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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, 1998
OR
Transition Report under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the transition period from to
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Commission file no. 33-95562
BEACH FIRST NATIONAL BANCSHARES, INC.
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(Name of Small Business Issuer in Its Charter)
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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)
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(843) 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
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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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 12, 1999 was $ 6,169,095. This calculation is
based upon $11.50 , the last trade price of the common stock of which the
Company is aware. There is no active trading market for the common stock and
trades are limited and sporadic.
There were 735,868 shares of the Company's common stock issued and
outstanding as of the record date, March 12, 1999.
Transitional Small Business Disclosure Format. (Check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Company's 1998 Annual Report and Proxy Statement.
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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, to serve as the holding
company Beach First National Bank (the "Bank"). 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 Avenue North in the City of Myrtle Beach, South Carolina, with
deposits insured by the FDIC.
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 Company believes that there has been a void in the
community banking market in the Myrtle Beach area which the Bank can
successfully fill. 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.
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 solicits these accounts from
individuals, businesses, associations and organizations, and governmental
authorities.
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.
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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).
Commercial Loans. The Bank makes loans for commercial purposes in
various lines of businesses. Included in this category are loans to purchase
equipment, finance accounts receivable or inventory or for working capital
purposes.
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.
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 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.
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 FIRREA in 1989 and following with
FDICIA 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 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.
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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
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 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 Securities Exchange
Act of 1934 (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
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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
State Board of Financial Institutions (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.
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.
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
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rule which establishes a risk-based deposit insurance premium system for all
insured depository institutions. Under this system, until mid-1995 depository
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 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.
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 nonaffiliated 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.
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 banks, and de novo branching by national banks if allowed by state
law. See "Recent Legislative Developments."
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.
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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 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
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"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, 1998, 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
Company continues 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
Company'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 untraditional activities. It is
uncertain what effect these regulations, when implemented, would have on the
Company.
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 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. From time to time, various bills are introduced in the
United States Congress with respect to the regulation of financial institutions.
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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 Company
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 to 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 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 1998 Myrtle Beach Area Statistical Abstract, Myrtle Beach had an estimated
population in 1996 of 28,456, while Horry County had an estimated population of
163,856. By 2010, Horry County's projected population will be 225,800. The
principal component of the economy of the Myrtle Beach area is vacation, sport,
and entertainment tourism. The Grand Strand hosts an estimated 13 million
visitors annually. 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 55,000 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 boasts
100 golf courses, with approximately 4.3 million rounds of golf played in 1997.
The entertainment segment is a year-round source of funds. The Grand Strand has
more than ten live entertainment theaters, including the Palace Theater and the
Alabama Theater, as well as entertainment centers as varied as Ripley's Aquarium
and the Pavilion Amusement Park.
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 1999, there were twelve 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.
9
<PAGE> 10
EMPLOYEES
As of March 1, 1999, the Company had sixteen full-time employees and
two part-time employees. The Company does not have any employees other than its
officers, none of whom receive any remuneration for their services to the
Company.
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 $218,000. 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 $534,000. The Company believes that the
facilities adequately serve the Bank's needs. There is one automated teller
machine located at the Bank's main office.
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 became involved in one such case in early 1998 relating to a
suspected kiting operation involving two customers' accounts. As the Company has
previously reported, it believed its total estimated loss exposure in this case
was $625,000. As a part of the recovery from one of these customers, the bank
took a deed in lieu of foreclosure on a single family residence as well as other
incidental collateral. The estimated fair value of the property, net of selling
costs, at December 31, 1998 is $288,074. In February 1998, another financial
institution which, along with the Bank, had been defrauded in the kiting
operation, commenced litigation against the Bank. In March 1999, the Bank
settled its lawsuit with the other financial institution, as well as a related
action it had brought against its data processor.
During 1998, $100,000 of the amounts previously thought to be
recoverable were charged to the allowance for possible loan losses. During 1998
and 1997, $50,000 and $62,000, respectively, were charged to operations to
establish reserves for professional fees related to recovery activities. During
1998, $47,000 was paid in professional fees related to this matter.
The Bank continues to employ various recovery and loss minimization
strategies relating to the kiting operations, including strategies to recover
from the customers who perpetrated the kite. Management does not believe any
possible future losses due to the fraud will have a material impact on the
results of operations of the Company.
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 12, 1999. As of March 12, 1999, the Company had 976 shareholders of
record. There is no established trading market in the Common Stock, and one is
not expected to develop in the near future.
10
<PAGE> 11
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 5 through
15 of the Company's Annual Report to Shareholders for the year ended December
31, 1998 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 18 through
36 of the Company's Annual Report to Shareholders for the year ended December
31, 1998 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 21, 1999 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on pages 6 through
7 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 21, 1999 is incorporated herein by reference.
11
<PAGE> 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information contained on pages 7 through
8 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 21, 1999 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 21, 1999 is incorporated herein by reference.
12
<PAGE> 13
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1.1 Selling Agent Agreement, dated October 16, 1995, by and
between Capital Investment Group, Inc. and the Company
(incorporated by reference to Exhibit 1.1 to the Company's
Registration Statement No. 33-95562 on Form S-1).
3.1. Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement No.
33-95562 on Form S-1).
3.2. Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement No. 33-95562 on Form S-1).
4.1. Provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement No. 33-95562 on Form S-1).
4.2. Form of Certificate of Common Stock (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement No.
33-95562 on Form S-1).
10.1. Contract of Sale, dated April 27, 1995, by and between Nadim
Baroody, Mary Baroody, Jean P. Saad, and Miray Saad, as
sellers, and Orvis Bartlett Buie, as purchaser (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement No. 33-95562 on Form S-1).
10.2. Line of Credit Note, dated April 24, 1995, by Sea Group, Ltd.
to The Bankers Bank (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement No. 33-95562 on Form
S-1)
10.3. Employment Agreement, dated August 23, 1995, by and between
the Company and William Gary Horn (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement No.
33-95562 on Form S-1).*
10.4. Form of Amended and Restated Escrow Agreement, dated November
1995, by and among The Bankers Bank, Capital Investment Group,
Inc., and the Company (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement No. 33-95562 on
Form S-1).
10.5. Amended and Restated Escrow Agreement, dated December 1, 1995,
by and among The Bankers Bank, Capital Investment Group, Inc.,
and the Company (incorporated by reference to Exhibit 10.5 of
the Company's Form 10-KSB for the fiscal year ended December
31, 1995).
10.6. Amendment to Employment Agreement, dated January 9, 1996, by
and between the Company and William Gary Horn (incorporated by
reference to Exhibit 10.6 of the Company's Form 10-KSB for the
fiscal year ended December 31, 1995).*
10.7. Stock Option Plan dated as of April 30, 1997 (incorporated by
reference to Exhibit 10.7 of the Company's Form 10-KSB for the
fiscal year ended December 31, 1996).
13 Annual Report to Shareholders for the year ended December 31,
1998
13
<PAGE> 14
16 Letter of Francis & Company, dated November 6, 1997 to the
Securities and Exchange Commission (incorporated by reference
to Exhibit 16 of the Company's Current Report on Form 8-K
filed on November 13, 1997)
21.1. Subsidiaries of the Company. (incorporated by reference to
Exhibit 21.1 of the Company's Form 10-QSB for the quarter
ended March 30, 1996).
27.1. Financial Data Schedule. (for SEC use only).
- -------------------------
* Denotes executive compensation contract or arrangement.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K.
14
<PAGE> 15
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 17, 1999 By: /s/ William Gary Horn
------------------------------- -------------------------------------
William Gary Horn
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William Gary Horn, 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
- ---------------------------------
Orvis Bartlett Buie Director March 17, 1999
/s/ Raymond E. Cleary
- ---------------------------------
Raymond E. Cleary III Chairman of the Board, and Chief March 17, 1999
Executive Officer
/s/ Vernie E. Dove
- ---------------------------------
Vernie E. Dove Director March 17, 1999
/s/ Jack Green, Jr.
- ---------------------------------
Jack Green, Jr. Director March 17, 1999
/s/ Michael D. Harrington
- ---------------------------------
Michael D. Harrington Director March 17, 1999
/s/ William Gary Horn
- ---------------------------------
William Gary Horn President March 17, 1999
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
- ---------------------------------
Joe N. Jarrett, Jr. Director
/s/ Richard E. Lester
- ---------------------------------
Richard E. Lester Director March 17, 1999
- ---------------------------------
Diane W. Sammons Director
/s/ Rick H. Seagroves
- ---------------------------------
Rick H. Seagroves Director March 17, 1999
/s/ Don J. Smith
- ---------------------------------
Don J. Smith Director March 17, 1999
- ---------------------------------
Samuel Robert Spann, Jr. Director
/s/ B. Larkin Spivey, Jr.
