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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
- --- 1934
For the fiscal year ended December 31, 1997
OR
Transition Report under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the transition period from _______ to _______
Commission file no. 33-95562
BEACH FIRST NATIONAL BANCSHARES, INC.
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(Name of Small Business Issuer in Its Charter)
South Carolina 57-1030117
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1550 North Oak Street
Myrtle Beach, South Carolina 29577
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(Address of Principal Executive Offices) (Zip Code)
(803) 626-2265
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Issuer's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 23, 1998, was $5,305,930. This calculation is based
upon the sales price of $10.00 per share in the Company's initial public
offering. There is no active trading market for the common stock and the $10.00
per share price is not indicative of present value.
There were 735,868 shares of the Company's common stock issued and
outstanding as of the record date, March 23, 1998.
Transitional Small Business Disclosure Format. (Check one): Yes No X
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ITEM 1. DESCRIPTION OF BUSINESS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. Investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors discussed herein and
those factors discussed in detail in the Company's filings with the Securities
and Exchange Commission.
GENERAL
Beach First National Bancshares, Inc. (the "Company") was incorporated as
a South Carolina corporation on July 28, 1995, primarily to own and control all
of the capital stock of Beach First National Bank (the "Bank"). The Company
engages in no business other than owning and managing the Bank. On December 31,
1996 the Company completed the initial public offering (the "Offering") of its
common stock, par value $1.00 per share (the "Common Stock"), at a price of
$10.00 per share. The Company sold 735,868 shares for $7,358,680 in the
Offering.
The Bank commenced operations on September 23, 1996. The Bank is
organized as a national banking association under the laws of the United States,
and the Bank engages in a commercial banking business from its main office
located at the corner of Oak Street and Sixteenth Street North in the City of
Myrtle Beach, South Carolina, with deposits insured by the FDIC.
The Company's holding company structure can assist the Bank in
maintaining its required capital ratios because the Company may, subject to
compliance with Federal Reserve debt guidelines, borrow money and contribute the
proceeds to the Bank as primary capital. The holding company structure also
permits greater flexibility in issuing stock for cash, property or services and
in reorganization transactions. Moreover, subject to certain regulatory
limitations, a holding company can purchase shares of its own stock, which the
Bank may not do. A holding company may also engage in certain non-banking
activities which the Board of Governors has deemed to be closely related to
banking. See "Supervision and Regulation."
MARKETING FOCUS
Most of the banks in the Myrtle Beach area are now local branches of
large regional banks. Although size gives the larger banks certain advantages in
competing for business from large corporations, including higher lending limits
and the ability to offer services in other areas of South Carolina and the
Myrtle Beach area, the Directors believe that there has been a void in the
community banking market in the Myrtle Beach area and believe that the Bank can
successfully fill this void. As a result, the Company generally does not attempt
to compete for the banking relationships of large corporations, but concentrates
its efforts on small- to medium-sized businesses and on individuals.
The Bank advertises through various forms of media, as well as direct
mail, to target market segments and emphasizes the Company's local ownership,
community bank nature, and ability to provide more personalized service than its
competition. The Directors, as long-time residents and
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business people in the Myrtle Beach area, have determined the credit needs of
the area through personal experience and communications with their business
colleagues. The Directors believe that the proposed community bank focus of the
Bank is likely to succeed in this market. The Directors believe that the area
reacts favorably to the Bank's emphasis on service to small businesses,
individuals, and professional concerns. However, no assurances in this respect
can be given.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts, and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the Myrtle
Beach area. In addition, the Bank offers certain retirement account services,
such as Individual Retirement Accounts (IRAs). All deposit accounts are insured
by the FDIC up to the maximum amount allowed by law (generally, $100,000 per
depositor, subject to aggregation rules). The Bank intends to solicit these
accounts from individuals, businesses, associations and organizations, and
governmental authorities. The Bank offers a Founder's Account to individuals who
purchase a minimum of 100 shares ($1,000) of Common Stock in the offering. The
Founder's Account is a checking account, in the name of the original purchaser
of the Common Stock, which has no service charges for the first year of the
account (subject to certain exclusions). The Bank also offers free checking for
depositors who maintain a minimum monthly balance of $500. The terms of the
Founder's Account are subject to change as determined by the Board of Directors
of the Bank.
LENDING ACTIVITIES
General. The Bank emphasizes a range of lending services, including real
estate, commercial and consumer loans, to individuals and small- to medium-sized
businesses and professional concerns that are located in or conduct a
substantial portion of their business in the Bank's market area.
Real Estate Loans. The loans secured generally by first or second
mortgages on real estate are one of the primary components of the Bank's loan
portfolio. These loans consist of commercial real estate loans, construction and
development loans, and residential real estate loans (but exclude home equity
loans, which are classified as consumer loans). Loan terms generally are limited
to five years or less, although payments may be structured on a longer
amortization basis. Interest rates may be fixed or adjustable, and are more
likely to be fixed in the case of shorter term loans. The Bank generally charges
an origination fee. Management attempts to reduce credit risk in the commercial
real estate portfolio by emphasizing loans on owner-occupied office and retail
buildings where the loan-to-value ratio, established by independent appraisals,
does not exceed 80%. In addition, the Bank typically requires personal
guarantees of the principal owners of the property backed with a review by the
Bank of the personal financial statements of the principal owners. The principal
economic risk associated with each category of anticipated loans, including real
estate loans, is the creditworthiness of the Bank's borrowers. The risks
associated with real estate loans vary with many economic factors, including
employment levels and fluctuations in the value of real estate. The Bank
competes for real estate loans with a number of bank competitors which are well
established in the Myrtle Beach area. Most of these competitors have
substantially greater resources and lending limits than the Bank. As a result,
the Bank may have to charge lower interest rates to attract borrowers. See
"Competition" below. The Bank may also originate loans for sale into the
secondary market. The Bank limits interest rate risk and credit risk on these
loans by locking the interest rate for each loan with the secondary investor and
receiving the investor's underwriting approval prior to originating the loan.
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Commercial Loans. The Bank makes loans for commercial purposes in various
lines of businesses. Equipment loans are typically made for a term of five years
or less at fixed or variable rates, with the loan fully amortized over the term
and secured by the financed equipment and with a loan-to-value ratio of 80% or
less. Working capital loans typically have terms not exceeding one year and are
usually secured by accounts receivable, inventory, or personal guarantees of the
principals of the business. For loans secured by accounts receivable or
inventory, principal is typically repaid as the assets securing the loan are
converted into cash, and in other cases principal is typically due at maturity.
The principal economic risk associated with each category of anticipated loans,
including commercial loans, is the creditworthiness of the Bank's borrowers. The
risks associated with commercial loans vary with many economic factors,
including the economy in the Myrtle Beach area, especially the tourist economy.
The well-established banks in the Myrtle Beach area make proportionately more
loans to medium- to large-sized businesses than the Bank. Many of the Bank's
anticipated commercial loans are made to small- to medium-sized businesses which
are less able to withstand competitive, economic, and financial conditions than
larger borrowers.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards. These loans typically carry balances of less than $25,000
(excluding home equity lines which could be higher depending upon the loan to
value ratio) and, in the case of non-revolving loans, are amortized over a
period not exceeding 60 months or are ninety-day term loans, in most cases
bearing interest at a fixed rate. The revolving loans typically bear interest at
a variable or fixed rate and require monthly payments of interest and a portion
of the principal balance. The underwriting criteria for home equity loans and
lines of credit are generally the same as applied by the Bank when making a
first mortgage loan, as described above, and home equity lines of credit
typically expire ten years or less after origination. As with the other
categories of loans, the principal economic risk associated with consumer loans
is the creditworthiness of the Bank's borrowers, and the principal competitors
for consumer loans are the established banks in the Myrtle Beach area.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds that individual officer's lending authority, the
loan request is considered by an officer with a higher lending limit. Any loan
in excess of this lending limit is approved by the directors' loan committee.
The Bank does not make any loans to any director or executive officer of the
Bank unless the loan is approved by the board of directors of the Bank and is
made on terms not more favorable to such person than would be available to a
person not affiliated with the Bank.
Lending Limits. The Bank's lending activities are subject to a variety of
lending limits imposed by federal law. While differing limits apply in certain
circumstances based on the type of loan or the nature of the borrower (including
the borrower's relationship to the Bank), in general the Bank is subject to a
loan-to-one-borrower limit. These limits increase or decrease as the Bank's
capital increases or decreases. Unless the Bank sells participations in its
loans to other financial institutions, the Bank is not able to meet all of the
lending needs of loan customers requiring aggregate extensions of credit above
these limits.
OTHER BANKING SERVICES
Other bank services which are in place or planned include cash management
services, safe deposit boxes, travelers checks, direct deposit of payroll and
social security checks, and automatic drafts for various accounts. The Bank is
associated with a shared network of automated teller machines
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that may be used by Bank customers throughout South Carolina and other regions.
In the future, the Bank intends to offer annuities, mutual funds, and other
financial services. The Bank also offers MasterCard and VISA credit card
services through a correspondent bank as an agent for the Bank. The Bank does
not plan to exercise trust powers during its initial years of operation. The
Bank may in the future offer a full-service trust department, but cannot do so
without the prior approval of the OCC.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with FDICIA, which
was enacted in 1991, numerous additional regulatory requirements have been
placed on the banking industry in the past several years, and additional changes
have been proposed. The operations of the Company and the Bank may be affected
by legislative changes and the policies of various regulatory authorities. The
Company is unable to predict the nature or the extent of the effect on its
business and earnings that fiscal or monetary policies, economic control, or new
federal or state legislation may have in the future.
The Company. Because it owns the outstanding capital stock of the Bank,
the Company is a bank holding company within the meaning of the federal Bank
Holding Company Act of 1956 (the "BHCA") and The South Carolina Bank Holding
Company Act (the "South Carolina Act"). The activities of the Company are also
be governed by the Glass-Steagall Act of 1933 (the "Glass-Steagall Act").
The BHCA. Under the BHCA, the Company is subject to periodic examination
by the Federal Reserve and is required to file periodic reports of its
operations and such additional information as the Federal Reserve may require.
The Company's and the Bank's activities are limited to banking, managing, or
controlling banks; furnishing services to or performing services for its
subsidiaries; and engaging in other activities that the Federal Reserve
determines to be so closely related to banking, managing, or controlling banks
as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
In addition, and subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of disapproval)
prior to any person or company acquiring "control" of a bank holding company,
such as the Company. Control is conclusively presumed to exist if an individual
or company acquires 25% or more of any class of voting
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securities of the bank holding company. Control is rebuttably presumed to exist
if a person acquires 10% or more but less than 25% of any class of voting
securities and either the Company has registered securities under Section 12 of
the Exchange Act (which the Company has done) or no other person owns a greater
percentage of that class of voting securities immediately after the transaction.
The regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in, nonbanking activities, unless the
Federal Reserve Board, by order or regulation, has found those activities to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve Board has
determined by regulation to be proper incidents to the business of a bank
holding company include making or servicing loans and certain types of leases,
engaging in certain insurance and discount brokerage activities, performing
certain data processing services, acting in certain circumstances as a fiduciary
or investment or financial adviser, owning savings associations, and making
investments in certain corporations or projects designed primarily to promote
community welfare.
The Federal Reserve Board imposes certain capital requirements on the
Company under the BHCA, including a minimum leverage ratio and a minimum ratio
of "qualifying" capital to risk-weighted assets. These requirements are
described below under "- Capital Regulations." Subject to its capital
requirements and certain other restrictions, the Company is able to borrow money
to make a capital contribution to the Bank, and such loans may be repaid from
dividends paid from the Bank to the Company (although the ability of the Bank to
pay dividends is subject to regulatory restrictions as described below in "The
Bank--Dividends"). The Company is also able to raise capital for contribution to
the Bank by issuing securities without having to receive regulatory approval,
subject to compliance with federal and state securities laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
Board policy, the Company is expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances in
which the Company might not otherwise do so. Under the BHCA, the Federal Reserve
Board may require a bank holding company to terminate any activity or relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve Board's determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution of the bank holding company. Further, federal
bank regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.
Glass-Steagall Act. The Company is also restricted in its activities by
the provisions of the Glass-Steagall Act, which prohibits the Company from
owning subsidiaries that are engaged principally in the issue, flotation,
underwriting, public sale, or distribution of securities. The interpretation,
scope, and application of the provisions of the Glass-Steagall Act currently are
being considered and reviewed by regulators and legislators, and the
interpretation and application of those provisions have been challenged in the
federal courts.
South Carolina Act. As a bank holding company registered under the South
Carolina Act, the Company is subject to regulation by the South Carolina Board.
Consequently, the Company must receive the approval of the South Carolina Board
prior to engaging in the acquisition of banking or nonbanking institutions or
assets. The Company must also file with the South Carolina Board periodic
reports with respect to its financial condition and operations, management, and
intercompany relationships between the Company and its subsidiaries.
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The Bank. The Bank operates as a national banking association
incorporated under the laws of the United States and subject to examination by
the OCC. Deposits in the Bank are insured by the FDIC up to a maximum amount
(generally $100,000 per depositor, subject to aggregation rules). The OCC and
the FDIC regulate or monitor virtually all areas of the Bank's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations, maintenance of books and records, and adequacy of staff
training to carry on safe lending and deposit gathering practices. The OCC
requires the Bank to maintain certain capital ratios and imposes limitations on
the Bank's aggregate investment in real estate, bank premises, and furniture and
fixtures. The Bank is required by the OCC to prepare quarterly reports on the
Bank's financial condition and to conduct an annual audit of its financial
affairs in compliance with minimum standards and procedures prescribed by the
OCC.
Under FDICIA, all insured institutions must undergo regular on site
examinations by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution. FDICIA also requires
the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding
companies relating, among other things, to: (i) internal controls, information
systems, and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; and (v) asset quality.
National banks and their holding companies which have been chartered or
registered or have undergone a change in control within the past two years or
which have been deemed by the OCC or the Federal Reserve Board, respectively, to
be troubled institutions must give the OCC or the Federal Reserve Board,
respectively, thirty days prior notice of the appointment of any senior
executive officer or director. Within the thirty day period, the OCC or the
Federal Reserve Board, as the case may be, may approve or disapprove any such
appointment. The Company and the Bank meet the criteria which trigger this
additional approval during the first two years after they are registered or
chartered, respectively.
Deposit Insurance. The FDIC establishes rates for the payment of premiums
by federally insured banks and thrifts for deposit insurance. A separate Bank
Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF") are
maintained for commercial banks and thrifts, respectively, with insurance
premiums from the industry used to offset losses from insurance payouts when
banks and thrifts fail. In 1993, the FDIC adopted a rule which establishes a
risk-based deposit insurance premium system for all insured depository
institutions. Under this system, until mid-1995 depositor institutions paid to
BIF or SAIF from $0.23 to $0.31 per $100 of insured deposits depending on its
capital levels and risk profile, as determined by its primary federal regulator
on a semi-annual basis. Once the BIF reached its legally mandated reserve ratio
in mid-1995, the FDIC lowered premiums for well-capitalized banks, eventually to
$.00 per $100, with a minimum semiannual assessment of $1,000. However, in 1996
Congress enacted the Deposit Insurance Funds Act of 1996, which eliminated this
minimum assessment. It also separated the Financial Corporation (FICO)
assessment to service the interest on its bond obligations. The amount assessed
on individual institutions, including the Bank, by
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FICO is in addition to the amount paid for deposit insurance according to the
risk-related assessment rate schedule. Increases in deposit insurance premiums
or changes in risk classification will increase the Bank's cost of funds, and
there can be no assurance that such cost can be passed on the Bank's customers.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of the bank's capital and surplus and, as to all affiliates combined, to 20% of
the bank's capital and surplus. Furthermore, within the foregoing limitations as
to amount, each covered transaction must meet specified collateral requirements.
Compliance is also required with certain provisions designed to avoid the taking
of low quality assets.
The Bank is also subject to the provisions of Section 23B of the Federal
Reserve Act which, among other things, prohibit an institution from engaging in
certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable to such institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with non-affiliated companies. The Bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with third parties
and (ii) must not involve more than the normal risk of repayment or present
other unfavorable features.
Dividends. A national bank may not pay dividends from its capital. All
dividends must be paid out of undivided profits then on hand, after deducting
expenses, including reserves for losses and bad debts. In addition, a national
bank is prohibited from declaring a dividend on its shares of common stock until
its surplus equals its stated capital, unless there has been transferred to
surplus no less than one-tenth of the bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval
of the OCC is required if the total of all dividends declared by a national bank
in any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus.
The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. In this regard, the allowance for loan and lease losses are not
considered an element of either "undivided profits then on hand" or "net
profits." Further, a national bank may be able to use a portion of its capital
surplus account as "undivided profits then on hand," depending on the
composition of that account. In addition, under FDICIA, the Bank may not pay a
dividend if, after paying the dividend, the Bank would be undercapitalized. See
"Capital Regulations" below.
Branching. National banks are required by the National Bank Act to adhere
to branch office banking laws applicable to state banks in the states in which
they are located. Under current South Carolina law, the Bank may open branch
offices throughout South Carolina with the prior approval of the OCC. In
addition, with prior regulatory approval, the Bank is able to acquire existing
banking operations in South Carolina. Furthermore, federal legislation has
recently been passed which permits interstate branching. The new law permits
out-of-state acquisitions by bank holding companies (subject to veto by new
state law), interstate branching by banks if allowed by state law, interstate
merging by
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banks, and de novo branching by national banks if allowed by state law. See
"Recent Legislative Developments." The Company currently has no plans or
agreements whereby the Bank would acquire other banks or thrifts.
Community Reinvestment Act. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve, the FDIC, the OCC, or the Office
of Thrift Supervision shall evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves; the Equal Credit Opportunity
Act, prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit; the Fair Credit Reporting Act of 1978, governing
the use and provision of information to credit reporting agencies; the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected by
collection agencies; and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Capital Regulations. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies and account for
off-balance sheet items. The guidelines are minimums, and the federal regulators
have noted that banks and bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios in excess of the minimums. Neither the Company nor
the Bank has received any notice indicating that either entity is subject to
higher capital requirements. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1
capital includes common shareholders' equity, qualifying perpetual preferred
stock, and minority interests in equity accounts of consolidated subsidiaries,
but excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred stock
not included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight applies. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk
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category, except for first mortgage loans fully secured by residential property
and, under certain circumstances, residential construction loans, both of which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% rating, and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage
ratio, which is equal to Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks which requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1997, the
Company and the Bank were qualified as "well capitalized." See "Management's
Discussion and Analysis or Plan of Operation -- Capital."
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution increases, and the
permissible activities of the institution decreases, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates, and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or a part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways. If the
Bank begins to grow at a rapid pace, a premature "squeeze" on capital could
occur making a capital infusion necessary. The requirements could impact the
Company's ability to pay dividends. The Company's present capital levels are
more than adequate; however, rapid growth, poor loan portfolio performance or
poor earnings performance or a combination of these factors could change the
Bank's capital position in a relatively short period of time.
FDICIA requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate risk,
concentration of credit risk, and the risks of non-traditional activities. It is
uncertain what effect these regulations, when implemented, would have on the
Company and the Bank.
Failure to meet these capital requirements would mean that a bank would
be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for
9
<PAGE> 11
achieving the minimum capital requirements. In addition, such a bank would
generally not receive regulatory approval of any application that requires the
consideration of capital adequacy, such as a branch or merger application,
unless the bank could demonstrate a reasonable plan to meet the capital
requirement within a reasonable period of time.
Enforcement Powers. FIRREA expanded and increased civil and criminal
penalties available for use by the federal regulatory agencies against
depository institutions and certain "institution-affiliated parties" (primarily
including management, employees, and agents of a financial institution, and
independent contractors such as attorneys and accountants and others who
participate in the conduct of the financial institution's affairs). These
practices can include the failure of an institution to timely file required
reports or the filing of false or misleading information or the submission of
inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such
violations. Criminal penalties for some financial institution crimes have been
increased to twenty years. In addition, regulators are provided with greater
flexibility to commence enforcement actions against institutions and
institution-affiliated parties. Possible enforcement actions include the
termination of deposit insurance. Furthermore, FIRREA expanded the appropriate
banking agencies' power to issue cease-and-desist orders that may, among other
things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnifications or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the ordering agency to be appropriate.
Recent Legislative Developments. In the 1994 legislative session, South
Carolina amended its bank holding act to allow nationwide interstate banking
beginning in 1996. The Interstate Banking Act, passed by Congress in 1994,
allows unrestricted interstate bank mergers, unrestricted interstate acquisition
of banks by bank holding companies, and interstate de novo branching by banks if
allowed by state law. In 1997, legislation was passed in North Carolina which
provides that until June 1, 1999, an out-of-state bank, such as the Bank, could
establish and maintain a de novo branch in North Carolina or acquire and
maintain an existing branch from another bank only if the laws of the home state
of the out-of-state bank contain reciprocal provisions permitting North Carolina
banks to establish and maintain de novo branches or acquire branches from
another bank in that state. South Carolina law does not contain such reciprocal
provisions, and therefore the North Carolina legislation has the effect of
prohibiting the Bank from establishing a de novo branch in North Carolina prior
to June 1, 1999. From time to time, various bills are introduced in the United
States Congress with respect to the regulation of financial institutions.
Certain of these proposals, if adopted, could significantly change the
regulation of banks and the financial services industry. The Bank cannot predict
whether any of these proposals will be adopted or, if adopted, how these
proposals would affect the Bank. From time to time, various bills are introduced
in the United States Congress with respect to the regulation of financial
institutions. Certain of these proposals, if adopted, could significantly change
the regulation of banks and the financial services industry. The Company cannot
predict whether any of these proposals will be adopted or, if adopted, how these
proposals would affect the Company.
