47,194) 224,760
---------- ---------- -----------
Net interest income $ 365,222 $ 33,794 $ 399,016
========== ========== ===========
7
8
PROVISION FOR LOAN LOSSES
The provision for loan losses was $119,168 for the first nine months
of 1999 and $92,500 for the same period of 1998. The increase 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 as the
portfolio grows. See also "Allowance for Possible Loan Losses" below.
NONINTEREST INCOME
Noninterest income was $102,212 in the first nine months of 1999
compared to $102,967 in the same period of 1998. For the three month periods
ended September 30, noninterest income was $43,382 in 1999 and $32,074 in 1998.
Service fees on deposit accounts increased during the first nine months of 1999
to $108,294 from $98,341 in the same period of 1998. Other income increased to
$23,491 for the nine month period ended September 30, 1999 from $15,355 for the
same period of 1998. Both of these categories of noninterest income increased
due to growth in the number of deposit accounts as well as increased
fee-related activities of customers. The net loss on the sale of investment
securities increased to $29,573 from $10,729 for the nine month period ended
September 30, 1999 and 1998 respectively. These losses primarily relate to
paydowns on mortgage backed securities and result from movements in market
interest rates since the securities were acquired.
NONINTEREST EXPENSE
Total noninterest expense increased from $973,275 for the nine months
ended September 30, 1998 to $1,138,885 for the same period of 1999, and from
$363,517 for the three months ended September 30, 1998 to $417,034 in 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 $45.9 million
in assets at September 30, 1999 from $36.1 million at September 30, 1998.
Salary and wages increased by $79,174 during the nine months and $33,682 during
the three months ended September 30, 1999 compared to the same periods in 1998,
and employee benefits increased by $20,604 and $5,479 during these periods.
These increases are partially the result of an increase in the number of
full-time equivalent employees to 18 at the end of September 1999 from 15 at
the end of September 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 $105,865
during the nine months ended September 30, 1999 and $47,499 during the three
months period, compared to $103,773 and $43,165 during the comparable periods
of 1998. For the nine month period ended September 30, 1999, data processing
increased to $53,247 from $31,826 during the same period of 1998. For the three
months ended September 30, 1999, data processing expense was $18,079 compared
to $11,877 for the same period of 1998. Data processing fees are directly
related to increases in the volume of loan and deposit accounts and associated
transaction activity.
Other operating expenses increased $37,543 during the nine months
ended September 30, 1999 compared to the same period of 1998, and increased
$6,883 during the three month period ended September 30, 1999 compared to the
same period of 1998. These increases were due to growth in operating expenses
associated with the expansion of loans and deposits.
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
At September 30, 1999 and September 30, 1998, the Company's investment
securities portfolio was a significant component of total earning assets.
Investment securities represented 23.3% of total earning assets at September
30, 1999 versus 41.0% at September 30, 1998. Total securities averaged $9.9
million in the first nine months of 1999 and totaled $9.6 at September 30,
1999. In the same period of 1998, total securities averaged $10.7 million and
totaled $13.6 million at September 30, 1998. At September 30, 1999, the
Company's total investment securities portfolio had a book value of $9.9
million and a market value of $9.6 for an unrealized net loss of $308,077. The
Company primarily invests in U.S. Government Agency Mortgage backed securities.
8
9
Contractual maturities and yields on the Company's investment
securities (all available for sale) at September 30, 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
SEPTEMBER 30, 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 $ -- --% $ -- --% $ -- --% $ -- --%
U.S. Government Agencies -- --% -- --% 462,349 7.01% -- --%
Mortgage-backed -- --% -- --% 333,363 6.53% 8,836,771 6.04%
Other -- --% -- --% -- --% 303,050 6.56%
--------- ----- -------- ----- --------- ---- ----------- ----
Total $ -- --% $ -- --% $ 795,712 6.81% $ 9,139,821 6.06%
========= ===== ======== ===== ========= ==== =========== ====
At September 30, 1999, short-term investments totaled $850,000
compared to $2,470,000 as of September 30, 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 September 30, 1999, net loans (gross loans less the allowance for
loan losses) totaled $30.4 million, an increase of $13.6 million from September
30, 1998. Average gross loans increased from $14.5 million with a yield of
9.18% in 1998 to $25.4 million with a yield of 9.12% 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
September 30, 1999 were 74.6% of earning assets, versus 51.5% at September 30,
1998.
