U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-- EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
-------------
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number: 33-95562
BEACH FIRST NATIONAL BANCSHARES, INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 58-1030117
------------------------ ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
1550 N. Oak Street, Myrtle Beach, South Carolina 29577
---------------------------------------------------------------------
(Address of principal executive offices)
(843) 626-2265
--------------------------------------------------
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
On July 31, 2000, 735,868 shares of the issuer's common stock, par value
$1.00 per share, were issued and outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1999
---- ----- ----
(unaudited) (unaudited) (audited)
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 1,907,434 $ 1,075,619 $ 2,516,526
Federal funds sold and short term investments 2,420,111 1,500,000 -
Investment securities available for sale 8,734,992 8,904,424 9,283,159
Loans, net 39,503,435 26,037,884 32,129,114
Premises and equipment, net 1,434,503 1,465,587 1,446,424
Real estate acquired in settlement of loans - 165,153 99,820
Other assets 957,357 560,499 680,352
--------------- -------------- ------------
Total assets $ 54,957,832 $ 39,707,166 $ 46,155,395
=============== ============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits $ 7,439,197 $ 5,522,841 $ 5,864,480
Interest bearing deposits 40,698,952 27,600,591 30,971,540
--------------- ------------- ------------
Total deposits 48,138,149 33,123,432 36,836,020
Other borrowings - - 2,820,000
Other liabilities 449,113 166,392 186,062
--------------- -------------- ------------
Total liabilities 48,587,262 33,289,824 39,842,082
--------------- -------------- ------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares
authorized; 735,868 shares issued and outstanding 735,868 735,868 735,868
Paid-in capital 6,476,481 6,476,481 6,476,481
Accumulated retained deficit ( 608,910) (728,632) (687,898)
Accumulated other comprehensive income (loss) (232,869) (66,375) (211,138)
--------- -------------- ------------
Total shareholders' equity 6,370,570 6,417,342 6,313,313
--------------- - -------------- ------------
Total liabilities and shareholders' equity $ 54,957,832 $ 39,707,166 $ 46,155,395
=============== ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statements of Operations
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 1,706,816 $ 1,077,015 $ 901,296 $ 575,756
Investment securities 304,691 312,096 150,620 141,437
Federal funds sold and short term investments 33,497 18,688 30,371 10,058
--------- --------- --------- --------
Total interest income 2,045,004 1,407,799 1,082,287 727,251
INTEREST EXPENSE
Deposits 965,759 658,501 538,450 331,910
Other borrowings 53,406 2,608 16,686 276
--------- --------- --------- --------
Total interest expense 1,019,165 661,109 555,136 332,186
Net interest income 1,025,839 746,690 527,151 395,065
PROVISION FOR POSSIBLE LOAN LOSSES 111,732 69,668 73,000 38,500
--------- --------- --------- --------
Net interest income after provision
for possible loan losses 914,107 677,022 454,151 356,565
--------- --------- --------- --------
NONINTEREST INCOME
Service fees on deposit accounts 118,344 65,44 62,987 37,681
Loss on sale of investment securities (6,104) (23,170) (3,597) (10,313)
Other income 18,745 16,559 9,646 8,405
--------- --------- --------- --------
Total noninterest income 130,985 58,832 69,036 35,773
--------- --------- --------- --------
NONINTEREST EXPENSES
Salaries and wages 455,238 328,423 251,727 167,932
Employee benefits 41,120 32,142 21,707 16,629
Supplies and printing 22,674 17,901 10,765 8,682
Advertising and public relations 33,162 22,870 15,955 11,670
Professional fees 64,930 58,367 29,743 28,391
Depreciation and amortization 92,294 102,010 47,849 51,781
Occupancy 23,865 20,785 12,145 10,832
Data processing fees 45,685 35,168 23,162 15,774
Other operating expenses 140,498 104,186 61,521 52,081
--------- --------- --------- --------
Total noninterest expenses 919,466 721,852 474,574 363,772
--------- --------- --------- --------
Income before income taxes 125,626 14,002 48,613 28,566
INCOME TAX EXPENSE 46,638 1,815 17,979 4,864
--------- --------- --------- --------
Net income $ 78,988 $ 12,187 $ 30,634 $ 23,702
========= ======== ========= ========
BASIC NET INCOME PER COMMON
SHARE $ .11 $ .02 $ .04 $ .03
========= ======== ========= ========
DILUTED NET INCOME PER COMMON
SHARE $ .10 $ .02 $ .04 $ .03