Effect of Governmental Monetary Policies. The earnings of the Bank are
affected by domestic economic conditions and the monetary and fiscal policies of
the United States government and its agencies. The Federal Reserve Board's
monetary policies have had, and are likely continue to have, an important impact
on the operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to curb inflation or
combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through
its open market operations in United States government securities and through
its regulation of the discount rate on borrowings of member banks and the
reserve requirements against
10
<PAGE> 12
member bank deposits. It is not possible to predict the nature or impact of
future changes in monetary and fiscal policies.
LOCATION AND SERVICE AREA
The Bank engages in a general commercial and retail banking business,
emphasizing the needs of small- to medium-sized businesses, professional
concerns, and individuals, primarily in Myrtle Beach, South Carolina and the
surrounding area, including Horry County. The Bank has an office located at the
corner of Oak Street and Sixteenth Avenue North in the city of Myrtle Beach. See
"Item 2. Description of Property" below.
Horry County is located on the Atlantic coast of the state of South
Carolina. Myrtle Beach, South Carolina is located within Horry County. The
Myrtle Beach area, also known as the Grand Strand, stretches from the North
Carolina state line at Little River to Georgetown, South Carolina. According to
the 1993 South Carolina Statistical Abstract, Myrtle Beach had an estimated
population in 1990 of 24,848, and Horry County had an estimated population of
144,053. The principal component of the economy of the Myrtle Beach area is
vacation, sport, and entertainment tourism. The vacation segment, which has a
four-month season, attracts vacationers from along the East Coast. Area hotels,
motels, condominiums, and cottages provide more than 36,000 rooms. The Myrtle
Beach area also has nine privately-owned campgrounds and two publicly-owned
state parks consisting of more than 7,000 sites. Convention business also has a
sizeable economic impact on the Myrtle Beach area. The sports segment, which has
an approximate ten-month season, attracts golfers, tennis players, and anglers.
The Grand Strand has more than 85 championship golf courses. The entertainment
segment is a year-round source of funds. The Grand Strand has nine live
entertainment theaters, including the Alabama Theater, which has 2,200 seats and
was opened by the country music supergroup Alabama. The Myrtle Beach area has
experienced steady growth over the past ten years, and the Directors expect the
Myrtle Beach area, as well as the service industry needed to support it, to
continue to grow.
COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in the
Myrtle Beach area and elsewhere. As of March 1998, there were fourteen
commercial banks and three savings banks operating in Horry County. A number of
these competitors are well established in the Myrtle Beach area. Most of them
have substantially greater resources and lending limits than the Bank and offer
certain services, such as extensive and established branch networks and trust
services, that the Bank does not provide. As a result of these competitive
factors, the Bank may have to pay higher rates of interest to attract deposits.
The Company believes that the community bank focus of the Bank, with its
emphasis on service to small businesses, individuals, and professional concerns,
gives it an advantage in this market.
EMPLOYEES
As of March 15, 1998, the Company had thirteen full-time employees and
one part-time employee. The Company does not have any employees other than its
officers, none of whom receive any remuneration for their services to the
Company.
11
<PAGE> 13
ITEM 2. DESCRIPTION OF PROPERTY
The principal place of business of both the Company and the Bank and the
main office of the Bank is located at the corner of Oak Street and Sixteenth
Avenue North in Myrtle Beach, South Carolina. The Bank's main office is a
located on 0.8-acre plot of land, which was purchased for $217,000. The Company
constructed a permanent banking facility of 5,000 square feet on the site at a
cost of approximately $1,000,000, which was paid out of the proceeds of the
Company's initial public offering. Furniture, fixtures, and equipment for the
main office cost approximately $450,000. The Company believes that the
facilities adequately serve the Bank's needs.
ITEM 3. 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of Common Stock, of which 735,868 shares, for a total of
$7,358,680, were sold in the initial public offering and are outstanding as of
March 23, 1998. As of March 23, 1998, the Company had 995 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. See "Item 1. Description of Business --
Dividends."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information contained on pages 3 through 13
of the Company's Annual Report to Shareholders for the year ended December 31,
1997 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 16 through
34 of the Company's
12
<PAGE> 14
Annual Report to Shareholders for the year ended December 31, 1997 is
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 1, 1997, the Company dismissed the firm of Francis & Company
CPA, as the auditors of the Company effective as of that date. The decision to
change accountants was approved by the board of directors of the Company.
The reports of Francis & Company on the Company's financial statements
for the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
In connection with the audits of the Company's financial statements for
the fiscal year ended December 31, 1996 and in the subsequent interim period,
there were no disagreements with Francis & Company on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of Francis & Company,
would have caused Francis & Company to make reference to the matter in their
report. During the fiscal year ended December 31, 1996 and in the subsequent
interim period, there were no "reportable events" to describe as specified in
Item 304(e)(1)(v) of Regulation S-B.
A copy of the letter dated November 6, 1997 from Francis & Co. stating
that such firm agrees with the above statements is filed as Exhibit 16.1 to the
Current Report on Form 8-K filed by the Company on November 13, 1997.
On October 1, 1997, the Company engaged Elliott, Davis & Company, LLP as
its independent auditors for the fiscal year ending December 31, 1997, to audit
the Company's financial statements. During the Company's most recent fiscal year
and the subsequent interim period preceding the engagement of Elliott, Davis &
Company, the Company did not consult Elliott, Davis & Company on any matter
requiring disclosure under Item 304(a)(3) of Regulation S-B.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
In response to this Item, the information contained on page 9 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 22, 1998 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on pages 6 through 9
of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 22, 1998 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information contained on pages 9 through 11
of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 22, 1998 is incorporated
13
<PAGE> 15
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on page 11 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 22, 1998 is incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<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).*
</TABLE>
14
<PAGE> 16
<TABLE>
<S> <C>
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
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
The Company filed a Current Report on Form 8-K on November 13, 1997 to
report a change in accountants.
15
<PAGE> 17
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: March 18, 1998 By: /s/ Raymond E. Cleary III
-------------------- ------------------------------------------
Raymond E. Cleary III
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Raymond E. Cleary III, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-KSB, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
-------------------------
Michael Bert Anderson Director
/s/ Orvis Bartlett Buie March 18, 1998
- ------------------------- -------------------------
Orvis Bartlett Buie Director
/s/ Raymond E. Cleary III March 18, 1998
- ------------------------- -------------------------
Raymond E. Cleary III President
Chief Executive Officer;
and Director
/s/ Vernie E. Dove March 18, 1998
- ------------------------- -------------------------
Vernie E. Dove Director
- ------------------------- -------------------------
Jack L. Green, Jr. Director
/s/ Michael D. Harrington March 18, 1998
- ------------------------- -------------------------
Michael D. Harrington Director
</TABLE>
F-6
<PAGE> 18
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William Gary Horn March 18, 1998
- ------------------------- -------------------------
William Gary Horn Director
/s/ Joe N. Jarrett, Jr. March 18, 1998
- ------------------------- -------------------------
Joe N. Jarrett, Jr. Director
/s/ Richard E. Lester March 18, 1998
- ------------------------- -------------------------
Richard E. Lester Director
- ------------------------- -------------------------
Diane W. Sammons Director
/s/ Rick H. Seagroves March 18, 1998
- ------------------------- -------------------------
Rick H. Seagroves Director
- ------------------------- -------------------------
Don J. Smith Director
- -------------------------
Samuel Robert Spann, Jr. Director
- ------------------------- -------------------------
B. Larkin Spivey, Jr. Director
/s/ James C. Yahnis March 18, 1998
- ------------------------- -------------------------
James C. Yahnis Director
</TABLE>
F-7
<PAGE> 19
INDEX TO EXHIBITS
<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>
<PAGE> 20
<TABLE>
<S> <C>
13 Annual Report to Shareholders 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.
<PAGE> 1
EXHIBIT 13
BEACH FIRST NATIONAL BANCSHARES, INC.
1997 Annual Report
Beach First National Bank
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Letter to Shareholders.................................................. 1
Selected Consolidated Financial Highlights.............................. 2
Business of the Company................................................. 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 3-13
Market for Company's Common Equity and Related
Shareholder Matters..................................................... 14
Report of Independent Accountants....................................... 16
Consolidated Financial Statements....................................... 17-34
Directors and Officers and Shareholder Information...................... 35
</TABLE>
<PAGE> 3
LETTER TO SHAREHOLDERS
Letter From the President and the Chairman:
Dear Customers, Friends and Shareholders:
Several years ago, fifteen dedicated local business leaders shared a vision to
establish a community bank in Myrtle Beach. These original organizers of Beach
First National Bank exemplify the characteristics of hard work and commitment
required to take on such a project. The goal of offering a hometown style of
doing business has proven to be the right direction. The officers and staff of
Beach First National Bank have transformed this commitment, dedication, and
enthusiasm into a working philosophy. The last sentence of our mission statement
sums up out approach to banking - "to improve the quality of life for all those
involved: customers, employees, management, stockholders and the entire
community."
December 31, 1997 ended the first fifteen months of Beach first's existence. The
first nine months of operation were conducted in a small temporary office space
across the street from the bank's construction site. Even in our temporary
location, the Bank was successful in establishing a solid base of loan and
deposit customers.
June 23, 1997 marked the opening of our beautiful new building. The design of
the building reflects our desire to create a warm and comfortable environment
for our customers. We are very proud of the fact that our building won the 1997
Best New Business Image Award presented by the Myrtle Beach Chamber of Commerce.
We are extremely pleased with the growth of the Bank over the past year. Assets
at year end 1997 grew to $26.9 million from $10.1 million at year end 1996.
Total loans increased $10.0 million during 1997 and ended the year at $11.1
million. Despite the significant growth in the loan portfolio, asset quality
remains our number one priority as demonstrated by our lack of chargeoffs or
past due loans.
Total deposits increased from $3.0 million at the end of the 1996 to $20.1
million at December 31, 1997. This strong growth was the result of successful
business development efforts by our staff, referrals from existing customers and
the increased customer convenience of the new main office facility.
Under the capital guidelines of the Office of the Comptroller of the Currency,
Beach First 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. 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%. As of December
31, 1997, Beach First exceed the "Well-capitalized" capital standards with total
risk-based capital of 40.1%, Tier I capital of 39.0% and Tier I leverage ratio
of 23.8%
The Company's net loss was $246,389 or $0.33 per common share for the year ended
December 31, 1997. This compares to a loss of $160,013 or $0.29 per common share
for the year ended December 31, 1996. This increase was expected since the bank
was open only three months in 1996. Through
<PAGE> 4
the end of 1997, management is encouraged that the actual losses have been less
than originally projected. Based on the current financial trends, we anticipate
that the Company will turn a profit on a monthly basis in 1998.
The Board of Directors and management of the Bank will continue to find new and
exciting ways to better serve our community. For example, Beach First has
received approval from the Office of the Comptroller of the Currency to
establish a courier system. This will provide a service to pick up deposits from
commercial customers that would not bank with Beach First at this time due to
our single location. This service should be available by May 1998.
