FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-25999
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WAKE FOREST BANCSHARES, INC.
----------------------------
(Exact name of small business issuer as specified in its charter)
United States of America 56-2131079
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
302 South Brooks Street
Wake Forest, North Carolina 27587
---------------------------------
(Address of principal executive offices)
(919)-556-5146
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(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 1, 2002 there were
issued and outstanding 1,149,140 shares of the Issuer's common stock, $.01 par
value
Transitional Small Business Disclosure Format: Yes No X
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WAKE FOREST BANCSHARES, INC.
CONTENTS
Item 1. Financial Statements
Consolidated statements of financial condition at June 30, 2002 (unaudited)
and September 30, 2001 1
Consolidated statements of income for the three months ended June 30, 2002
and June 30, 2001 (unaudited) 2
Consolidated statements of income for the nine months ended June 30, 2002
and June 30, 2001 (unaudited) 3
Consolidated statements of comprehensive income for the three and nine months ended
June 30, 2002 and June 30, 2001 (unaudited) 4 Consolidated statements of
cash flows for the nine months ended
June 30, 2002 and June 30, 2001 (unaudited) 5
Notes to consolidated financial statements (unaudited) 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 -12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14 - 15
Signatures 16
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2002 AND SEPTEMBER 30, 2001
June 30, September 30,
ASSETS 2002 2001
-------------- --------------
(Unaudited)
Cash and short-term cash investments $ 15,244,900 $ 15,885,100
Investment securities:
Available for sale, at estimated market value 685,400 1,510,100
FHLB stock 330,400 330,400
Loans receivable, net 75,627,350 74,632,400
Accrued interest receivable 78,900 86,100
Foreclosed assets, net 533,450 391,250
Property and equipment, net 405,750 423,650
Prepaid expenses and other assets 38,750 77,500
-------------- -------------
Total Assets $ 92,944,900 $ 93,336,500
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 76,774,800 $ 77,220,600
Accrued expenses and other liabilities 618,750 551,400
Dividends payable 138,000 138,600
Note payable- ESOP 44,150 88,300
Deferred income taxes - 176,550
Redeemable common stock held by the ESOP
net of unearned ESOP shares 648,000 612,100
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Total liabilities 78,223,700 78,787,550
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Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued - -
Common stock, par value $ .01, authorized 5,000,000 shares, issued 1,216,612 and
1,215,862 at June 30, 2002 and September 30, 2001 12,150 12,150
Additional paid-in capital 5,054,200 4,996,900
Accumulated other comprehensive income 418,200 616,850
Retained earnings, substantially restricted 10,139,350 9,733,750
Less: Common stock in treasury, at cost (902,700) (810,700)
-------------- -------------
Total stockholders' equity 14,721,200 14,548,950
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Total liabilities and stockholders' equity $ 92,944,900 $ 93,336,500
============== =============
See Notes to Consolidated Financial Statements.
1
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
----------------- -----------------
Interest and dividend income:
Loans $ 1,522,200 $ 1,757,600
Investment securities 7,050 38,200
Short-term cash investments 58,100 163,200
--------------- ---------------
Total interest income 1,587,350 1,959,000
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Interest expense:
Interest on deposits 784,400 1,124,050
Interest on ESOP debt 700 2,150
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Total interest expense 785,100 1,126,200
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Net interest income before provision for loan losses 802,250 832,800
Provision for loan losses (32,500) (10,500)
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Net interest income after provision for loan losses 769,750 822,300
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Noninterest income:
Service charges and fees 14,000 18,600
Gain on sale of investments 77,900 -
Other 200 450
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92,100 19,050
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Noninterest expense:
Compensation and benefits 186,150 241,350
Occupancy 13,150 10,250
Federal insurance and operating assessments 11,050 10,300
Data processing and outside service fees 34,600 27,000
REO provisions and expense 76,950 2,200
Other operating expense 69,850 64,950
--------------- ---------------
391,750 356,050
--------------- ---------------
Income before income taxes 470,100 485,300
Income taxes 179,250 180,650
--------------- ---------------
Net income $ 290,850 $ 304,650
================ ================
Basic earnings per share $ 0.25 $ $ 0.27
Diluted earnings per share $ 0.25 $ $ 0.27
Dividends paid per share $ 0.12 $ $ 0.12
See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
----------------- -----------------
Interest and dividend income:
Loans $ 4,735,700 $ 5,184,250
Investment securities 27,450 116,250
Short-term cash investments 219,150 528,200
----------------- -----------------
Total interest income 4,982,300 5,828,700
----------------- -----------------
Interest on deposits 2,685,650 3,256,700
Interest on ESOP debt 2,700 8,500
----------------- -----------------
Total interest expense 2,688,350 3,265,200
----------------- -----------------
Net interest income before provision for loan losses 2,293,950 2,563,500
Provision for loan losses (114,250) (28,500)
----------------- -----------------
Net interest income after provision for loan losses 2,179,700 2,535,000
----------------- -----------------
Noninterest income:
Service charges and fees 45,400 46,800
Gain on sale of investments 273,450 -
Other 9,750 8,850
----------------- -----------------
328,600 55,650
----------------- -----------------
Noninterest expense:
Compensation and benefits 598,900 756,750
Occupancy 34,200 31,100
Federal insurance and operating assessments 33,100 30,000
Data processing and outside service fees 90,600 87,300
REO provisions and expense 222,950 2,850
Other operating expense 213,400 205,850
----------------- -----------------
1,193,150 1,113,850
----------------- -----------------
Income before income taxes 1,315,150 1,476,800
Income taxes 504,600 546,100
----------------- -----------------
Net income $ 810,550 $ 930,700
================= =================
Basic earnings per share $ 0.70 $ 0.81
Diluted earnings per share $ 0.70 $ 0.81
Dividends paid per share $ 0.36 $ 0.36
See Notes to Consolidated Financial Statements.
3
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THREE MONTHS ENDED JUNE 30: 2002 2001
----------------- -----------------
Net income $ 290,850 $ 304,650
----------------- -----------------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (13,300) 48,150
Less: reclassification adjustments for gains included
in net income (48,300) -
----------------- -----------------
Other comprehensive income (61,600) 48,150
----------------- -----------------
Comprehensive income $ 229,250 $ 352,800
================= =================
2002 2001
FOR NINE MONTHS ENDED JUNE 30: ----------------- -----------------
Net income $ 810,550 $ 930,700
----------------- -----------------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (29,100) 171,000
Less: reclassification adjustments for gains included
in net income (169,550) -
----------------- -----------------
Other comprehensive income (198,650) 171,000
----------------- -----------------
Comprehensive income $ 611,900 $ 1,101,700
================= =================
See Notes to Consolidated Financial Statements.
4
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
------------------- ------------------
Net income $ 810,550 $ 930,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 24,950 25,400
ESOP contribution expense charged to paid-in capital 28,850 14,000
Provision for loan losses 114,250 28,500
Provision for foreclosed assets 206,000 -
Gain on sale of investments (273,450) -
Gain on sale of foreclosed assets, net (8,900 -
Deferred income taxes (54,800) (35,050)
Amortization of unearned ESOP shares 44,150 44,150
Amortization of unearned RRP shares 18,900 42,550
Changes in assets and liabilities:
Prepaid expenses and other assets 38,750 (8,250)
Accrued interest receivable 7,200 16,500
Accrued expenses and other liabilities 67,350 165,000
------------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,023,800 1,223,500
------------------- ------------------
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable (2,099,200) (2,533,850)
Proceeds from sale of foreclosed assets 672,400 272,100
Purchase of FHLB stock - (39,700)
Capital additions to foreclosed assets (21,700) -
Proceeds from sale of available for sale investment securities 277,700 -
Maturity of available for sale investment securities 500,000 250,000
Purchase of property and equipment (7,050) (700)
------------------- ------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (677,850) (2,052,150)
------------------- ------------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits (445,800) 10,241,200
Principal payments on ESOP debt (44,150) (44,150)
Proceeds from stock options exercised 9,550 -
Repurchase of common stock for the Treasury (92,000) (197,750)
Dividends paid (413,750) (416,100)
------------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (986,150) 9,583,200
------------------- ------------------
Net increase in cash and cash equivalents (640,200) 8,754,550
Cash and cash equivalents:
Beginning 15,885,100 6,735,850
------------------- ------------------
Ending $ 15,244,900 $ 15,490,400
=================== ==================
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 2,704,600 $ 3,277,000
=================== ==================
Cash payment of income taxes $ 500,000 $ 587,000
=================== ==================
Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ 35,900 $ 175,100
=================== ==================
Transfer of loans to foreclosed assets $ 990,000 $ 762,650
=================== ==================
Incr. (decr.) in unrealized gain on investment securities $ (47,000) $ 171,000
=================== ==================
See Notes to Consolidated Finanical Statements.