========= ======== ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Beach First National Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Accumulated
Other Total
Common stock Paid-in Retained Comprehensive shareholders'
Shares Amount Capital Deficit loss Equity
------ ------ ------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 735,868 $ 735,868 $ 6,476,481 $ (740,819) $ 2,126 $ 6,473,656
Net income - - - 12,187 - 12,187
Other comprehensive loss, net of income taxes:
Unrealized loss on investment securities - - - - (91,671) (91,671)
Less reclassification adjustments for losses
included in net loss - - - - 23,170 23,170
----------
Comprehensive loss - - - - - (56,314)
------- --------- ----------- ---------- ------------ -----------
BALANCE, JUNE 30, 1999 735,868 $ 735,868 $ 6,476,481 $ (728,632) $ (66,375) $ 6,417,342
======= ========= =========== ========== ============ ===========
Accumulated
Other Total
Common stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Deficit Loss Equity
------ ------ ------- ------- ------------- -----------
BALANCE, DECEMBER 31, 1999 735,868 $ 735,868 $ 6,476,481 $ (687,898) $ (211,138) $ 6,313,313
Net income - - - 78,988 - 78,988
Other comprehensive loss, net of income taxes:
Unrealized loss on investment securities - - - - (25,577) (25,577)
Less reclassification adjustments for losses
included in net income - - - - 3,846 3,846
Comprehensive loss - - - - - (57,257)
BALANCE, JUNE 30, 2000 735,868 $ 735,868 $ 6,476,481 $ (608,910) $ (232,869) $ 6,370,570
======= ========= =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 78,988 $ 12,187
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes 42,198 1,815
Provisions for loan losses 77,152 69.668
Depreciation and amortization 92,294 102,010
Writedown on real estate acquired in settlement of loans 15,000 -
Loss on sale of investment securities 6,104 23,170
Increase (decrease) in other assets (316,324) 22,237
Increase (decrease) in other liabilities 263,049 (21,191)
-------- --------
Net cash provided by operating activities 258,461 209,896
-------- --------
INVESTING ACTIVITIES
Purchase of investment securities (209,313) (1,363,470)
Proceeds from sale or call of investment securities 717,973 3,858,454
Decrease (increase) in Federal funds sold & short term investments (2,420,111) 750,000
Increase in loans, net (7,451,473) (5,275,211)
Purchase of premises and equipment (71,578) (28,799)
Proceeds from sale of ORE 84,820 124,921
---------- ----------
Net cash used in investing activities (9,349,682) (1,934,105)
---------- ----------
FINANCING ACTIVITIES
Decrease in Federal funds purchased (2,820,000) (158,912)
Net increase in deposits 11,302,129 1,988,390
---------- ----------
Net cash provided by financing activities 8,482,129 1,829,479
---------- ----------
Net increase (decrease) in cash and cash equivalents (609,092) 105,270
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD $ 2,516,526 $ 970,349
============ ===========
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 1,907,434 $ 1,075,619
============ ===========
CASH PAID FOR
Income taxes $ 3,770 $ -
------------ ------------
Interest $ 978,929 $ 650,474
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements, and the Company's operating
performance each quarter is subject to various risks and uncertainties that are
discussed in detail in the Company's filings with the Securities and Exchange
Commission, including the "Risk Factors" section in the Company's Registration
Statement on Form S-1 (Registration Number 33-95562) as filed with and declared
effective by the Securities and Exchange Commission. The Bank completed its
third full year of operations in 1999 and has grown substantially since opening
in September 1996. Comparisons of the Bank's results for the periods presented
should be made with an understanding of the Bank's short history.
Results of Operations
EARNINGS REVIEW
The Company's net income was $78,988, or $.11 per common share, for the six
months ended June 30, 2000 as compared to a net income of $12,187, or $.02 per
common share, for the six months ended June 30, 1999. The Company's net income
was $30,634, or $.04 per common share, for the three months ended June 30, 2000
as compared to net income of $23,702, or $.03 per common share, for the same
period of 1999. The improvement in net income reflects the Bank's continued
growth, as average earning assets increased to $46.7 million during the first
six months of 2000 from $34.6 million during the same period of 1999. The return
on average assets for the six month period ended June 30 was .31% in 2000
compared to .06% in 1999; the return on average equity was 2.50% in 2000 versus
.39% in 1999.