- ---------------------------------
B. Larkin Spivey, Jr. Director March 17, 1999
/s/ James C. Yahnis
- ---------------------------------
James C. Yahnis Director March 17, 1999
</TABLE>
16
<PAGE> 17
INDEX TO EXHIBITS
Exhibit
Number Description
1.1. Selling Agent Agreement, dated October 16, 1995, by and between Capital
Investment Group, Inc. and the Company (incorporated by reference to
Exhibit 1.1 to the Company's Registration Statement No. 33-95562 on
Form S-1).
3.1. Articles of Incorporation (incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement No. 33-95562 on Form S-1).
3.2. Bylaws (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-95562 on Form S-1).
4.1. Provisions in the Company's Articles of Incorporation and Bylaws
defining the rights of holders of the Common Stock (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement No.
33-95562 on Form S-1).
4.2. Form of Certificate of Common Stock (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement No. 33-95562 on
Form S-1).
10.1. Contract of Sale, dated April 27, 1995, by and between Nadim Baroody,
Mary Baroody, Jean P. Saad, and Miray Saad, as sellers, and Orvis
Bartlett Buie, as purchaser (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement No. 33-95562 on Form S-1).
10.2. Line of Credit Note, dated April 24, 1995, by Sea Group, Ltd. to The
Bankers Bank (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 33-95562 on Form S-1).
10.3. Employment Agreement, dated August 23, 1995, by and between the Company
and William Gary Horn (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement No. 33-95562 on Form S-1).*
10.4. Form of Amended and Restated Escrow Agreement, dated November 1995, by
and among The Bankers Bank, Capital Investment Group, Inc., and the
Company (incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement No. 33-95562 on Form S-1).
10.5. Amended and Restated Escrow Agreement, dated December 1, 1995, by and
among The Bankers Bank, Capital Investment Group, Inc., and the Company
(incorporated by reference to Exhibit 10.5 of the Company's Form 10-KSB
for the fiscal year ended December 31, 1995).
10.6. Amendment to Employment Agreement, dated January 9, 1996, by and
between the Company and William Gary Horn (incorporated by reference to
Exhibit 10.6 of the Company's Form 10-KSB for the fiscal year ended
December 31, 1995).*
10.7. Stock Option Plan dated as of April 30, 1997 (incorporated by reference
to Exhibit 10.7 of the Company's Form 10-KSB for the fiscal year ended
December 31, 1996).
13 Annual Report to Shareholders for the year ended December 31, 1998
17
<PAGE> 18
16 Letter of Francis & Company, dated November 6, 1997 to the Securities
and Exchange Commission (incorporated by reference to Exhibit 16 of the
Company's Current Report on Form 8-K filed on November 13, 1997)
21.1. Subsidiaries of the Company. (incorporated by reference to Exhibit 21.1
of the Company's Form 10-QSB for the quarter ended March 30, 1996).
27.1. Financial Data Schedule. (for SEC use only).
- -------------
* Denotes executive compensation contract or arrangement.
18
<PAGE> 1
EXHIBIT 13
BEACH FIRST
NATIONAL
BANCSHARES, INC.
1998 ANNUAL REPORT
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Letter to Shareholders............................................................................................3
Selected Consolidated Financial Highlights........................................................................4
Business of the Company...........................................................................................5
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................................5-15
Market for Company's Common Equity and Related
Shareholder Matters..............................................................................................15
Report of Independent Accountants................................................................................17
Consolidated Financial Statements.............................................................................18-36
Directors and Officers and Shareholder Information............................................................37-38
</TABLE>
<PAGE> 3
LETTER TO OUR SHAREHOLDERS
Establishing a banking presence in a growing community like Myrtle Beach
requires a talented and dedicated staff and management team. The banking
environment today is brimming with options, from both established financial
institutions as well as from non-traditional banking companies. To distinguish
ourselves from our competitors, we at Beach First have focused on providing
excellent service and developing strong customer relationships. Based on the
growth the Bank enjoyed in 1998, we believe we have found the right approach. We
can provide better service to the small to mid-sized customers because we are
locally owned and managed.
The assets of the Company increased to $37.9 million in 1998, up 41% from $26.9
million at year-end 1997. Growth in deposits of $11.1 million in 1998 allowed us
to expand our lending activity in the local community. Net loans increased by
$9.7 million in 1998, with total loans ending the year at $20.8 million. Loan
quality remains a priority and the quality of our assets continues to be
excellent.
Based on the strong growth in 1998, we are positioned for a profitable 1999. The
Company's net loss in 1998 decreased to $233,183 from a loss of $246,389 in
1997. Our capital base remains strong, with our ratios meeting the
well-capitalized standards as established by the Office of the Comptroller of
the Currency.
The Bank introduced Beach First Express, a courier service, in mid-1998. We are
the only financial institution on the Strand that offers this unique service to
pick up deposits from our business customers. Also, over the past few months we
have been evaluating locations for a proposed new branch. We hope to finalize
our plans over the coming weeks and progress to the construction phase during
1999.
Much has been written about the potential problems the Year 2000 date change
could have on date-sensitive computer programs. Beach First is fully committed
to addressing this issue. We are checking our systems to identify areas that may
be affected by the century date change and, when necessary, we are making
modifications or installing upgrades. Our goal is to ensure that our systems
will handle the new century date change smoothly so you will not be
inconvenienced.
We realize you have a choice of where to bank and invest your hard-earned money.
The Board of Directors, management, and staff thank you for your continued
support. As we look forward to 1999 and the Year 2000, we are confident that
Beach First National Bank will be prepared to face the challenges and
opportunities that will create value in your investment. Our goal will be to
exceed shareholder expectations in the new millenium.
/s/ Raymond E. Cleary, III /s/ William Gary Horn
- ------------------------------ ------------------------
Raymond E. Cleary, III William Gary Horn
Chairman of the Board, President
and Chief Executive Officer
3
<PAGE> 4
BEACH FIRST NATIONAL BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Income Statement Data:
<S> <C> <C> <C>
Net interest income $ 1,147 $ 727 $ 273
Provision for possible loan losses 273 153 17
Noninterest income 137 49 2
Noninterest expense 1,316 1,006 418
Net income $ (233) $ (246) $ (160)
Per Share Data:
Basic earnings (loss) per share $ (0.32) $ (0.33) $ (0.29)
Book value $ 8.80 $ 9.12 $ 9.46
Balance Sheet Data (Year End):
Total assets $ 37,945 $ 26,938 $ 10,064
Loans (net of unearned income) 21,095 11,288 1,094
Total earning assets 34,917 23,417 8,741
Deposits 31,135 20,072 3,018
Shareholders equity $ 6,474 $ 6,711 $ 6,961
Balance Sheet Data (Averages):
Total assets $ 32,462 $ 19,281 $ 7,340
Loans (net of unearned income) 15,704 6,144 116
Total earning assets 29,412 17,020 5,574
Deposits 25,616 12,386 605
Shareholders equity $ 6,599 $ 6,789 $ 6,185
Selected Ratios:
Net interest margin 3.90% 4.27% 4.90%
Return on average assets -0.72% -1.28% -2.18%
Return on average equity -3.53% -3.63% -2.59%
Net charge-offs to average loans (net of
unearned income) 1.14% 0.00% 0.00%
Average equity to average assets 20.33% 35.21% 84.26%
Risk-based capital (Bank):
Tier 1 capital to risk-adjusted assets 22.7% 39.0% 200.0%
Total capital to risk-adjusted assets 23.8% 40.1% 200.0%
Leverage ratio 15.1% 23.8% 70.0%
</TABLE>
4
<PAGE> 5
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 serve as
a holding company for Beach First National Bank (the "Bank") upon its formation.
The Bank commenced business on September 23, 1996, as a national 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 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.
