UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
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|
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended: June 30, 2008
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o
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TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number: 000-22503
BEACH FIRST NATIONAL BANCSHARES,
INC.
(Exact name of
registrant as specified in its charter)
South Carolina
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57-1030117
|
(State of Incorporation)
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|
(I.R.S. Employer Identification No.)
|
3751 Robert M. Grissom Parkway, Suite 100, Myrtle Beach, South
Carolina 29577
(Address of
principal executive offices)
(843)
626-2265
(Registrants
telephone number)
Not Applicable
(Former name,
former address and former fiscal year, if changed since last report)
Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13
or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
o
|
Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting company
o
|
|
|
(Do not check if a smaller
reporting company)
|
|
Indicate by check mark
whether the registrant is shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
State the number of shares outstanding of each of the issuers classes
of common equity, as of the latest practicable date: On August 8,
2008, 4,845,018 shares of the issuers common stock, par value $1.00 per share,
were issued and outstanding.
PART I
FINANCIAL
INFORMATION
Item
1. Financial Statements
.
Beach First National Bancshares, Inc. and Subsidiaries
Consolidated
Condensed Balance Sheets
|
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June 30,
|
|
December 31,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
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Cash and due from banks
|
|
$
|
10,473,167
|
|
$
|
4,992,634
|
|
$
|
6,592,898
|
|
Federal funds sold and short-term
investments
|
|
3,087,016
|
|
566,044
|
|
26,072,380
|
|
Total cash and cash equivalents
|
|
13,560,183
|
|
5,558,678
|
|
32,665,278
|
|
Investment securities
|
|
69,059,993
|
|
65,677,993
|
|
69,656,884
|
|
|
|
|
|
|
|
|
|
Portfolio loans, net of unearned
|
|
553,385,016
|
|
503,432,516
|
|
445,308,418
|
|
Allowance for loan losses (ALL)
|
|
(7,646,053
|
)
|
(6,935,616
|
)
|
(6,331,806
|
)
|
Portfolio loans, net of ALL
|
|
545,738,963
|
|
496,496,900
|
|
438,976,612
|
|
|
|
|
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|
|
|
|
Mortgage loans held for sale
|
|
6,528,090
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|
6,475,619
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12,073,613
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Federal Reserve Bank stock
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|
984,000
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984,000
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984,000
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Federal Home Loan Bank stock
|
|
3,545,100
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|
3,395,300
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3,395,300
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Premises and equipment, net
|
|
16,089,907
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|
15,746,143
|
|
15,320,929
|
|
Cash value of life insurance
|
|
3,616,025
|
|
3,554,807
|
|
3,488,334
|
|
Investment in BFNB Trusts
|
|
310,000
|
|
310,000
|
|
310,000
|
|
Other assets
|
|
10,085,769
|
|
7,788,978
|
|
7,391,740
|
|
Total assets
|
|
$
|
669,518,030
|
|
$
|
605,988,418
|
|
$
|
584,262,690
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
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Deposits
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
$
|
37,345,807
|
|
$
|
33,138,936
|
|
$
|
37,320,198
|
|
Interest bearing deposits
|
|
495,927,217
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|
431,059,409
|
|
420,950,438
|
|
Total deposits
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|
533,273,024
|
|
464,198,345
|
|
458,270,636
|
|
Advances from Federal Home Loan Bank
|
|
55,000,000
|
|
55,000,000
|
|
55,000,000
|
|
Federal funds purchased and other
borrowings
|
|
14,128,499
|
|
18,288,148
|
|
7,058,507
|
|
Junior subordinated debentures
|
|
10,310,000
|
|
10,310,000
|
|
10,310,000
|
|
Other liabilities
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|
3,706,225
|
|
5,613,875
|
|
4,749,438
|
|
Total liabilities
|
|
616,417,748
|
|
553,410,368
|
|
535,388,581
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
Common stock, $1 par value; 10,000,000
shares
authorized; 4,845,018 issued and outstanding at June
30, 2008, 4,845,018 at December 31, 2007, and
4,836,916 at June 30, 2007
|
|
4,845,018
|
|
4,845,018
|
|
4,836,916
|
|
Paid-in capital
|
|
29,503,750
|
|
29,494,912
|
|
29,050,951
|
|
Retained earnings
|
|
19,803,645
|
|
18,583,425
|
|
16,017,612
|
|
Accumulated other comprehensive loss
|
|
(1,052,131
|
)
|
(345,305
|
)
|
(1,031,370
|
)
|
Total shareholders equity
|
|
53,100,282
|
|
52,578,050
|
|
48,874,109
|
|
Total liabilities and shareholders equity
|
|
$
|
669,518,030
|
|
$
|
605,988,418
|
|
$
|
584,262,690
|
|
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
Beach First National Bancshares, Inc, and Subsidiaries
Consolidated Condensed Statements of Income
(Unaudited)
|
|
Six Months Ended
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
19,463,997
|
|
$
|
20,024,549
|
|
$
|
9,304,543
|
|
$
|
10,324,311
|
|
Investment securities
|
|
1,906,342
|
|
1,849,572
|
|
907,898
|
|
944,729
|
|
Fed funds sold and short term investments
|
|
86,885
|
|
144,570
|
|
15,283
|
|
72,093
|
|
Other
|
|
9,445
|
|
11,860
|
|
4,133
|
|
5,961
|
|
Total interest income
|
|
21,466,669
|
|
22,030,551
|
|
10,231,857
|
|
11,347,094
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
9,659,697
|
|
9,199,762
|
|
4,562,572
|
|
4,732,478
|
|
Advances from the FHLB, federal funds
purchased and other borrowings
|
|
1,452,282
|
|
1,188,302
|
|
709,347
|
|
651,344
|
|
Junior subordinated debentures
|
|
311,726
|
|
396,982
|
|
137,348
|
|
199,514
|
|
Total interest expense
|
|
11,423,705
|
|
10,785,046
|
|
5,409,267
|
|
5,583,336
|
|
Net interest income
|
|
10,042,964
|
|
11,245,505
|
|
4,822,590
|
|
5,763,758
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
1,314,000
|
|
622,000
|
|
568,000
|
|
320,800
|
|
Net interest income after provision for
possible loan losses
|
|
8,728,964
|
|
10,623,505
|
|
4,254,590
|
|
5,442,958
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
Service fees on deposit accounts
|
|
209,477
|
|
278,023
|
|
55,433
|
|
142,535
|
|
Mortgage production related income
|
|
1,663,699
|
|
3,287,803
|
|
923,698
|
|
1,515,131
|
|
Merchant income
|
|
384,829
|
|
259,226
|
|
231,142
|
|
162,661
|
|
Income from cash value life insurance
|
|
72,583
|
|
74,416
|
|
39,056
|
|
37,657
|
|
Gain on sale of fixed asset
|
|
220
|
|
4,780
|
|
|
|
930
|
|
Other income
|
|
516,053
|
|
583,014
|
|
217,509
|
|
341,725
|
|
Total noninterest income
|
|
2,846,861
|
|
4,487,262
|
|
1,466,838
|
|
2,200,639
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
3,673,688
|
|
4,347,295
|
|
1,975,807
|
|
2,014,863
|
|
Employee benefits
|
|
799,853
|
|
807,422
|
|
398,645
|
|
406,516
|
|
Supplies and printing
|
|
104,916
|
|
93,086
|
|
52,649
|
|
41,904
|
|
Advertising and public relations
|
|
318,942
|
|
317,052
|
|
136,542
|
|
173,446
|
|
Professional fees
|
|
339,160
|
|
272,824
|
|
196,724
|
|
144,836
|
|
Depreciation and amortization
|
|
550,206
|
|
522,961
|
|
281,269
|
|
270,363
|
|
Occupancy
|
|
806,242
|
|
865,545
|
|
395,627
|
|
401,262
|
|
Data processing fees
|
|
636,525
|
|
353,062
|
|
450,225
|
|
181,605
|
|
Mortgage production related expenses
|
|
379,018
|
|
816,378
|
|
209,351
|
|
435,681
|
|
Merchant Processing
|
|
406,182
|
|
280,026
|
|
248,505
|
|
168,197
|
|
Other operating expenses
|
|
1,661,621
|
|
1,293,140
|
|
852,257
|
|
768,941
|
|
Total noninterest expenses
|
|
9,676,353
|
|
9,968,791
|
|
5,197,601
|
|
5,007,614
|
|
Income before income taxes
|
|
1,899,472
|
|
5,141,976
|
|
523,827
|
|
2,635,983
|
|
Income tax expense
|
|
679,252
|
|
1,831,159
|
|
187,320
|
|
937,550
|
|
Net income
|
|
$
|
1,220,220
|
|
$
|
3,310,817
|
|
$
|
336,507
|
|
$
|
1,698,433
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.25
|
|
$
|
0.69
|
|
$
|
0.07
|
|
$
|
0.35
|
|
Diluted net income per common share
|
|
$
|
0.25
|
|
$
|
0.67
|
|
$
|
0.07
|
|
$
|
0.34
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
4,845,018
|
|
4,793,924
|
|
4,845,018
|
|
4,818,556
|
|
Diluted
|
|
4,914,943
|
|
4,949,533
|
|
4,903,612
|
|
4,967,124
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
3
Beach
First National Bancshares, Inc. and Subsidiaries
Consolidated
Condensed Statements of Changes in Shareholders Equity and Comprehensive
Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Common stock
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
Shareholders
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2007
|
|
4,768,413
|
|
$
|
4,768,413
|
|
$
|
28,657,576
|
|
$
|
12,706,795
|
|
$
|
(673,205
|
)
|
$
|
45,459,579
|
|
Net income
|
|
|
|
|
|
|
|
3,310,817
|
|
|
|
3,310,817
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment securities
|
|
|
|
|
|
|
|
|
|
(570,694
|
)
|
(570,694
|
)
|
Unrealized gain on interest rate swap
|
|
|
|
|
|
|
|
|
|
212,529
|
|
212,529
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
2,952,652
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
68,503
|
|
68,503
|
|
393,375
|
|
|
|
|
|
461,878
|
|
Balance, June 30, 2007
|
|
4,836,916
|
|
$
|
4,836,916
|
|
$
|
29,050,951
|
|
$
|
16,017,612
|
|
$
|
(1,031,370
|
)
|
$
|
48,874,109
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Common stock
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
Shareholders
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008
|
|
4,845,018
|
|
$
|
4,845,018
|
|
$
|
29,494,912
|
|
$
|
18,583,425
|
|
$
|
(345,305
|
)
|
$
|
52,578,050
|
|
Net income
|
|
|
|
|
|
|
|
1,220,220
|
|
|
|
1,220,220
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment securities
|
|
|
|
|
|
|
|
|
|
(702,936
|
)
|
(702,936
|
)
|
Unrealized loss on interest rate swap
|
|
|
|
|
|
|
|
|
|
(3,890
|
)
|
(3,890
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
513,394
|
|
Stock based compensation expense
|
|
|
|
|
|
8,838
|
|
|
|
|
|
8,838
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
4,845,018
|
|
$
|
4,845,018
|
|
$
|
29,503,750
|
|
$
|
19,803,645
|
|
$
|
(1,052,131
|
)
|
$
|
53,100,282
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
4
Beach First National Bancshares, Inc.