During the first half of 2000, net interest income increased to $1,025,839 from
$746,690 in the same period of 1999. The growth in net interest income resulted
from an increase of $637,205 in interest income, partially offset by an increase
in interest expense of $358,056. For the three months ended June 30, 2000, net
interest income increased to $527,151 from $395,065 during the comparable period
of 1999. The net interest spread was 3.25% in the first six months of 2000
compared to 3.11% during the same period of 1999. The net interest margin was
4.40% for the six month period ended June 30, 2000 compared to 4.36% for the
same period of 1999.
The provision for loan losses was $111,732 for the six month period and $73,000
for the three month period ended June 30, 2000, compared to $69,668 and $38,500
for the six month and three month periods ended June 30, 1999. The Company's
allowance for loan losses as a percentage of its period end loans was 1.21% and
1.24% at June 30, 2000 and 1999, respectively. Net charge-offs totaled $34,580
for the first half of 2000. In the same period of 1999, there were $6,115 in net
charge offs. The Company had $39,056 in non-performing loans at June 30, 2000
and $14,350 at June 30, 1999.
Noninterest income for the six month period ended June 30, 2000 was $130,985,
compared to $58,832 in the same period of 1999 resulting from the $15.0 million
increase in deposits from June 30, 1999 to June 30, 2000. This was due primarily
to an increase in service fees on deposits accounts resulting from a $15.0
million growth in deposits from June 30, 1999 to June 30, 2000. For the three
month periods ended June 30, 2000 and 1999, noninterest income was $69,036 and
$35,773, respectively.
Noninterest expense was $919,466 for the six month period ended June 30, 2000,
which was an increase of $197,614 over the same period of 1999. For the three
months ended June 30, noninterest expense was $474,574 in 2000 and $363,772 in
1999. These increases in noninterest expense reflect increases primarily in
salaries, advertising and pubic relations, data processing fees and other
expenses related to the growth of the Bank as well the writedown to market value
of real estate acquired in settlement of loans.
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.
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Income and Expenses, and Rates
For the six months ended For the six months ended
June 30, 2000 June 30, 1999
------------- -------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Federal funds sold & short
<S> <C> <C> <C> <C> <C> <C>
term investments $ 1,048,089 $ 33,497 6.41% $ 787,459 $ 18,688 4.79%
Investment securities 9,071,724 304,691 6.74% 9,970,539 312,096 6.31%
Loans 36,627,129 1,706,816 9.35% 23,816,870 1,077,015 9.12%
--------------- ------------ ----------- -------------- ------------ -----------
Total earning assets $ 46,746,942 $ 2,045,004 8.77% $ 34,574,868 $ 1,407,799 8.21%
============== ============ =========== ============== ============ ===========
Interest-bearing deposits $ 35,207,192 $ 965,759 5.50% $ 26,034,775 658,501 5.10%
Other borrowings 1,796,099 53,406 5.96% 94,756 2,608 5.55%
-------------- ------------ ----------- -------------- ------------- -----------
Total interest-bearing
liabilities $ 37,003,291 $ 1,019,165 5.52% $ 26,129,531 $ 661,109 5.10%
============== ============ ========== ============== ============ ===========
Net interest spread 3.25% 3.11%
Net interest income/margin $ 1,025,839 4.40% $ 746,690 4.36%
============ ========== ============ ===========
</TABLE>
As reflected above, for the first half of 2000 the average yield on earning
assets amounted to 8.77%, while the average cost of interest-bearing liabilities
was 5.52%. For the same period of 1999, the average yield on earning assets was
8.21% and the average cost of interest-bearing liabilities was 5.10%. 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 $12.8 million reflects the
Bank's success in continuing to build its customer base. The net interest margin
is computed by subtracting interest expense from interest income and dividing
the resulting figure by average interest-earning assets. The net interest margin
for the six month period ended June 30, 2000 was 4.40% and for the same period
of 1999 was 4.36%. This increase was the result of growth in average earning
assets of $12.2 million, partially offset by a $10.9 million increase in
interest-bearing liabilities. In addition, the weighted average rates on earning
assets increased by 56 basis points while the rate on deposits increased by only
42 basis points. The increase in outstanding balances is consistent with the
Bank's expansion of its core base of loans and deposits.
