<PAGE> 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: June 30, 1998
-------------
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from --------------- to -----------------
Commission file number: 33-95562
---------
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 July 31, 1998, 735,868 shares of the issuer's common stock, par
value $1.00 per share, were issued and outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 844,375 $ 937,313 $ 1,539,044
Federal funds sold 2,080,000 710,000 1,210,000
Investment securities available for sale 10,866,728 8,103,023 10,883,516
Loans, net 15,266,662 6,030,704 11,118,604
Premises and equipment, net 1,552,852 1,374,385 1,682,316
Other assets 975,042 287,028 504,764
----------- ----------- -----------
Total assets $31,585,659 $17,442,453 $26,938,244
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Non-interest bearing deposits $ 4,052,163 $ 2,806,380 $ 3,974,419
Interest bearing deposits 20,576,209 7,808,803 16,097,502
----------- ----------- -----------
Total deposits 24,628,372 10,615,183 20,071,921
Other liabilities 308,920 43,769 155,788
----------- ----------- -----------
Total liabilities 24,937,292 10,658,952 20,227,709
----------- ----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000
shares authorized; 735,868 shares issued 735,868 735,868 735,868
and outstanding
Paid-in capital 6,476,481 6,476,481 6,476,481
Retained deficit (587,151) (407,439) (507,636)
Net unrealized gain (loss) on investment securities
available for sale, net of income taxes 23,169 (21,409) 5,822
----------- ----------- -----------
Total shareholders' equity 6,648,367 6,783,501 6,710,535
----------- ----------- -----------
Total liabilities and shareholders' equity $31,585,659 $17,442,453 $26,938,244
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 3
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $332,024 $119,848 $ 621,850 $ 175,214
Investment securities 166,278 138,527 329,633 252,567
Federal funds sold 32,501 17,152 48,768 61,163
-------- -------- ---------- ---------
Total interest income 530,803 275,527 1,000,251 488,944
INTEREST EXPENSE
Deposits and borrowings 267,640 96,056 496,898 180,138
-------- -------- ---------- ---------
Net interest income 263,163 179,471 503,353 308,806
PROVISION FOR POSSIBLE LOAN LOSSES 30,000 45,000 65,000 85,500
-------- -------- ---------- ---------
Net interest income after provision
for possible loan losses 233,163 134,471 438,353 223,306
-------- -------- ---------- ---------
NONINTEREST INCOME
Service fees on deposit accounts 37,270 3,011 65,145 4,079
Other income 4,951 7,564 10,237 8,326
-------- -------- ---------- ---------
Total noninterest income 42,221 10,575 75,382 12,405
NONINTEREST EXPENSES
Salaries and wages 130,659 90,881 258,007 176,166
Employee benefits 22,019 17,373 41,938 32,169
Supplies and printing 11,763 4,183 19,394 24,937
Advertising and public relations 7,321 19,095 16,652 23,670
Professional fees 40,621 13,987 60,608 21,004
Depreciation and amortization 48,546 11,486 97,067 30,311
Other operating expenses 63,553 58,187 120,583 73,646
-------- -------- ---------- ---------
Total noninterest expenses 324,482 215,192 614,249 381,903
-------- -------- ---------- ---------
Loss before income taxes (49,098) (70,146) (100,514) (146,192)
INCOME TAX BENEFIT 9,800 0 21,000 0
-------- -------- ---------- ---------
Net loss $(39,298) $(70,146) $ (79,514) $(146,192)
======== ========= ========== =========
NET LOSS PER COMMON SHARE $ (.05) $ (.10) $ (.11) $ (.20)
======== ======== ========== =========
The Company paid no cash dividends during these
periods.