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of Beach First
National Bancshares, Inc. and its subsidiary, Beach First National Bank. This
commentary should be read in conjunction with the consolidated financial
statements and the related notes and the other statistical information in this
report. The Bank completed its second full year of operations in 1998 and has
grown substantially since opening in September 1996. Comparisons of the
Company's results for the periods presented should be made with an understanding
of its short history.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EARNINGS REVIEW
The Company's net loss was $233,183, or $0.32 per common share, for the
year ended December 31, 1998 as compared to a loss of $246,389, or $0.33 per
common share, for the year ended December 31, 1997 and a loss of $160,013, or
$0.29 per common share, in 1996. The Bank continues its strong growth trends, as
average earning assets increased to $29.4 million during 1998, a 73% increase
from $17.0 million in 1997. The deficit return on average assets for 1998 was
(.72)% in 1998 compared to (1.28)% in 1997 and (2.18)% in 1996; the deficit
return on average equity was (3.53)% in 1998 versus (3.63)% in 1997 and (2.59)%
in 1996.
Net interest income increased to $1,147,443 in 1998 from $727,172 in
1997 and $272,870 in 1996. The growth in net interest income resulted from an
increase of $1,059,031 in interest income in 1998 and $927,982 in 1997.
Partially offsetting these were increases in interest expense of $638,760 in
1998 and $473,680 in 1997. The net interest spread was 2.47% in 1998 compared to
1.97% in 1997 and (.34)% in 1996. The net interest margin was 3.90% for the year
ended 1998 compared to 4.27% for the year ended 1997 and 4.90% for 1996.
The provision for loan losses was $272,500 in 1998, up from $153,000 in
1997 and $16,502 in 1996. The Company's allowance for loan losses as a
percentage of its period end loans was 1.25%, 1.51%, and 1.55% at December 31,
1998, 1997, and 1996 respectively. Net charge-offs totaled $178,787 in 1998.
There were no net charge-offs in 1997 or 1996.
Non-interest income for 1998 was $137,128, compared to $49,393 in 1997
and $1,676 in 1996. This was due primarily to an increase in service fees on
deposit accounts resulting from a $11.1 million growth in deposits from December
31, 1997 to December 31, 1998.
Non-interest expense was $1,316,254 for 1998, compared to $1,005,954 in
1997 and $418,057 for 1996. The increase in non-interest expense reflects
increased costs associated with the growth of the Bank, legal fees and
collection costs related to a kiting operation, and occupancy expenses resulting
from the move into the new main office facility in June 1997.
5
<PAGE> 6
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, 1998 December 31, 1997
----------------- -----------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 2,458,164 $ 133,807 5.44% $ 2,274,274 $ 123,185 5.42%
Investment securities 11,205,990 722,708 6.45% 8,578,719 543,383 6.33%
Loans 15,747,900 1,444,855 9.17% 6,166,768 575,771 9.34%
----------- ---------- ----- ------------ ----------- ----
Total earning assets $29,412,054 $2,301,370 7.82% $ 17,019,761 $ 1,242,339 7.30%
=========== ========== ==== ============ =========== ====
Interest-bearing deposits $21,412,871 $1,139,311 5.32% $ 9,647,740 $ 514,132 5.33%
Other borrowings 132,820 14,616 11.00% 18,027 1,035 5.74%
---------- ---------- ----- ------------ ----------- ----
Total interest-bearing
liabilities $21,545,691 $1,153,927 5.36% $ 9,665,767 $ 515,167 5.33%
=========== ========== ==== ============ =========== ====
Net interest spread 2.47% 1.97%
Net interest income/margin $ 1,147,443 3.90% $ 727,172 4.27%
=========== ==== =========== ====
</TABLE>
As reflected above, for 1998 the average yield on earning assets
amounted to 7.82%, while the average cost of interest-bearing liabilities was
5.36%. For 1997, the average yield on earning assets was 7.30% and the average
cost of interest-bearing liabilities was 5.33%. The increase in the yield on
earning assets is attributable to a significant increase in outstanding loans
which earn higher rates than other components of earning assets. This increase
in average loans of $9.6 million was expected as the Bank continues to build its
customer base. The net interest margin is computed by subtracting interest
expense from interest income and dividing the resulting figure by average
interest-earning assets. The net interest margin for the period ended December
31, 1998 was 3.90% and for 1997 was 4.27%. This decline was the result of an
increase in average interest-bearing deposits of $11.8 million, or 122%.
Partially offsetting this increase in deposits was a 73% increase in the level
of earning assets. In addition, the weighted average rates on earning assets
increased by 52 basis points while the rate on interest-bearing liabilities only
increased 3 basis points. The increase in outstanding balances was predicted
since the Bank is expanding its core base of loans and deposits.
The following table presents the changes in the Company's net interest
income as a result of changes in the volume and rate of its interest-earning
assets and interest-bearing liabilities. The change in net interest income is
primarily due to increases in the volume of both loans and deposits rather than
changes in average rates.
6
<PAGE> 7
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
----------------------------------------- --------------------------------------
1998 versus 1997 1997 versus 1996
----------------------------------------- --------------------------------------
Volume Rate Net change Volume Rate Net change
---------- ------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Funds with Escrow Agent $ -- $ -- $ -- $(182,591) $ -- $(182,591)
Federal funds sold 10,009 613 10,622 79,734 938 80,672
Investment securities 169,441 9,884 179,325 468,779 (2,182) 466,597
Loans 879,060 (9,976) 869,084 564,954 (1,650) 563,304
---------- ------- ---------- ---------- ------- ---------
Total earning assets 1,058,510 521 1,059,031 930,876 (2,894) 927,982
Interest-bearing deposits 625,985 (807) 625,178 489,179 2,198 491,377
Other borrowings 12,633 949 13,582 (11,945) (5,753) (17,698)
---------- ------- ---------- ---------- ------- ---------
Total interest-bearing
Liabilities 638,618 142 638,760 477,234 (3,555) 473,679
---------- ------- ---------- ---------- ------- ---------
Net interest income $ 419,892 $ 379 $ 420,271 $ 453,642 $ 661 $ 454,303
========== ======= ========= ========= ======== ==========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $272,500 in 1998 compared to $153,000
in 1997 and $16,502 in 1996. The Company increased the 1998 provision as a
result of the significant growth in outstanding loans from $11.1 million at
December 31, 1997 to $20.8 million at December 31, 1998. Management anticipates
loan growth will continue to be strong in 1999 and that it will continue to
increase the amount of the provision for loan losses.
See also "Allowance for Possible Loan Losses" below.
NONINTEREST INCOME
Noninterest income increased to $137,128 in 1998 from $49,393 in 1997
and $1,676 in 1996. Service fees on deposit accounts, the largest component of
noninterest income, increased from $26,779 in 1997 to $128,059 in 1998 as the
result of an increase in deposits of $11.1 million. This growth in deposits was
expected as the Bank operated for a full year in its new facility. By relocating
to a full-service office in mid-1997, the Bank was able to increase its customer
base by offering more convenient banking services.
NONINTEREST EXPENSE
Total noninterest expense increased to $1,316,254 for the period ended
December 31, 1998 from $1,005,954 and $418,057 for the same periods of 1997 and
1996. The increase in noninterest expense reflects an increase in most expense
categories as a result of the growth of the Company to $37.9 million in assets
at the end of 1998 from $26.9 million at the end of 1997 and $10.1 million at
the end of 1996. Salary and wages expense totaled $566,706 in 1998, $445,896 in
1997, and $204,198 in 1996. Employee benefits were $48,230 in 1998, $35,455 in
1997 and $34,256 in 1996. These increases reflected an increase in the number of
full-time equivalent employees to 14 at the end of 1998 from 13 at the end of
1997 and 9 at the end of 1996. Additional staff was hired to support the
internal growth in loans and deposits. Management does not anticipate any
significant additions to staff during the next 12 months. Professional fees were
$148,487 for the year ended December 31, 1998 compared to $98,644 for 1997 and
$26,178 for 1996. The 1998 figure includes costs associated with the Bank's Year
2000 project. Also included in the category are collection costs in the amount
of $50,000 in 1998 and $62,000 in 1997 which are related to the kiting operation
discussed in Note 8 to the financial statements.
Depreciation and amortization increased to $194,114 from $134,903 in
1997 and $26,380 in 1996. The increase was directly related to the completion of
the new main office facility in June 1997 and the purchase of
7
<PAGE> 8
additional furniture, equipment and computer hardware and software. The increase
in the category of other operating expenses to $191,084 in 1998 from $141,716 in
1997 and $44,245 in 1996 was principally due to an increase in operating
expenses related to the new main office building and other expenses associated
with the expansion of loan and deposits.