The following table presents the changes in the Company's net interest income as
a result of changes in the volume and rate of its interest-earning assets and
interest-bearing liabilities. The change in net interest income is primarily due
to increases in the volume of both loans and deposits rather than changes in
average rates.
Analysis of Changes in Net Interest Income
---------------------------------------------
Three months ended June 30, 2000 versus 1999
---------------------------------------------
Volume Rate Net change
------ ---- ----------
Federal funds sold & short term investments $ 8,330 $ 6,479 $ 14,809
Investment securities (30,188) 22,783 (7,405)
Loans 596,956 32,845 629,801
------- ------ -------
Total earning assets 575,098 62,107 637,205
Interest-bearing deposits 251,607 55,651 307,258
Other borrowings 50,587 211 50,798
------ --- ------
Total interest-bearing liabilities 302,194 55,862 358,056
------- ------ -------
Net interest income $272,904 $ 6,245 $279,149
======== ====== =======
<PAGE>
Provision for Loan Losses
The provision for loan losses was $111,732 for the first six months of 2000 and
$69,668 for the same period of 1999. For the three month periods ending June 30,
2000 and 1999, these figures were $73,000 and $38,500, respectively. The
increases were the result of management's assessment of the adequacy of the
reserve for possible loan losses given the size, mix and quality of the current
loan portfolio. Management anticipates loan growth will continue to be strong in
2000 and that it will continue to increase the amount of the provision for loan
losses as the portfolio grows. See also "Allowance for Possible Loan Losses"
below.
Noninterest Income
Noninterest income increased to $130,985 in the first six months of 2000 from
$58,832 in the same period of 1999. For the three months ended June 30, 2000,
noninterest income was $69,036 in 2000 and $35,773 in 1999. Service fees on
deposit accounts, the largest component of noninterest income, increased from
$65,443 for the first six months of 1999 to $118,344 during the same period of
2000. This category of noninterest income increased due to growth in the number
of deposit accounts as well as increased fee-related activities of customers.
The net loss on the sale of investment securities decreased to $6,104 from
$23,170 for the six month period ended June 30, 2000 and 1999, respectively.
These losses primarily relate to paydowns on mortgage backed securities and
result from movements in market interest rates since the securities were
acquired.
Noninterest Expense
Total noninterest expense increased from $721,852 for the six months ended June
30, 1999 to $919,466 for the same period of 2000, and from $363,772 for the
three months ended June 30, 1999 to $474,574 in the same period of 2000. The
increase in noninterest expense reflects an increase in most expense categories
as a result of the growth of the assets of the Bank to $55.0 million at June 30,
2000 from $39.7 million at June 30, 1999. Salary and wages increased by $126,815
during the six months ended June 30, 2000 and $83,795 during the three months
ended June 30, 2000 compared to the same periods in 1999, and employee benefits
increased by $8,978 and $5,078 during these periods. These increases are
primarily the result of increased incentive-based compensation programs
implemented in 2000 for all employees as well as severance payments payable to
Mr. Horn, the Bank's former President whose resignation was effective in
February 2000.
Advertising and public relations expense increased by $10,292 for the first half
of 2000 compared to 1999 and increased $4,285 in the second quarter of 2000
compared to the same period of 1999. This growth is the result of increased
media and promotional expenses. Depreciation and amortization expense decreased
by $9,716 from the first half of 1999 to the same period of 2000, and declined
by $3,932 in the second quarter of 2000 compared to 1999. This decline was due
to the fact that equipment purchased when the bank opened in 1996 has now been
fully depreciated.
For the six month period ended June 30, 2000, data processing expense increased
to $45,685 from $35,168 during the same period of 1999. During the three month
period ended June 30, data processing expense increased to $23,162 in 2000 from
$15,774 in 1999. Data processing fees are directly related to increases in the
volume of loan and deposit accounts and associated transaction activity. The
category of other expenses increased to $140,498 for the first six months of
2000 compared to $104,186 for the same period of 1999, and increased to $61,521
during the three month period ended June 30, 2000 from $52,081 in the same
period of 1999. This increase was due to the growth of operating expenses
associated with the expansion of loans and deposits and the writedown to market
value of real estate acquired in settlement of loans.