and Subsidiaries
Consolidated Condensed Statements
of Cash Flows
|
|
|
|
For the Year
|
|
|
|
Six Months Ended
|
|
Ended
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Operating activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,220,220
|
|
$
|
3,310,817
|
|
$
|
5,876,630
|
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
550,206
|
|
522,961
|
|
1,060,255
|
|
Proceeds from sale of mortgages held for
sale
|
|
65,395,286
|
|
158,623,684
|
|
231,970,200
|
|
Disbursements for mortgages held for sale
|
|
(65,447,757
|
)
|
(158,552,816
|
)
|
(225,967,597
|
)
|
Discount accretion and premium amortization
|
|
(194,662
|
)
|
85,822
|
|
(153,431
|
)
|
Deferred income taxes
|
|
|
|
616,493
|
|
(673,024
|
)
|
Provisions for loan losses
|
|
1,314,000
|
|
622,000
|
|
2,045,600
|
|
Recourse reserve provision
|
|
10,000
|
|
50,000
|
|
205,000
|
|
Loss (gain) on sale of property and
equipment
|
|
(220
|
)
|
22,773
|
|
(6,324
|
)
|
(Gain) on sale of investment securities
|
|
|
|
|
|
(7,904
|
)
|
(Gain) on sale of other real estate owned
|
|
2,890
|
|
60,497
|
|
|
|
Stock based compensation expense
|
|
8,838
|
|
|
|
7,643
|
|
(Increase) decrease in other assets
|
|
382,834
|
|
(1,913,593
|
)
|
(1,713,779
|
)
|
Increase (decrease) in other liabilities
|
|
(1,889,047
|
)
|
1,961,160
|
|
1,994,064
|
|
Net cash provided by (used in) operating
activities
|
|
1,352,588
|
|
5,409,798
|
|
(14,538,066
|
)
|
Investing activities
|
|
|
|
|
|
|
|
Proceeds from paydowns of investment
securities
|
|
3,779,062
|
|
|
|
4,988,852
|
|
Proceeds from sale of investment securities
|
|
21,195,000
|
|
|
|
8,623,625
|
|
Purchase of investment securities
|
|
(29,226,455
|
)
|
(1,182,354
|
)
|
(10,077,003
|
)
|
Purchase of FHLB stock
|
|
(149,800
|
)
|
(919,700
|
)
|
(919,700
|
)
|
Increase in loans, net
|
|
(54,691,710
|
)
|
(48,687,115
|
)
|
(107,223,880
|
)
|
Purchase of life insurance contracts
|
|
(61,218
|
)
|
(63,749
|
)
|
(130,221
|
)
|
Purchase of property and equipment
|
|
(893,969
|
)
|
(976,599
|
)
|
(2,462,068
|
)
|
Proceeds from sale of property and
equipment
|
|
220
|
|
|
|
6,324
|
|
Proceeds from sale of other real estate
owned
|
|
1,782,757
|
|
|
|
1,679,229
|
|
Net cash used in investing activities
|
|
(58,266,113
|
)
|
(51,829,517
|
)
|
(105,514,842
|
)
|
Financing activities
|
|
|
|
|
|
|
|
Repayment of advances from Federal Home
Loan Bank
|
|
|
|
|
|
(5,000,000
|
)
|
Advances from Federal Home Loan Bank
|
|
|
|
17,500,000
|
|
22,500,000
|
|
Increase (decrease) in Federal funds
purchased
|
|
(3,998,900
|
)
|
|
|
11,382,100
|
|
Net increase in deposits
|
|
69,074,679
|
|
41,913,507
|
|
47,841,216
|
|
Proceeds from exercise of stock options
|
|
|
|
461,878
|
|
520,733
|
|
Tax benefit of stock options
|
|
|
|
|
|
385,565
|
|
Repayments of other borrowings
|
|
(160,749
|
)
|
|
|
(303,772
|
)
|
Net cash provided by financing activities
|
|
64,915,030
|
|
59,875,385
|
|
77,325,842
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
8,001,505
|
|
13,455,666
|
|
(13,650,934
|
)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of
period
|
|
$
|
5,558,678
|
|
$
|
19,209,612
|
|
$
|
19,209,612
|
|
Cash and cash equivalents end of period
|
|
$
|
13,560,183
|
|
$
|
32,665,278
|
|
$
|
5,558,678
|
|
Cash paid for
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
1,246,215
|
|
$
|
1,831,159
|
|
$
|
3,851,653
|
|
Interest
|
|
$
|
11,872,371
|
|
$
|
10,345,881
|
|
$
|
22,042,809
|
|
The accompanying notes are an integral part
of these consolidated condensed financial statements.
5
Beach First National Bancshares, Inc.
Notes to Consolidated Condensed Financial
Statements (Unaudited)
1.
Basis of
Presentation
The accompanying consolidated condensed
financial statements for Beach First National Bancshares, Inc. (Company)
were prepared in accordance with instructions for Form 10-Q and,
therefore, do not include all disclosures necessary for a complete presentation
of financial condition, results of operations, and cash flows in conformity
with generally accepted accounting principles.
All adjustments, consisting only of normal recurring accruals, which
are, in the opinion of management, necessary for fair presentation of the
interim consolidated financial statements have been included. The results of operations for the six month
period ended June 30, 2008 are not necessarily indicative of the results
that may be expected for the entire year.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Companys audited consolidated financial statements and
related notes for the year ended December 31, 2007.
Certain
previously reported amounts have been reclassified to conform to the current
years presentations. Such changes had
no effect on previously reported net income or shareholders equity.
2.
Principles
of Consolidation
The accompanying consolidated condensed
financial statements include the accounts of the Company and its subsidiaries,
Beach First National Bank and BFNM Building, LLC (LLC) (See No. 4 Investment in LLC below). The Company also owns two grantor trusts,
Beach First National Trust and Beach First National Trust II. All significant inter-company items and
transactions have been eliminated in consolidation. In accordance with current accounting
guidance, the financial statements of the trusts have not been included in the
Companys financial statements.
3.
Earnings Per
Share
The Company
calculates earnings per share in accordance with Statement of Financial
Accounting Standard No. 128, Earnings per Share (SFAS 128). SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock such as
options, warrants, convertible securities, or contingent stock agreements if
those securities trade in a public market.
This standard specifies computation and
presentation requirements for both basic EPS and, for entities with complex
capital structures, diluted EPS. Basic
earnings per share are computed by dividing net income by the weighted average
common shares outstanding. Diluted
earnings per share is similar to the computation of basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. The dilutive
effect of options outstanding under the Companys stock option plan is
reflected in diluted earnings per share by application of the treasury stock
method.
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF THE BASIC AND
DILUTED EPS COMPUTATIONS:
|
|
For the Six Months Ended
|
|
For the Year Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
1,220,220
|
|
$
|
3,310,817
|
|
$
|
5,876,630
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding basic
|
|
4,845,018
|
|
4,793,924
|
|
4,817,911
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.25
|
|
$
|
0.69
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
1,220,220
|
|
$
|
3,310,817
|
|
$
|
5,876,630
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding basic
|
|
4,845,018
|
|
4,793,924
|
|
4,817,911
|
|
|
|
|
|
|
|
|
|
Incremental shares from assumed conversion of
stock options
|
|
69,925
|
|
155,609
|
|
159,156
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding diluted
|
|
4,914,943
|
|
4,949,533
|
|
4,977,067
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.25
|
|
$
|
0.67
|
|
$
|
1.18
|
|
6
4.
Investment
in LLC
The LLC is a partnership with our legal
counsel, Nelson Mullins Riley & Scarborough LLP (NMRS), for purposes
of acquiring a parcel of land and constructing an office building on the
property. The Company owns two-thirds of
the LLC and NMRS owns the remaining one-third.
The building is a three-story, 46,066 square foot office building
located on 3.5 acres at the southwest corner of Robert M. Grissom Parkway and
38th Avenue North in Myrtle Beach, South Carolina. The Company leases two-thirds of the building
(approximately 30,000 square feet) from the LLC. Because the Company occupies approximately
12,500 square feet of space, it intends to lease the other 17,500 square feet
of its portion to outside tenants. NMRS
also leases one-third of the building from the LLC. As of June 30, 2008, 4,700 square feet
is available for lease.