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
At December 31, 1998 and December 31, 1997, the Company's investment
securities portfolio was a significant component of the Company's total earning
assets. Investment securities represented 30.4% of total assets at December 31,
1998 versus 40.4% of total assets at December 31, 1997 and 50.5% of total assets
at December 31, 1996. Investment securities averaged $11.2 million in 1998 and
totaled $11.5 million at December 31, 1998. In 1997, investment securities
averaged $8.6 million and totaled $10.9 million at December 31, 1997. At
December 31, 1998, the Company's total investment securities portfolio had a
book value of $11,520,206 and a market value of $11,524,689 for an unrealized
net gain of $4,483. 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, 1998 are as follows.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
DECEMBER 31, 1998
<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 $ -- 0.00% $ -- 0.00% $ -- 0.00% $ -- 0.00%
U.S. Government
Agencies -- 0.00% 1,503,836 6.21% 101,063 7.08% -- 0.00%
Mortgage-backed -- 0.00% 263,356 6.50% -- 0.00% 9,465,584 5.92%
Other -- 0.00% -- 0.00% -- -- 190,850 6.00%
------- ---- ---------- ----- ----------- ---- ----------- -----
Total $ -- 0.00% $1,767,192 6.25% $ 101,063 7.08% $ 9,656,434 5.92%
======= ========== ===== =========== ==== =========== =====
</TABLE>
At December 31, 1998, short-term investments totaled $2,250,000
compared to $1,210,000 as of December 31, 1997. These funds are one source of
the Bank's liquidity and are generally invested in an earning capacity on an
overnight basis.
LOANS
At December 31, 1998, net loans (gross loans less the allowance for
loan losses) totaled $20.8 million, an increase of $9.7 million from December
31, 1997. Average gross loans increased from $6,166,768 with a yield of 9.34% in
1997 to $15,747,900 with a yield of 9.17% in 1998. The interest rates charged on
loans vary with the degree of risk and the maturity and amount of the loan.
Competitive pressures, money market rates, availability of funds and government
regulations also influence interest rates.
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 1998 as loans
ended the year at 60.5% of earning assets, versus 48.4% at the end of 1997.
8
<PAGE> 9
The following table shows the composition of the loan portfolio by
category at December 31, 1998 and 1997.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
Amount Percent of Total Amount Percent of Total
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Commercial $ 4,912,666 23.29% $ 3,555,120 31.49%
Real estate - construction 1,432,612 6.79% 1,250,869 11.08%
Real estate - mortgage 11,033,354 52.31% 5,206,991 46.13%
Consumer 3,716,924 17.62% 1,275,126 11.30%
----------- ------ ---------- ------
Loans, gross 21,095,556 100.00% 11,288,106 100.00%
======= ======
Allowance for possible loan losses (263,215) (169,502)
--------- ---------
Loans, net $20,832,341 $11,118,604
=========== ===========
</TABLE>
The principal component of the Company's loan portfolio at year end
1998 and 1997 was mortgage loans, which represented 52.31% and 46.13% of the
portfolio respectively. In the context of this discussion, a "real estate
mortgage loan" is defined as any loan, other than loans for construction
purposes, secured by real estate, regardless of the purpose of the loan. The
Company follows the common practice of financial institutions in the Company's
market area of obtaining a security interest in real estate whenever possible,
in addition to any other available collateral. This collateral is taken to
reinforce the likelihood of the ultimate repayment of the loan and tends to
increase the magnitude of the real estate loan portfolio component. Generally,
the Company limits its loan-to-value ratio to 80%. Due to the short time the
portfolio has existed, the current mix may not be indicative of the ongoing
portfolio mix. Management will attempt to maintain a relatively diversified loan
portfolio to help reduce the risk inherent in concentrations of collateral.
The following table sets forth the maturity distribution, classified
according to sensitivity to changes in interest rates, for selected components
of the Company's loan portfolio as of December 31, 1998.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
One year or After one but After five
less within five years years Total
----------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Commercial $ 1,358,216 $ 3,501,689 $ 52,761 $ 4,912,666
Real estate 439,200 9,270,500 1,323,654 11,033,354
Construction 1,082,612 350,000 1,432,612
Consumer 1,461,826 1,846,809 408,289 3,716,924
----------- ------------ ----------- ------------
Total $ 4,341,854 $ 14,968,998 $ 1,784,704 $ 21,095,556
=========== ============ =========== ============
Fixed Interest Rate $ 1,863,403 $ 13,830,370 $ 1,520,568 $ 17,214,341
Variable Interest Rate 2,478,451 1,138,628 264,136 3,881,215
----------- ------------ ----------- ------------
Total $ 4,341,854 $ 14,968,998 $ 1,784,704 $ 21,095,556
=========== ============ =========== ============
</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.
9
<PAGE> 10
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Management maintains an allowance for possible loan losses which it
believes is adequate to cover inherent losses in the loan portfolio. However,
management's judgment is based upon a number of assumptions about future events
which are believed to be reasonable, but which may or may not prove accurate,
particularly given the Company's short operating history and rapid growth. 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, 1998, the allowance for possible loan losses was
263,215, or 1.25% of outstanding loans, compared to an allowance for possible
loans losses of $169,502, or 1.51% of outstanding loans at December 31, 1997. In
1998, the Bank had net charge-offs of $178,787. There were no net charge-offs in
1997. There were no non-performing loans at the end of 1998 or 1997.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average loans outstanding $ 15,748 $ 6,167 $ 116
Loans outstanding at period end 21,095 11,288 1,094
Total nonperforming loans 0 0 0
Beginning balance of allowance 170 17 0
Loans charged off (180) 0 0
Total recoveries 1 0 0
--------- -------- ---------
Net loans charged off (179) 0 0
Provision for loan losses 273 153 17
--------- -------- ---------
Balance at period end 264 170 17
========= ======== =========
Net charge-offs to average loans 1.14% 0.00% 0.00%
Allowance as a percent of total loans 1.25% 1.51% 1.55%
Nonperforming loans as a
percentage of total loans -- --- --
Allowance as a percent of
nonperforming loans -- --- --
</TABLE>
10
<PAGE> 11
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average total deposits were $25.6 million and average interest-bearing
deposits were $21.4 million in 1998. Average total deposits were $12.4 million
and average interest-bearing deposits were $9.6 million in 1997. The following
table sets forth the deposits of the Company by category as of December 31, 1998
and December 31, 1997
DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
Percent of Percent of
Amount Deposits Amount Deposits
------ -------- ------ --------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 5,199,610 16.70% $ 3,974,419 19.80%
NOW accounts 1,180,514 3.79% 633,560 3.15%
Money market accounts 3,317,331 10.65% 1,448,681 7.22%
Savings accounts 4,645,653 14.92% 4,913,584 24.48%
Time deposits less than $100,000 11,678,302 37.52% 5,923,125 29.51%
Time deposits of $100,000 or over 5,113,633 16.42% 3,178,552 15.84%
-------------- ------ -------------- ------
Total deposits $ 31,135,042 100.00% $ 20,071,921 100.00%
============== ====== ============== ======
</TABLE>
Internal growth, resulting primarily from special promotions and
increased customer convenience of the Bank's new 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 shareholders.
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 $26,021,410
at December 31, 1998 compared to $16,893,369 at December 31, 1997. A stable base
of deposits is expected to be the Company's primary source of funding to meet
both its short-term and long-term liquidity needs in the future. Core deposits
as a percentage of total deposits were approximately 84% at both December 31,
1998 and December 31, 1997. The Company's loan-to-deposit ratio was 67.8% at
December 31, 1998 versus 56.2% at December 31, 1997. The average loan-to-deposit
ratio was 61.5% during 1998 and 49.8% during 1997.
CAPITAL
Under the capital guidelines of the Office of the Comptroller of the
Currency, the Bank is required to maintain a minimum total risk-based capital
ratio of 8%, with at least 4% being Tier 1 capital. To be considered
"well-capitalized", banks must meet regulatory standards of 10% for total
risk-based capital and 6% for Tier 1 capital. Tier 1 capital consists of common
shareholders' equity, qualifying perpetual preferred stock, and minority
interest in equity accounts of consolidated subsidiaries, less goodwill. In
addition, the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital
to total average assets) of at least 4%. The "well-capitalized" standard for the
Tier 1 leverage ratio is 5%. The following chart reflects the risk-based
regulatory capital ratios of the Bank at December 31, 1998.