<PAGE>
BALANCE SHEET REVIEW
Investment Securities
Total securities averaged $ 9.1 million in the first six months of 2000 and
totaled $8.7 million at June 30, 2000. In the same period of 1999, total
securities averaged $10.0 million and totaled $8.9 million at June 30, 1999. At
June 30, 2000, the Company's total investment securities portfolio had a book
value of $9,089,599 and a market value of $8,734,992 for an unrealized net loss
of $354,607. The Company primarily invests in U.S. Government Agency Mortgage-
backed securities.
Contractual maturities and yields on the Company's investment securities (all
available for sale) at June 30, 2000 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.
<TABLE>
<CAPTION>
Investment Securities Maturity Distribution and Yields
June 30, 2000
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 $ ---- ----% ---- $ ---- $ ---- ----% $ ---- ----%
U.S. Govt Agencies ---- ---- ---- ---- 662,398 7.30% ---- ----
Mortgage-backed ---- ---- ---- ---- ---- ---- 8,114,151 6.13%
Other ---- ---- ---- ---- ---- ---- 313,050 6.68%
------- ----- ---- ------- -------- ------ --------- ----
Total $ ---- 0.00% ---- $ ---- $662,398 7.30% $8,427,201 6.15%
======= ===== ===== ======= ======== ===== ========== ====
</TABLE>
At June 30, 2000, short-term investments totaled $2,420,111 compared to
$1,500,000 as of June 30, 1999. These funds are one source of the Bank's
liquidity and are generally invested in an earning capacity on an overnight or
short-term basis.
Loans
At June 30, 2000, net loans (gross loans less the allowance for loan losses)
totaled $39.5 million, an increase of $13.5 million from June 30, 1999. Average
gross loans increased from $23.8 million with a yield of 9.12% in the first six
months of 1999 to $36.6 million with a yield of 9.35% in 2000. The interest
rates charged on loans vary with the degree of risk and the maturity and amount
of the loan. Competitive pressures, money market rates, availability of funds
and government regulations also influence interest rates.
Since loans typically provide higher yields than other types of earning assets,
one of the Bank's goals is for loans to represent the largest category of
earning assets. Much progress was made in the effort as loans at June 30, 2000
were 78.2% of earning assets, versus 71.8% at June 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
The following table shows the composition of the loan portfolio by
category at June 30, 2000 and 1999.
Composition of Loan Portfolio
June 30, 2000 June 30, 1999
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
<S> <C> <C> <C> <C>
Commercial $7,009,860 17.5% $4,544,554 17.2%
Real estate - construction 4,159,907 10.4% 2,598,765 9.8%
Real estate - mortgage 24,079,385 60.1% 15,398,846 58.3%
Consumer 4,807,928 12.0% 3,885,456 14.7%
------------- ----- ----------- -----
Loans, gross 40,057,080 100.0% 26,427,621 100.0%
===== =====
Unearned income (67,615) (62, 969)
Allowance for possible loan losses (486,030) (326,768)
------------ ----------
Loans, net $39,503,435 $26,037,884
============ ==========
</TABLE>
The principal component of the Company's loan portfolio at June 30, 2000 and
1999 was mortgage loans, which represented 60.1% and 58.3% of the portfolio,
respectively. In the context of this discussion, a "real estate mortgage loan"
is defined as any loan, other than loans for construction purposes, secured by
real estate, regardless of the purpose of the loan. The Company follows the
common practice of financial institutions in the Company's market area of
obtaining a security interest in real estate whenever possible, in addition to
any other available collateral. The collateral is taken to reinforce the
likelihood of the ultimate repayment of the loan and tends to increase the
magnitude of the real estate loan portfolio component. Generally, the Company
limits it loan-to-value ratio to 80%. Due to the short time the portfolio has
existed, the current mix may not be indicative of the ongoing portfolio mix.
Management will attempt to maintain a relatively diversified loan portfolio to
help reduce the risk inherent in concentrations of collateral.
The following table sets forth the maturity distribution, classified according
to sensitivity to changes in interest rates, for selected components of the
Company's loan portfolio as of June 30, 2000.