Upon
completion of construction, the construction financing note from the
third-party lender was converted to a term loan payable by the LLC to the
third-party bank and is secured by the building. The loan requires 107
installments of principal and interest based on a fifteen year amortization,
with all remaining principal and interest due on June 15, 2015. The
interest rate is variable based on one-month LIBOR plus 1.40%. The outstanding
balance on the loan at June 30, 2008 is $6,745,299 and is shown as other
borrowings in the accompanying balance sheet.
5.
Derivative Financial Instruments Interest Rate SWAP
The Company has two types of derivative instruments. One is an interest
rate swap on the LLC building loan, which is discussed below, and the other is
created as part of residential mortgage lending activities when the Company
enters into a rate-locked loan commitment with a prospective borrower and, at
the same time, arranges to sell the loan to an investor. The Company has
determined that this latter derivative activity is not material.
In June 2005, the LLC obtained a $7,235,000 loan from a bank for
the construction of the building that serves as the Companys corporate office.
The interest on this loan floats based on LIBOR plus 1.40%. At the same time,
the LLC entered into an interest rate swap agreement in the same notional
amount as a risk management tool to lock the interest cash outflows on the
floating-rate debt. Under the terms of the swap (which expires upon maturity of
the building loan in June 15, 2015), the Company pays monthly a fixed
interest rate of 4.62% and receives interest payments equal to LIBOR. As there
are no differences between the critical terms of the interest rate swap and the
hedged debt obligation, the Company assumes no ineffectiveness in the hedging
relationship.
The estimated fair value of this agreement at June 30, 2008 was a
liability of approximately $130,015, which is included in the Companys balance
sheet. Changes in the fair value are recorded as a separate component in other
comprehensive income. The fixed rate of
4.62% paid under the swap agreement, when added to the loans margin above
LIBOR of 1.40%, converts the building loans interest (and cash flows) from a
variable rate to a fixed rate of 6.12%, resulting in interest expense of
$209,764 and $217,515 for the six months ended June 30, 2008 and 2007,
respectively.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedged transactions. This process includes
linking all derivatives that are designated as fair value or cash flow hedges
to specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Company also formally assesses,
both at the hedges inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge or that it has ceased to
be a highly effective hedge, the Company discontinues hedge accounting
prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it
is determined that the derivative is no longer effective in offsetting changes
in cash flows of a hedged item (including forecasted transactions); (2) the
derivative expires or is sold, terminated, or exercised; (3) the
derivative is no longer designated as a hedge instrument because is it unlikely
that a forecasted transaction will occur; or (4) management determines
that designation of the derivative as a hedge instrument is no longer
appropriate.
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be carried
on the balance sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized immediately in
earnings. In all other situations in which hedge accounting is discontinued,
the derivative will be carried at its fair value on the balance sheet, with
subsequent changes in its fair value recognized in current earnings.
7
6.
Fair Value Measurements
Effective January 1, 2008, the Company adopted SFAS No. 157,
Fair Value Measurements (SFAS 157) which provides a framework for measuring
and disclosing fair value under generally accepted accounting principles. SFAS
157 requires disclosures about the fair value of assets and liabilities
recognized in the balance sheet in periods subsequent to initial recognition,
whether the measurements are made on a recurring basis (for example,
available-for-sale investment securities) or on a nonrecurring basis (for
example, impaired loans).
SFAS 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes six levels of inputs that may be used to measure
fair value:
Level 1:
Quoted prices in active markets for
identical assets or liabilities. Level 1 assets and liabilities include debt
and equity securities and derivative contracts that are traded in an active
exchange market. Level 1 securities include
those traded on an active exchange, such as the New York Stock Exchange, U.S.
Treasury securities that are traded by dealers or brokers in active
over-the-counter markets, and money market funds.
Level 2:
Observable inputs other than Level 1
prices such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities. Level 2 assets and liabilities include debt securities
with quoted prices that are traded less frequently than exchange-traded
instruments and derivative contracts whose value is determined using a pricing
model with inputs that are observable in the market or can be derived
principally from or corroborated by observable market data. Level 2 securities
include mortgage-backed securities and debentures issued by government
sponsored entities, municipal bonds, and corporate debt securities. This
category generally includes certain derivative contracts and impaired loans.
Level 3:
Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant
management judgment or estimation. For example, this category generally
includes certain private equity investments, retained residual interests in
securitizations, residential mortgage servicing rights, and highly-structured
or long-term derivative contracts.
Assets and liabilities measured at fair value on a recurring basis are
as follows as of June 30, 2008:
|
|
Quoted Market
Price in Active
Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available-for-sale investment securities
|
|
|
|
$
|
69,059,993
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
|
$
|
6,528,090
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement (liability)
|
|
|
|
(130,015
|
)
|
|
|
Total
|
|
$
|
|
|
$
|
75,458,068
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is predominantly an asset based lender with real estate
serving as collateral on a substantial majority of loans. Loans which are
deemed to be impaired are primarily valued at the fair values of the underlying
real estate collateral. Such fair values are obtained using independent
appraisals, which the Company considers to be level 2 inputs. The aggregate
carrying amount of impaired loans at June 30, 2008 was $13,003,335. The Company has no assets or liabilities
whose fair values are measured using level 3 inputs.
FASB Staff Position No. FAS 157-2 delays the implementation of
SFAS 157 until the first quarter of 2009 with respect to goodwill, other
intangible assets, real estate and other assets acquired through foreclosure
and other non-financial assets measured at fair value on a nonrecurring basis.
8
Item 2.
Managements Discussion and Analysis of Financial Condition and Results
of Operations
The
following is our discussion and analysis of certain significant factors that
have affected our financial position and operating results and those of our
subsidiary, Beach First National Bank, during the periods included in the
accompanying financial statements. This
commentary should be read in conjunction with the financial statements and the
related notes and the other statistical information included in this report.
This
report contains forward-looking statements relating to, without limitation,
future economic performance, plans and objectives of management for future
operations, and projections of revenues and other financial items that are
based on the beliefs of management, as well as assumptions made by and
information currently available to management.
The words may, will, anticipate, should, would, believe,
contemplate, expect, estimate, continue, and intend, as well as other
similar words and expressions of the future, are intended to identify
forward-looking statements. Our actual
results may differ materially from the results discussed in the forward-looking
statements, and our operating performance each quarter is subject to various
risks and uncertainties that are discussed in detail in our filings with the
Securities and Exchange Commission (the SEC), including, without limitation:
·
significant
increases in competitive pressure in the banking and financial services
industries;
·
changes
in the interest rate environment which could reduce anticipated or actual
margins;
·
changes in
political conditions or the legislative or regulatory environment;
·
general economic
conditions, either nationally or regionally and especially in our primary
service area, continuing to be weak resulting in, among other things, a
deterioration in credit quality;
·
changes
occurring in business conditions and inflation;
·
changes in
management;
·
changes in
technology;
·
changes in
deposit flows;
·
the level of
allowance for loan loss;
·
the rate of
delinquencies and amounts of charge-offs;
·
the rates of
loan growth;
·
adverse changes
in asset quality and resulting credit risk-related losses and expenses;
·
higher than
anticipated levels of defaults on loans;
·
the amount of
our real estate-based loans and the weakness in the commercial real estate
market:
·
misperceptions
by depositors about the safety of their deposits;
·
changes in
monetary and tax policies;
·
loss of consumer
confidence and economic disruptions resulting from terrorist activities;
·
changes in the
securities markets;
·
other risks and
uncertainties detailed from time to time in our filings with the SEC; and
·
natural
disasters, such as a hurricane or flooding in our footprint.
Critical Accounting Policies
We have
adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States and with general practices
within the banking industry in the preparation of our consolidated financial
statements. Our significant accounting
policies are described in the footnotes to our audited consolidated financial
statements as of December 31, 2007 as filed on our Form 10-K.
Certain accounting policies involve significant judgments and
assumptions by management which has a material impact on the carrying value of
certain assets and liabilities. We
consider such accounting policies to be critical accounting policies. The judgments and assumptions we use are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because
of the nature of the judgments and assumptions we make, actual results could
differ from these judgments and estimates.
These differences could have a material impact on our carrying values of
assets and liabilities and our results of operations.
We believe the allowance for loan losses is the critical accounting
policy that requires the most significant judgment and estimates used in
preparation of our consolidated financial statements. Some of the more critical judgments
supporting the amount of our allowance for loan losses include judgments about
the credit worthiness of borrowers, the estimated value of the underlying
collateral, the assumptions about cash flow, determination of loss factors for
estimating credit losses, the impact of current events, and conditions, and
other factors impacting the level of probable inherent losses. Under different conditions or using different
assumptions, the actual amount of credit losses incurred by us may be different
from managements estimates provided in our consolidated financial statements. Refer to the subsection entitled
9
Allowance for Loan Losses
below for a more complete discussion of our processes and methodology for
determining our allowance for loan losses.
Overview
The following discussion describes our results of operations for the
quarter ended June 30, 2008 as compared to the quarter ended June 30,
2007, as well as results for the six months ended June 30, 2008 and 2007,
along with our financial condition as of June 30, 2008 as compared to December 31,
2007. Like most community banks, we
derive most of our income from interest we receive on our portfolio loans and
investments. Our primary source of funds
for making these loans and investments is our deposits, on which we pay
interest. Consequently, one of the key
measures of our success is our amount of net interest income, or the difference
between the income on our interest-earning assets, such as loans and
investments, and the expense on our interest-bearing liabilities, such as
deposits. Another key measure is the
spread between the yield we earn on these interest-earning assets and the rate
we pay on our interest-bearing liabilities.