11
<PAGE> 12
ANALYSIS OF CAPITAL
DECEMBER 31, 1998
(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 980 4.00% 5,553 22.7% 4,573 18.7%
Total risk-based capital 1,959 8.00% 5,817 23.8% 3,858 15.8%
Tier 1 leverage 1,472 4.00% 5,553 15.1% 4,081 11.1%
</TABLE>
A condition of the original offering was that a minimum of 525,000
shares must be sold. There were a total of 735,868 shares sold during the
offering period with net 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 are being used to provide working capital, including additional capital
for investment in the Bank, if needed.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Primary sources of liquidity for the Company are a stable base of
deposits, scheduled repayments on the Company's loans, and interest on and
maturities of its investments. All securities of the Company have been
classified as available-for-sale. Occasionally, the Company might sell
investment securities in connection with the management of its interest
sensitivity gap or to manage cash availability. The Company may also utilize its
cash and due from banks, security repurchase agreements, and federal funds sold
to meet liquidity requirements as needed. In addition, the Company has the
ability, on a short-term basis, to purchase federal funds from other financial
institutions. Presently, the Company has made arrangements with commercial banks
for short-term unsecured advances of up to $3,000,000. The Company believes that
its liquidity and ability to manage assets will be sufficient to meet its cash
requirements over the near term.
The Company monitors and manages the pricing and maturity of its assets
and liabilities in order to lessen the potential impact that interest rate
movements could have on its net interest margin. To minimize the effect of these
margin swings, the balance sheet should be structured so that repricing
opportunities exist for both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals Imbalances in these pricing
opportunities at any point in time constitute interest rate risk.
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of rate
sensitive assets and liabilities at any given time interval. Management
generally attempts to maintain a balance between rate sensitive assets and
liabilities to minimize the company's interest rate risks. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity, or
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 1998 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.
12
<PAGE> 13
INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Within After three but After one but After Total
three within twelve within five Five -----
months months years Years
------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Federal funds sold $ 2,250,000 $ -- $ -- $ -- $ 2,250,000
Investment securities -- 4,760,350 1,767,192 4,997,148 11,524,689
Loans 4,754,236 990,382 13,830,370 1,520,568 21,095,556
------------ ------------ ------------ ----------- -------------
Total earning assets $ 7,004,236 $ 5,750,732 $ 15,597,562 $ 6,517,715 $ 34,870,245
============ ============ ============ =========== =============
LIABILITIES
Interest-bearing liabilities
Money market and NOW $ 4,497,844 $ -- $ -- $ -- $ 4,497,844
Regular savings deposits 333,739 -- -- -- 333,739
Prime savings deposits 4,311,913 -- -- -- 4,311,913
Time deposits 2,161,185 6,536,219 8,094,532 -- 16,791,936
------------ ------------ ------------ ----------- -------------
Total interest-bearing
liabilities $ 11,304,681 $ 6,536,219 $ 8,094,532 $ -- $ 25,935,432
============ ============ ============ =========== =============
Period gap $ (4,300,446) $ (785,487) $ 7,503,031 $ 6,517,715 $ 8,934,813
Cumulative gap $ (4,300,446) $ (5,085,934) $ 2,417,097 $ 8,934,813 $ 8,934,813
Ratio of cumulative gap to total
earning assets (12.33)% (14.59)% 6.93% 25.62%
</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 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. The Company cannot
predict whether any of these proposals will be adopted or, if adopted, how these
proposals would affect the Company.
13
<PAGE> 14
YEAR 2000 ISSUES
Some computers, software, and other equipment include programming codes
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches and are commonly referred to as the "Year 2000 Problem."
ASSESSMENT
The Year 2000 Problem could affect computers, software, and other
equipment that the Company uses. Accordingly, the Company has developed a plan
that provides for, among other things, the replacement or modification of
existing information systems as necessary. Because the primary hardware and
software systems which the Company uses are presently certified by their vendors
as Year 2000 compliant, the Company has not incurred significant costs to date
relating to software modifications or new installations for the other systems.
Most systems are made compliant through periodic software upgrades provided by
the various vendors as part of the license agreements. However, while the
Company does not expect the cost of these efforts to be material to its
financial position or any year's operating results, there can be no assurance to
this effect.
INTERNAL INFRASTRUCTURE
The Company utilizes an outsourced data processing system for most of
its accounting functions. The Company's primary systems have been tested by
proxy with the vendor, which has tested in environments with like software and
hardware systems as the Company. Banking regulators have approved this type of
testing as a valid means of testing. The Company has received and reviewed the
vendor's Year 2000 test results. Based on this review, the Company does not
believe that the data processing system has material Year 2000 issues. The
Company believes that it has also identified substantially all of the major
computers, software applications, and related equipment used in connection with
its internal operations that must be modified, upgraded, or replaced to minimize
the possibility of a material disruption of its business. The Company is in the
process of upgrading and testing the systems that it has determined are not
prepared for the Year 2000. The Company believes that the testing of its systems
should be completed by March 31, 1999. The Company has spent approximately
$18,000 to get all of its systems Year 2000 compliant. The Company does not
believe that the cost related to these efforts will be material to its business.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS
In addition to computers and related systems, the operation of the
Company's office and facilities equipment, such as fax machines, photocopiers,
telephone switches, security systems, and other devices, may be affected by the
Year 2000 Problem. The Company has completed its assessment of the potential
effect of, and the costs of remediating, the Year 2000 Problem on this
equipment. The Company estimates that its total cost of completing any required
modifications, upgrades, or replacements of these internal systems will not have
a material effect on its business.
SUPPLIERS AND OTHER THIRD PARTIES
The Company has been gathering information from and has initiated
communications with its suppliers and other third parties to identify and, to
the extent possible, resolve issues involving the Year 2000 Problem. The Company
believes that the information systems and software it uses, and the network
connections it maintains, are programmed to comply with Year 2000 requirements.
However, there is a risk that they are not.
CUSTOMERS
The Company believes that the largest Year 2000 Problem exposure to
most banks is the preparedness of the customers of the banks. Management is
addressing with its customers the possible consequences of not being prepared
for Year 2000. Should large borrowers not sufficiently address this issue, the
Company may experience an
14
<PAGE> 15
increase in loan defaults. The amount of potential loss from this issue is not
quantifiable. Management is attempting to reduce this exposure by educating its
customers. In addition, during the loan underwriting process, management
requires documentation from commercial borrowers that they are taking all
necessary measures to assure that their information systems technology is in
compliance with the Year 2000 requirements.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS
The Company expects to identify and resolve all Year 2000 Problems that
could materially adversely affect its business, financial condition, or
operating results. However, the Company believes that it is not possible to
determine with complete certainty that all Year 2000 Problems affecting it have
been identified or corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition, the
Company cannot accurately predict how many failures related to the Year 2000
Problem will occur with its suppliers, customers, or other third parties or the
severity, duration, or financial consequences of such failures. As a result, the
Company expects that it could possibly suffer the following consequences:
o A number of operational inconveniences and inefficiencies for
the Company, its service providers, or its customers that may
divert the Company's time and attention and financial and
human resources from its ordinary business activities;
o System malfunctions that may require significant efforts by
the Company or its service providers or customers to prevent
or alleviate material business disruptions.
CONTINGENCY PLANS
The Company is currently developing contingency plans to be implemented
as part of its efforts to identify and correct Year 2000 Problems affecting its
internal systems. The Company expects to complete its contingency plans by the
end of the first quarter of 1999. Depending on the systems affected, these plans
could include (a) accelerated replacement of affected equipment or software; (b)
short term use of backup equipment and software; (c) increased work hours for
the Company's personnel or use of contract personnel to correct on an
accelerated schedule any Year 2000 Problems which arise; and (d) other similar
approaches. If the Company is required to implement any of these contingency
plans, these plans could have a material adverse effect on its business,
financial condition, or operating results.
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of Common Stock, of which 735,868, for a total of $7,358,680,
were sold in the initial public offering and are outstanding as of March 12,
1999. As of March 12, 1999, the Company had 976 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> 16
BEACH FIRST NATIONAL BANCSHARES, INC.