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 735,868 735,868 735,868 735,868
======== ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -----------------------
1998 1997 1998 1997
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Net loss $ (39,298) $ (70,146) $ (79,514) $ (146,192)
Other comprehensive income, net of tax
Net change in unrealized gains (losses) on
securities available for sale 4,544 (1,041) 17,347 (31,076)
----------- ----------- --------- -----------
Total other comprehensive income 4,544 (1,041) 17,347 (31,076)
----------- ---------- --------- -----------
Comprehensive loss $ (34,754) $ (71,187) $ (62,167) $ (177,268)
============ =========== ========= ===========
</TABLE>
4
<PAGE> 5
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
-------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (79,514) $ (146,192)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Deferred income taxes (21,000) -
Provisions for loan losses 65,000 85,500
Depreciation and amortization 97,067 30,311
Loss on sale of investment securities 4,491 -
(Increase) decrease in other assets (493,542) (161,781)
Increase (decrease) in other liabilities 153,132 (41,813)
---------- ----------
Net cash used in operating activities (274,366) (233,975)
---------- ----------
INVESTING ACTIVITIES
Purchase of investment securities (3,925,433) (4,595,125)
Maturities or calls of securities 3,969,067 1,525,605
Decrease (increase) in Federal funds sold (870,000) 1,850,000
Increase in loans, net (4,148,058) (4,952,807)
Purchase of premises and equipment (2,330) (926,841)
----------- -----------
Net cash used in investing activities (4,976,754) (7,099,168)
----------- -----------
FINANCING ACTIVITIES
Increase in deposits 4,556,451 7,597,527
---------- ----------
Net cash provided by financing activities 4,556,451 7,597,527
---------- ----------
Net change in cash and cash equivalents (694,669) 264,384
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,539,044 672,929
---------- ----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 844,375 $ 937,313
========== ==========
CASH PAID FOR
Interest $ 494,848 $ 169,620
---------- ----------
Income taxes 0 0
</TABLE>
5
<PAGE> 6
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 six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. For
further information, please refer to the consolidated financial statements and
footnotes thereto for the Company's fiscal year ended December 31, 1997,
included in the Company's Form 10-KSB for the year ended December 31, 1997.
NOTE 2 - SUMMARY OF ORGANIZATION
Beach First National Bancshares, Inc., Myrtle Beach, South Carolina
(the "Company"), was incorporated July 28, 1995 under the laws of the State of
South Carolina for the purpose of operating as a bank holding company with
respect to a then proposed de novo bank, Beach First National Bank, Myrtle
Beach, South Carolina (the "Bank").
The Company offered its common stock for sale to the public under an
initial public offering price of $10 per share. As of December 31, 1996, when
the offering was terminated, 735,868 shares were sold, resulting in net proceeds
of $7,212,349.
During 1996, the Company obtained regulatory approval to operate the
Bank, and 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.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements, and the
Company's operating performance each quarter is subject to various risks and
uncertainties that are discussed in detail in the Company's filings with the
Securities and Exchange Commission, including the "Risk Factors" section in the
Company's Registration Statement on Form S-1 (Registration Number 33-95562) as
filed with and declared effective by the Securities and Exchange Commission. The
Bank completed it first full year of operations in 1997 and has grown
substantially since opening in September 1996. Comparisons of the Bank's results
for the periods presented should be made with an understanding of the Bank's
short history.
RESULTS OF OPERATIONS
EARNINGS REVIEW
The Company's net loss was $79,514, or $0.11 per share, for the six
months ended June 30, 1998 as compared to a loss of $146,192, or $0.20 per
share, for the six months ended June 30, 1997. The Company's net loss was
$39,298, or $0.05 per share, for the three months ended June 30, 1998 as
compared to a loss of $70,146, or $0.10 per share, for the three months ended
June 30, 1997. The improvement in net income reflects the Bank's continued
growth, as average earning assets increased from $13.8 million during the six
months ended June 30, 1997 to $26.2 million for the same period of 1998. The
return on average assets for the first six months of 1998 was (.55)% compared to
(1.87)% for the same period in 1997; the return on average equity was (2.40)%
for first six months of 1998 versus (4.29%) in the same period of 1997.
During the first half of 1998, net interest income increased to
$503,353 from $308,806 in the first half of 1997. This increase in net interest
income was the result of a $511,307 increase in interest income and a $316,760
increase in interest expense associated with the Bank's continued development of
its deposit and loan base. For the three months ended June 30, 1998, net
interest income increased to $263,163 from $179,471 over the comparable period
in 1997. The net interest spread for the first six months of 1998 was 2.26%
compared to 1.71% during the comparable period in 1997 . The net interest margin
was 3.87% for the first six months of 1998 and was 4.50% in the same period of
1997.