The following table shows the composition of the loan portfolio by
category at September 30, 1999 and 1998.
COMPOSITION OF LOAN PORTFOLIO
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
Percent Percent
Amount of Total Amount Of Total
------ -------- ------ --------
Commercial $ 5,105,440 16.6% $ 2,839,660 16.7%
Real estate - construction 3,202,184 10.4% 1,390,892 8.2%
Real estate - mortgage 18,136,221 58.9% 10,435,071 61.3%
Consumer 4,358,528 14.1% 2,357,062 13.8%
------------ ----- ------------ -----
Loans, gross 30,802,373 100.0% 17,022,685 100.0%
===== =====
Unearned income (73,915) (43,755)
Allowance for possible loan losses (376,268) (198,079)
------------ ------------
Loans, net $ 30,352,189 $ 16,780,851
============ ============
9
10
The principal component of the Company's loan portfolio at September
30, 1999 and 1998 was mortgage loans, which represented 58.9% and 61.3% 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 September 30, 1999.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
SEPTEMBER 30, 1999
After one but After
One year Within five Five
or less Years Years Total
------- ----- ----- -----
Commercial $ 2,169,739 $ 2,781,995 $ 153,707 $ 5,105,441
Real estate 2,093,996 14,474,895 1,567,328 18,136,219
Construction 2,634,721 397,000 170,464 3,202,185
Consumer 1,699,218 2,178,340 480,970 4,358,528
------------ --------------- ------------ ---------------
Total gross loans $ 8,597,674 $ 19,832,230 $ 2,372,469 $ 30,802,373
============ =============== ============ ===============
Fixed Interest Rate $ 3,584,124 $ 18,613,221 $ 2,109,845 $ 24,307,190
Variable Interest Rate 5,013,550 1,219,009 262,624 6,495,183
------------ --------------- ------------ ---------------
Total gross loans $ 8,597,674 $ 19,832,230 $ 2,372,469 $ 30,802,373
============ =============== ============ ===============
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
Management maintains an allowance for possible loan losses to cover
losses in the loan portfolio. 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 as to 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 a number of factors, including the
total amount of past due loans, general economic conditions, regulatory
reviews, and management's assessment of potential losses. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant change. Ultimately, losses may vary from current estimates and
future additions to the allowance may be necessary. 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. Management evaluates the adequacy of the allowance for loan losses
quarterly and makes provisions for loan losses based on this evaluation.
At September 30, 1999, the allowance for possible loan losses was
376,268, or 1.22% of outstanding loans, compared to an allowance for possible
loans losses of $198,079, or 1.16% of outstanding loans, at September 30, 1998.
10
11
In the first nine months of 1999, the Bank had net charge-offs of $6,115. In
the same period of 1998, there were $63,923 in net charge offs. The Company had
no non-performing loans at September 30, 1999 and 1998.
ALLOWANCE FOR LOAN LOSSES
NINE MONTHS ENDING SEPTEMBER 30,
1999 1998
---- ----
Average loans outstanding $ 25,373,742 $ 14,513,120
Loans outstanding at period end 30,728,458 16,978,930
Total nonperforming loans -- --
Beginning balance of allowance $ 263,215 $ 169,502
Loans charged off (6,115) (63,923)
Total recoveries 0 0
------------ ------------
Net loans charged off (6,115) (63,923)
Provision for loan losses 119,168 92,500
------------ ------------
Balance at period end $ 376,268 $ 198,079
============ ============
Net charge-offs to average loans 0.02% 0.44%
Allowance as a percent of total loans 1.22% 1.16%
Nonperforming loans as a
percentage of total loans N/A N/A
Nonperforming loans as a
percentage of allowance N/A N/A
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average total deposits were $30.9 million and average interest-bearing
deposits were $26.0 million in the nine months half of 1999. Average total
deposits were $22.2 million and average interest-bearing deposits were $18.4
million in the same period of 1998. The following table sets forth the deposits
of the Company by category as of September 30, 1999 and September 30, 1998.
