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 December 31, 2002
----------------------------------
[ ] 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
------------------------------- ------------------------------
(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 February 1, 2003 there were
issued and outstanding 1,147,140 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
<table>
<caption>
PART 1. - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated statements of financial condition at December 31, 2002 (unaudited)
and September 30, 2002 1
Consolidated statements of income for the three months ended December 31, 2002
and December 31, 2001 (unaudited) 2
Consolidated statements of comprehensive income for the three months ended
December 31, 2002 and December 31, 2001 (unaudited) 3
Consolidated statements of cash flows for the three months ended December 31,
2002 and December 31, 2001 (unaudited) 4
Notes to consolidated financial statements (unaudited) 5 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 -12
Item 3. Internal Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 15 - 16
Exhibits 17
</table>
<page>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND SEPTEMBER 30, 2002
<table>
<caption>
December 31, September 30,
ASSETS 2002 2002
------------ -------------
(Unaudited) *
Cash and short-term cash investments $ 17,565,000 $ 15,303,250
Investment securities:
Available for sale, at estimated market value 658,650 623,500
FHLB stock 330,400 330,400
Loans receivable, net of loan loss allowances of $493,250
at December 31, 2002 and $463,250 at September 30, 2002 71,319,400 75,747,400
Accrued interest receivable 85,900 77,350
Foreclosed assets, net 522,450 422,900
Property and equipment, net 398,000 403,700
Deferred income tax debits, net 44,600 41,300
Prepaid expenses and other assets 49,500 35,700
------------ ------------
Total Assets $ 90,973,900 $ 92,985,500
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 74,415,000 $ 76,767,500
Accrued expenses and other liabilities 589,950 599,600
Dividends payable 137,650 137,900
Note payable- ESOP 14,700 29,450
Accrued income taxes 188,400 --
Redeemable common stock held by the ESOP
net of unearned ESOP shares 433,650 611,250
------------ ------------
Total Liabilities 75,779,350 78,145,700
------------ ------------
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 12,150 12,150
Additional paid-in capital 5,185,800 5,062,900
Accumulated other comprehensive income 401,600 379,800
Retained earnings, substantially restricted 10,540,100 10,298,850
Less: Common stock in treasury, at cost (945,100) (913,900)
------------ ------------
Total stockholders' equity 15,194,550 14,839,800
------------ ------------
Total liabilities and stockholders' equity $ 90,973,900 $ 92,985,500
============ ============
</table>
See Notes to Consolidated Financial Statements.
* Derived from audited financial statements.
1
<page>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
<table>
<caption>
2002 2001
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Interest and dividend income:
Loans $ 1,425,600 $ 1,645,850
Investment securities 6,600 12,300
Short-term cash investments 60,950 84,800
----------- -----------
Total interest and dividend income 1,493,150 1,742,950
----------- -----------
Interest expense:
Interest on deposits 673,000 1,014,850
Interest on ESOP debt 300 1,100
----------- -----------
Total interest expense 673,300 1,015,950
----------- -----------
Net interest income 819,850 727,000
Provision for loan losses (30,000) (15,750)
----------- -----------
Net interest income after provision for loan losses 789,850 711,250
----------- -----------
Noninterest income:
Service charges and fees 9,900 17,000
Other -- 4,700
----------- -----------
9,900 21,700
----------- -----------
Noninterest expense:
Compensation and benefits 172,900 206,250
Occupancy 10,100 10,100
Federal insurance and operating assessments 11,000 10,950
Data processing and outside service fees 27,600 30,650
REO expense 18,850 1,600
Other operating expense 68,200 59,300
----------- -----------
308,650 318,850
----------- -----------
Income before income taxes 491,100 414,100
Income taxes 189,600 160,200
----------- -----------
Net income $ 301,500 $ 253,900
=========== ===========
Basic earnings per share $ 0.26 $ 0.22
Diluted earnings per share $ 0.26 $ 0.22
Dividends paid per share $ 0.12 $ 0.12
</table>
See Notes to Consolidated Financial Statements.
2
<page>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
<table>
<caption>
2002 2001
-------- --------
Net income $301,500 $253,900
-------- --------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 21,800 2,400
Less: reclassification adjustments for gains included
in net income -- --
-------- --------
Other comprehensive income 21,800 2,400
-------- --------
Comprehensive income $323,300 $256,300
======== ========
</table>
See Notes to Consolidated Financial Statements.