5
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
Wake Forest Bancshares, Inc. (the "Company") is located in Wake Forest, North
Carolina and is the parent stock holding company of Wake Forest Federal Savings
and Loan Association (the "Association" or "Wake Forest Federal"), it's only
subsidiary. The Company conducts no business other than holding all of the stock
in the Association, investing dividends received from the Association,
repurchasing its common stock from time to time, and distributing dividends on
its common stock to its shareholders. The Association's principal activities
consist of obtaining deposits and providing mortgage credit to customers in its
primary market area, the counties of Wake and Franklin, North Carolina. The
Company's and the Association's primary regulator is the Office of Thrift
Supervision (OTS) and its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).
NOTE 2. ORGANIZATIONAL STRUCTURE
The Company is majority owned by the Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company. Members of the MHC consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the MHC for as long as it remains in mutual form. Initially, the
MHC's principal assets consisted of 635,000 shares of the Association's common
stock (now converted to the Company's common stock) and $100,000 in cash
received from the Association as initial capital. The MHC has since received its
proportional share of dividends declared and paid by the Association (now the
Company), and such funds are invested in deposits with the Association. The MHC,
which by law must own in excess of 50% of the stock of the Company, currently
has an ownership interest of 55.3% of the Company. The mutual holding company is
registered as a savings and loan holding company and is subject to regulation,
examination, and supervision by the OTS.
The Company was formed on May 7, 1999 solely for the purpose of becoming a
savings and loan holding company and had no prior operating history. The
formation of the Company had no impact on the operations of the Association or
the MHC. The Association continues to operate at the same location, with the
same management, and subject to all the rights, obligations and liabilities of
the Association which existed immediately prior to the formation of the Company.
The Board of Directors of the Association capitalized the Company with $100,000.
Future capitalization of the Company will depend upon dividends declared by the
Association based on future earnings, or the raising of additional capital by
the Company through a future issuance of securities, debt or by other means. The
Board of Directors of the Company has no present plans or intentions with
respect to any future issuance of securities or debt at this time.
The establishment of the Company was treated similar to a pooling of interests
for accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and expenses of the Company immediately following its
formation were substantially the same as those of the Association immediately
prior to the formation, all of which are shown on the Company's books at their
historical recorded values.
6
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (except for the
consolidated statement of financial condition at September 30, 2001, which is
audited) have been prepared in accordance with generally accepted accounting
principles for interim financial information and Regulation S-B. Accordingly,
they do not include all of the information required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (none of which were other than normal recurring
accruals) necessary for a fair presentation of the financial position and
results of operations for the periods presented have been included. The results
of operations for the three and nine month periods ended June 30, 2002 are not
necessarily indicative of the results of operations that may be expected for the
Company's fiscal year ending September 30, 2002. The accounting policies
followed are as set forth in Note 1 of the Notes to Consolidated Financial
Statements in the Company's September 30, 2001 Annual Report to Stockholders.
NOTE 4. DIVIDENDS DECLARED
On June 17, 2002, the Board of Directors of the Company declared a dividend of
$0.12 a share for stockholders of record as of June 28, 2002 and payable on July
10, 2002. The dividends declared were accrued and reported as dividends payable
in the June 30, 2002 Consolidated Statement of Financial Condition. Wake Forest
Bancorp, Inc., the mutual holding company, did not waive the receipt of
dividends declared by the Company.