AND SUBSIDIARY
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
16
<PAGE> 17
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 sheets of
BEACH FIRST NATIONAL BANCSHARES, INC. (the "Company") AND SUBSIDIARY as of
December 31, 1998 and 1997 and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the years
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 audits. The consolidated financial statements of
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY for the year ended
December 31, 1996 were audited by other auditors whose report, dated March 1,
1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY at December 31, 1998
and 1997 and the results of their operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Elliott, Davis & Company, LLP
Greenville, South Carolina
January 29, 1999
17
<PAGE> 18
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 970,349 $ 1,539,044
Federal funds sold 2,250,000 1,210,000
Investment securities 11,524,689 10,883,516
Loans, net 20,832,341 11,118,604
Property and equipment, net 1,530,005 1,682,316
Real estate acquired in settlement of loans 288,074 --
Other assets 549,164 504,764
------------ ------------
Total assets $ 37,944,622 $ 26,938,244
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing deposits $ 5,199,610 $ 3,974,419
------------ ------------
Interest bearing deposits 25,935,432 16,097,502
------------ ------------
Total deposits 31,135,042 20,071,921
------------ ------------
Other liabilities 335,924 155,788
------------ ------------
Total liabilities 31,470,966 20,227,709
------------ ------------
COMMITMENTS AND CONTINGENCIES - Notes 10, 14 and 15
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 (740,819) (507,636)
------------ ------------
Accumulated other comprehensive income 2,126 5,822
------------ ------------
Total shareholders' equity 6,473,656 6,710,535
------------ ------------
Total liabilities and shareholders' equity $ 37,944,622 $ 26,938,244
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
18
<PAGE> 19
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $ 1,444,855 $ 575,771 $ 12,467
Investment securities 722,708 543,383 76,786
Federal funds sold 133,807 123,185 42,513
Escrow account -- -- 182,591
----------- ----------- ---------
Total interest income 2,301,370 1,242,339 314,357
INTEREST EXPENSE
Deposits and borrowings 1,153,927 515,167 41,487
----------- ----------- ---------
Net interest income 1,147,443 727,172 272,870
PROVISION FOR POSSIBLE LOAN LOSSES 272,500 153,000 16,502
----------- ----------- ---------
Net interest income after provision for
possible loan losses 874,943 574,172 256,368
----------- ----------- ---------
NONINTEREST INCOME
Service fees on deposit accounts 128,059 26,779 509
Gain (loss) on sale of investment securities (12,467) 4,887 669
Gain on sale of equipment -- 1,660 --
Other income 21,536 16,067 498
----------- ----------- ---------
Total noninterest income 137,128 49,393 1,676
----------- ----------- ---------
NONINTEREST EXPENSES
Salaries and wages 566,706 445,896 204,198
Employee benefits 48,230 35,455 34,256
Supplies and printing 52,265 46,509 23,843
Advertising and public relations 30,855 51,227 40,079
Professional fees 148,487 98,644 26,178
Depreciation and amortization 194,114 134,903 26,380
Occupancy 37,565 31,694 13,985
Data processing fees 46,948 19,910 4,893
Other operating expenses 191,084 141,716 44,245
----------- ----------- ---------
Total noninterest expenses 1,316,254 1,005,954 418,057
----------- ----------- ---------
Loss before income taxes (304,183) (382,389) (160,013)
INCOME TAX BENEFIT 71,000 136,000 --
----------- ----------- ---------
Net loss $ (233,183) $ (246,389) $(160,013)
=========== =========== =========
NET LOSS PER COMMON SHARE $ (.32) $ (.33) $ (.29)
=========== =========== =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 735,868 735,868 558,791
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
19
<PAGE> 20
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Accumulated
------------------ other Total
Paid-in Retained comprehensive shareholders'
Shares Amount capital deficit income equity
-------- -------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 10 $ 10 $ 90 $(101,234) $ -- $ (101,134)
-----------
Net loss -- -- -- (160,013) -- (160,013)
Other comprehensive loss, net of income taxes:
Unrealized gain on investment securities -- -- -- -- 10,336 10,336
Less reclassification adjustments for gains included
in net loss -- -- -- -- (669) (669)
-----------
Comprehensive loss -- -- -- -- -- (150,346)
Sale of stock 735,858 735,858 6,476,391 -- -- 7,212,249
-------- -------- ---------- --------- -------- -----------
BALANCE, DECEMBER 31, 1996 735,868 735,868 6,476,481 (261,247) 9,667 6,960,769
-----------
Net loss -- -- -- (246,389) -- (246,389)
Other comprehensive loss, net of income taxes:
Unrealized gain on investment securities -- -- -- -- 1,042 1,042
Less reclassification adjustments for gains included
in net loss -- -- -- -- (4,887) (4,887)
-----------
Comprehensive loss -- -- -- -- -- (250,234)
-------- -------- ---------- --------- -------- -----------
BALANCE, DECEMBER 31, 1997 735,868 735,868 6,476,481 (507,636) 5,822 6,710,535
-----------
Net loss -- -- -- (233,183) -- (233,183)
Other comprehensive loss, net of income taxes:
Unrealized loss on investment securities -- -- -- -- (16,163) (16,163)
Less reclassification adjustments for losses included
in net loss -- -- -- -- 12,467 12,467
-----------
Comprehensive loss -- -- -- -- -- (236,879)
-----------
BALANCE, DECEMBER 31, 1998 $735,868 $735,868 $6,476,481 $(740,819) $ 2,126 $ 6,473,656
======== ======== ========== ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
20
<PAGE> 21
BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (233,183) $ (246,389) $ (160,013)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Deferred income taxes (71,000) (136,000) --
Provisions for loan losses 272,500 153,000 16,502
Depreciation and amortization 194,114 134,903 26,380
Loss (gain) on sale of investment securities 12,467 (4,887) (669)
Gain on sale of equipment -- (1,660) --
(Increase) decrease in other assets (120,152) (192,903) 59,126
Increase (decrease) in other liabilities 22,012 70,206 (521,981)
------------ ------------ ------------
Net cash provided by (used in) operating activities 76,758 (223,730) (580,655)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities (11,235,042) (10,928,847) (5,572,290)
Sale of investment securities 10,576,918 5,130,898 501,797
Decrease (increase) in Federal funds sold (1,040,000) 1,350,000 (2,560,000)
Increase in loans, net (9,986,237) (10,193,707) (1,094,399)
Purchase of premises and equipment (24,213) (1,331,589) (256,068)
Proceeds from sale of equipment -- 8,825 --
------------ ------------ ------------
Net cash used in investing activities (11,708,574) (15,964,420) (8,980,960)
------------ ------------ ------------
FINANCING ACTIVITIES
Sale of stock, net -- -- 7,212,249
Net increase in deposits 11,063,121 17,054,265 3,017,656
------------ ------------ ------------
Net cash provided by financing activities 11,063,121 17,054,265 10,229,905
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (568,695) 866,115 668,290
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,539,044 672,929 4,639
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 970,349 $ 1,539,044 $ 672,929
============ ============ ============
CASH PAID FOR
Income taxes $ -- $ -- $ --
============ ============ ============
Interest $ 1,147,103 $ 477,725 $ 46,271
============ ============ ============
SCHEDULE OF NONCASH INVESTING ACTIVITY
Real estate acquired in settlement of loans $ 288,074 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
21
<PAGE> 22
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 (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The statement requires
investments in equity and debt securities to be classified into three
categories:
1. Available for sale: 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 (accumulated other comprehensive income).
22
<PAGE> 23
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
2. Held to maturity: 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.
3. Trading: 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 unrealized gains and losses
are recognized in the statement of operations. The Company has no
trading securities.
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 balance sheet. 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 provision for possible loan losses charged to operating expenses
reflects 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, 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.
23
<PAGE> 24
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
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,
1998 and 1997, the Company had no impaired loans.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired through foreclosure is initially recorded at the lower
of cost or estimated fair value. Subsequent to the date of acquisition, it
is carried at the lower of cost or fair value, adjusted for net selling
costs. Fair values of real estate owned are reviewed regularly and
writedowns are recorded when it is determined that the carrying value of
real estate exceeds the fair value less estimated costs to sell. Costs
relating to the development and improvement of such property are
capitalized, whereas those costs relating to holding the property are
charged to expense.
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 SFAS No. 7, "Accounting and Reporting by Development
Stage Enterprises," 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, 1998 and 1997,
total organizational costs net of amortization amounted to $48,370 and
$65,958, respectively and are included in other assets in the balance
sheets.
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 SFAS
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.
COMPREHENSIVE INCOME
In June, 1997, the Financial Accounting Standards Board (FASB) issued SFAS
130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a full
set of financial statements. Under this statement, enterprises are required
to classify items of "other comprehensive income" by their nature in the
financial statement and display the balance of other comprehensive income
separately in the equity section of the balance sheet. Statement 130 is
effective for both interim and annual periods beginning after December 15,
1997. Comparative financial statements provided for earlier periods are
required to be reclassified to reflect the provisions of the statement. The
adoption of this standard had no effect on the Company's net income or
stockholders' equity.