3
<page>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
<table>
<caption>
2002 2001
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Net income $ 301,500 $ 253,900
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,600 7,950
ESOP contribution expense charged to paid-in capital 7,850 11,050
Provision for loan losses 30,000 15,750
(Gain) loss on sale of foreclosed assets 600 (4,650)
Amortization of unearned ESOP shares 14,700 14,700
Amortization of unearned RRP shares -- 14,200
Changes in assets and liabilities:
Prepaid expenses and other assets (13,800) 34,300
Accrued interest receivable (8,550) 29,600
Accrued expenses and other liabilities 178,750 122,050
Deferred income taxes (16,650) (9,250)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 502,000 489,600
------------ ------------
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable 4,236,300 (939,700)
Proceeds from sale of foreclosed assets 64,250 155,000
Capitalized REO cost (2,700)
Maturity of available for sale investment securities -- 500,000
Purchase of property and equipment (1,900) (3,750)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,295,950 (288,450)
------------ ------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits (2,352,500) 3,297,600
Principal payments on ESOP debt (14,750) (14,750)
Repurchase of common stock for the Treasury (31,200) --
Dividends paid (137,750) (137,650)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,536,200) 3,145,200
------------ ------------
Net increase in cash and cash equivalents 2,261,750 3,346,350
Cash and cash equivalents:
Beginning 15,303,250 15,885,100
------------ ------------
Ending $ 17,565,000 $ 19,231,450
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 675,350 $ 1,039,050
============ ============
Cash payment of income taxes $ -- $ 422,000
============ ============
Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ (77,250) $ 19,850
============ ============
Transfer of loans to foreclosed assets $ 161,700 $ 502,050
============ ============
Incr. (decr.) in unrealized gain on investment securities, net $ 21,800 $ 2,400
============ ============
</table>
See Notes to Consolidated Finanical Statements.
4
<page>
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 savings 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 55.4% 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.
5
<page>
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, 2002, which is
derived from audited financial statements) 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 month period ended December 31, 2002 are
not necessarily indicative of the results of operations that may be expected for
the Company's fiscal year ending September 30, 2003. The accounting policies
followed are as set forth in Note 1 of the Notes to Consolidated Financial
Statements in the Company's September 30, 2002 Annual Report to Stockholders.
NOTE 4. DIVIDENDS DECLARED
On December 16, 2002, the Board of Directors of the Company declared a dividend
of $0.12 a share for stockholders of record as of December 31, 2002 and payable
on January 10, 2003. The dividends declared were accrued and reported as
dividends payable in the December 31, 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. 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 month periods ended December
31, 2002 and 2001 is presented below.
<table>
<caption>
FOR THE THREE MONTHS ENDED DECEMBER 31: 2002 2001
--------- ---------
Weighted average shares outstanding for Basic EPS 1,144,640 1,144,744
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 7,041 9,181
--------- ---------
Weighted average shares outstanding for diluted EPS 1,151,681 1,153,925
========= =========
</table>
6
<page>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTION PLAN
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (Statement 148). Statement 148 amends
SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Statement 148 is effective for
financial statements for fiscal years ending after December 15, 2002. Early
application of the disclosure provisions is encouraged. The Company continues to
account for its stock-based compensation in accordance with APB 25 and has
adopted the disclosure provisions of Statement 148 effective for all periods
presented herein.
The Company has a stock option plan for the benefit of its officers, directors,
and key employees. Options totaling 54,000 at a grant price of $12.75 were
granted on January 22, 1997. No options have been granted since that date. The
options became exercisable at the rate of 20% annually for years during periods
of service as an employee, officer, or director, and expire after ten years.
Accelerated vesting may occur in certain circumstances as disclosed in the plan
documents. Options are exercisable at the fair value on the date of grant. A
summary of the changes in the Company's options during the quarters ended
December 31, 2002 and 2001 is presented below:
2002 2001
- ------------------------------------------------------------------------------
Stock options outstanding at beginning of the quarter 37,336 38,086
- ------------------------------------------------------------------------------
Granted -- --
- ------------------------------------------------------------------------------
Exercised -- --
- ------------------------------------------------------------------------------
Terminated -- --
- ------------------------------------------------------------------------------
Stock options outstanding at end of the quarter 37,336 38,086
- ------------------------------------------------------------------------------
Stock options exercisable at end of the quarter 37,336 30,469
- ------------------------------------------------------------------------------
Grants of options under the plan are accounted for following Accounting
Principles Board (APB) Opinion No. 25 and its related interpretations.
Accordingly, no compensation cost has been recorded. In 1995, the Financial
Accounting Standards Board issued Standard No. 123, which requires disclosures
concerning the fair value of options and encourages accounting recognition for
options using the fair value method. The Company has elected to apply the
disclosure-only provisions of the Statement.