Our commitment to the market, our philosophy of old-fashioned personal service
to our customers, and our attention to new business development will enable
Beach First National Bank to compete aggressively and grow rapidly in the years
ahead. The goals and standards of Beach First are high. We are confident that we
are on the right path to achieving our business and personal objectives.
On behalf of our distinguished Board of Directors and our professional staff, we
thank you for your involvement with Beach First. We look forward to working with
you in 1998.
With Our Best Wishes,
Gary Horn
President/Chief Executive Officer
Raymond E. Cleary, III
Chairman of the Board
- 2 -
<PAGE> 5
BEACH FIRST NATIONAL BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Earnings:
Net interest income $ 727 $ 273 166.3 %
Provision for possible loan losses 153 17 800.0 %
Noninterest income 49 2 2,350.0 %
Noninterest expense -- -- -- %
Profit from operations (382) (160) (138.8)%
Income tax benefit 136 -- (53.8)%
Net income (246) (160) (53.8)%
Per Share Data:
Basic earnings per share $ (0.33) $ (0.29) (13.8)%
Net income (on a fully diluted basis)
Book value 9.12 9.46 (3.6)%
Selected Average Balances:
Total assets $ 19,281 $ 7,340 162.7 %
Loans (net of unearned income) 6,167 116 5,216.4 %
Deposits 12,386 605 1,947.3 %
Shareholders' equity 6,789 6,185 9.8 %
Selected Year-End Balances:
Total assets $ 26,938 $ 10,064 167.7 %
Loans (net of unearned income) 11,288 1,094 931.8 %
Deposits 20,072 3,018 565.1 %
Shareholders' equity 6,911 6,961 (3.6)%
Selected Ratios:
Net interest margin 4.27% 4.90 %
Return on average assets (1.28)% (2.18)%
Return on average equity (3.63)% (2.59)%
Net charge-offs to average loans (net of unearned
income) 0% 0 %
Average equity to average assets 35.21% 84.26 %
Risk-based capital:
Tier 1 capital to risk-adjusted assets 39.0% 185.93 %
Total capital to risk-adjusted assets 40.10% 185.41 %
Leverage 23.80% 70.40 %
</TABLE>
- 3 -
<PAGE> 6
This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Annual Report and include all statements regarding the
intent, belief or current expectations of the Company, its directors or its
officers with respect to, among other things: (i) the Company's financing plans;
(ii) trends affecting the Company's financial condition or results of
operations; (iii) the Company's growth strategy and operating strategy; and (iv)
the declaration and payment of dividends. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various factors
discussed herein and those factors discussed in detail in the Company's filings
with the Securities and Exchange Commission.
BUSINESS OF THE COMPANY
Beach First National Bancshares, Inc. (the "Company") was organized under
the South Carolina Business Corporation Code on July 28, 1995, to become a
one-bank holding company by acquiring all the capital stock of Beach First
National Bank (the "Bank") upon its formation. The Bank commenced business on
September 23, 1996, and the only activity of the Company since then has been the
ownership and operation of the Bank. The Bank was organized as a banking
association under the laws of the United States. The Bank is engaged in a
general commercial and retail banking business, emphasizing in its marketing the
Bank's local management and ownership, from its main office in Myrtle Beach,
South Carolina. The products offered include commercial and retail checking
accounts, NOW accounts, money market accounts and certificates of deposit. The
Bank offers commercial loans, real estate loans and installment loans. It also
acts as an issuing agent for U.S. savings bonds, traveler's checks, money orders
and cashier's checks, and it offers collection teller services, including wire
transfer services. The Bank also offers a night depository facility, safe
deposit boxes, and ATM service.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operation should be read in conjunction with the Company's Consolidated
Financial Statements and related notes and the statistical information included
elsewhere herein.
OVERVIEW
The Company was incorporated in South Carolina on July 28, 1995 to become
a bank holding company and to own and control all of the capital stock of Beach
First National Bank ("the Bank"). Organizing activities for the Company were
begun in January 1995 and consisted primarily of preparation and filing of a
registration statement for sale of the Company's stock, preparation and filing
of the Bank's charter application and hiring of staff. On February 7, 1996, the
Federal Deposit Insurance Corporation approved the Company's application for
deposit insurance for the Bank. The Company received preliminary approval of its
application to charter the Bank from the Office of the Comptroller of the
Currency on February 12, 1996. On April 17, 1996, the Board of Governors of the
Federal Reserve System approved the Company's application to become
- 4 -
<PAGE> 7
a bank holding company, and the South Carolina State Board of Financial
Institutions approved the Company's application to become a bank holding company
on May 2, 1996. Beach First National Bank, the Company's only subsidiary, began
operations on September 23, 1996.
The Bank is engaged in a general commercial banking business, emphasizing
in its marketing the Bank's local management and ownership. The Bank offers a
full range of banking services designed to meet the basic financial needs of its
customers. These services include checking accounts, NOW accounts, Money Market
Deposit accounts, savings accounts, certificates of deposit and Individual
Retirement Accounts. The Bank also offers short- to medium-term commercial and
personal loans. At December 31, 1997, the Company had approximately $26.9
million in assets, $11.1 million in loans, $20.1 million in deposits and $6.7
million in shareholders' equity.
EARNINGS REVIEW
The Company's net loss was $246,389, or $0.33 per common share, for the
year ended December 31, 1997 as compared to a loss of $160,013, or $0.29 per
common share, for the year ended December 31, 1996 and a loss of $101,234 or
$2.18 per common share in 1995. The 1997 totals reflect an increase in all
non-interest expense categories as a result of increased staffing, an increase
in the allowance for loan losses, and costs associated with opening a permanent
main office facility. An increase in net interest income of $454,302 during the
year ended December 31, 1997 partially offset the increase in non-interest
expenses. The increase in net interest income was attributable to higher average
earning assets, which grew from $5.6 million in 1996 to $17.0 million during
1997. The return on average assets for 1997 was (1.28)% compared to (2.18%) in
1996; the return on average equity was (3.63)% in 1997 versus (2.59%) in 1996. A
comparison of these ratios to the prior period is not meaningful due to the
minimal amount of assets in the Company during 1995.
Net interest income increased $454,302 to $727,172 in 1997 from $272,870
in 1996. This increase in net interest income was the result of a $927,982
increase in interest income and a $473,680 increase in interest expense
associated with the Bank's continued development of its deposit and loan base.
The net interest spread was 1.97% in 1997 compared to (.34%) in 1996 and (3.56%)
in 1995. The net interest margin was 4.27% for the year ended 1997 compared to
4.90% for 1996 and 2.25% in 1995.
The provision for loan losses increased to $153,000 in 1997 from $16,502
in 1996. This increase reflects management's estimate of the amount necessary to
establish the allowance for loan losses at a level believed to be adequate in
relation to the current size, mix and quality of the portfolio. 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 valid. 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. The Company's
allowance for loan losses as a percentage of its period end loans was 1.50% and
1.51% at December 31, 1997 and 1996 respectively. The company had no
non-performing loans or net charge-offs in 1997 or 1996.
Non-interest income increased $47,717 in 1997 to $49,393 from $1,676 in
1996. The increase was due primarily to an increase in service fees on deposit
accounts resulting from a $17.1 million growth in deposits from December 31,
1996 to December 31, 1997.
Non-interest expense was $1,005,954 in 1997, which was an increase of
$587,897 over the period ended December 31, 1996. The increase in non-interest
expense reflects an increase in all
- 5 -
<PAGE> 8
expense categories as a result of the Bank subsidiary being in operation for the
entire year of 1997. The Company's efficiency ratio, which is noninterest
expense as a percentage of net interest income plus noninterest income, improved
to 129.5% in 1997 compared to 152.3% in 1996. The Company's relatively high
efficiency ratio is a result of the Bank being in only its second year of
operation.
NET INTEREST INCOME
The primary source of revenue for the Company is net interest income,
which is the difference between income on interest-bearing assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the rates earned on the Company's interest-earning assets and
the rates paid on its interest-bearing liabilities as well as the relative
amounts of interest-bearing assets and interest-bearing liabilities. Presented
below are various components of assets and liabilities, interest income and
expense and yields/costs for the periods indicated.
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------- ----------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
<S> <C> <C> <C> <C> <C> <C>
Funds with Escrow Agent $ -- $ -- 0.00% $3,477,924 $182,591 5.25%
Federal funds sold 2,274,274 123,185 5.42% 802,213 42,513 5.30%
Investment securities 8,578,719 543,383 6.33% 1,177,814 76,786 6.52%
Loans 6,166,768 575,771 9.34% 115,860 12,467 10.76%
----------- ---------- ---- ---------- -------- -----
Total earning assets $17,019,761 $1,242,339 7.30% $5,573,81 $314,357 5.64%
=========== ========== ==== ========== ======== =====
Interest-bearing deposits $ 9,647,740 $ 514,132 5.33% $ 468,247 $ 22,755 4.86%
Other borrowings 18,027 1,035 5.74% 226,086 18,733 8.29%
----------- ---------- ---- ---------- -------- -----
Total interest-bearing
liabilities $ 9,665,767 $ 515,167 5.33% $ 694,333 $ 41,488 5.98%
=========== ========== ==== ========== ======== =====
Net interest spread 1.97% -0.34%
Net interest
income/margin $ 727,172 4.27% $272,869 4.90%
</TABLE>
As reflected above, for 1997 the average yield on earning assets
amounted to 7.30%, while the average cost of interest-bearing liabilities was
5.33%. For 1996, the average yield on earning assets was 5.64% and the average
cost of interest-bearing liabilities was 5.98%. The increase in the yield on
earning assets is attributable to a significant increase in outstanding loans
which earn higher rates than other components of earning assets. This increase
in loans was expected as the Bank completed its first full year of operation.
The net interest margin is computed by subtracting interest expense from
interest income and dividing the resulting figure by average interest-earning
assets. The net interest margin for the period ended December 31, 1997 was 4.27%
and for 1996 was 4.90%. This decline was the result of an increase in
interest-bearing deposits of $9.2 million and an increase in average rates paid
from 4.86% to 5.33%. The increase in deposits and rates was predicted since the
Bank was establishing its core base of deposits which include a mix of
certificates of deposit, Money Market accounts, savings accounts and
interest-bearing checking accounts.
- 6 -
<PAGE> 9
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>
-------------------------------------------
1997 versus 1996
-------------------------------------------
Volume Rate Net change
------ ---- ----------
<S> <C> <C> <C>
Funds with Escrow Agent $(182,591) $ -- $(182,591)
Federal funds sold 79,734 938 80,672
Investment securities 468,779 (2,182) 466,597
Loans 564,954 (1,650) 563,304
--------- --------- ---------
Total earning assets 930,876 (2,894) 927,982
Interest-bearing deposits 489,179 2,198 491,377
Other borrowings (11,945) (5,753) (17,698)
--------- --------- ---------
Total interest-bearing
liabilities 477,234 (3,555) 473,679
--------- --------- ---------
Net interest income $ 453,642 $ 661 $ 454,303
========= ========= =========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $153,000 in 1997 compared to $16,502 in
1996. The Company increased the 1997 provision as a result of the significant
growth in outstanding loans from $1.1 million at December 31, 1996 to $11.1
million at December 31, 1997. Management anticipates loan growth will continue
to be strong in 1998. 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 valid.