NOTE 5. EARNINGS PER SHARE
Basic earnings per share amounts are based on the weighted average shares of
common stock outstanding. Diluted earnings per share assumes the conversion,
exercise or issuance of all potential common stock instruments such as options,
warrants and convertible securities, unless the effect is to reduce a loss or
increase earnings per share. This presentation has been adopted for all periods
presented. There were no adjustments required to net income for any period in
the computation of diluted earnings per share. The reconciliation of weighted
average shares outstanding for the computation of basic and diluted earnings per
share for the three and nine month periods ended June 30, 2002 and 2001 is
presented below.
FOR THE THREE MONTHS ENDED JUNE 30: 2002 2001
----------------- -----------------
Weighted average shares outstanding for Basic EPS 1,146,881 1,140,692
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 8,426 3,456
----------------- -----------------
Weighted average shares outstanding for diluted EPS 1,155,307 1,144,148
================= =================
2002 2001
FOR THE NINE MONTHS ENDED JUNE 30: ----------------- -----------------
Weighted average shares outstanding for Basic EPS 1,146,534 1,145,148
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 8,168 656
----------------- -----------------
Weighted average shares outstanding for diluted EPS 1,154,702 1,145,804
================= =================
7
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND JUNE 30, 2002:
Total assets decreased by $391,600 to $92.9 million at June 30, 2002 from $93.3
million at September 30, 2001. Total assets decreased during the nine months
ended June 30, 2002 primarily due to a decrease in deposits of approximately
$445,800 during the period. The decrease in deposits contributed to a decrease
in cash and short term cash investments of approximately $640,200 for the nine
month period.
Net loans receivable increased by $994,950 to $75.6 million at June 30, 2002
from $74.6 million at September 30, 2001. Assuming interest rates remain fairly
stable and local economic conditions improve, management believes that its loan
portfolio has potential for future growth because the Company operates in
lending markets that have had sustained strong loan demand over the past several
years. However, there can be no assurances that such loan demand can or will
continue.
Investment securities decreased by $824,700 to $1.0 million at June 30, 2002
from $1.8 million at September 30, 2001. The decrease is attributable to
maturing investments, an approximately $278,000 sale of FHLMC stock, and
management's decision to remain liquid and not to invest in a market that is at
historically low interest rates. At June 30, 2002, the Company's investment
portfolio, which consisted of FHLB stock and FHLMC stock, had approximately
$418,000 in net unrealized gains.
The Company had no borrowings outstanding during the period other than the loan
incurred by the ESOP for purchase of 41,200 shares of the Company's common
stock. The ESOP borrowed $412,000 for its purchase of stock from an outside
financial institution on April 3, 1996. During the current nine month period,
the Company made principal payments totaling $44,150 plus interest on the ESOP
note, reducing the outstanding balance of the note to $44,150 at June 30, 2002.
The Company is committed to making retirement plan contributions sufficient to
amortize the debt over its seven year term, and as such, has reported the debt
on its balance sheet. The Company recorded retirement plan expense of
approximately $74,700 during the nine month period ended June 30, 2002. The
Company also has recorded a liability of 648,000 at June 30, 2002 for the ESOP
put option.
The Company has an ongoing stock repurchase program authorizing management to
repurchase shares of its outstanding common stock. The repurchases are made
through registered broker-dealers from shareholders in open market purchases at
the discretion of management. The Company intends to hold the shares repurchased
as treasury shares, and may utilize such shares to fund stock benefit plans or
for any other general corporate purposes permitted by applicable law. At June
30, 2002 the Company had repurchased 66,772 shares of its common stock. The
program continues until completed or terminated by the Board of Directors.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND JUNE 30, 2002
(CONTINUED):
Retained earnings increased by $405,600 to $10.1 million at June 30, 2002 from
$9.7 million at September 30, 2001. The increase is primarily attributable to
the Company's earnings of $810,550 during the nine month period ended June 30,
2002, reduced by $413,150 in dividends declared during the period. At June 30,
2002, the Company's capital amounted to $14.7 million, which as a percentage of
total assets was 15.84%, and was considerably in excess of the regulatory
capital requirements at such date.
ASSET QUALITY:
The Company's level of non-performing loans, defined as loans past due 90 days
or more, as a percentage of loans outstanding, was 0.73% at June 30, 2002 and
1.35% at September 30, 2001. The Company's non-performing loans at June 30, 2002
amounted to $548,495 and consisted of five residential mortgage loans. Two of
the loans are to the same borrower. The Company believes that it has sufficient
allowances established to cover any loss associated with these loans. Based on
management's analysis of the adequacy of its allowances, $32,500 and $114,250 in
provisions for additional loan loss allowances were made during the three and
nine month periods ended June 30, 2002, respectively. The Company's loan loss
allowance was $433,250 at June 30, 2002.