The provision for loan losses was $65,000 for the six month period and
$30,000 for the three month period ended June 30, 1998, down from $85,500 and
$45,000 for the six month and three month periods ended June 30, 1997. The
Company's allowance for loan losses as a percentage of its period end loans was
1.10% and 1.66% at June 30, 1998 and 1997 respectively. The Company had no
non-performing loans at June 30, 1998 or 1997. Net charge-offs totaled $64,623
for the first six months of 1998. There were no net charge-offs in the same
period of 1997.
7
<PAGE> 8
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
Non-interest income for the six month period ended June 30, 1998 was
$75,382, an increase of $62,977 over the same period of 1997. The was due
primarily to an increase in service fees on deposit accounts resulting from a
$14.0 million growth in deposits from June 30, 1997 to June 30, 1998.
Non-interest expense was $614,249 for the six month period ended June
30, 1998, which was an increase of $232,346 over the same period of 1997. The
increase in non-interest expense reflects increased costs associated with the
growth of the Bank, legal fees related to a suspected kiting operation, and
higher occupancy expenses resulting from the move into the new main office
facility in June 1997.
NET INTEREST INCOME
The primary source of revenue for the Company is net interest income,
which is the difference between income on interest-bearing assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the rates earned on the Company's interest-earning assets and
the rates paid on its interest-bearing liabilities as well as the relative
amounts of interest-bearing assets and interest-bearing liabilities.
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
----------------------------------------- ------------------------------------------
Average Income Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------- -------------- ----- ------------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 1,775,967 $ 48,768 5.54% $ 2,329,669 $ 61,163 5.29%
Investment securities 10,584,066 329,633 6.28% 7,785,704 252,567 6.54%
Loans 13,888,055 621,850 9.03% 3,726,038 175,214 9.48%
-------------- -------------- ----- ------------- ------------ ----
Total earning assets $ 26,248,088 $ 1,000,251 7.68% $ 13,841,411 $ 488,944 7.12%
============== ============== ===== ============= ============ ====
Interest-bearing deposits $ 18,374,861 $ 489,219 5.37% $ 6,683,004 $ 179,465 5.42%
Other borrowings 103,631 7,679 14.94% 23,702 673 5.73%
-------------- -------------- ----- ------------- ------------ ----
Total Interest-
bearing liabilities $ 18,478,492 $ 496,898 5.42% $ 6,706,706 $ 180,138 5.42%
============== ============== ===== ============= ============ ====
Net interest spread 2.26% 1.71%
Net interest income/margin $ 503,353 3.87% $ 308,806 4.50%
============== ===== ============ ====
</TABLE>
As reflected above, for the first half of 1998 the average yield on
earning assets amounted to 7.68%, while the average cost of interest-bearing
liabilities was 5.42%. For the same period of 1997, the average yield on earning
assets was 7.12% and the average cost of interest-bearing liabilities was 5.42%.
The increase in the yield on earning assets is attributable to a significant
increase in outstanding
8
<PAGE> 9
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
loans which earn higher rates than other components of earning assets. This
increase in loans was expected as the Bank continues to build its customer base.
The net interest margin is computed by subtracting interest expense from
interest income and dividing the resulting figure by average interest-earning
assets. The net interest margin for the six month period ended June 30, 1998 was
3.87% and for 1997 was 4.50%. This decline was the result of an increase in
interest-bearing deposits of $11.7 million partially offset by a decline in the
rates paid from 5.42% to 5.37%. The increase in deposits was predicted since the
Bank is establishing its core base of deposits, which includes a mix of
certificates of deposit, money market accounts, savings accounts, and
interest-bearing checking accounts.