Of
course, there are risks inherent in all loans, so we maintain an allowance for
loan losses to absorb probable losses on existing loans that may become
uncollectible. We establish and maintain
this allowance by charging a provision for loan losses against our operating
earnings. In the following section, we
have included a detailed discussion of this process.
In
addition to earning interest on our loans and investments, we earn income
through fees and other expenses we charge to our customers. We describe the various components of this
noninterest income, as well as our noninterest expense, in the following
discussion.
The
following discussion and analysis also identifies significant factors that have
affected our financial position and operating results during the periods
included in the accompanying financial statements. We encourage you to read this discussion and
analysis in conjunction with the financial statements and the related notes and
the other statistical information also included in this report.
Results of Operations
Earnings Review
Our net income was
$1,220,220 or $0.25 diluted net income per common share, for the six months
ended June 30, 2008 as compared to $3,310,817, or $0.67 diluted net income
per common share, for the same period in 2007.
Our net income was $336,507 or $0.07 per diluted common share, for the
three month ended June 30, 2008 as compared to net income of $1,698,433 or
$0.34 per diluted common share for the same period in 2007. The decrease in net income is attributed to
the challenging financial environment facing all banks. The net interest margin declined to 3.27% at
June 30, 2008, due in part to rate reductions since September 2007 of
3.25% in the prime lending rate. We expect continued pressure on the net
interest margin throughout 2008. The
return on average assets for the six month period ended June 30, 2008 was
0.38% as compared to 1.20% for the same period in 2007. The return on average equity was 4.56% for
the six month period ended June 30, 2008 versus 14.12% for the same period
in 2007.
Over the past 24 months, real estate values have fallen and the rate of
default on mortgage loans has risen.
There has been a resulting disruption in secondary markets for
mortgages, especially in non-conforming loan products. The Federal Reserve Bank has reduced
short-term rates to stimulate the economy.
As a result of inflationary pressures coming from oil, food and certain
other sectors, the long end of the yield curve has not dropped as fast as the
short end, resulting in a steepening of the yield curve. The Company has been affected by these events
in areas such as mortgage banking; land acquisition, development and
construction lending; and consumer lending.
The Company has seen an increase in delinquencies and non-performing
loans during 2007 and the first half of 2008, and it continues to monitor its
portfolio of real estate loans closely.
The reduction in short-term rates has adversely impacted the Companys
net interest margin. In the current
economic, market and credit environment, there can be no assurance that the
Companys portfolio will continue to perform at current levels.
Net Interest Income
Our primary
source of revenue is net interest income, which represents the difference
between the income on interest-earning assets and expense on interest-bearing
liabilities. During the first six months
of 2008, net interest income decreased 10.7% to $10,042,964 from $11,245,505
for the same period of 2007. For the three months ended June 30, 2008, net
interest income decreased 16.3% to $4,822,590 from $5,763,758 during the
comparable period of 2007. The decline
in net interest income for the first six months of 2008 resulted from a
decrease of $563,882 in interest income offset by an increase in interest
expense of $638,659. Our level of net
interest income is determined by the level of our earning assets
10
and our net interest margin. The
impact on net interest income from the continued growth of our loan portfolio
was offset by the decrease in the prime lending rate which reduced our net
interest margin. Average total loans
increased from $442.2 million in the first six months of 2007 to $537.6 million
in the same period in 2008. Average
total loans increased $78.9 million from $458.7 million for the year ended December 31,
2007 as compared to $537.6 million for the six months ended June 30,
2008. In addition, average securities
decreased to $73.1 million in the first six months of 2008 compared to $73.7
million for the first six months of 2007, and decreased $0.3 million from $73.4
million for the year ended December 31, 2007. Net interest spread, the difference between
the rate we earn on interest-earning assets and the rate we pay on
interest-bearing liabilities, was 3.78% in the first six months of 2007
compared to 2.84% during the same period of 2008, and 3.63% for the year ended December 31,
2007. The net interest margin was 3.27%
for the six month period ended June 30, 2008 compared to 4.35% for the
same period of 2007, and 4.20% for the year ended December 31, 2007. The decline in the net interest spread and
the net interest margin can be attributed to the challenging financial
environment facing banks including the reduction in the prime lending rate and
an increase in nonaccrual loans. Because
we are asset-sensitive over a one year period, the rate cuts immediately impact
approximately 60% of our portfolio loans. Since our deposit rates have not
declined as quickly, this has put pressure on our net interest margin. We anticipate that some of this pressure may
be eased as we are able to re price our deposits to current market rates. For
example, over the next three months, one-third of our CD portfolio will
mature. These CDs currently yield
approximately 4.08% and we anticipate replacing these CDs with lower rate
deposits. However, there is risk we may
not be able to replace these CDs with lower rate deposits, or replace all of
these deposits at all, especially given our intent to reduce our reliance on
brokered deposits and not to accept or renew additional brokered deposits in
the near future.
The following table sets forth, for the periods indicated, information
related to our average balance sheet and average yields on assets and average
rates paid on liabilities. The yield or
rates were derived by dividing annualized income or expense by the average
balance of the corresponding assets or liabilities. The average balances are calculated from the
daily balances from the periods indicated.
|
|
Average Balances, Income and Expenses, and Rates
|
|
|
|
For the six months ended June 30,
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Average
|
|
Income/
|
|
Yield/
|
|
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds
sold, short term investments and trust preferred securities
|
|
$
|
6,264,381
|
|
$
|
86,885
|
|
2.79
|
%
|
$
|
5,862,124
|
|
$
|
144,570
|
|
4.97
|
%
|
Investment
securities plus FHLB and FRB Stock
|
|
73,139,319
|
|
1,915,787
|
|
5.27
|
%
|
73,705,208
|
|
1,861,432
|
|
5.09
|
%
|
Loans
|
|
537,617,439
|
|
19,463,997
|
|
7.28
|
%
|
442,197,588
|
|
20,024,549
|
|
9.13
|
%
|
Total earning
assets
|
|
$
|
617,021,139
|
|
$
|
21,466,669
|
|
7.00
|
%
|
$
|
521,764,920
|
|
$
|
22,030,551
|
|
8.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash &
Due from Banks
|
|
6,358,829
|
|
|
|
|
|
6,468,934
|
|
|
|
|
|
Other Assets
|
|
21,055,227
|
|
|
|
|
|
21,633,605
|
|
|
|
|
|
Total Assets
|
|
$
|
644,435,195
|
|
|
|
|
|
$
|
549,867,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
$
|
474,225,329
|
|
$
|
9,659,697
|
|
4.10
|
%
|
$
|
398,844,585
|
|
$
|
9,199,762
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
77,417,291
|
|
1,764,008
|
|
4.58
|
%
|
61,281,966
|
|
1,585,284
|
|
5.22
|
%
|
Total
interest-bearing liabilities
|
|
$
|
551,642,620
|
|
$
|
11,423,705
|
|
4.16
|
%
|
$
|
460,126,551
|
|
$
|
10,785,046
|
|
4.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
34,651,575
|
|
|
|
|
|
34,576,265
|
|
|
|
|
|
Other Liabilities
|
|
4,663,159
|
|
|
|
|
|
8,266,245
|
|
|
|
|
|
Total Liabilities
|
|
$
|
590,957,354
|
|
|
|
|
|
$
|
502,969,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Capital
|
|
53,477,841
|
|
|
|
|
|
46,898,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and Equity
|
|
$
|
644,435,195
|
|
|
|
|
|
$
|
549,867,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
spread
|
|
|
|
|
|
2.84
|
%
|
|
|
|
|
3.78
|
%
|
Net interest
income/margin
|
|
|
|
$
|
10,042,964
|
|
3.27
|
%
|
|
|
$
|
11,245,505
|
|
4.35
|
%
|
11
The following table sets forth the impact of the varying levels of
earning assets and interest-bearing liabilities and the applicable rates have
had on changes in net interest income for the periods presented.
|
|
Analysis of Changes in Net Interest Income
|
|
|
|
For the six months ended June 30,
|
|
|
|
2008 versus 2007
|
|
|
|
Volume
|
|
Rate
|
|
Net change
|
|
Federal funds sold and short term
investments and trust preferred securities
|
|
$
|
5,981
|
|
$
|
(63,666
|
)
|
$
|
(57,685
|
)
|
Investment securities
|
|
(9,653
|
)
|
64,008
|
|
54,355
|
|
Loans
|
|
3,510,216
|
|
(4,070,768
|
)
|
(560,552
|
)
|
Total earning assets
|
|
3,506,544
|
|
(4,070,426
|
)
|
(563,882
|
)
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
1,561,015
|
|
(1,101,080
|
)
|
459,935
|
|
Other borrowings
|
|
372,058
|
|
(193,334
|
)
|
178,724
|
|
Total interest-bearing liabilities
|
|
1,933,073
|
|
(1,294,414
|
)
|
638,659
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,573,471
|
|
$
|
(2,776,012
|
)
|
$
|
(1,202,541
|
)
|
Provision for Loan Losses
We have
established an allowance for loan losses through a provision for loan losses
charged as an expense on our statement of income. We review our loan portfolio periodically to
evaluate our outstanding loans and to measure both the performance of the
portfolio and the adequacy of the allowance for loan losses. The provision for loan losses was $1,314,000
for the first six months of 2008 as compared to $622,000 for the same period of
2007. The provision for loan losses was
$568,000 for the three months ended June 30, 2008 and $320,800 for the
same period in 2007. The increase in the
provision was the result of managements assessment of the adequacy of the
reserve for possible loan losses given the size, mix, and quality of the
current loan portfolio, the increases in non performing loans, and the current
economic environment. Please see the
discussion below under Allowance for Loan Losses for a description of the
factors we consider in determining the amount of the provision we expense each
period to maintain this allowance.