DEPOSITS
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
Percent of Percent of
Amount Deposits Amount Deposits
------ -------- ------ --------
Demand deposit accounts $ 7,910,392 21.1% $ 4,159,976 14.3%
NOW accounts 1,132,771 3.0% 800,661 2.7%
Money market accounts 4,106,568 11.0% 3,973,702 13.6%
Savings accounts 4,953,730 13.2% 5,219,166 17.9%
Time deposits less than $100,000 13,630,238 36.3% 9,880,661 33.9%
Time deposits of $100,000 or over 5,767,008 15.4% 5,133,815 17.6%
-------------- ---------- ------------ ----------
Total deposits $ 37,500,707 100.0% $ 29,167,981 100.00%
============== ========== ============ ==========
Internal growth, resulting primarily from special promotions and
increased customer convenience of the main office facility opened in September
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 $31.7
million at September 30, 1999 compared to $24.0 million at September 30, 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
11
12
deposits as a percentage of total deposits were approximately 85% at September
30 1999 and 82% at September 30, 1998. The Company's loan-to-deposit ratio was
81.9% at September 30, 1999 versus 58.2% at September 30, 1998. The average
loan-to-deposit ratio was 77.7% during the first nine months of 1999 and 60.6%
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
shareholders' equity, qualifying perpetual preferred stock, and minority
interest in equity accounts of consolidated subsidiaries, less goodwill. In
addition, the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1
capital to total average assets) of at least 4%. The "well-capitalized"
standard for the Tier 1 leverage ratio is 5%. The following chart reflects the
risk-based regulatory capital ratios of the Bank at September 30, 1999.
ANALYSIS OF CAPITAL
SEPTEMBER 30, 1999
(Amounts in thousands)
Required Actual Excess
-------- ------ ------
Amount % Amount % Amount %
------ - ------ - ------ -
The Bank:
Tier 1 risk-based capital 1,335 4.0% 5,593 16.8% 4,258 12.8%
Total risk-based capital 2,670 8.0% 5,969 17.9% 3,299 9.9%
Tier 1 leverage 1,335 4.0% 5,593 13.3% 4,258 9.3%
A condition of the original offering was that a minimum of 525,000
shares be sold. 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.
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.
12
13
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 interest rate sensitivity position at September 30, 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
SEPTEMBER 30, 1999
After three but After one but
Within three Within twelve within five After five
month months Years years Total
----- ------ ----- ----- -----
ASSETS
Earning assets:
Federal funds sold $ 850,000 $ -- $ -- $ -- $ 850,000
Investment securities 2,847,019 -- 6,780,437 9,627,456
Loans 8,030,580 2,048,727 18,613,221 2,109,845 30,802,373
----------- ------------ ------------ ------------ ------------
Total earning assets $ 8,880,580 $ 4,895,746 $ 18,613,221 $ 8,890,282 $ 41,279,829
=========== ============ ============ ============ ============
LIABILITIES
Interest-bearing liabilities
Money market and NOW $ 5,239,339 $ -- $ -- $ -- $ 5,239,339
Savings deposits 4,953,730 -- 4,953,730
Time deposits 3,222,733 8,516,741 7,657,772 -- 19,397,246
----------- ------------ ------------ ------------ ------------
Total interest-bearing
liabilities $13,415,802 $ 8,516,741 $ 7,657,772 $ -- $ 29,590,315
=========== ============ ============ ============ ============
Period gap $(4,535,222) $ (3,620,995) $ 10,955,449 $ 8,890,282 $ 11,689,514
Cumulative gap $(4,535,222) $ (8,156,217) $ 2,799,232 $ 11,689,514 $ 11,689,514
Ratio of cumulative gap to
total earning assets (10.9)% (19.8)% 6.8% 28.3%
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.