At June 30, 2002, the Company had four single-family residential properties
acquired in foreclosure amounting to $533,450, net of recorded allowances. All
four of the properties were partially completed homes to the same borrower at
date of foreclosure. One property has been subsequently sold and the other three
are being readied for market. The Company believes that the properties have been
adequately reserved at June 30, 2002 and no further loss is expected.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
2002 AND 2001:
GENERAL. Net income for the three month period ended June 30, 2002 was $290,850
($0.25 per share) as compared to $304,650 ($0.27 per share) earned during the
same quarter in 2001. Net income for the nine month period ended June 30, 2002
was $810,550 ($0.70 per share) as compared to $930,700 ($0.81 per share) earned
during the same period in 2001. As discussed below, decreases in net interest
income between the comparable periods was primarily responsible for the changes
in net income. Increases in non-interest income and non-interest expense during
the current periods in 2002 were similar in scope and did significantly impact
earnings.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
2002 AND 2001 (CONTINUED):
INTEREST INCOME. Interest income decreased by $371,650 from $1,959,000 for the
three months ended June 30, 2001 to $1,587,350 for the three months ended June
30, 2002. The decline in interest income resulted primarily from a 1.67%
decrease in the average yield on interest earning assets between the quarters.
Interest income decreased by $846,400 from $5,828,700 for the nine months ended
June 30, 2001 to $4,982,300 for the nine months ended June 30, 2002. The decline
in interest income resulted primarily from a 1.77% basis point decrease in the
yield on interest-earning assets between the periods. The Company's yield on
interest earning assets was 8.08% and 8.42% for the quarter and nine month
period ended June 30, 2001; respectively, and 6.41% and 6.65% for the quarter
and nine month period ended June 30, 2002; respectively. The changes in yield
occurred primarily due to fluctuations in market rates outstanding during the
periods.
INTEREST EXPENSE. Interest expense decreased by $341,100 from $1,126,200 for the
three months ended June 30, 2001 to $785,100 for the three months ended June 30,
2002. Interest expense decreased by $576,850 from $3,265,200 for the nine months
ended June 30, 2001 to $2,688,350 for the nine months ended June 30, 2002. The
decreases were primarily the result of a decrease in the Company's cost of funds
between the periods, which decreased by 1.84% and 1.43% for the three and nine
month periods ended June 30, 2002 as compared to the same periods a year
earlier. As a result of overall higher market rates, the Company's cost of funds
decreased from 5.81% and 5.91% for the quarter and nine month period ended June
30, 2001; respectively, to 3.97% and 4.48% for the quarter and nine month period
ended June 30, 2002, respectively.
NET INTEREST INCOME. Net interest income decreased by $30,550 from $832,800 for
the three months ended June 30, 2001 to $802,250 for the three months ended June
30, 2002. Net interest income decreased by $269,550 from $2,563,500 for the nine
months ended June 30, 2001 to $2,293,950 for the nine months ended June 30,
2002. As explained above, the decrease in net interest income resulted primarily
from a larger decrease in the yield on interest earning assets than the
associated decline in the Company's cost of funds between the periods. The
Company's interest rate margin was 3.53% and 3.28% for the current quarter and
nine month period ended June 30, 2002; respectively, as compared to 3.64% and
3.85% for the quarter and nine month period ended June 30, 2001; respectively.
PROVISION FOR LOAN LOSSES. The Company provided $32,500 and $114,250 in loan
loss provisions during the current quarter and nine month period ended June 30,
2002; respectively, as compared to $10,500 and $28,500 during the three and nine
month period; respectively, a year earlier. Provisions, which are charged to
operations, and the resulting loan loss allowances are amounts the Company's
management believes will be adequate to absorb losses that are estimated to have
occurred. Loans are charged off against the allowance when management believes
that uncollectibility is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES (continued) The allowance for loan losses is evaluated
on a regular basis by management and is based upon management's periodic review
of the collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of the underlying collateral and
prevailing economic conditions. Management's decision to increase the provisions
in 2002 as compared to the prior year is a result of a greater weakness in the
local real estate market and less favorable regional and local economic
conditions which may have affected the credit quality of its loan portfolio.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.