24
<PAGE> 25
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 COMMON SHARE
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 per 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 loss or shareholders' equity.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instrument and Hedging Activities." All derivatives are to be measured at
fair value and recognized in the balance sheet as assets or liabilities.
The statement is effective for fiscal years and quarters beginning after
June 15, 1999. Because the Company does not use derivative transactions at
this time, management does not expect that this standard will have an
effect on the financial statements.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-5, "Reporting on the Costs of Start-Up Activities," which provides
guidance on the financial reporting of start-up costs and organization
costs. SOP 98-5 requires start-up costs and organization costs to be
expensed as incurred. Sop 98-5 is effective for fiscal years beginning
after December 15, 1998. Initial adoption must be reported as the
cumulative effect of a change in accounting principle. SOP 98-5 will be
adopted in the first quarter of 1999 and will not have a material effect on
the Company's financial statements.
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, computed by
applying prescribed percentages to its various types of deposits, either at the
bank or on deposit with the Federal Reserve Bank. At December 31, 1998 and 1997
these required reserves were met by vault cash.
25
<PAGE> 26
NOTE 3 - FEDERAL FUNDS SOLD
When the Bank's cash reserves (Note 2) are in excess of the required
amount, it may lend the excess to other banks on a daily basis. As of December
31, 1998 and 1997, federal funds sold amounted to $2,250,000 and $1,210,000,
respectively.
NOTE 4 - INVESTMENT SECURITIES
The amortized costs and fair value of investment securities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------
GROSS UNREALIZED
----------------
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ------- -------- -----------
<S> <C> <C> <C> <C>
Federal agencies $ 1,596,849 $ 8,049 $ -- $ 1,604,898
Mortgage-backed 9,732,507 -- 3,566 9,728,941
Federal Reserve Bank
(FRB) stock - restricted 190,850 -- -- 190,850
----------- ------- -------- -----------
Total securities $11,520,206 $ 8,049 $ 3,566 $11,524,689
=========== ======= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------
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>
The amortized costs and fair values of investment securities at
December 31, 1998, 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 after one through five years $ 1,758,427 $ 1,767,192
Due after five through ten years 100,419 101,063
Due after ten years 9,470,510 9,465,584
FRB stock (no maturity) 190,850 190,850
--------------- ---------------
Total investment securities $ 11,520,206 $ 11,524,689
=============== ===============
</TABLE>
26
<PAGE> 27
NOTE 4 - INVESTMENT SECURITIES, CONTINUED
During 1998, 1997 and 1996 gross proceeds from the sale of investment
securities was $10,576,918, $5,130,898 and $501,797, respectively. Net losses
from the sale of investment securities were $12,467 in 1998 and net gains in
1997 and 1996 were $4,887 and $669, respectively. As of December 31, 1998 and
1997, there were no securities pledged as collateral for public funds.
NOTE 5 - LOANS
The composition of net loans by major loan category is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Commercial $ 4,912,666 $ 3,555,120
Real estate - construction 1,432,612 1,250,869
Real estate - mortgage 11,033,354 5,206,991
Consumer 3,716,924 1,275,126
------------ ------------
Loans, gross 21,095,556 11,288,106
Less allowance for possible loan losses (263,215) (169,502)
------------ ------------
Loans, net $ 20,832,341 $ 11,118,604
============ ============
</TABLE>
At December 31, 1998 and 1997, 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,
-------------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Balance, beginning of year $169,502 $ 16,502 $ --
Recoveries of loans previously charged against the
allowance 1,499 -- --
Provision for loan losses 272,500 153,000 16,502
Loans charged against the allowance (180,286) -- --
-------- -------- ---------
Balance, end of year $263,215 $169,502 $ 16,502
======== ======== =========
</TABLE>
27
<PAGE> 28
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land $ 218,608 $ 218,608
Furniture and equipment 619,106 594,892
Buildings and improvements 994,339 994,339
----------- -----------
1,832,053 1,807,839
Accumulated depreciation (302,048) (125,523)
----------- -----------
Total property and equipment $ 1,530,005 $ 1,682,316
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and
1996 amounted to $176,524, $117,314 and $21,988, 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 - REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
During January of 1998, the Bank discovered a kiting operation
involving two customers' accounts. As part of recovering amounts at risk from
the fraud, a deed was taken in lieu of foreclosure on a single family residence.
The estimated fair value of the property, net of various settlement costs, at
December 31, 1998 is $288,074. During 1998, $100,000 of amounts previously
thought to be recoverable were charged to operations. The Bank continues to
employ various recovery and loss minimization strategies. Management does not
believe any possible future losses due to the fraud will have a material impact
on the results of operations of the Company or stockholders' equity.
28
<PAGE> 29
NOTE 9 - DEPOSITS
The following is a detail of the deposit accounts:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Non-interest bearing deposits $ 5,199,610 $ 3,974,419
Interest bearing deposits:
NOW accounts 1,180,513 633,560
Money market accounts 3,317,331 1,448,681
Savings 4,645,653 4,913,584
Time, less than $100,000 11,678,302 5,923,125
Time, $100,000 and over 5,113,633 3,178,552
----------- -----------
Total deposits $31,135,042 $20,071,921
=========== ===========
</TABLE>
Interest expense on time deposits greater than $100,000 was $260,466 in
1998, $97,660 in 1997 and $3,859 in 1996.
At December 31, 1998 the scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 8,697,404
2000 4,704,901
2001 1,484,716
2002 1,904,814
-----------
$16,791,935
===========
</TABLE>
NOTE 10 - 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, arising from such litigation and claims either have been
properly accrued for or will not be material to shareholders' equity or the net
loss from operations.
Refer to Note 14 concerning contracts the Company executed with the
Bank's President and to Note 15 concerning financial instruments with off
balance sheet risk.
NOTE 11 - UNUSED LINES OF CREDIT
At December 31, 1998, the Bank had unused lines of credit to purchase
federal funds totaling $3,000,000 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 12 - INCOME TAXES
Net losses since inception have eliminated the requirement to record a
provision for income taxes in 1998, 1997 and 1996. The income tax benefits of
$71,000 recorded in 1998 and $136,000 in 1997 reflect 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
sheets. Net
29
<PAGE> 30
operating losses available to offset future taxable income amounted to
approximately $950,000 at December 31, 1998 and are available through 2013.
NOTE 13 - OPERATING LEASE
In October 1997, the Bank leased an automobile under an operating
lease. Lease expense for 1998 was $6,720 and for 1997, $1,680. Future minimum
lease payments are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31, AMOUNT
------------------------------- -----------------------
<S> <C>
1999 $ 6,720
2000 6,720
2001 5,040
-----------------------
Total minimum payments required $ 18,480
=======================
</TABLE>
NOTE 14- 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 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.
30
<PAGE> 31
NOTE 14 - RELATED PARTY TRANSACTIONS
A summary of loan transactions with directors, including their
affiliates, and executive officers follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
Balance, beginning of year $2,662,407 $ 70,531 $ --
New loans 1,552,088 2,727,835 70,531
Less loan payments 1,709,109 135,959 $ --
---------- ----------
Balance, end of year $2,505,386 $2,662,407 $70,531
========== ========== =======
</TABLE>
BORROWINGS AND DEPOSITS BY DIRECTORS AND EXECUTIVE OFFICERS, CONTINUED
Deposits by directors and their related interests, at December 31, 1998
and 1997, approximated $1,928,000 and $4,073,000, respectively.
NOTE 15 - 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, 1998, unfunded
commitments to extend credit were $2,492,872, of which $958,107 is at fixed
rates and $1,534,765 is at variable rates. 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.
At December 31, 1998, there was a $25,000 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.
31
<PAGE> 32
NOTE 16 - 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 1998 and 1997 amounted to $10,398
and $8,392, respectively.
NOTE 17 - 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 increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997
-------------- -----------------
<S> <C> <C>
Net loss - as reported $ (233,183) $ (246,389)
Net loss - pro forma (286,381) (276,804)
Net loss per share - as reported (.32) (.33)
Net loss per share - pro forma (.39) (.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, 1998 and 1997
and changes during the years ending on those dates is presented below:
32
<PAGE> 33
NOTE 17- STOCK OPTION PLAN, CONTINUED
<TABLE>
<CAPTION>
1998 1997
---------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year $ 101,048
Granted 4,585 $ 11.67 103,293 $ 10.00
Exercised -- -- -- --
Forfeited or expired (1,655) -- (2,245) --
--------- --------
Outstanding at year end 103,978 11.67 101,048 10.00
========= ========== ======== ==========
Options exercisable 53,118 35,975
Weighted-average fair value of
options granted during the year $ 11.67 $ 10.00
Shares available for grant 6,022 8,952
</TABLE>
NOTE 18 - 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 19 - 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 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is subject.