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.
NONINTEREST INCOME
Noninterest income increased from $1,676 in 1996 to $49,393 in 1997.
Service fees on deposit accounts, the largest component of noninterest income,
increased from $509 in 1996 to $26,779 as the result of an increase in deposits
of $17.1 million. This growth in deposits was expected as the Bank operated for
a full year in 1997 and moved into a new 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.
- 7 -
<PAGE> 10
NONINTEREST EXPENSE
Total noninterest expense increased from $418,057 for the period ended
December 31, 1996 to $1,005,954 for the year ended December 31, 1997. The
increase in non-interest expense reflects an increase in all expense categories
as a result of the Bank subsidiary being in operation for an entire year.
Salaries, wages and employee benefits totaled $481,351 in 1997, $238,454 in
1996, and $18,750 in 1995. Full-time equivalent employees increased to 13 at the
end of 1997 from 9 at the end of 1996. Additional staff was hired to support the
internal growth in loans and deposits. Supplies and printing increased to
$46,509 in 1997 from $23,843 in 1996 and $2,997 in 1995. This increase was
related to the increase in loans and deposits. Advertising and public relations
increased 27.8% to $51,227 in 1997. The advertising campaign associated with the
grand opening of the new building contributed to this increase. Professional
fees were $98,644 in 1997, $26,178 in 1996, and $61,122 in 1995. The 1997 figure
includes the establishment of a $62,000 reserve for potential costs of
collecting monies due that are related to a suspected kiting operation discussed
in Note 19 - Subsequent Event.
Depreciation and amortization increased $108,523 in 1997 from $26,380 in
1996 and $1,005 in 1995. 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 $193,320 in 1997 from $63,123 in 1996 and $27,199 in 1995
was principally due to an increase in operating expenses related to the new
building and growth in data processing fees and other expenses associated with
the expansion of loan and deposits.
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
At December 31, 1997 and December 31, 1996, the Company's investment
securities portfolio was a significant component of the Company's total earning
assets. Total securities averaged $8.6 million in 1997 and totaled $10.9 million
at December 31, 1997. In 1996, total securities averaged $1.2 million and
totaled $5.1 million at December 31, 1996. At December 31, 1997, the Company's
total investment securities portfolio had a book value of $10,873,997 and a
market value of $10,883,516 for an unrealized net gain of $9,519. Investment
securities represented 40.4% of total assets at December 31, 1997 versus 50.5%
of total assets at December 31, 1996. Although the Company anticipates that the
investment securities portfolio will continue to be a significant component of
the Company's total earning assets for the next several years, the Company
anticipates that the securities portfolio as a percentage of total assets will
continue to decrease each year as the Company's loan portfolio continues to
grow. The Company primarily invests in U.S. Treasury securities and securities
of other U.S. Government agencies.
Contractual maturities and yields on the Company's investment securities
(all available for sale) at December 31, 1997 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.
- 8 -
<PAGE> 11
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
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
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $499,219 6.04% $ 508,281 6.01% $ -- 0.00% $ -- 0.00%
U.S. Government Agencies -- 0.00% 5,624,231 6.34% 2,234,382 6.95% -- 0.00%
Mortgage-backed -- 0.00% 384,963 6.54% -- 0.00% 1,441,590 6.07%
Other -- 0.00% -- --% -- --% 190,850 6.00%
-------- ---- ---------- ---- ---------- ---- ---------- ----
Total $499,219 6.04% $6,517,475 6.33% $2,234,382 6.95% $1,632,440 6.06%
======== ==== ========== ==== ========== ==== ========== ====
</TABLE>
At December 31, 1997, short-term investments totaled $1,210,000 compared
to $2,560,000 as of December 31, 1996. These funds are one source of the Bank's
liquidity and are generally invested in an earning capacity on an overnight
basis.
LOANS
Total loans increased $10.0 million during 1997, ending the year at $11.1
million. Average gross loans increased from $115,860 in 1996 to $6,166,768 in
1997. 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 during 1997 as loans
ended the year at 48.1% of earning assets, versus 12.3% at the end of 1996.
The following table shows the composition of the loan portfolio by
category at December 31, 1997 and 1996. There were no loans at December 31,
1995.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Commercial $ 3,555,120 31.49% $ 125,000 11.42%
Real estate - construction 1,250,869 11.08% 188,210 17.20%
Real estate - mortgage 5,206,991 46.13% 681,548 62.28%
Consumer 1,275,126 11.30% 99,641 9.10%
------------ ------ ----------- ------
Loans, gross 11,288,106 100.00% 1,094,399 100.00%
====== ======
Allowance for possible loan losses (169,502) (16,502)
------------ -----------
Loans, net $ 1,118,604 $ 1,077,897
============ ===========
</TABLE>
The principal component of the Company's loan portfolio at year end 1997
and 1996 was mortgage loans which represented 46.13% and 62.28% of the portfolio
respectively. 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.
- 9 -
<PAGE> 12
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 December 31, 1997.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
WITHIN AFTER THREE BUT AFTER ONE BUT AFTER
THREE WITHIN TWELVE WITHIN FIVE FIVE
MONTHS MONTHS YEARS YEARS TOTAL
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Commercial $1,169,797 $ 20,285 $2,365,038 $ -- $ 3,555,120
Real estate 314,581 177,966 3,859,261 855,183 5,206,991
Construction 1,007,203 -- 243,666 -- 1,250,869
Consumer 288,636 78,825 907,665 -- 1,275,126
---------- -------- ---------- -------- -----------
Total $2,780,217 $277,076 $7,375,630 $855,183 $11,288,106
========== ======== ========== ======== ===========
Fixed Interest Rate $ 265,912 $277,076 $7,375,630 $855,183 $ 8,773,801
Variable Interest Rate 2,514,305 -- -- -- 2,514,305
---------- -------- ---------- -------- -----------
Total $2,780,217 $277,076 $7,375,630 $855,183 $11,288,106
========== ======== ========== ======== ===========
</TABLE>
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 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 valid. Thus,
there can be no assurance that charge-offs in future periods will not exceed the
allowance for possible loan losses or that additional increases in the allowance
for possible loan losses will not be required.
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 December 31, 1997, the allowance for possible loan losses was $169,502
or 1.50% of outstanding loans compared to an allowance for possible loans losses
of $16,502 or 1.51% of outstanding loans at December 31, 1996. The Bank has not
charged off any loans since commencing operations in September 1996. There were
no non-accrual, restructured or other non-performing loans
- 10 -
<PAGE> 13
at December 31, 1997. There were no non-performing loans, no potential problem
loans, no loans defined as "troubled debt restructurings" and no loans
classified for regulatory purposes as loss, doubtful, substandard, or special
mention at December 31, 1997. In addition, there were no loans delinquent
greater than 30 days at that time.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average total deposits were $12,386,098 and average interest-bearing
deposits were $9,647,740 in 1997. Average total deposits were $604,674 and
average interest-bearing deposits were $468,247 in 1996. The following table
sets forth the deposits of the Company by category as of December 31, 1997 and
December 31, 1996.
DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Percent of Percent of
Amount Deposits Amount Deposits
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 3,974,419 19.80% $ 383,128 12.70%
NOW accounts 633,560 3.15% 107,014 3.55%
Money market accounts 1,448,681 7.22% 166,258 5.51%
Savings accounts 4,913,584 24.48% 1,440,697 47.74%
Time deposits less than $100,000 5,923,125 29.51% 397,133 13.16%
Time deposits of $100,000 or over 3,178,552 15.84% 523,426 17.34%
----------- ------ ---------- ------
Total deposits $20,071,921 100.00% $3,017,656 100.00%
=========== ====== ========== ======
</TABLE>
Internal growth, resulting primarily from special promotions and
increased customer convenience of the new main office facility, generated the
new deposits. The sizable increase in demand deposit accounts was attributable
to new accounts from commercial loan customers and business accounts opened by
directors and other stockholders.
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 $16,893,369 at December
31, 1997 compared to $2,494,230 at December 31, 1996. A stable base of deposits
is expected to be the Company's primary source of funding to meet both its
short-term and long-term liquidity needs in the future. Core deposits as a
percentage of total deposits were approximately 84% at December 31, 1997, up
slightly from 83% at December 31, 1996. The Company's loan-to-deposit ratio was
55.39% at December 31, 1997 versus 35.72% at December 31, 1996. The average
loan-to-deposit ratio was 49.79% during 1997 and 19.16% during 1996.
During 1995 and 1996, the Company utilized a short-term line of credit
established with The Bankers Bank in Atlanta, Georgia to fund its cash needs
during the organizational and pre-opening phases. In addition, a short-term loan
was extended to the organizers of the Company by The Bankers Bank for the
purpose of purchasing land for the Bank's main office. These borrowings averaged
$226,086 during 1996 and $148,468 during 1995. The Company had no short-term
borrowings at December 31, 1997 or December 31, 1996.
- 11 -
<PAGE> 14
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 December 31, 1997.
ANALYSIS OF CAPITAL
December 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Required Actual Excess
Amount % Amount % Amount %
-------- --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
The Bank:
Tier 1 risk-based capital 591 4.00% 5,760 39.0% 5,169 35.0%
Total risk-based capital 1,182 8.00% 5,930 40.1% 4,748 32.1%
Tier I leverage 968 4.00% 5,760 23.8% 4,792 19.8%
</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 $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 $2,000,000. 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.
- 12 -
<PAGE> 15
To minimize the effect of these margin swings, the balance sheet should be
structured so that repricing opportunities exist for both assets and liabilities
in roughly equivalent amounts at approximately the same time intervals.
Imbalances in these pricing opportunities at any point in time constitute
interest rate risk.
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of rate
sensitive assets and liabilities at any given time interval. Management
generally attempts to maintain a balance between rate sensitive assets and
liabilities to minimize the company's interest rate risks. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity or by
adjusting the interest rate during the life of an asset or liability. Managing
the amount of assets and liabilities repricing in the same time interval helps
to hedge the risk and minimize the impact on net interest income of rising or
falling interest rates.