Noninterest Income
Noninterest income decreased to $2,846,861 for
the six months ended June 30, 2008, down 36.6% from $4,487,262 for the
same period in 2007. For the three
months ended June 30, 2008, noninterest income decreased to $1,466,838
million as compared to $2,200,639 in 2007.
This decrease in noninterest income is primarily attributable to the
decrease in income from our mortgage operation, which fell from $3,287,803 for
the first six months of 2007 to $1,663,699 for the first six months of
2008. The reduction in noninterest
income from our mortgage operation is a reflection of the downturn in the
economy in general and the real estate and mortgage markets in particular.
Noninterest Expense
Total
noninterest expense decreased 2.9% to $9,676,353 for the six month period ended
June 30, 2008 from $9,968,791 for the same period in 2007, and increased
3.8% to $5,197,601 million for the three months ended June 30, 2008 from
$5,007,614 million in the same period of 2007.
Salary and wages and employee benefits expense decreased $681,176 to
$4,473,541 during the six month period ended June 30, 2008 compared to the
same period in 2007. The reduction in
salary and benefits relates to the decline in mortgage production related
income as well as reduced staffing in the mortgage operation.
We had 157 and
180 full-time equivalent employees (FTE) at June 30, 2008 and 2007,
respectively. The mortgage operation FTE
declined from 95 FTE to 57 FTE. Excluding our mortgage operation staff, FTE
increased from 85 at June 30, 2007 to 100 FTE at June 30, 2008. Staffing increases were primarily due to
overall growth and the addition of our 73
rd
Avenue branch that
opened in the first quarter of 2008.
For the six
months ended June 30, 2008, advertising and public relations costs
increased $1,890 to $318,942 as compared to the same period in 2007, and
decreased $36,904 to $136,542 for the three months ended June 30, 2008
compared to the same period in 2007.
Professional fees increased $66,336 to $339,160 for the six month period
ended June 30, 2008 compared to the same period in 2007. These fees continue to increase due to our
growth, the regulatory fees associated with such growth, and the escalating
cost of accounting, auditing, and legal services for a public company.
12
Occupancy
expenses decreased $59,303 to $806,242 during the six months ended
June 30, 2008 compared to the same period in 2007, and by $5,635 for the
three months ended June 30, 2008 compared to the same period in 2007.
Data
processing fees increased during the six months ended June 30, 2008 to
$636,525 from $353,062 during the same period in 2007. For the three months ended June 30,
2008, data processing costs totaled $450,225 compared to $181,605 for June 30,
2007. Data processing costs are
primarily related to the volume of loan and deposit accounts and transaction
activity. During April 2008, we
converted to a new core operating system. The one time conversion cost of
$225,760 was expensed in the second quarter of 2008.
Other
operating expenses increased 28.5% to $1,661,621 during the six months ended
June 30, 2008 compared to $1,293,140 during the same period in 2007. Other operating expenses increased 10.8%, to
$852,257, for the three months ended June 30, 2008 compared to the same
period in 2007. These increases are
primarily the result of increased operating expenses related to the growth of
the Company, including our new branch, along with other expenses associated
with the expansion of loans and deposits. The increase in other operating expenses
was primarily due to increases in FDIC fees, director and advisory fees, credit
and collections, and software maintenance.
Specifically,
FDIC fees increased $125,867, director and board advisory fees increased
$162,351, credit and collections expense increased $92,111, and software
maintenance increased $77,821 collectively totaling an increase of
$458,150. The total increase in other
operating expenses was $368,481 during the six months ended June 30, 2008
as compared to the same period in 2007.
The
following table presents a comparison of other operating expenses:
|
|
Other Operating Expenses
|
|
|
|
For the six months ended
|
|
For the three months ended
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
June 30,
2008
|
|
June 30,
2007
|
|
Telephone
|
|
$
|
88,429
|
|
$
|
63,645
|
|
$
|
45,175
|
|
$
|
31,829
|
|
Postage and freight
|
|
61,027
|
|
47,318
|
|
30,893
|
|
24,757
|
|
Armored Car
|
|
43,289
|
|
42,550
|
|
22,515
|
|
22,714
|
|
Credit and collection-bank
|
|
179,072
|
|
86,961
|
|
103,309
|
|
41,795
|
|
Dues and subscriptions
|
|
79,452
|
|
66,244
|
|
37,180
|
|
32,285
|
|
Employee travel, conferences, meals, and lodging
|
|
89,644
|
|
129,404
|
|
53,567
|
|
53,453
|
|
Business development and donations
|
|
186,861
|
|
187,953
|
|
107,463
|
|
161,823
|
|
FDIC insurance
|
|
150,245
|
|
24,378
|
|
80,954
|
|
12,696
|
|
Other insurance
|
|
25,420
|
|
45,231
|
|
12,850
|
|
20,451
|
|
Debit/ATM
|
|
55,276
|
|
46,024
|
|
27,235
|
|
24,093
|
|
Credit card processing fees
|
|
27,561
|
|
20,752
|
|
14,827
|
|
12,767
|
|
Federal Reserve charges
|
|
20,547
|
|
20,681
|
|
9,716
|
|
10,971
|
|
Software maintenance
|
|
134,802
|
|
56,981
|
|
43,794
|
|
41,443
|
|
Director and advisory board fees
|
|
212,353
|
|
50,002
|
|
112,775
|
|
24,662
|
|
NASDAQ
|
|
13,636
|
|
29,576
|
|
8,182
|
|
8,182
|
|
Furniture and equipment
|
|
173,763
|
|
161,999
|
|
98,335
|
|
96,347
|
|
Other operating expenses
|
|
120,244
|
|
213,441
|
|
43,487
|
|
148,673
|
|
Total
|
|
$
|
1,661,621
|
|
$
|
1,293,140
|
|
$
|
852,257
|
|
$
|
768,941
|
|
Balance Sheet Review
General
We had total assets of
$669.5 million at June 30, 2008, an increase of 14.6% from $584.3 million
at June 30, 2007, and an increase of 10.5% from $606.0 million at
December 31, 2007. Total assets at
June 30, 2008 consisted primarily of $559.9 million in loans including
mortgage loans held for sale, $69.1 million in investments, and $10.4 million
in cash and due from banks. Our
liabilities at June 30, 2008 totaled $616.4 million, consisting primarily
of $533.3 million in deposits, $55.0 million in Federal Home Loan Bank (FHLB)
advances, and $10.3 million of junior subordinated debentures. Our total deposits increased to $533.3
million at June 30, 2008, up 16.4% from $458.3 million at June 30,
2007, and up 14.9%
13
from
$464.2 million at December 31, 2007.
Shareholders equity increased $0.5 million to $53.1 million at
June 30, 2008 from $52.6 million at December 31, 2007, and increased
$4.2 million from $48.9 million at June 30, 2007.
Investment Securities
Total investment securities averaged $68.7 million during the first six
months of 2008 and totaled $69.1 million at June 30, 2008. Total investment securities averaged $70.2
million during the first six months of 2007 and totaled $69.7 million at
June 30, 2007. Total investment
securities averaged $69.0 million for the year ended December 31, 2007 and
totaled $65.7 million at December 31, 2007. At June 30, 2008, our total investment
securities portfolio had a book value of $70.6 million and a fair market value
of $69.1 million, for an unrealized net loss of $1.5 million. We primarily invest in short term U.S.
Government Sponsored Enterprises and Federal Agency securities.
At June 30, 2008,
federal funds sold and short-term investments totaled $3.1 million, compared to
$26.1 million at June 30, 2007 and $566,404 at December 31,
2007. These funds are one source of our
banks liquidity and are generally invested in an earning capacity on an
overnight or short-term basis. This decline in short-term investments is due to
loan demand during this quarter and a more competitive market for deposits.
Loans
Since loans typically
provide higher yields than other types of earning assets, a substantial
percentage of our earning assets are invested in our loan portfolio. As of June 30, 2008, loans represented
87.1% of average earning assets as compared to 84.8% at June 30, 2007, and
85.2% at December 31, 2007. At
June 30, 2008, net portfolio loans (portfolio loans less the allowance for
loan losses and deferred loan fees) totaled $545.7 million, an increase of
$106.8 million, or 24.3%, from June 30, 2007 and an increase of $49.2
million, or 9.92% from December 31, 2007.
Average gross loans increased to $537.6 million with a yield of 7.28%
during the first six months of 2008 from $442.2 million with a yield of 9.13%
during the same period in 2007. Average
gross loans were $458.7 million with a yield of 8.95% for the year ended December 31,
2007. The decrease in yield on loans
during these periods is due to the interest rate declines in 2007 and
2008. The interest rates charged on
loans vary with the degree of risk, the maturity, the guarantees, and the
collateral on each loan. Competitive
pressures, money market rates, availability of funds, and government
regulations also influence interest rates.