<TABLE>
<CAPTION>
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
June 30, 2000
After one but After
One year Within five Five
or less Years Years Total
-------- --------------- --------- ------
<S> <C> <C> <C> <C>
Commercial $ 3,095,092 $ 3,797,275 $ 117,493 $ 7,009,860
Real estate 2,933,323 18,861,191 2,284,871 24,079,385
Construction 2,531,728 1,168,179 460,000 4,159,907
Consumer 1,714,976 2,559,569 533,383 4,807,928
Total gross loans $10,275,119 $ 26,386,214 $ 3,395,747 $ 40,057,080
========== ============= ========== ============
Fixed Interest Rate 3,005,270 25,505,658 3,322,287 31,833,215
Variable Interest Rate 7,269,849 880,556 73,460 8,223,865
---------- ------------- ---------- -----------
Total gross loans $10,275,119 $ 26,386,214 $ 3,395,747 $ 40,057,080
========== ============= ========== ============
</TABLE>
<PAGE>
The information presented in the above table is based on the contractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is subject to
review and credit approval, as well as modification of terms upon their
maturity. Actual repayments of loans may differ from maturities reflected above
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
Allowance for Possible Loan Losses
We have established an allowance for loan losses through a provision for loan
losses charged to expense. The allowance represents an amount which we believe
will be adequate to absorb probable losses on existing loans that may become
uncollectible. Our judgment in determining the adequacy of the allowance is
based on evaluations of the collectibility of loans and takes into consideration
such factors as conditions that may affect the borrower's ability to pay,
overall portfolio quality, and a review of specific problem loans. We adjust the
amount of the allowance periodically based on changing circumstances. Recognized
losses are charged to the allowance for losses, while subsequent recoveries are
added to the allowance. A loan is impaired when it is probable that we will be
unable to collect all principal and interest payments due in accordance with the
terms of the loan agreement. Individually identified impaired loans are measured
based on the present value of payments expected to be received, using the
contractual loan rate as the discount rate. Alternatively, measurement may be
based on observable market prices, or, for loans that are solely dependent on
the collateral for repayment, measurement may be based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds the measure
of fair value, a valuation allowance is established as a component of the
allowance for loan losses. Changes to the valuation allowance are recorded as a
component of the provision for loan losses.
In addition, regulatory agencies periodically review our allowance for loan
losses as part of their examination process, and they may require us to record
additions to the allowance based on their judgment about information available
to them at the time of their examinations.
At June 30, 2000, the allowance for possible loan losses was $486,030, or 1.21%
of outstanding loans, compared to an allowance for possible loan losses of
$326,768 or 1.24% of outstanding loans, at June 30, 1999. In the first six
months of 2000, the Bank had net charge-offs of $34,580. In the same period of
1999, there were $6,115 in net charge offs. The Company had non-performing loans
of $39,056 and $14,350 at June 30, 2000 and 1999, respectively.
Allowance for Loan Losses
Six months ending June 30,
2000 1999
---- ----
Average loans outstanding $ 36,627,129 $ 23,816,870
Loans outstanding at period end 40,057,080 26,427,621
Total nonperforming loans 39,056 14,350
Beginning balance of allowance $ 408,878 $ 263,215
Loans charged off (34,580) (6,115)
Total recoveries 0 0
------------ ------------
Net loans charged off (34,580) (6,115)
Provision for loan losses 111,732 69,668
------------ ------------
Balance at period end $ 486,030 $ 326,768
============ =============
Net charge-offs to average loans .09% .03%
Allowance as a percent of total loans 1.21% 1.24%
Nonperforming loans as a
percentage of total loans .09% .05%
Nonperforming loans as a
percentage of allowance 8.04% 4.39%
<PAGE>
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $41.5 million and average interest-bearing deposits
were $35.2 million in the first half of 2000. Average total deposits were $30.9
million and average interest-bearing deposits were $26.0 million in the same
period of 1999. The following table sets forth the deposits of the Company by
category as of June 30, 2000 and June 30, 1999.
<TABLE>
<CAPTION>
Deposits
June 30, 2000 June 30, 1999
Percentof Percent of
Amount Deposits Amount Deposits
------ --------- ------ --------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 7,439,197 15.5% $ 5,522,841 16.8%
NOW accounts 1,260,919 2.6% 1,032,992 3.1%
Money market accounts 6,107,185 12.7% 3,693,229 11.1%
Savings accounts 3,665,125 7.6% 4,725,085 14.2%
Time deposits less than $100,000 18,243,924 37.9% 12,831,695 38.8%
Time deposits of $100,000 or over 11,421,799 23.7% 5,317,590 16.0%
------------- ------- -------------- ------
Total deposits $ 48,138,149 100.0% $ 33,123,432 100.00%
============= ======= ============== ======
</TABLE>
Internal growth, resulting primarily from special promotions and increased
advertising generated the new deposits.