The interest rate sensitivity position at year end 1997 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
December 31, 1997
<TABLE>
<CAPTION>
After Three
Within but Within After One
Three Twelve but Within After Five
Months Months Five Years Years Total
------ ----------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Assets
Earning assets:
Federal funds sold $ 1,210,000 $ -- $ -- $ -- $ 1,210,000
Investment securities -- 1,477,383 6,517,475 2,888,658 10,883,516
Loans 2,780,217 277,076 7,375,630 855,183 11,288,106
----------- ----------- ----------- ---------- -----------
Total earning assets $ 3,990,217 $ 1,754,459 $13,893,105 $3,743,841 $23,381,622
=========== =========== =========== ========== ===========
Liabilities
Interest-bearing liabilities
Money market and NOW $ 2,082,241 $ -- $ -- $ -- $ 2,082,241
Regular savings deposits 284,964 -- -- -- 284,964
Prime savings deposits 4,628,620 -- -- -- 4,628,620
Time deposits 1,350,373 1,879,607 5,871,697 -- 9,101,677
----------- ----------- ----------- ---------- -----------
Total interest-bearing liabilities $ 8,346,198 $ 1,879,607 $ 5,871,697 $ -- $16,097,502
=========== =========== =========== ========== ===========
Period gap $(4,355,981) $ (125,148) $ 8,021,408 $3,743,841 $ 7,284,120
Cumulative gap $(4,355,981) $(4,481,129) $ 3,540,279 $7,284,120 $ 7,284,120
Ratio of cumulative gap to total
earning assets (18.63%) (19.17%) 15.14% 31.15%
</TABLE>
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
- 13 -
<PAGE> 16
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 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 operations.
- 14 -
<PAGE> 17
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 shares, for a total of $7,358,680, were
sold in the initial public offering and are outstanding as of March 23, 1998. As
of March 23, 1998, the Company had 995 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.
- 15 -
<PAGE> 18
BEACH FIRST NATIONAL BANCSHARES, INC.
AND SUBSIDIARY
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE PERIOD FROM JANUARY 15, 1995 (INCEPTION)
TO DECEMBER 31, 1995
- 16 -
<PAGE> 19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
BEACH FIRST NATIONAL BANCSHARES, INC.
Myrtle Beach, South Carolina
We have audited the accompanying consolidated balance sheet of BEACH
FIRST NATIONAL BANCSHARES, INC. (the `Company") AND SUBSIDIARY as of December
31, 1997 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARY as of December 31, 1996 and for the year then
ended and for the period from January 15, 1995 (inception) to December 31, 1995
were audited by other auditors whose report, dated March 1, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presents fairly, in all material respects, the consolidated financial position
of the BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY at December 31, 1997
and the results of their operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Elliott, Davis & Company, LLP
Greenville, South Carolina
January 30, 1998
- 17 -
<PAGE> 20
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,539,044 $ 672,929
Federal funds sold 1,210,000 2,560,000
Investment securities available for sale 10,883,516 5,080,830
Loans, net 11,118,604 1,077,897
Property and equipment, net 1,682,316 475,205
Other assets 504,764 197,146
----------- -----------
Total assets $26,938,244 $10,064,007
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing deposits $ 3,974,419 $ 383,128
Interest bearing deposits 16,097,502 2,634,528
----------- -----------
Total deposits 20,071,921 3,017,656
Other liabilities 155,788 85,582
----------- -----------
Total liabilities 20,227,709 3,103,238
----------- -----------
COMMITMENTS AND CONTINGENCIES - NOTES 9, 13 AND 19
SHAREHOLDERS' EQUITY
Common stock, $1 par value, 10,000,000 shares authorized,
735,868 shares issued 735,868 735,868
Paid-in capital 6,476,481 6,476,481
Retained deficit (507,636) (261,247)
Net unrealized gain on investment securities available for sale,
net of income taxes 5,822 9,667
Total shareholders' equity 6,710,535 6,960,769
----------- -----------
Total liabilities and shareholders' equity $26,938,244 $10,064,007
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 18 -
<PAGE> 21
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD FROM
DECEMBER 31, JANUARY 15, 1995
--------------------- (INCEPTION) THROUGH
1997 1996 DECEMBER 31, 1995
---------- -------- --------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $ 575,771 $ 12,467 $ --
Investment securities 543,383 76,786 --
Federal funds sold 123,185 42,513 --
Escrow account -- 182,591 22,919
---------- -------- ---------
Total interest income 1,242,339 314,357 22,919
INTEREST EXPENSE
Deposits and borrowings 515,167 41,487 13,080
---------- -------- ---------
Net interest income 727,172 272,870 9,839
PROVISION FOR POSSIBLE LOAN LOSSES 153,000 16,502 --
---------- -------- ---------
Net interest income after provision for possible
loan losses 574,172 256,368 9,839
---------- -------- ---------
NONINTEREST INCOME
Service fees on deposit accounts 26,779 509 --
Gain on sale of investment securities 4,887 669 --
Gain on sale of equipment 1,660 -- --
Other income 16,067 498 --
---------- -------- ---------
Total noninterest income 49,393 1,676 --
---------- -------- ---------
NONINTEREST EXPENSES
Salaries and wages 445,896 204,198 18,750
Employee benefits 35,455 34,256 --
Supplies and printing 46,509 23,843 2,997
Advertising and public relations 51,227 40,079 --
Professional fees 98,644 26,178 61,122
Depreciation and amortization 134,903 26,380 1,005
Other operating expenses 193,320 63,123 27,199
---------- -------- ---------
Total noninterest expenses 1,005,954 418,057 111,073
---------- -------- ---------
Loss before income taxes (382,389) (160,013) (101,234)
INCOME TAX BENEFIT 136,000 -- --
---------- -------- ---------
Net loss $ (246,389) $160,013) $(101,234)
========== ======== =========
NET LOSS PER COMMON SHARE $ (.33) $ (.29) $ (2.18)
========== ======== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 735,868 558,791 46,526
========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 19 -
<PAGE> 22
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net unrealized
Common stock gain on Total
------------ Paid in Retained investment securities shareholders'
Shares Amount capital (deficit) available for sale equity
------- -------- ---------- --------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 15, 1995
(inception) -- -- -- -- -- $ --
Sale of stock 10 10 90 -- -- 100
Net loss -- -- -- (101,234) -- (101,234)
------- -------- ---------- --------- ------- ----------
Balance, December 31, 1995 10 10 90 (101,234) -- (101,134)
Sale of stock 735,858 735,858 6,476,391 -- -- 7,212,249
Change in net unrealized gain on
investment securities available
for sale, net of income taxes -- -- -- -- 9,667 9,667
Net loss -- -- -- (160,013) -- (160,013)
------- -------- ---------- --------- ------- ----------
Balance, December 31, 1996 735,868 735,868 6,476,481 (261,247) 9,667 6,960,769
Change in net unrealized gain on
investment securities available
for sale, net of income taxes -- -- -- -- (3,845) (3,845)
Net loss -- -- -- (246,389) -- (246,389)
------- -------- ---------- --------- ------- ----------
Balance, December 31, 1997 735,868 $735,868 $6,476,481 $(507,636) $ 5,822 $6,710,535
======= ======== ========== ========= ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- 20 -
<PAGE> 23
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended For the period from
December 31, January 15, 1995
------------------------------ (inception) through
1997 1996 December 31, 1995
------------ ----------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (246,389) $ (160,013) $(101,234)
Adjustments to reconcile net loss to net cash
used in operating activities
Deferred income taxes (136,000) -- --
Provisions for loan losses 153,000 16,502 --
Depreciation and amortization 134,903 26,380 1,005
Gain on sale of investment securities (4,887) (669) --
(Increase) decrease in other assets (192,903) 59,126 (260,665)
Increase (decrease) in other liabilities 70,206 (521,981) 131,563
------------ ----------- ---------
Net cash used in operating activities (223,730) (580,655) (229,331)
------------ ----------- ---------
INVESTING ACTIVITIES
Purchase of investment securities (10,928,847) (5,572,290) --
Sale of investment securities 5,130,898 501,797 --
Decrease (increase) in Federal funds sold 1,350,000 (2,560,000) --
Increase in loans, net (10,193,707) (1,094,399) --
Purchase of premises and equipment (1,331,589) (256,068) (242,130)
Proceeds from sale of equipment 8,825 -- --
------------ ----------- ---------
Net cash used in investing activities (15,964,420) (8,980,960) (242,130)
------------ ----------- ---------
FINANCING ACTIVITIES
Increase in borrowings -- -- 476,000
Sale of stock, net -- 7,212,249 100
Net increase in deposits 17,054,265 3,017,656 --
------------ ----------- ---------
Net cash provided by financing activities 17,054,265 10,229,905 476,100
------------ ----------- ---------
Net increase in cash and cash equivalents 866,115 668,290 4,639
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 672,929 4,639 --
------------ ----------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 1,539,044 $ 672,929 $ 4,639
============ =========== =========
CASH PAID FOR
Income taxes $ -- $ -- $ --
============ =========== =========
Interest $ 477,725 $ 46,271 $ --
============ =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-21-
<PAGE> 24
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
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 (the
"Bank"). The Company offered its common stock for sale to the public under an
initial public offering price of $10 per share.
During 1996, the Company obtained regulatory approval to
operate a national bank and opened for business on September 23, 1996, with a
total capitalization of $6.3 million. The Bank provides full commercial banking
services to customers and is subject to regulation of the Office of the
Controller of the Currency (OCC) and the Federal Deposit Insurance Corporation.
The Company is subject to regulation of the Federal Reserve Board.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany accounts and transactions have
been eliminated in consolidation. The accounting and reporting policies of
the Company conform to generally accepted accounting principles and to
general practices in the banking industry. The Company uses the accrual
basis of accounting.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amount of income and
expenses during the reporting periods. Actual results could differ from
those estimates.
CONCENTRATIONS OF CREDIT RISK
The Company, through its subsidiary makes loans to individuals and
businesses in and around Horry County for various personal and commercial
purposes. The Company has a diversified loan portfolio and the borrowers'
ability to repay their loans is not dependent upon any specific economic
sector.
INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investment in Debt and Equity Securities". The statement requires
investments in equity and debt securities to be classified into three
categories:
1. Held to maturity securities: These are investment securities which the
Company has the ability and intent to hold until maturity. These
securities are stated at cost, adjusted for amortization of premiums
and the accretion of discounts. The Company has no held to maturity
securities.
2. Trading securities: These are securities which are bought and held
principally for the purpose of selling in the near future. Trading
securities are reported at fair market value, and related
-22-
<PAGE> 25
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
unrealized gains and losses are recognized in the income statement. The
Company has no trading securities.
3. Available for sale securities: These are securities which are not
classified as either held to maturity or as trading securities. These
securities are reported at fair market value. Unrealized gains and
losses are reported, net of income taxes, as separate components of
shareholders' equity.
LOANS, INTEREST AND FEE INCOME ON LOANS
Loans are stated at the principal balance outstanding. Unearned discount,
unamortized loan fees and the allowance for possible loan losses are
deducted from total loans in the statement of condition. Interest income is
recognized over the term of the loan based on the principal amount
outstanding. Points on real estate loans are taken into income to the
extent they represent the direct cost of initiating a loan. The amount in
excess of direct costs is deferred and amortized over the expected life of
the loan.
Loans are generally placed on non-accrual status when principal or interest
becomes ninety days past due, or when payment in full is not anticipated.