33
<PAGE> 34
NOTE 19 - REGULATORY MATTERS
As of December 31, 1998, 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:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY PURPOSES ACTION PROVISIONS
ACTUAL MINIMUM MINIMUM
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(AMOUNTS IN $000)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Capital (to
risk weighted assets) $5,817 23.8% $1,959 8.0% $2,449 10.0%
Tier 1 Capital (to
risk weighted assets) 5,553 22.7 980 4.0 1,469 6.0
Tier 1 Capital (to
average assets) 5,553 15.1 1,472 4.0 1,840 5.0
AS OF DECEMBER 31, 1997
Total Capital (to $
risk weighted assets) $5,930 40.1% 1,182 8.0% $1,478 10.0%
Tier 1 Capital (to
risk weighted assets) 5,760 39.0 591 4.0 887 6.0
Tier 1 Capital (to
average assets) 5,760 23.8 968 4.0 1,210 5.0
</TABLE>
NOTE 20 - PARENT COMPANY FINANCIAL INFORMATION
Following is condensed financial information of Beach First National
Bancshares, Inc. (parent company only):
34
<PAGE> 35
NOTE 20 - PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash $ 12,790 $ 47,805
Due from Bank subsidiary 353,038
Investment in Bank subsidiary 5,596,215 5,820,544
Securities available for sale 537,560 800,031
Other Assets 10,681 61,093
------------ ------------
Total assets $ 6,510,284 $ 6,729,473
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 36,628 $ 18,939
Common stock 735,868 735,868
Paid-in capital 6,476,481 6,476,481
Retained deficit (740,819) (507,637)
Accumulated other comprehensive income 2,126 5,822
------------ ------------
Total liabilities and shareholders' equity $ 6,510,284 $ 6,729,473
============ ============
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
REVENUES
<S> <C> <C> <C>
Interest income $ 46,720 $ 48,329 182,591
Loss on sale of securities (1,155) -- --
Other income 100 6,818 --
--------- --------- ---------
Total revenues 45,665 55,147 182,591
--------- --------- ---------
EXPENSES
Interest expense -- -- 10,427
Depreciation and amortization 2,900 2,900 726
Other expenses 53,630 36,205 108,881
--------- --------- ---------
Total expenses 56,530 39,105 120,034
--------- --------- ---------
Income (loss) before equity in
undistributed net loss of bank subsidiary (10,865) 16,042 62,557
Equity in undistributed net loss of Bank
subsidiary (222,318) (262,431) (222,570)
--------- --------- ---------
Net loss $(233,183) $(246,389) $(160,013)
========= ========= =========
</TABLE>
35
<PAGE> 36
NOTE 20 - PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $(233,183) $ (246,389) $ (160,013)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Equity in undistributed loss of the
bank subsidiary 222,318 262,431 222,570
Depreciation and amortization 2,900 2,900 726
Increase in due from Bank (353,038) -- --
(Gain) loss on sale of securities 1,155 (887) --
(Increase) decrease in other assets 50,412 (44,706) 243,554
(Decrease) increase in accounts payable 17,690 (5,270) (107,354)
--------- ----------- -----------
Net cash provided by (used for)
operating activities (291,746) (31,921) 199,483
--------- ----------- -----------
INVESTING ACTIVITIES
Purchase of securities available for sale (609,693) (1,501,288) --
Sale of securities available for sale 866,424 699,518 --
(Purchase) sale of property and equipment -- -- 241,125
Purchase of bank stock -- -- (6,300,000)
--------- ----------- -----------
Net cash provided (used for
investing activities) 256,731 (801,770) (6,058,875)
--------- ----------- -----------
FINANCING ACTIVITIES
Borrowings -- -- (476,000)
Proceeds from sale of stock, net -- -- 7,212,249
--------- ----------- -----------
Net cash provided by financing
activities -- -- 6,736,249
--------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (35,015) (833,691) 876,857
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 47,805 881,496 4,639
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,790 $ 47,805 $ 881,496
========= =========== ===========
</TABLE>
36
<PAGE> 37
BEACH FIRST NATIONAL BANCSHARES, INC. - BOARD OF DIRECTORS
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION WITH
ADDRESS OCCUPATION COMPANY
------- ---------- -------
<S> <C> <C>
Michael Bert Anderson Hotel Owner Director and Secretary
Myrtle Beach, SC
Orvis Bartlett Buie Certified Public Accountant Director
Myrtle Beach, SC
Raymond E. Cleary III Dentist Chairman and CEO
Myrtle Beach, SC
Vernie E. Dove Insurance Agent Director
Myrtle Beach, SC
Jack L. Green, Jr. Orthodontist Director
Myrtle Beach, SC
Michael D. Harrington Contractor Director
Myrtle Beach, SC
William Gary Horn Bank President Director and President
Myrtle Beach, SC
Joe N. Jarrett Orthopedic Surgeon Director
Myrtle Beach, SC
Richard D. Lester Attorney Director
Myrtle Beach, SC
Diane W. Sammons Restaurant Owner Director
Myrtle Beach, SC
Rick H. Seagroves Franchise Restaurant Owner Director
Myrtle Beach, SC
Don J. Smith Real Estate Director
Myrtle Beach, SC
Samuel Robert Spann, Jr. Roofing Contractor Director
Murrells Inlet, SC
B. Larkin Spivey, Jr. Campground Owner and Director
Myrtle Beach, SC Real Estate Investor
James C. Yahnis Beer Wholesaler Director
Murrells Inlet, SC
</TABLE>
37
<PAGE> 38
BEACH FIRST NATIONAL BANK
OFFICERS
William Gary Horn President
Ann W. Jones Executive Vice President
Katie Huntley Executive Vice President
Barbara Abrams Vice President
Tiffany Suggs Assistant Vice President
Jerome Smoak Vice President
Linda Dickinson Loan Operations Officer
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 21, 1999, at 2:00 p.m.
<TABLE>
<CAPTION>
CORPORATE OFFICE: GENERAL COUNSEL:
- ----------------- ----------------
<S> <C>
1550 North Oak Street Nelson Mullins Riley & Scarborough, L.L.P.
Myrtle Beach, South Carolina 29577 First Union Plaza
(843) 626-2265 999 Peachtree Street, NE / Suite 1400
(843) 916-7818 Fax Atlanta, Georgia 30309
</TABLE>
REGISTRAR AND TRANSFER AGENT
First-Citizens Bank and Trust Company of South Carolina
P. O. Box 29
Columbia, South Carolina 29202
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED AT NO CHARGE TO SHAREHOLDERS AS OF THE RECORD DATE UPON WRITTEN
REQUEST TO: ANN W. JONES, BEACH FIRST NATIONAL BANCSHARES, INC., 1550 NORTH OAK
STREET, MYRTLE BEACH, SOUTH CAROLINA 29577
38
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BEACH FIRST NATIONAL BANCSHARES, INC. FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 970,349
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,250,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,524,689
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 21,095,556
<ALLOWANCE> 263,215
<TOTAL-ASSETS> 37,944,622
<DEPOSITS> 31,135,042
<SHORT-TERM> 0
<LIABILITIES-OTHER> 177,012
<LONG-TERM> 158,912
0
0
<COMMON> 735,868
<OTHER-SE> (5,737,788)
<TOTAL-LIABILITIES-AND-EQUITY> 37,944,622
<INTEREST-LOAN> 1,444,855
<INTEREST-INVEST> 722,708
<INTEREST-OTHER> 133,807
<INTEREST-TOTAL> 2,301,370
<INTEREST-DEPOSIT> 1,139,311
<INTEREST-EXPENSE> 1,153,927
<INTEREST-INCOME-NET> 1,147,443
<LOAN-LOSSES> 272,500
<SECURITIES-GAINS> (12,467)
<EXPENSE-OTHER> 1,316,254
<INCOME-PRETAX> (304,183)
<INCOME-PRE-EXTRAORDINARY> (304,183)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (233,183)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
<YIELD-ACTUAL> 7.82
<LOANS-NON> 0
<LOANS-PAST> 1,080
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 169,502
<CHARGE-OFFS> 180,286
<RECOVERIES> 1,499
<ALLOWANCE-CLOSE> 263,215
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 263,215
</TABLE>