Core deposits, which exclude certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits were $36.7 million at June 30,
2000 compared to $27.8 million at June 30, 1999. 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 76% at June 30, 2000 and 84% at
June 30, 1999. The Company's loan-to-deposit ratio was 83.1% at June 30, 2000
versus 79.6% at June 30, 1999. The average loan-to-deposit ratio was 88.2%
during the first six months of 2000 and 77.0% during the same period of 1999.
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 June 30, 2000.
<PAGE>
Analysis of Capital
June 30, 2000
(Amounts in thousands)
Required Actual Excess
-------- ------ ------
Amount % Amount % Amount %
------ - ------ - ------ -
The Bank:
Tier 1 risk-based capital 1,638 4.0% 5,692 13.9% 4,054 9.9%
Total risk-based capital 3,273 8.0% 6,178 15.1% 2,905 7.1%
Tier 1 leverage 1,638 4.0% 5,692 11.0% 4,054 7.0%
The Company believes that it has sufficient capital to fund its
activities on an on-going basis.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Primary sources of liquidity for the Company are core deposits, scheduled
repayments on the Company's loans and interest on and maturities of its
investments. All securities of the Company have been classified as available for
sale. Occasionally, the Company might sell investment securities in connection
with the management of its interest sensitivity gap or to manage cash
availability. The Company may also utilize its cash and due from banks, security
repurchase agreements and federal funds sold to meet liquidity requirements as
needed. In addition, the Company has the ability, on a short-term basis, to
purchase federal funds from other financial institutions. Presently, the Company
has made arrangements with commercial banks for short-term unsecured advances of
up to $3,000,000. The Company believes that its liquidity and ability to manage
assets will be sufficient to meet its cash requirements over the near term.
The Company monitors and manages the pricing and maturity of its assets and
liabilities in order to lessen the potential impact that interest rate movements
could have on its net interest margin. To minimize the effect of these margin
swings, the balance sheet should be structured so that repricing opportunities
exist for both assets and liabilities in roughly equivalent amounts at
approximately the same time intervals Imbalances in these pricing opportunities
at any point in time constitute interest rate risk.
Interest rate sensitivity refers to the responsiveness of interest-bearing
assets and liabilities to changes in market interest rates. The rate sensitive
position, or gap, is the difference in the volume of rate sensitive assets and
liabilities at any given time interval. Management generally attempts to
maintain a balance between rate sensitive assets and liabilities to minimize the
company's interest rate risks. Interest rate sensitivity can be managed by
repricing assets or liabilities, selling securities available-for-sale,
replacing an asset or liability at maturity or by adjusting the interest rate
during the life of an asset or liability. Managing the amount of assets and
liabilities repricing in the same time interval helps to hedge the risk and
minimize the impact on net interest income of rising or falling interest rates.
<PAGE>
The interest rate sensitivity position at June 30, 2000 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.
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
June 30, 2000
After three
but After one but
Within three Within twelve within five After five
month months Years years Total
----- ------ ------------- ----- -----
Assets
Earning assets:
Federal funds sold
<S> <C> <C> <C> <C> <C>
& short term investments $ 2,222,111 $ 198,000 $ -- $ -- $ 2,420,111
Investment securities -- 2,239,120 -- 6,495,872 8,734,992
Loans 9,682,986 1,546,149 25,505,658 3,322,287 40,057,080
--------- --------- ---------- --------- ----------
Total earning assets $ 11,905,097 $ 3,983,269 $ 25,505,658 $ 9,818,159 $ 51,212,183
============ =========== ============ =========== ============
Liabilities
Interest-bearing liabilities
Money market and NOW $ 7,368,104 $ -- $ -- $ -- $ 7,368,104
Savings deposits 3,665,125 -- -- -- 3,665,125
Time deposits 5,637,985 15,912,781 8,114,957 29,665,723
--------- ---------- --------- ----------- -----------
Total interest-bearing
liabilities $ 16,671,214 $ 15,912,781 $ 8,114,957 $ -- $ 40,698,952
============ =========== =========== =========== ===========
Period gap $ (4,766,117) $(11,929,512) $ 17,390,701 $ 9,818,159 $ 10,513,231
Cumulative gap $ (4,766,117) $(16,695,529) $ 695,072 $ 10,513,231 $ 10,513,231
Ratio of cumulative gap to
Total earning assets (9.31)% (32.60)% 1.36% 20.53%
</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.