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
<TABLE>
<CAPTION>
-------------------------------------------
Six Months Ended June 30, 1998 versus 1997
-------------------------------------------
Volume Rate Net change
---------- --------- -----------
<S> <C> <C> <C>
Federal funds sold $ (15,205) $ 2,810 $ (12,395)
Investment securities 87,152 (10,086) 77,066
Loans 455,012 (8,376) 446,636
--------- --------- ---------
Total earning assets 526,959 (15,652) 511,307
Interest-bearing deposits 311,288 (1,534) 309,754
Other borrowings 5,923 1,083 7,006
--------- --------- ---------
Total interest-bearing
Liabilities 317,211 (451) 316,760
--------- --------- ---------
Net interest income $ 209,748 $ (15,201) $ 194,547
========= ========= =========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $65,000 for the first six months of
1998 and $85,500 for the same period of 1997. The decline was the result of
management's assessment of the adequacy of the reserve for possible loans losses
given the size, mix and quality of the current loan portfolio. Management seeks
to determine the appropriate amount of loan loss provision for the condition of
the loan portfolio by continuously assessing general loan loss risk, asset
quality, current and predicted economic conditions and loan delinquencies.
However, management's judgment as to the adequacy of the allowance is based upon
a number of assumptions about future events which it believes to be reasonable,
but which may or may not be accurate. Thus, there is a risk that charge-offs in
future periods may exceed the allowance for loan losses or that additional
increases in the loan loss allowance will be required.
9
<PAGE> 10
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
NONINTEREST INCOME
Noninterest income increased from $12,405 in the first six months of
1997 to $75,382 in the same period of 1998, and from $10,575 in the three months
ended June 30, 1997 to $42,221 in the same period of 1998. Service fees on
deposit accounts, the largest component of noninterest income, increased from
$4,079 to $65,145 over the first six month in 1998 as the result of an increase
in deposits of $14.0 million. This growth in deposits was expected as the Bank
moved into a new, more convenient facility in June 1997. By relocating to a
full-service branch, the Bank was able to increase its customer base by offering
more convenient banking services.
NONINTEREST EXPENSE
Total noninterest expense increased from $381,903 for the six months
ended June 30, 1997 to $614,249 for the same period in 1998, and from $215,192
for the three months ended June 30, 1997 to $324,482 in the same period of 1998.
The increase in non-interest expense reflects an increase in most expense
categories as a result of the Company's growth from $17.4 million in assets at
the end of the June 1997 to $31.6 million at June 30, 1998. Salaries and wages
expense increased by $81,841 during the six months and $39,778 during the three
months ended June 30, 1998 compared to the same periods in 1997, and employee
benefits increased by $9,769 and $4,646 during these periods. These increases
reflected an increase in the number of full-time equivalent employees to 16 at
the end of June 1998 from 13 at the end of June 1997, as the Company added
additional staff to support its growth in loans and deposits. Management does
not anticipate any significant additions to staff during the next 12 months.
Professional fees were $60,608 during the six months ended and $40,621 during
the three months ended June 30, 1998, compared to $21,004 and $13,987 during the
comparable periods of 1997. The 1998 figures include costs associated with the
Bank's Year 2000 project and also includes a $20,000 addition (during the six
month period) to the reserve established for potential costs of collecting
monies due that are related to a suspected kiting operation. (See Part II, Item
1)
Depreciation and amortization increased $66,756 during the six months
ended June 30, 1998 compared to the same period of 1997, and increased $37,060
during the three month period ended June 30, 1998 compared to the same period of
1997. The increase was directly related to the completion of the new main office
facility and the purchase of additional furniture, equipment and computer
hardware and software. The increase in the category of other operating expenses
to $120,583 in the six month period ended June 30, 1998 from $73,646 in 1997 was
principally due to an increase in operating expenses related to the new main
office building and growth in data processing fees and other expenses associated
with the expansion of loan and deposits.
NET LOSS PER SHARE
Basic net loss per common share is computed on the basis of the
weighted average number of common shares outstanding in accordance with SFAS No.
128, "Earnings on Share". The treasury stock method is used to compute the
effect of stock options on the weighted average number of common shares
outstanding for the diluted method. No dilution occurs under the treasury stock
method as the exercise price of stock options equals or exceed the market value
of the stock.