13
14
INDUSTRY DEVELOPMENTS
On November 4, 1999, the U.S. Senate and House of Representatives each
passed the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act is expected to be signed into law by
President Clinton in early November 1999. Among other things, the Act repeals
the restrictions on banks affiliating with securities firms contained in
sections 20 and 32 of the Glass-Steagall Act. The Act also creates a new
"financial holding company" under the Bank Holding Company Act, which will
permit holding companies to engage in a statutorily provided list of financial
activities, including insurance and securities underwriting and agency
activities, merchant banking, and insurance company portfolio investment
activities. The Act also authorizes activities that are "complementary" to
financial activities. The Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis. Nevertheless, the Act may have the result of increasing the amount
of competition that the Company faces from larger institutions and other types
of companies. In fact, it is not possible to predict the full effect that the
Act will have on the Company.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 produce 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. 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." The Year 2000 Problem could affect computers,
software, and other equipment that the Company uses. In September 1996, the
Federal Financial Institutions Examination Council alerted the banking industry
that serious challenges could be encountered with Year 2000 issues. In
addition, the OCC has issued guidelines to require compliance with Year 2000
issues. In accordance with these guidelines, we have developed and are
executing a plan to ensure that our computer and telecommunication systems do
not have these Year 2000 problems. We rely on third party vendors to supply
most of our computer and telecommunication systems and other office equipment.
Our technology and processing vendors work with many other financial
institutions, all of whom, like us, are required by their bank regulators to be
Year 2000 compliant. Because our systems are substantially similar to those
used in many other banks, we believe that the scrutiny imposed by our
regulatory and the banking industry in general have significantly reduced the
Year 2000 related risks we might otherwise have faced. Nonetheless, there is a
risk that the Year 2000 issues could negatively affect our business.
INTERNAL INFRASTRUCTURE
The Company utilizes an outsourced data processing system by Fiserv
for most of its accounting functions. Fiserv is a well-established company and
provides computer systems and data processing for numerous financial
institutions. Fiserv has tested its systems with software and hardware similar
to the Company's. The Company has reviewed these test results and is relying on
them as a proxy for a test of its own systems with Fiserv. Banking regulators
have approved this type of testing as a valid means of testing. Based on this
review, the Company does not believe that its data processing system has any
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 [HAS] the process of upgrading and
testing the systems that it has determined are not prepared for the Year 2000.
Remediation of all systems was completed by September 30, 1999. The Company has
spent approximately $42,000 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.
14
15
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 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 business.
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. Nevertheless, there is a risk that some of the hardware or
software that the Company uses will not be Year 2000 compliant, and the Company
cannot predict with any certainty the costs the Company will incur to respond
to any Year 2000 issues. Factors which may affect the amount of these costs
include the Company's inability to control third party modification plans, the
Company's ability to identify and correct all relevant computer codes, the
availability and cost of engaging personnel trained in solving Year 2000
issues, and other similar uncertainties.
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 requires 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 possibly 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.
Additionally, there may be a higher than usual demand for liquidity
immediately prior to the century change due deposit withdrawals by customers
concerned about Year 2000 issues. To address this possible demand, the Company
has secured an additional line of credit with the Federal Home Loan Bank. The
Company is also taking the appropriate measures to secure additional lines of
credit at the Federal Reserve Discount Window.
15
16
CONTINGENCY PLANS
The Company has developed contingency plans to be implemented as part
of its efforts to identify and correct Year 2000 Problems affecting its
internal systems. 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 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.
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of Common Stock, of which 735,868, for a total of $7,358,680,
were sold in the initial public offering and are outstanding. As of October 6,
1999, the Company had 935 shareholders of record. There is no established
trading market in the Common Stock, and one is not expected to develop in the
near future.
All outstanding shares of Common Stock of the Company are entitled to
share equally in dividends from funds legally available therefor, when, as and
if declared by the Board of Directors. The Company does not plan to declare any
dividends in the immediate future.
16
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
There are no material legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 2. CHANGES IN SECURITIES.
- -------------------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION.
- ---------------------------
None.
17
18
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).
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)
18
19
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)
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.
19
20
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 4, 1999 By: /s/ William Gary Horn
------------------- ------------------------------------------------
William Gary Horn
President
By: /s/ Ann W. Jones
--------------------------------------------
Ann W. Jones
Chief Financial and Principal Accounting Officer
20