<PAGE>
YEAR 2000 ISSUES
Like many financial institutions, we rely upon computers for conducting our
business and for information systems processing. Industry experts were concerned
that on January 1, 2000, some computers would not be able to interpret the new
year properly, causing computer malfunctions. While we have not experienced any
material computer malfunctions to date, there remains a risk that our computers
will be unable to read or interpret data on Year 2000-sensitive dates, including
October 10, 2000. Our regulators have issued guidelines to require compliance
with Year 2000 issues. In accordance with these guidelines, we have developed
and executed a plan to ensure that our computer and telecommunication systems do
not have these Year 2000 problems. We generally rely on software and hardware
developed by independent third parties for our information systems. We believe
that our internal systems and software, including our network connections, are
programmed to comply with Year 2000 requirements, although there is a risk they
may not be. We incurred approximately $26,000 in expenses in 1999 to implement
our Year 2000 plan. Under our plan, we are continuing to monitor the situation
throughout 2000. Based on information currently available, we believe that we
will not incur significant additional expenses in connection with the Year 2000
issue.
The Year 2000 issue may also negatively affect the business of our customers,
but to date we are not aware of any material Year 2000 issues affecting them. We
include Year 2000 readiness in our lending criteria to minimize risk. However,
this will not eliminate the issue, and any financial difficulties that our
customers experience caused by Year 2000 issues could impair their ability to
repay loans to us.
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 July 31, 2000, the
Company had 921 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.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
There are no material legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
Item 2. Changes in Securities.
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The Company's Bylaws provides that the Board of Directors shall be
divided into three classes with each class to be as nearly equal in number as
possible. The Bylaws also provide that the three classes of directors are to
have staggered terms, so that the terms of only approximately one-third of the
Board members will expire at each annual meeting of shareholders. The current
Class I directors are Raymond E. Cleary, III, Joe N. Jarrett, Jr., Richard E.
Lester, and Don J. Smith. The current Class II directors are Michael Bert
Anderson, Orvis Bartlett Buie, Michael D. Harrington, Rick H. Seagroves, and
Walter E. Standish, III. The current Class III directors are Vernie E. Dove,
Jack L. Green, Samuel Robert Spann, Jr., B. Larkin Spivey, and James C. Yahnis.
The Class II directors were up for reelection at this year's annual meeting held
April 19, 2000. Each of the existing Class II directors were reelected at the
annual
<PAGE>
meeting. For Mr. Anderson, 385,871 votes were cast in favor of his reelection as
director, 2,100 votes were withheld and no votes abstained. For Mr. Buie,
385,871 votes were cast in favor of his reelection as director, 2,100 votes were
withheld and no votes abstained. For Mr. Harrington, 384,571 votes were cast in
favor of his reelection as director, 3,400 votes were withheld and no votes
abstained. For Mr. Seagroves, 385,671 votes were cast in favor of his reelection
as director, 2,300 votes were withheld and no votes abstained. For Mr. Standish,
385,871 votes were cast in favor of his reelection as director, 2,100 votes were
withheld and no votes abstained. The terms of the Class III directors will
expire at the 2001 Annual Shareholders Meeting, and the terms of the Class I
directors will expire at the 2002 Annual Shareholders Meeting.
Item 5. Other Information.
--------------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
-----------------------------------------
(a) Exhibits - See Exhibit Index attached hereto.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period ended June 30,
2000.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEACH FIRST NATIONAL BANCSHARES, INC.
Date: August 10, 2000 By: /s/ Walter E. Standish, III
---------------------- -----------------------------
Walter E. Standish, III
President
/s/ Ann W. Jones
------------------------------
Ann W. Jones
Chief Financial and Principal
Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27.1. Financial Data Schedule for the period ended June 30, 2000.
(for SEC use only).