The following table shows
the composition of the loan portfolio and mortgage loans held for sale by
category at June 30, 2008, December 31, 2007, and June 30, 2007.
|
|
Composition of Loan Portfolio
|
|
|
|
June 30, 2008
|
|
December 31. 2007
|
|
June 30, 2007
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
Commercial
|
|
$
|
68,450,260
|
|
12.4
|
%
|
$
|
60,376,105
|
|
12.0
|
%
|
$
|
52,597,017
|
|
11.8
|
%
|
Real estate construction
|
|
51,220,297
|
|
9.2
|
%
|
63,988,173
|
|
12.7
|
%
|
41,964,309
|
|
9.4
|
%
|
Real estate mortgage
|
|
425,205,087
|
|
76.8
|
%
|
370,989,308
|
|
73.6
|
%
|
342,668,444
|
|
76.9
|
%
|
Consumer
|
|
8,896,536
|
|
1.6
|
%
|
8,504,685
|
|
1.7
|
%
|
8,357,160
|
|
1.9
|
%
|
Portfolio loans, gross
|
|
553,772,180
|
|
100.0
|
%
|
503,858,271
|
|
100.0
|
%
|
445,586,930
|
|
100.0
|
%
|
Unearned loan fees and costs, net
|
|
(387,164
|
)
|
|
|
(425,755
|
)
|
|
|
(278,512
|
)
|
|
|
Allowance for possible loan losses
|
|
(7,646,053
|
)
|
|
|
(6,935,616
|
)
|
|
|
(6,331,806
|
)
|
|
|
Portfolio loans, net
|
|
545,738,963
|
|
|
|
496,496,900
|
|
|
|
438,976,612
|
|
|
|
Mortgage loans held for sale
|
|
6,528,090
|
|
|
|
6,475,619
|
|
|
|
12,073,613
|
|
|
|
Loans, net
|
|
$
|
552,267,053
|
|
|
|
$
|
502,972,519
|
|
|
|
$
|
451,050,225
|
|
|
|
The principal component of
our portfolio loans at June 30, 2008, December 31, 2007, and
June 30, 2007, was mortgage loans, which represented 76.8%, 73.6%, and
76.9%, 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. We follow the
common practice of financial institutions in our 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, we limit the loan-to-value ratio
to 80%. We attempt to maintain a
relatively diversified loan
14
portfolio to help reduce the
risk inherent in concentrations of collateral.
Loans held for sale are consumer real estate loans that are pending sale
to investors.
Allowance for Loan Losses
We have
established an allowance for loan losses through a provision for loan losses
charged to expense on our statement of income.
The allowance for loan losses represents an amount which we believe will
be adequate to absorb probable losses on existing loans that may become
uncollectible. Our judgment as to the
adequacy of the allowance for loan losses is based on a number of assumptions
about future events, which we believe to be reasonable, but which may or may
not prove to be accurate. The evaluation
of the allowance is segregated into general allocations and specific
allocations. For general allocations,
the portfolio is segregated into risk-similar segments for which historical
loss ratios are calculated and adjusted for identified trends or changes in
current portfolio characteristics.
Historical loss ratios are calculated by product type for consumer loans
(installment and revolving), mortgage loans, and commercial loans and may be
adjusted for other risk factors. To allow for modeling error, a range of
probable loss ratios is then derived for each segment. The resulting percentages are then applied to
the dollar amounts of the loans in each segment to arrive at each segments
range of probable loss levels. Certain
nonperforming loans are individually assessed for impairment under SFAS
No. 114 and assigned specific allocations.
Other identified high-risk loans or credit relationships based on
internal risk ratings are also individually assessed and assigned specific
allocations.
The
general allocation also includes a component for probable losses inherent in
the portfolio, based on managements analysis that is not fully captured
elsewhere in the allowance. This
component serves to address the inherent estimation and imprecision risk in the
methodology as well as address managements evaluation of various factors or
conditions not otherwise directly measured in the evaluation of the general and
specific allocations. Such factors
include the current general economic and business conditions; geographic,
collateral, or other concentrations of credit; system, procedural, policy, or
underwriting changes; experience of the lending staff; entry into new markets
or new product offerings; and results from internal and external portfolio
examinations.
Periodically,
we adjust the amount of the allowance based on changing circumstances. We charge recognized losses to the allowance
and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of
loans in future periods will not exceed the allowance for loan losses as
estimated at any point in time or that provisions for loan losses will not be
significant to a particular accounting period.
The
allocation of the allowance to the respective loan segments is an approximation
and not necessarily indicative of future losses or future allocations. The entire allowance is available to absorb
losses occurring in the overall loan portfolio.
In addition, the allowance is subject to examination and adequacy
testing by regulatory agencies, which may consider such factors as the
methodology used to determine adequacy and the size of the allowance relative
to that of peer institutions, and other adequacy tests. Such regulatory agencies could require us to
adjust the allowance based on information available to them at the time of
their examination.
At
June 30, 2008, the allowance for loan losses was $7.6 million, or 1.37% of
total outstanding loans, compared to an allowance for loan losses of $6.3
million, or 1.38% of total outstanding loans, at June 30, 2007, and $6.9
million, or 1.36% of total outstanding loans, at December 31, 2007. During the first six months of 2008, we had
net charge-offs totaling $603,563. During the same period in 2007, we had net
charge-offs totaling $178,246. We had
non-performing loans totaling $13.0 million, $1.4 million, and $2.9 million at
June 30, 2008, June 30, 2007, and December 31, 2007,
respectively. While there can be no
assurances, we do not expect significant losses relating to these nonperforming
loans because we believe that the collateral supporting these loans is
sufficient to cover the outstanding loan balance. Nevertheless, the recent downturn in the real
estate market has resulted in an increase in loan delinquencies, defaults and
foreclosures, and we believe these trends are likely to continue. In some cases, this downturn has resulted in
a significant impairment to the value of our collateral and our ability to sell
the collateral upon foreclosure, and there is a risk that this trend will
continue. The real estate collateral in
each case provides an alternate source of repayment in the event of default by
the borrower and may deteriorate in value during the time the credit is extended. If real estate values continue to decline, it
is also more likely that we would be required to increase our allowance for
loan losses.
The
following table sets forth certain information with respect to our allowance
for loan losses and the composition of charge-offs and recoveries for the six
months ended June 30, 2008, June 30, 2007, and the full year ended
December 31, 2007.
15
|
|
Allowance for Loan Losses
|
|
|
|
Six months
ended June 30,
|
|
Year ended
December 31,
|
|
Six months
ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
|
|
Average total loans outstanding
|
|
$
|
537,617,439
|
|
$
|
458,703,104
|
|
$
|
442,197,589
|
|
Total loans outstanding at period end
|
|
559,913,106
|
|
509,908,135
|
|
457,382,031
|
|
Total nonperforming loans
|
|
13,003,335
|
|
2,902,888
|
|
1,431,960
|
|
|
|
|
|
|
|
|
|
Beginning balance of allowance
|
|
6,935,616
|
|
5,888,052
|
|
5,888,052
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
(615,977
|
)
|
(984,430
|
)
|
(185,241
|
)
|
Total recoveries
|
|
12,414
|
|
36,394
|
|
6,995
|
|
Net loans charged off
|
|
(603,563
|
)
|
(948,036
|
)
|
(178,246
|
)
|
Transfer to mortgage recourse
|
|
|
|
(50,000
|
)
|
(50,000
|
)
|
Provision for loan losses
|
|
1,314,000
|
|
2,045,600
|
|
672,000
|
|
Balance at period end
|
|
$
|
7,646,053
|
|
$
|
6,935,616
|
|
$
|
6,331,806
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average total loans (annualized)
|
|
0.23
|
%
|
0.21
|
%
|
0.08
|
%
|
Allowance as a percent of total loans
|
|
1.37
|
%
|
1.36
|
%
|
1.38
|
%
|
Allowance as a percentage of nonperforming loans
|
|
58.80
|
%
|
238.90
|
%
|
442.20
|
%
|
The
following table sets forth the breakdown of the allowance for loan losses by
loan category and the percentage of loans in each category to gross loans as of
June 30, 2008. We believe that the
allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each
category is not necessarily indicative of further losses and does not restrict
the use of the allowance to absorb losses in any category.
|
|
As of June 30, 2008
|
|
Commercial .
|
|
$
|
1,574,659
|
|
12.4
|
%
|
Real estate construction
|
|
1,083,729
|
|
9.2
|
%
|
Real estate mortgage
|
|
4,868,924
|
|
76.8
|
%
|
Consumer
|
|
78,778
|
|
1.6
|
%
|
Unallocated
|
|
39,963
|
|
|
|
Total allowance for loan losses
|
|
$
|
7,646,053
|
|
100.0
|
%
|
Nonperforming
Assets/Other Real Estate Owned
We discontinue accrual of interest on a loan when we
conclude it is doubtful that we will be able to collect interest from the
borrower. We reach this conclusion by
taking into account factors such as the borrowers financial condition,
economic and business conditions, and the results of our previous collection
efforts. Generally, we will place a
delinquent loan in nonaccrual status when the loan becomes 90 days or more past
due. When we place a loan in nonaccrual
status, we reverse all interest which has been accrued on the loan but remains
unpaid and we deduct this interest from earnings as a reduction of reported
interest income. We do not accrue any
additional interest on the loan balance until we conclude the collection of
both principal and interest is reasonably certain. At June 30, 2008, there were no loans
accruing interest which were 90 days or more past due and we had no
restructured loans.
Nonaccrual loans were
$13,003,335, $1,431,960, and $2,902,888 as of June 30, 2008, June 30,
2007, and December 31, 2007, respectively.
As the economy continues to weaken, some of our borrowers find that they
do not have sufficient cash flow to make payments on time, and we place their
loans on non-accrual status. There are
currently 30 loans that are on non accrual at June 30, 2008. Five of those borrowers amount to 61% of the
total nonaccrual amount.
If the bank takes properties
from a loan work-out, it places it in the other real estate owned asset account
(OREO). The properties that are
received are recorded at the lower of cost or the current value of the loan in
OREO. Any write-down in value, before
being placed into OREO, is included as a charge-off in the allowance for loan
loss. Any subsequent gain or loss,
including expenses related to the sale, is recorded through the income
statement.
At June 30, 2008 we had
$2,365,000 in OREO, compared to $328,775 at June 30, 2007, and $15,000 at
December 31, 2007. As of
June 30, 2008, there are six properties in OREO, one of which is under
contract. The properties in OREO
16
at June 30, 2008 include two small parcels of
undeveloped land, two developed residential lots, and two completed residential
units.