When a loan is placed on non-accrual status, interest accrued but not
received is generally reversed against interest income. If collectibility
is in doubt, cash receipts on non-accrual loans are not recorded as
interest income, but are used to reduce principal.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provisions for loan losses charged to operating expenses reflect the
amount deemed appropriate by management to establish an adequate reserve to
meet the present and foreseeable risk characteristics of the current loan
portfolio. Management's judgement is based on periodic and regular
evaluation of individual loans, the overall risk characteristics of the
various portfolio segments, past experience with losses and prevailing and
anticipated economic conditions. Loans which are determined to be
uncollectible are charged against the allowance. Provisions for loan losses
and recoveries on loans previously charged off are added to the allowance.
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard requires
that all lenders value loans at the loan's fair value if it is probable
that the lender will be unable to collect all amounts due according to the
terms of the loan agreement. Fair value may be determined based upon the
present value of expected cash flows, market price of the loan, if
available, or value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate. SFAS No.
114 was amended by SFAS No. 118 to allow a lender to use existing methods
for recognizing interest income on an impaired loan and by requiring
additional disclosures about how a creditor recognizes interest income on
an impaired loan.
Under SFAS No. 114, as amended by SFAS 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or
partially, all cash receipts are applied to principal. When this doubt does
not exist, cash receipts are applied under the contractual terms of the
loan agreement first to principal then to interest income. Once the
reported principal balance has been reduced to zero,
-23-
<PAGE> 26
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
future cash receipts are applied to interest income, to the extent that any
interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. For these accruing impaired loans, cash receipts are
typically applied to principal and interest receivable in accordance with
the terms of the restructured loan agreement. Interest income is recognized
on these loans using the accrual method of accounting. As of December 31,
1997 and 1996, the Company had no impaired loans.
NON-PERFORMING ASSETS
Non-performing assets include real estate acquired through foreclosure or
deed taken in lieu of foreclosure, and loans on non-accrual status. Loans
are placed on non-accrual status when, in the opinion of management, the
collection of additional interest is questionable. Thereafter no interest
is taken into income unless received in cash or until such time as the
borrower demonstrates the ability to pay principal and interest.
At December 31, 1997 and 1996 the Bank had no non-performing assets.
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets. Maintenance and repairs
are charged to operations, while major improvements are capitalized. Upon
retirement, sale or other disposition of property and equipment, the cost
and accumulated depreciation are eliminated from the accounts, and gain or
loss is included in income from operations.
ORGANIZATIONAL COSTS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
7, the Company and the Bank capitalized all direct organizational costs
that were incurred in the expectation that they would generate future
revenues and otherwise be of benefit after the Bank opened for business.
These capitalized costs are amortized over a sixty-month period using the
straight-line method. As of December 31, 1997 and 1996, total
organizational costs net of amortization amounted to $65,958 and $83,547,
respectively.
INCOME TAXES
The consolidated financial statements have been prepared on the accrual
basis. When income and expenses are recognized in different periods for
financial reporting purposes and for purposes of computing income taxes
currently payable, deferred taxes are provided on such temporary
differences. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Under SFAS 109, deferred tax assets and liabilities are recognized
for the expected future tax consequences of events that have been
recognized in the consolidated financial statements or tax return. Deferred
tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled.
-24-
<PAGE> 27
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
ADVERTISING AND PUBLIC RELATIONS EXPENSE
Advertising, promotional and other business development costs are generally
expensed as incurred. External costs incurred in producing media
advertising are expensed the first time the advertising takes place.
External costs relating to direct mailing costs are expensed in the period
in which the direct mailings are sent.
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 exceeds the
market value of the stock.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents are defined
as those amounts included in the balance sheet caption "Cash and Due From
Banks". Cash and cash equivalents have an original maturity of three months
or less.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to
the current year presentation. Such changes had no effect on previously
reported net income or shareholders' equity.
RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting standards that have been proposed or issued by standard-setting
groups that do not require adoption until a future date will have no
material impact on the financial statements upon adoption.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances either at the
bank or on deposit with the Federal Reserve Bank. At December 31, 1997 and 1996
these required reserves were met by vault cash.
NOTE 3 - FEDERAL FUNDS SOLD
The Bank is required to maintain legal cash reserves computed by
applying prescribed percentages to its various types of deposits. When the
Bank's cash reserves are in excess of the required amount, the Bank may lend the
excess to other banks on a daily basis. As of December 31, 1997 and 1996,
federal funds sold amounted to $1,210,000 and $2,560,000, respectively.
-25-
<PAGE> 28
NOTE 4 - INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized costs and fair value of investment securities available
for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------
Gross Unrealized
Amortized ---------------------
Cost Gains Losses Fair Value
----------- ------- -------- -----------
<S> <C> <C> <C> <C>
United States Treasury $ 1,002,687 $ 4,813 $ -- $ 1,007,500
Federal agencies 7,849,890 13,496 (4,773) 7,858,613
Mortgage-backed 1,830,570 4,655 (8,672) 1,826,553
Federal Reserve Bank (FRB) stock --
restricted 190,850 -- -- 190,850
----------- ------- -------- -----------
Total securities $10,873,997 $22,964 $(13,445) $10,883,516
=========== ======= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------
Gross Unrealized
Amortized ------------------
Cost Gains Losses Fair Value
---------- ------- ------ ----------
<S> <C> <C> <C> <C>
United States Treasury $1,496,102 $ 3,429 $ -- $1,499,531
Federal agencies 1,923,916 10,713 -- 1,934,629
Mortgage-backed 1,455,314 1,227 (721) 1,455,820
Federal Reserve Bank (FRB) stock -
restricted 190,850 -- -- 190,850
---------- ------- ----- ----------
Total securities $5,066,182 $15,369 $(721) $5,080,830
========== ======= ===== ==========
</TABLE>
The amortized costs and fair values of securities available for sale at
December 31, 1997, by contractual maturity, are shown in the following chart.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
-------------- -----------
<S> <C> <C>
Due in one year or less $ 497,973 $ 499,219
Due after one through five years 6,508,725 6,517,475
Due after five through ten years 2,229,804 2,234,383
Due after ten years 1,446,645 1,441,589
FRB stock (no maturity) 190,850 190,850
----------- -----------
Total investment securities $10,873,997 $10,883,516
=========== ===========
</TABLE>
During 1997 and 1996, securities sales in the amount of $5,130,898 and
$501,797 yielded gains on sales of securities in the amount of $4,887 and $669,
respectively. As of December 31, 1997 and 1996, there were no securities pledged
as collateral for public funds.
-26-
<PAGE> 29
NOTE 5 - LOANS
The composition of net loans by major loan category is presented below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Commercial $ 3,555,120 $ 125,000
Real estate - construction 1,250,869 188,210
Real estate - mortgage 5,206,991 681,548
Consumer 1,275,126 99,641
----------- ----------
Loan, gross 11,288,106 1,094,399
Less allowance for possible loan losses (169,501) (16,502)
----------- ----------
Loan, net $11,118,604 $1,077,897
=========== ==========
</TABLE>
At December 31, 1997 and 1996, there were no nonaccruing loans.
NOTE 6 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is a valuation reserve available
to absorb future loan charge-offs. The allowance is increased by provisions
charged to operating expenses and by recoveries of loans which were previously
written-off. The allowance is decreased by the aggregate loan balances, if any,
which were deemed uncollectible during the year.
Activity within the allowance for possible loan losses account follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996
-------- -------
<S> <C> <C>
Balance, beginning of year $ 16,502 $ --
Provision for loan losses 153,000 16,502
-------- -------
Balance, end of year $169,502 $16,502
======== =======
</TABLE>
During 1997 and 1996 there were no loan charge-offs or recoveries.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Components of property and equipment included in the consolidated
balance sheets are as follows:
-27-
<PAGE> 30
NOTE 7 - PROPERTY AND EQUIPMENT, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996
----------- ---------
<S> <C> <C>
Land $ 218,608 $ 218,608
Furniture and equipment 594,892 177,068
Buildings and improvements 994,339 -
----------- ---------
1,807,839 395,676
Accumulated depreciation (125,523) (22,993)
----------- ---------
1,682,316 372,683
Construction in progress - 102,522
----------- ---------
Total property and equipment $ 1,682,316 $ 475,205
=========== =========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 amounted to $117,314, $21,988 and $1,005, respectively. Depreciation is
charged to operations over the estimated useful lives of the assets. The
estimated useful lives and methods of depreciation for the principal items
follow:
<TABLE>
<CAPTION>
Type of Asset Life in Years Depreciation Method
-------------------------- ------------- -------------------
<S> <C> <C>
Software 3 Straight-line
Furniture and equipment 5 to 7 Straight-line
Buildings and improvements 5 to 40 Straight-line
</TABLE>
NOTE 8 - DEPOSITS
The following is a detail of the deposit accounts:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
----------- ----------
<S> <C> <C>
Non-interest bearing deposits $ 3,974,419 $ 383,128
Interest bearing deposits:
NOW accounts 633,560 107,014
Money market accounts 1,448,681 166,258
Savings 4,913,584 1,440,697
Time, less than $100,000 5,923,125 397,133
Time, $100,000 and over 3,178,552 523,426
----------- ----------
Total deposits $20,071,921 $3,017,656
=========== ==========
</TABLE>
Interest expense on time deposits greater than $100,000 was $97,660 in
1997 and $3,859 in 1996.
-28-
<PAGE> 31
NOTE 8 - DEPOSITS, CONTINUED
At December 31, 1997 the scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<S> <C>
1991 $ 3,229,980
1999 4,605,540
2000 678,290
2001 587,867
-----------
$ 9,101,677
===========
</TABLE>
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims will not
be material to the Bank's financial position.
Refer to Note 12 concerning contracts the Company executed with the
Bank's President and to Note 13 concerning financial instruments with
off-balance sheet risk.
NOTE 10 - UNUSED LINES OF CREDIT
At December 31, 1997, the Bank had unused lines of credit to purchase
federal funds totaling $2,000,000 from unrelated banks. These lines of credit
are available on a one to seven day basis for general corporate purposes of the
Bank. All of the lenders have reserved the right to withdraw these lines at
their option.
NOTE 11 - INCOME TAXES
Net losses since inception have eliminated the requirement to record a
provision for income taxes in 1997, 1996 and 1995. The income tax benefit of
$136,000 recorded in 1997 reflects the value of net operating losses available
for offset against future taxable income. The resulting deferred tax asset is
presented with other assets in the consolidated balance sheet. Net operating
losses available to offset future taxable income amounted to approximately
$640,000 at December 31, 1997 and are available through 2012.
NOTE 12 - RELATED PARTY TRANSACTIONS
EMPLOYMENT AGREEMENT
On August 23, 1995, the Company entered into a five-year employment
agreement (the "Agreement") with the President/CEO of the Bank. The
Agreement provides for an automatic, annual renewal after the initial
five-year term, unless either party thereto expresses a prior written,
contrary intent. The Agreement also provides for an initial annual salary
of $75,000, increasing to $90,000 when escrow funds are released. A cash
bonus equaling 5 percent of the net pre-tax income of the Bank will also be
paid if the Bank achieves certain performance levels as established by the
Board from time to time. Other customary benefits, including stock options,
will also be provided. The Company agreed to grant the President/CEO
options to purchase 36,793 shares, equaling 5 percent of the number of
shares sold in the initial public offering. One-fifth of the options will
vest annually, beginning September 23, 1997, provided however that certain
performance criteria as set by the Board are met. The options can be
exercised at any time during the ten years following their
-29-
<PAGE> 32
NOTE 12 - RELATED PARTY TRANSACTIONS, CONTINUED
EMPLOYMENT AGREEMENT, CONTINUED
vesting at a price of $10 per share. However, in the event of a change in
control, the options may be subject to immediate vesting. Other provisions,
such as non-compete and non-solicitation clauses are included in the
Agreement.