NON-INTEREST INCOME. During the current quarter, the Company sold 1,250 shares
of FHLMC stock with a cost basis of approximately $1,250 and realized a gain of
approximately $78,000. During the second quarter of 2002, the Company sold 3,100
shares for a realized gain of approximately $196,000. The Company continues to
hold 11,154 shares of FHLMC stock in its investment portfolio. There were no
other investment sales during the nine month period ended June 30, 2002, or
during the same period a year earlier.
NON-INTEREST EXPENSE. Non-interest expense, exclusive of REO provision and
expense, decreased by $39,050 to $314,800 for the three month period ended June
30, 2002 from $353,850 for the comparable quarter in 2001. Non-interest expense,
exclusive of REO provision and expense, decreased by $140,800 to $970,200 for
the nine month period ended June 30, 2002 from $1,111,000 for the same period a
year earlier.
The only significant dollar increase in any category of non-interest expense
occurred in area of foreclosed assets, which totaled $76,950 and $222,950 for
the three and nine month periods ended June 30, 2002. The largest portion of
that expense occurred when the Company charged earnings for $206,000 of specific
allowances established on foreclosed assets during the current year. The
provisions all related to foreclosures on five loans collateralized by
residential properties to the same borrower. Two of the five properties have
been sold and management does not expect additional significant expense
associated with the remaining properties.
Compensation and related benefits decreased from $241,350 during the quarter
ended June 30, 2001 to $186,150 in the current quarter, and from $756,750 during
the nine month period ended June 30, 2001 to $598,900 in the nine months ended
June 30, 2002. The decrease in compensation and benefits occurred primarily
because in 2001, compensation was higher a result of hiring a new senior lending
officer while transitioning a retiring senior loan officer, and because of an
approximately 125% increase in the cost of health insurance coverage during
2001. In addition, the Company's CEO retired March 31, 2002, and the Company CFO
assumed the responsibilities of both roles effective April 01, 2002.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits.
During the nine month period ended June 30, 2002, cash and cash equivalents, a
significant source of liquidity, decreased by approximately $640,200. Proceeds
from the Company's operations contributed $1,023,800 in cash during the period.
A decrease in deposits of approximately $445,800, dividend payments of $413,750,
and treasury stock purchases of $92,000 were primarily responsible for $986,150
of cash utilized from financing activities. Net loan originations of
approximately $2.1 million, reduced by matured investments and proceeds from the
sale of foreclosed assets also utilized cash.
Given its excess liquidity and its ability to borrow from the Federal Home Loan
Bank of Atlanta, the Company believes that it will have sufficient funds
available to meet anticipated future loan commitments, unexpected deposit
withdrawals, and other cash requirements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Statements herein regarding estimated future expense levels and other
operational matters may constitute forward-looking statements under the federal
securities laws. Such statements are subject to certain risks and uncertainties.
Undue reliance should not be placed on this information. These estimates are
based on the current expectations of management, which may change in the future
due to a large number of potential events, including unanticipated future
developments.
12
WAKE FOREST BANCSHARES, INC.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any material legal proceedings
at the present time. Occasionally, the Association is a party
to legal proceedings within the normal course of business
wherein it enforces its security interest in loans made by it,
and other matters of a similar nature.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Company's Chief Executive Officer and Chief Financial
Officer have furnished statements relating to its Form 10-QSB
for the quarter ended June 30, 2002 pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002. The statements are attached hereto
as Exhibit 99.1.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1, Section 906 of the Sarbanes-Oxley Act of 2002 No
reports on Form 8-K were filed for the period covered by this
report
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAKE FOREST BANCSHARES, INC.
Dated August 10, 2002 By: s/s Robert C. White
--------------------------- -----------------------------------
Robert C. White
President, CEO & CFO
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAKE FOREST BANCSHARES, INC.
Dated August 10, 2002 By:
---------------------------- --------------------------------------
Robert C. White
President, CEO & CFO
16