10
<PAGE> 11
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
At June 30, 1997, the Company's investment securities portfolio was the
largest component of the Company's total earning assets. However, by June 30,
1998, investment securities had declined from 56.3% of average earning assets to
40.3%. Total securities averaged $10.6 million in the first six months of 1998
compared to $7.8 million during this period in 1997. At June 30, 1998, total
securities were $10.9 million and totaled $8.1 million at June 30, 1997. The
Company primarily invests in U.S. Treasury securities and securities of other
U.S. Government agencies.
At June 30, 1998, short-term investments totaled $2,080,000 compared to
$710,000 as of June 30, 1997. These funds are one source of the Bank's liquidity
and are generally invested in an earning capacity on an overnight basis.
LOANS
At June 30, 1998, net loans totaled $15.3 million, an increase of $9.2
million from June 30, 1997. The composition of the Company's loan portfolio at
June 30, 1998 was as follows: commercial and commercial real estate, 63.3%;
consumer, 12.3%; residential mortgage; 15.4%; and construction, 9.0%. Due to the
short time the portfolio has existed, the current mix may not be indicative of
the ongoing portfolio mix. Management will attempt to maintain a relatively
diversified loan portfolio to help reduce the risks inherent in concentrations
of collateral.
Average gross loans increased from $3.7 million with a yield of 9.48%
in the first half of 1997 to $13.9 million with a yield of 9.03% in 1998. The
interest rates charged on loans vary with the degree of risk and the maturity
and amount of the loan. Competitive pressures, money market rates, availability
of funds and government regulations also influence interest rates.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Management maintains an allowance for possible loan losses which it
believes is adequate to cover inherent losses in the loan portfolio. However,
management's judgment is based upon a number of assumptions about future events
which are believed to be reasonable, but which may or may not prove accurate.
Thus, there can be no assurance that charge-offs in future periods will not
exceed the allowance for possible loan losses or that additional increases in
the allowance for possible loan losses will not be required.
The allowance for possible loan losses is established through charges
in the form of a provision for loan losses. Loan losses and recoveries are
charged or credited directly to the allowance. The amount charged to the
provision for loan losses by the Company is based on management's judgment 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 the total amount of past due loans, general economic conditions and
management's assessment of potential losses.
At June 30, 1998, the allowance for possible loan losses was $169,878
or 1.10% of
11
<PAGE> 12
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
outstanding loans compared to an allowance for possible loans losses
of $102,002 or 1.66% of outstanding loans at June 30, 1997. Net charge-offs
totaled $64,623 for the first six months of 1998. There were no net charge-offs
in the same period of 1998. There were no non-accrual, restructured or other
non-performing loans at June 30, 1998 or 1997.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average total deposits were $22.2 million and average interest-bearing
deposits were $18.4 million in the first half of 1998. Average total deposits
were $8.6 million and average interest-bearing deposits were $6.7 million in the
first half of 1997. Internal growth, resulting primarily from special promotions
and increased customer convenience of the new main office facility, generated
the new deposits.
Core deposits, which exclude certificates of deposit of $100,000 or
more, provide a relatively stable funding source for the Company's loan
portfolio and other earning assets. The Company's core deposits were $20.1
million at June 30, 1998 compared to $9.1 million at June 30, 1997. A stable
base of deposits is expected to be the Company's primary source of funding to
meet both its short-term and long-term liquidity needs in the future. Core
deposits as a percentage of total deposits were approximately 82% at June 30,
1998, down slightly from 86% at June 30, 1997. The Company's loan-to-deposit
ratio was 62.9% at June 30, 1998 versus 57.9% at June 30, 1997. The average
loan-to-deposit ratio was 62.6% during the first half of 1998 and 43.3% during
the same period of 1997.
CAPITAL
Under the capital guidelines of the Office of the Comptroller of the
Currency, the Bank is required to maintain a minimum total risk-based capital
ratio of 8%, with at least 4% being Tier I capital. To be considered
"well-capitalized", banks must meet regulatory standards of 10% for total
risk-based capital and 6% for Tier I capital. Tier I 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 I leverage ratio (Tier I capital
to total average assets) of at least 4%. The "well-capitalized" standard for the
Tier I leverage ratio is 5%. The following chart reflects the risk-based
regulatory capital ratios of the Bank at June 30, 1998.