Deposits
Average total deposits were
$508.9 million for the six months ended June 30, 2008, up 17.4% from
$433.4 million during the same period in 2007 and up 15.6% from $440.2 million
at December 31, 2007. Average
interest-bearing deposits were $474.2 million for six months ended
June 30, 2008, up 18.9% from $398.8 million during the same period of 2007
and up 17.4% from $404.1 million at December 31, 2007.
The
following table sets forth our deposits by category as of June 30, 2008,
June 30, 2007, and December 31, 2007.
|
|
Deposits
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
June 30, 2007
|
|
|
|
Amount
|
|
Percent
of
Deposits
|
|
Amount
|
|
Percent
of
Deposits
|
|
Amount
|
|
Percent of
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposit accounts
|
|
$
|
37,345,807
|
|
7.0
|
%
|
$
|
33,138,936
|
|
7.1
|
%
|
$
|
37,320,198
|
|
8.1
|
%
|
Interest bearing checking accounts
|
|
28,342,410
|
|
5.3
|
%
|
20,377,754
|
|
4.4
|
%
|
22,228,924
|
|
4.9
|
%
|
Money market accounts
|
|
130,971,973
|
|
24.6
|
%
|
103,821,154
|
|
22.4
|
%
|
109,117,393
|
|
23.8
|
%
|
Savings accounts
|
|
3,265,704
|
|
0.6
|
%
|
2,988,881
|
|
0.6
|
%
|
2,528,859
|
|
0.6
|
%
|
Time deposits less than $100,000
|
|
198,409,238
|
|
37.2
|
%
|
161,038,254
|
|
34.7
|
%
|
170,679,000
|
|
37.2
|
%
|
Time deposits of $100,000 or more
|
|
134,937,892
|
|
25.3
|
%
|
142,833,366
|
|
30.8
|
%
|
116,396,262
|
|
25.4
|
%
|
Total deposits
|
|
$
|
533,273,024
|
|
100.0
|
%
|
$
|
464,198,345
|
|
100.00
|
%
|
$
|
458,270,636
|
|
100.00
|
%
|
Deposit growth was
attributable to brokered funds, internal growth, and the generation of new
deposit accounts due primarily to special promotions and increased advertising.
Core deposits, which exclude certificates of deposit
of $100,000 or more, provide a relatively stable funding source for our loan
portfolio and other earning assets. Our
core deposits were $398.3 million at June 30, 2008, compared to $341.9
million at June 30, 2007, and $321.4 million at December 31,
2007. Our brokered deposits were $75.6
million as of June 30, 2008, $39.6 million as of June 30, 2007, and
$46.1 million as of December 31, 2007.
We expect a stable base of deposits to be our primary source of funding
to meet both our short-term and long-term liquidity needs. Core deposits as a percentage of total
deposits were 74.7% at June 30, 2008, 74.6% at June 30, 2007, and
69.2% at December 31, 2007. Our loan-to-deposit ratio was 105.0% at
June 30, 2008 versus 99.8% at June 30, 2007 and 109.8% at
December 31, 2007. The average loan-to-deposit
ratio was 105.7% during the first six months of 2008, 102.0% during the same
period of 2007, and 104.2% at December 31, 2007.
Advances from Federal Home Loan
Bank
In
addition to deposits, we obtained funds from the FHLB to help fund our loan
growth. Average borrowings from the FHLB
were $55.0 million during the second quarter of 2008 and 2007 and $48.7 million
for the year ended December 31, 2007.
The following table reflects the current borrowing terms.
FHLB Description
|
|
Balance
|
|
Current
Rate
|
|
Maturity
Date
|
|
Option
Date
|
|
Fixed rate
|
|
$
|
10,000,000
|
|
5.36
|
%
|
06/04/2010
|
|
|
|
Fixed Rate Hybrid
|
|
5,000,000
|
|
4.76
|
%
|
10/21/2010
|
|
|
|
Convertible
|
|
7,500,000
|
|
4.51
|
%
|
11/23/2010
|
|
11/24/08
|
|
Convertible
|
|
5,000,000
|
|
3.68
|
%
|
07/13/2015
|
|
7/14/08
|
|
Convertible
|
|
5,000,000
|
|
4.06
|
%
|
09/29/2015
|
|
9/29/09
|
|
Convertible
|
|
5,000,000
|
|
4.16
|
%
|
03/13/2017
|
|
3/13/09
|
|
Convertible
|
|
7,500,000
|
|
4.39
|
%
|
04/13/2017
|
|
4/13/09
|
|
Prime Based Advance
|
|
10,000,000
|
|
2.16
|
%
|
09/19/2011
|
|
|
|
|
|
$
|
55,000,000
|
|
|
|
|
|
|
|
17
Junior Subordinated Debentures
The average and period end balances of the floating rate trust preferred securities through BFNB Trust I and BFNB Trust II (the Trusts) totaled $10.3 million for all periods reported. These trust preferred securities are reported on our consolidated balance sheet as junior subordinated debentures. The trust preferred securities accrue and pay distributions annually at a rate per annum equal to the six month LIBOR plus 270 and 190 basis points, respectively, which was 5.62% and 4.68% at June 30, 2008. The distribution rate payable on these securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the trust preferred securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity dates of May 27, 2034 and March 30, 2035, respectively. The Company has no current intention to exercise its right to defer payments of interest on the trust preferred securities. The Company has the right to redeem the trust preferred securities, in whole or in part, on or after May 27, 2009 and March 30, 2010, respectively. The trust preferred securities can be redeemed prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.
Capital Resources
At both the holding company
and bank level, we are subject to various regulatory capital requirements
administered by the federal banking agencies.
To be considered well-capitalized, we must maintain total risk-based
capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of
at least 5%.
At June 30, 2008, our
total shareholders equity was $53.1 million ($54.8 million at the bank
level). At June 30, 2008, our Tier
1 capital ratio was 10.32% (10.84% at the bank level), our total risk-based
capital ratio was 11.57% (12.10% at the bank level), and our Tier 1 leverage
ratio was 8.28% (8.68% at the bank level).
At June 30, 2008 the bank was considered well capitalized and the
holding company met or exceeded its applicable regulatory capital requirements.
Liquidity Management
Liquidity represents the ability of a company to
convert assets into cash or cash equivalents without significant loss, and the
ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our
sources and uses of funds in order to meet our day-to-day cash flow
requirements while maximizing profits.
Liquidity management is made more complicated because different balance
sheet components are subject to varying degrees of management control. For example, the timing of maturities of our
investment portfolio is fairly predictable and subject to a high degree of
control at the time investment decisions are made. However, net deposit inflows and outflows are
far less predictable and are not subject to the same degree of control.
Our primary sources of
liquidity are deposits, scheduled repayments on our loans, and interest on and
maturities of our investments. We plan
to meet our future cash needs through the liquidation of temporary investments
and the generation of deposits. All of
our securities have been classified as available for sale. Occasionally, we might sell investment securities
in connection with the management of our interest sensitivity gap or to manage
cash availability. We may also utilize
our cash and due from banks, security repurchase agreements, and federal funds
sold to meet liquidity requirements as needed.
In addition, we have the ability, on a short-term basis, to purchase
federal funds from other financial institutions. Presently, we have made arrangements with
commercial banks for short-term unsecured advances of up to $31.8 million. We maintain a secured line of credit in the
amount of $10.0 million with our primary correspondent. We also have a line of credit with the FHLB
to borrow based on our 1 to 4 family loans, resulting in an availability of up
to $66.5 million at June 30, 2008.
The FHLB has approved borrowings up to 15% of the banks total assets
less advances outstanding. The
borrowings are available by pledging additional collateral and purchasing FHLB
stock. At June 30, 2008, we had
borrowed $55.0 million on this line of credit.
We believe that our existing stable base of core deposits, our bond
portfolio, borrowings from the FHLB, and short-term federal funds lines will
enable us to successfully meet our liquidity.
Interest
Rate Sensitivity
A
significant portion of our assets and liabilities are monetary in nature, and
consequently they are very sensitive to changes in interest rates. This interest rate risk is our primary market
risk exposure, and it can have a significant effect on our net interest income
and cash flows. We review our exposure
to market risk on a regular basis, and we manage the pricing and maturity of
our assets and liabilities to diminish the potential adverse impact that
changes in interest rates could have on our net interest income.
We actively monitor and
manage our interest rate risk exposure principally by measuring our interest
sensitivity gap, which is the positive or negative dollar difference between
assets and liabilities that are subject to interest rate repricing within a
given period of time. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities, and it is considered
negative when the amount of interest-rate sensitive liabilities exceeds the
amount of interest-rate sensitive assets.
We generally would benefit from increasing market
18
interest rates when we have an asset-sensitive, or a positive, interest
rate gap and we would generally benefit from decreasing market interest rates
when we have liability-sensitive, or a negative, interest rate gap. When measured on a gap basis, we are
liability-sensitive over the cumulative one-year time frame and asset-sensitive
after one year as of June 30, 2008.
However, our gap analysis is not a precise indicator of our 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. For example, rates paid on a substantial
portion of core deposits may change contractually within a relatively short
time frame, but we believe those rates are significantly less interest-sensitive
than market-based rates such as those paid on noncore deposits.
Net interest income is also
affected by other significant factors, including changes in the volume and mix
of interest-earning assets and interest-bearing liabilities. We perform asset/liability modeling to assess
the impact of varying interest rates and the impact that balance sheet mix
assumptions will have on net interest income.
We attempt to manage interest rate sensitivity 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 that reprice in the same time interval helps us to
hedge risks and minimize the impact on net interest income of rising or falling
interest rates. We evaluate interest
sensitivity risk and then formulate guidelines regarding asset generation and
repricing, funding sources and pricing, and off-balance sheet commitments in
order to decrease interest rate sensitivity risk.