BORROWINGS AND DEPOSITS BY DIRECTORS AND EXECUTIVE OFFICERS
Certain directors, executive officers and companies with which they are
affiliated, are customers of and have banking transactions with the Bank in
the ordinary course of business. These loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable arms-length transactions.
A summary of loan transactions with directors, including their
affiliates, and executive officers follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Balance, beginning of year $ 70,531 $ -
New loans 2,727,835 70,531
Less loan payments 135,959 -
----------- ---------
Balance, end of year $ 2,662,407 $ 70,531
=========== =========
</TABLE>
Deposits by directors and their related interests, at December 31, 1997
and 1996, approximated $4,073,208 and $1,263,757, respectively.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the ordinary course of business, and to meet the financing needs of
its customers, the Company is a party to various financial instruments with
off-balance sheet risk. These financial instruments, which include commitments
to extend credit and standby letters of credit, involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheets. The contract amount of those instruments reflects the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any material condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. At December 31, 1997, unfunded
commitments to extend credit were $2,006,771. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate.
-30-
<PAGE> 33
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, CONTINUED
At December 31, 1997, there was a $5,000 commitment under a letter of
credit. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Collateral
varies but may include accounts receivable, inventory, equipment, marketable
securities and property. Since most of the letters of credit are expected to
expire without being drawn upon, they do not necessarily represent future cash
requirements.
NOTE 14 - EMPLOYEE BENEFIT PLAN
On January 1, 1997, the Company adopted the Beach First National Bank
Profit Sharing and 401(k) Plan for the benefit of all eligible employees. The
Company contributes to the Plan annually upon approval by the Board of
Directors. Contributions made to the Plan in 1997 amounted to $8,392.
NOTE 15 - STOCK OPTION PLAN
On April 30, 1997, the Company adopted a stock option plan for the
benefit of the directors, officers and employees. The Board may grant up to
110,000 options at an option price per share not less than the fair market value
on the date of grant. The directors were granted 1,500 options each that vested
immediately. All other options granted to officers and employees vest 20 percent
each year for five years and expire 10 years from the grant date. The Company
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". Accordingly, no
compensation cost has been recognized for the stock option plan. Had
compensation cost been determined based on the fair value at the grant date for
the above stock option awards consistent with the provisions of SFAS 123, the
Company's net loss and net loss per common share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the year ended
December 31, 1997
------------------
<S> <C>
Net loss as reported $(246,389)
Net loss pro forma (276,804)
Net loss per share as reported (.33)
Net loss per share pro forma (.38)
</TABLE>
The fair value of the option grant is estimated on the date of grant
using the Black-Scholes option pricing model and the minimum value method
allowed by SFAS 123. The risk free interest rate used was 5.89 percent, the
expected option life was 5 years and the assumed dividend rate was zero.
A summary of the status of the plan as of December 31, 1997 and changes
during the year ending on that date is presented below:
-31-
<PAGE> 34
NOTE 15 - STOCK OPTION PLAN, CONTINUED
<TABLE>
<CAPTION>
Shares Weighted average exercise price
- ------ --------------------------------
<S> <C> <C>
Outstanding at beginning of year $ - $ -
Granted 103,293 10.00
Exercised - -
Forfeited or expired (2,245) -
----------- ---------
Outstanding at year end 101,048 $ 10.00
=========== =========
Options exercisable at December 31, 1997 35,975
Weighted-average fair value of options granted during the year $ 2.58
Shares available for grant 8,952
</TABLE>
NOTE 16 - DIVIDENDS
There are no current plans to initiate payment of cash dividends and
future dividend policy will depend on the Bank's and the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Company's Board of Directors. The Bank is restricted in its ability to
pay dividends under the national banking laws and regulations of the OCC.
Generally, these restrictions require the Bank to pay dividends derived solely
from net profits. Moreover, OCC prior approval is required if dividends declared
in any calendar year exceed the Bank's net profit for that year combined with
its retained net profits for the preceding two years.
NOTE 17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital to risk-weighted assets, and of
Tier I capital to average assets. Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification of the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the
institution's category. The Bank's actual capital amounts and ratios and minimum
regulatory amounts and ratios are presented as follows:
-32-
<PAGE> 35
NOTE 17 - REGULATORY MATTERS, CONTINUED
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
adequacy purposes action provisions
------------------- ------------------
Actual Minimum Minimum
----------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN $000)
AS OF DECEMBER 31, 1997
Total Capital (to risk weighted assets) $5,930 40.1% $1,182 8.0% $1,478 10.0%
Tier I Capital (to risk weighted assets) 5,760 39.0 591 4.0 887 6.0
Tier I Capital (to average assets) 5,760 23.8 968 4.0 1,210 5.0
AS OF DECEMBER 31, 1996
Total Capital (to risk weighted assets) $6,025 200.0% $ 241 8.0% $ 301 10.0%
Tier I Capital (to risk weighted assets) 6,008 200.0 120 4.0 180 6.0
Tier I Capital (to average assets) 6,008 70.0 341 4.0 427 5.0
</TABLE>
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
Following is condensed financial information of Beach First National
Bancshares, Inc. (parent company only):
Condensed Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
----------- ---------
<S> <C> <C>
ASSETS
Cash $ 47,805 $ 881,496
Investment in Bank subsidiary 5,820,544 6,087,096
Securities available for sale 800,031 --
Other assets 61,093 16,386
----------- ----------
Total assets $ 6,729,473 $6,984,978
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 18,938 $ 24,209
Common stock 735,868 735,868
Paid-in capital 6,476,481 6,476,481
Retained deficit (507,637) (261,247)
Unrealized gain on securities 5,823 9,667
----------- ----------
Total liabilities and shareholders' equity $ 6,729,473 $6,984,978
=========== ==========
</TABLE>
-33-
<PAGE> 36
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
Condensed Statements of Operations
<TABLE>
<CAPTION>
For the years ended For the period from
December 31, January 15, 1995
------------------------ (inception) through
1997 1996 December 31, 1995
--------- -------- -------------------
<S> <C> <C> <C>
REVENUES
Interest income $ 48,329 $ 182,591 $ 22,919
Other income 6,818 - -
--------- --------- ---------
Total revenues 55,147 182,591 22,919
--------- --------- ---------
EXPENSES
Interest expense - 10,427 13,080
---------
Depreciation and amortization 2,900 726 1,005
---------
Other expenses 36,205 108,881 110,068
---------
Total expenses 39,105 120,034 124,153
---------
Income (loss) before subsidiary equity in undistributed
loss of Bank 16,042 62,557 (101,234)
---------
Equity in undistributed net loss of Bank subsidiary (262,431) (222,570) -
--------- --------- ---------
Net loss $(246,389) $(160,013) $(101,234)
========= ========= =========
</TABLE>
-34-
<PAGE> 37
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended For the period from
December 31, January 15, 1995
------------------------ (inception) through
1997 1996 December 31, 1995
----------- ---------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (246,389) $ (160,013) $(101,234)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Equity in undistributed net loss of the bank
subsidiary 262,431 222,570 -
Depreciation and amortization 2,175 726 1,005
Gain on sale of securities available for sale 887 - -
Increase (decrease) in other assets (44,706) 243,554 (260,665)
Decrease (increase) in accounts payables (5,270) (107,354) 131,563
----------- ----------- ---------
Net cash provided by (used for) operating
activities (30,872) 199,483 (229,331)
INVESTING ACTIVITIES
Purchase of securities available for sale (1,501,288) - -
Sale of securities available for sale 698,469 - -
(Purchase) sale of property and equipment - 241,125 (242,130)
Purchase of bank stock - (6,300,000) -
Net cash used by investing activities (802,819) (6,058,875) (242,130)
FINANCING ACTIVITIES
Borrowings - (476,000) 476,000
Proceeds from sale of stock, net - 7,212,249 100
-----------
Net cash provided by financing activities - 6,736,249 476,100
Net increase in cash and cash equivalents (833,691) 876,857 4,639
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 881,496 4,639 -
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,805 $ 881,496 $ 4,639
=========== =========== =========
</TABLE>
NOTE 19 - SUBSEQUENT EVENT
On January 9, 1998 the Bank became aware of a suspected kiting
operation. The total estimated loss exposure is $625,000. The Bank has multiple
defenses and recovery options which are being aggressively pursued by management
and legal counsel. The amount of any potential loss can not be accurately
predicted and management believes they will recover all monies at risk including
legal and other costs of collection. Management has charged $62,000 to
operations at December 31, 1997 for professional fees to establish a reserve for
potential costs of collecting all monies due. Any unfavorable developments in
this matter could have a material adverse effect on the operating results of the
Bank.
-35-
<PAGE> 38
BEACH FIRST NATIONAL BANCSHARES, INC. & BEACH
FIRST NATIONAL BANK
BOARD OF DIRECTORS
Insert names of directors and their principal occupation
BEACH FIRST NATIONAL BANCSHARES, INC. & BEACH
FIRST NATIONAL BANK
OFFICERS
Insert names of officers and their titles
REGISTRAR AND TRANSFER AGENT
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Beach First National Bancshares,
Inc. will be held at the Myrtle Beach Convention Center, 2101 North Oak Street,
Myrtle Beach, South Carolina 29577 on Wednesday, April 22, 1998, at 2:00 p.m.
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, WILL BE FURNISHED AT NO CHARGE TO SHAREHOLDERS AS OF THE RECORD DATE
UPON WRITTEN
-36-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,539,944
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,210,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,883,516
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 11,288,106
<ALLOWANCE> 169,502
<TOTAL-ASSETS> 26,938,244
<DEPOSITS> 20,071,921
<SHORT-TERM> 0
<LIABILITIES-OTHER> 155,788
<LONG-TERM> 0
0
0
<COMMON> 735,868
<OTHER-SE> 5,974,667
<TOTAL-LIABILITIES-AND-EQUITY> 26,938,244
<INTEREST-LOAN> 575,771
<INTEREST-INVEST> 543,383
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,242,339
<INTEREST-DEPOSIT> 515,167
<INTEREST-EXPENSE> 515,167
<INTEREST-INCOME-NET> 727,172
<LOAN-LOSSES> 153,000
<SECURITIES-GAINS> 4,887
<EXPENSE-OTHER> 193,320
<INCOME-PRETAX> (382,389)
<INCOME-PRE-EXTRAORDINARY> (382,389)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (246,389)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
<YIELD-ACTUAL> 1.97
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,502
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 169,502
<ALLOWANCE-DOMESTIC> 169,502
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