12
<PAGE> 13
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
ANALYSIS OF CAPITAL
(Amounts in thousands)
June 30, 1998
<TABLE>
<CAPTION>
Required Actual Excess
----------------- ----------------- -----------------
The Bank: Amount % Amount % Amount %
- --------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
The Bank:
Tier 1 risk-based capital 758 4.00% 5,680 30.0% 4,922 26.0%
Total risk-based capital 1,517 8.00% 5,850 30.9% 4,333 22.9%
Tier I leverage 1,189 4.00% 5,680 19.1% 4,491 15.1%
</TABLE>
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 the Company used $6,300,000 of this amount to capitalize the
Bank. The Company believes that this amount is sufficient to fund the activities
of the Bank in its initial stages of operations, and that the Bank will generate
sufficient income from operations to fund its activities on an on-going basis.
The remaining offering proceeds will be used to provide working capital,
including additional capital for investment in the Bank, if needed.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Primary sources of liquidity for the Company are a stable base of
deposits, scheduled repayments on the Company's loans and interest on and
maturities of its investments. All securities of the Company have been
classified as available for sale. Occasionally, the Company might sell
investment securities in connection with the management of its interest
sensitivity gap or to manage cash availability. The Company may also utilize its
cash and due from banks, security repurchase agreements and federal funds sold
to meet liquidity requirements as needed. In addition, the Company has the
ability, on a short-term basis, to purchase federal funds from other financial
institutions. Presently, the Company has made arrangements with commercial banks
for short-term unsecured advances of up to $3,000,000. The Company believes that
its liquidity and ability to manage assets will be sufficient to meet its cash
requirements over the near term.
The Company monitors and manages the pricing and maturity of its assets
and liabilities in order to lessen the potential impact that interest rate
movements could have on its net interest margin. To minimize the effect of these
margin swings, the balance sheet should be structured so that repricing
opportunities exist for both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals. Imbalances in these pricing
opportunities at any point in time constitute interest rate risk.
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of rate
sensitive assets and liabilities at any given time interval. Management
generally attempts to
13
<PAGE> 14
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
maintain a balance between rate sensitive assets and liabilities to minimize the
company's interest rate risks. Interest rate sensitivity can be managed by
repricing assets or liabilities, selling securities available-for-sale,
replacing an asset or liability at maturity or by adjusting the interest rate
during the life of an asset or liability. Managing the amount of assets and
liabilities repricing in the same time interval helps to hedge the risk and
minimize the impact on net interest income of rising or falling interest rates.
The Company generally would benefit from increasing market rates of
interest when it has an asset sensitive gap and generally would benefit from
decreasing market rates of interest when it is liability sensitive. 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.
INDUSTRY DEVELOPMENTS
Proposed legislation could have an effect on both the costs of doing
business and the competitive factors facing the financial services industry. Due
to continued changes in the regulatory environment, additional legislation
related to the banking industry is likely to continue. While the potential
effects of legislation currently under consideration cannot be measured, the
Company is unaware of any pending legislation or regulatory reform which would
materially affect its financial position or operating results in the foreseeable
future.
Like many financial institutions, the Company and the Bank rely upon
computers for the daily conduct of their business and for information systems
processing. There is concern among industry experts that on January 1, 2000
computers will be unable to "read" the new year and there may be widespread
computer malfunctions. The Company and the Bank generally rely on software and
hardware developed by independent third parties to provide the information
systems used by the Company and the Bank. The Company is seeking assurances
about the Year 2000 compliance with respect to the third party hardware or
software system it uses, and the Company believes that its internal systems and
software and the network connections it maintains will be adequately programmed
to address the Year 2000 issue. Based on information currently available,
management does not believe that the Company or the Bank will incur significant
costs in connection with the year 2000 issue. Nevertheless, there can be no
assurances that all hardware and software that either the Company or the Bank
uses will be Year 2000
14
<PAGE> 15
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
compliant, and the Company cannot predict with any certainty the costs the
Company or the Bank will incur to respond to any Year 2000 issues. Further, the
business of many of the Bank's customers may be negatively affected by the Year
2000 issue, and any financial difficulties incurred by the Bank's customers in
solving Year 2000 issues could negatively affect such customer's ability to
repay any loans which the Bank may have extended. Therefore, even if the Company
and the Bank do not incur significant direct costs in connection with responding
to the year 2000 issue, there can be no assurance that the failure or delay of
the Bank's customers or other third parties in addressing the Year 2000 issue or
the costs involved in such process will not have a material adverse effect on
the Bank's business, financial condition and results of operation.