Off Balance Sheet Risk
Through
the operations of our bank, we have made contractual commitments to extend
credit in the ordinary course of our business activities. These commitments are legally binding
agreements to lend money to our customers at predetermined interest rates for a
specified period of time. We evaluate
each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by us upon extension of credit, is based on our credit evaluation of
the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate.
We manage the credit risk on these commitments by subjecting them to
normal underwriting and risk management processes.
At June 30, 2008, the
bank had issued unused commitments to extend credit of $47.5 million through
various types of lending arrangements.
Past experience indicates that many of these commitments to extend credit
will expire unused. We believe that we
have adequate sources of liquidity to fund commitments that are drawn upon by
the borrowers.
In
addition to commitments to extend credit, we also issue standby letters of
credit which are assurances to a third party that if our customer fails to meet
its contractual obligation to the third party the bank will honor those
commitments up to the letter of credit issued.
Standby letters of credit totaled $10.9 million at June 30, 2008. Past experience indicates that many of these
standby letters of credit will expire unused.
However, through our various sources of liquidity, we believe that we
will have the necessary resources to meet these obligations should the need
arise.
Except as disclosed in this
report, we are not involved in off-balance sheet contractual relationships,
unconsolidated related entities that have off-balance sheet arrangements or
transactions that could result in liquidity needs or other commitments or
significantly impact earnings.
Impact
of Inflation
The effect of relative purchasing
power over time due to inflation has not been taken into account in our
consolidated financial statements.
Rather, our financial statements have been generally prepared on an
historical cost basis in accordance with generally accepted accounting
principles.
Unlike most industrial companies, our assets and
liabilities are primarily monetary in nature.
Therefore, the effect of changes in interest rates will have a more
significant impact on our performance than will the effect of changing prices
and inflation in general. In addition,
interest rates may generally increase as the rate of inflation increases,
although not necessarily in the same magnitude.
As discussed previously, we seek to manage the relationships between
interest sensitive assets and liabilities in order to protect against wide rate
fluctuations, including those resulting from inflation.
19
Recently
Issued Accounting Standards
The
following is a summary of recent authoritative pronouncements that could impact
the accounting, reporting, and/or disclosure of financial information by us.
In
December 2007, the FASB issued SFAS No. 141(R), Business
Combinations, (SFAS 141(R)) which replaces SFAS 141. SFAS 141(R) establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures goodwill acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. FAS 141(R) is effective for acquisitions by the
Company taking place on or after January 1, 2009. Early adoption is
prohibited. Accordingly, a calendar year-end company is required to record and
disclose business combinations following existing accounting guidance until
January 1, 2009. The Company will assess the impact of SFAS 141(R) if
and when a future acquisition occurs.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB
No. 51 (SFAS 160). SFAS 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Before this statement, limited guidance
existed for reporting noncontrolling interests (minority interest). As a
result, diversity in practice exists. In some cases minority interest is
reported as a liability and in others it is reported in the mezzanine section
between liabilities and equity. Specifically, SFAS 160 requires the recognition
of a noncontrolling interest (minority interest) as equity in the consolidated
financials statements and separate from the parents equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parents ownership interest in a subsidiary that do not
result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interests. SFAS 160 is effective for the Company on
January 1, 2009. Earlier adoption
is prohibited. At this time, the Company believes that upon adoption, SFAS 160
will not materially impact on its financial position, results of operations or
cash flows.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires enhanced disclosures about
an entitys derivative and hedging activities and thereby improving the
transparency of financial reporting. It
is intended to enhance the current disclosure framework in SFAS 133 by
requiring that objectives for using derivative instruments be disclosed in terms
of underlying risk and accounting designation. This disclosure better conveys
the purpose of derivative use in terms of the risks that the entity is
intending to manage. SFAS 161 is effective for the Company on January 1,
2009. This pronouncement does not impact accounting measurements but will
result in additional disclosures if the Company is involved in material
derivative and hedging activities at that time.
In
February 2008, the FASB issued FASB Staff Position No. 140-3,
Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions (FSP 140-3). This FSP provides guidance on accounting for
a transfer of a financial asset and the transferors repurchase financing of
the asset. This FSP presumes that an initial transfer of a financial
asset and a repurchase financing are considered part of the same arrangement
(linked transaction) under SFAS No. 140. However, if certain criteria are
met, the initial transfer and repurchase financing are not evaluated as a
linked transaction and are evaluated separately under Statement 140. FSP
140-3 will be effective for financial statements issued for fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years and earlier application is not permitted. Accordingly, this FSP is
effective for the Company on January 1, 2009. The Company is
currently evaluating the impact, if any, the adoption of FSP 140-3 will have on
its financial position, results of operations and cash flows.
In
April 2008, the FASB issued FASB Staff Position No. 142-3,
Determination of the Useful Life of Intangible Assets (FSP 142-3). This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R), Business Combinations,
and
other U.S. generally accepted accounting principles. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years and early adoption is
prohibited. Accordingly, this FSP is
effective for the Company on January 1, 2009. The Company does not believe the adoption of
FSP 142-3 will have a material impact on its financial position, results of
operations, or cash flows.
20
In
May, 2008, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 162, The Hierarchy of
Generally Accepted Accounting Principles, (SFAS No. 162). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).
SFAS No. 162 will be effective 60 days following the SECs approval
of the Public Company Accounting Oversight Boards amendments to AU
Section 411,
The Meaning of
Present
Fairly in Conformity With Generally Accepted Accounting Principles. The FASB has stated that it does not expect
SFAS No. 162 will result in a change in current practice. The application
of SFAS No. 162 will have no effect on the Companys financial position,
results of operations or cash flows.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Companys financial position, results of operations or cash flows.
Item
3. Quantitative and Qualitative
Disclosures about Market Risk
.
Market risk is the risk of
loss from adverse changes in market prices and rates. Our market risk arises principally from
interest rate risk inherent in our lending, deposit, and borrowing
activities. Management actively monitors
and manages its interest rate risk exposure.
In addition to other risks that we manage in the normal course of
business, such as credit quality and liquidity, management considers interest
rate risk to be a significant market risk that could potentially have a
material effect on our financial condition and results of operations. The information contained in Item 2 in the
section captioned Interest Rate Sensitivity is incorporated herein by
reference. Other types of market risks,
such as foreign currency risk and commodity price risk, do not arise in the
normal course of our business activities.
The primary objective of
asset and liability management is to manage interest rate risk and achieve
reasonable stability in net interest income throughout interest rate
cycles. This is achieved by maintaining
the proper balance of rate-sensitive earning assets and rate-sensitive
interest-bearing liabilities. The
relationship of rate-sensitive earning assets to rate-sensitive
interest-bearing liabilities is the principal factor in projecting the effect
that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and liabilities are
those that can be repriced to current market rates within a relatively short
time period. Management monitors the rate sensitivity of earning assets and
interest-bearing liabilities over the entire life of these instruments, but
places particular emphasis on the next twelve months. At June 30, 2008, on a cumulative basis
through 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by
$30.4 million. This liability-sensitive
position is largely attributable to short-term certificates of deposit, money
market accounts and interest bearing checking accounts, which totaled $433.5
million at June 30, 2008.
Item 4. Controls and Procedures
.
As of the end of the period
covered by this report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of June 30, 2008. There have been no significant changes in our
internal controls over financial reporting during the fiscal quarter ended
June 30, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
The design of any system of controls and procedures
is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal
proceedings to which the company or any of our subsidiaries is a party or of
which any of our property is the subject.
Item 1A. Risk Factors.
Other than as described
elsewhere in this Form 10-Q, there
were no material changes from the risk factors
presented
in our annual report on Form 10-K for the year ended December 31,
2007.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior
Securities.
Not applicable.
Item
4. Submission of Matters to a Vote of Security Holders
On April 21, 2008, Beach First National Bancshares, Inc. held
its 2008 Annual Meeting of Shareholders.
The only matter submitted to shareholders at the meeting was the
election of the Class I directors.
The following describes the matter voted upon at the annual meeting and
sets forth the number of votes cast for and those withheld (there were no
broker non-votes or abstentions). The
results of the 2008 Annual Meeting of Shareholders were as follows:
Proposal #1 Election of Class I Directors
|
|
Voting Shares in
Favor
|
|
Withheld
|
|
|
|
#
|
|
%
|
|
Authority
|
|
Raymond E. Cleary II, DDS
|
|
4,153,008
|
|
85.7
|
|
65,817
|
|
Thomas P. Anderson
|
|
4,150,583
|
|
85.7
|
|
68,242
|
|
Joe N. Jarrett, Jr., MD
|
|
4,153,233
|
|
85.7
|
|
65,592
|
|
Richard E. Lester
|
|
4,152,783
|
|
85.7
|
|
66,042
|
|
Don J. Smith
|
|
4,153,233
|
|
85.7
|
|
65,592
|
|
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibit
|
|
Description
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification
of the Principal Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification
of the Principal Financial Officer
|
|
|
|
32
|
|
Section 1350
Certifications
|
22
SIGNATURES
In accordance with the requirements of 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 8,
2008
|
|
|
By:
|
/s/ Walter E. Standish, III
|
|
|
|
|
|
Walter E. Standish, III
|
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
August 8,
2008
|
|
|
By:
|
/s/ Gary S. Austin
|
|
|
|
|
|
Gary S. Austin
|
|
|
|
|
|
Chief Financial and Principal Accounting Officer
|
23
INDEX TO EXHIBITS
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification
of the Principal Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification
of the Principal Financial Officer
|
|
|
|
32
|
|
Section 1350
Certifications
|
24
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