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
operating 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 requires 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 ere
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 as 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 Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS 106, "Employers' Accounting for Postretirement
Benefits Other than 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.
15
<PAGE> 16
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
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 effect on its financial statements.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Bank is involved in various legal proceedings
which management considers to be incidental to the normal conduct of the Bank's
business. The Bank is involved in one such case involving a suspected kiting
operation in which the total estimated loss exposure of $625,000. Management
believes that the Bank has multiple defenses and recovery options which it
intends to pursue aggressively. Management has charged $62,000 to operations at
December 31, 1997 (and another $20,000 at June 30, 1998) for professional fees
to establish a reserve for this case. Any unfavorable developments in this
matter could have a material adverse effect on the short-term operating results
of the Bank.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
1. The Company's Bylaws provides that the Board of Directors shall be
divided into three classes with each class to be as nearly equal in
number as possible. The Bylaws also provide that the three classes of
directors are to have staggered terms, so that the terms of only
approximately one-third of the Board members will expire at each annual
meeting of shareholders. The current Class I directors are Raymond E.
Cleary, III, William Gary Horn, Joe N. Jarrett, Jr., Richard E. Lester,
and Don J. Smith. The current Class II directors are Michael Bert
Anderson, Orvis Bartlett Buie, Michael D. Harrington, Diane W. Sammons,
and Rick H. Seagroves. The current Class III directors are Vernie E.
Dove, Jack L. Green, Jr., Samuel Robert Spann, Jr., B. Larkin Spivey,
Jr., and James C. Yahnis. The Class III directors were up for
reelection at this year's annual meeting held April 22, 1998. Each of
the existing Class III directors was reelected at the annual meeting,
with 438,352 votes cast in favor of the reelection of each director and
12,200 votes withheld. The terms of the Class I directors will expire
at the 1999 Annual Shareholders Meeting, and the terms of the Class II
directors will expire at the 2000 Annual Shareholders Meeting.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
17
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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).
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
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)
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).
</TABLE>
- ----------------------
* Denotes executive compensation contract or arrangement.
(b) Reports on Form 8-K.
None.
19
<PAGE> 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: August 10, 1998 By: /s/ William Gary Horn
---------------------- ----------------------------------
William Gary Horn
President
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BEACH FIRST NATIONAL BANCSHARES, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 844,375
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,080,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,866,728
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 15,436,540
<ALLOWANCE> 169,878
<TOTAL-ASSETS> 31,585,659
<DEPOSITS> 24,628,372
<SHORT-TERM> 0
<LIABILITIES-OTHER> 308,920
<LONG-TERM> 0
0
0
<COMMON> 735,868
<OTHER-SE> 5,912,499
<TOTAL-LIABILITIES-AND-EQUITY> 31,585,659
<INTEREST-LOAN> 621,850
<INTEREST-INVEST> 329,633
<INTEREST-OTHER> 48,768
<INTEREST-TOTAL> 1,000,251
<INTEREST-DEPOSIT> 489,219
<INTEREST-EXPENSE> 496,898
<INTEREST-INCOME-NET> 503,353
<LOAN-LOSSES> 65,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 614,249
<INCOME-PRETAX> (100,514)
<INCOME-PRE-EXTRAORDINARY> (100,514)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (79,514)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
<YIELD-ACTUAL> 7.68
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 169,502
<CHARGE-OFFS> 64,623
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 169,878
<ALLOWANCE-DOMESTIC> 169,878
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