However, had compensation cost been recorded based on the fair value ($4.17 per
share) of awards at the grant date, the pro forma impact on the Company's net
income and earnings per share would have been to reduce such amounts by
approximately $4,825 ($0.00 per basic and dilutive share) for the quarter ended
December 31, 2001. There was no fair value expense effect for the quarter ended
December 31, 2002 because the five year period over which the options vested
(and would have been expensed under SFAS No. 123) expired during the year ended
September 30, 2002. The fair value of each grant was estimated at the grant date
using the Black-Scholes option-pricing model with the following assumptions for
1997 when the options were granted: dividend rate of 2.75%; risk-free interest
rate of 5.87%; expected lives of 10 years; and price volatility of 26.51%.
7
<page>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities and Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which statements represent
the Company's judgment concerning the future and are subject to risks and
uncertainties that could cause the Company's actual operating results to differ
materially. Such forward-looking statements can be identified by the use of
forward-looking terminology, such as "may", "will", "expect", "anticipate",
"estimate", "believe", or "continue", or the negative thereof or other
variations thereof or comparable terminology. The Company cautions that such
forward-looking statements are further qualified by important factors that could
cause the Company's actual operating results to differ materially from those in
the forward-looking statements, as well as the factors set forth in the
Company's periodic reports and other filings with the SEC.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND DECEMBER 31, 2002:
Total assets decreased by $2.0 million to $91.0 million at December 31, 2002
from $93.0 million at September 30, 2002. Total assets decreased during the
three months ended December 31, 2002 primarily due to a decrease in deposits of
approximately $2.4 million during the period. Because the Company currently has
a significant amount of liquidity, deposits were priced conservatively in
comparison to competition. Cash and short term cash investments increased by
approximately $2.3 million for the three month period due to a decrease in the
Company's loan portfolio during the same period.
Net loans receivable decreased by $4.4 million to $71.3 million at December 31,
2002 from $75.7 million at September 30, 2002. The decrease is a reflection of a
still stagnant economy and a more guarded approach to lending in general. The
Company's construction loan portfolio has declined as both the Company and its
builder customers have taken a more cautious approach given the area's sluggish
real estate market. The high tech sector of the area's employment base has
declined during the past year and has negatively impacted the overall real
estate market. Assuming economic conditions improve, management believes that
the long-term fundamentals of its lending markets provide potential for future
loan expansion because the Company operates in markets that have had sustained
significant growth and strong loan demand over the past several years. However,
there can be no assurances that such loan demand can or will materialize in the
future.
Investment securities increased by $35,150 to $989,050 at December 31, 2002 from
$953,900 at September 30, 2002. The increase is attributable to unrealized gains
on the Company's FHLMC stock. The Company has decided to maintain higher levels
of liquidity due to the historically low investment rates available in the
market and as a result, has not been actively involved in the buying and selling
securities. At December 31, 2002, the Company's investment portfolio, which
consisted primarily of FHLB stock and FHLMC stock, had approximately $650,000 in
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 three month period,
the Company made principal payments totaling $14,750 plus interest on the ESOP
note, reducing the outstanding balance of the note to $14,700 at December 31,
2002. The Company is committed to making retirement plan contributions
sufficient to amortize the debt over its seven-year term, and as such,
8
<page>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
has reported the debt on its balance sheet. The Company recorded retirement plan
expense of approximately $22,650 during the three month period ended December
31, 2002. The Company also has recorded a liability of $443,650 at December 31,
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
December 31, 2002 the Company had repurchased 69,472 shares of its common stock.
The program continues until completed or terminated by the Board of Directors.
Retained earnings increased by $241,250 to $10.5 million at December 31, 2002
from $10.3 million at September 30, 2002. The increase is attributable to the
Company's earnings during the three month period ended December 31, 2002,
reduced by $137,750 in dividends paid during the period and a $77,250 credit to
retained earnings to reflect the change in the fair value of the ESOP shares
subject to the put option. At December 31, 2002, the Company's stockholders'
equity amounted to $15.2 million, which as a percentage of total assets was
16.70%, 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 1.29% at December 31, 2002
and 1.38% at September 30, 2002. The Company's non-performing loans at December
31, 2002 amounted to $923,120 and consisted of six single family residential
loans. Three 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. There were no loans charged off during the current quarter. Based on
management's analysis of the adequacy of its allowances, a $30,000 provision for
additional loan loss allowances was made during the three month period ended
December 31, 2002. The Company's loan loss allowance was $493,250 at December
31, 2002.
The Company allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Such
evaluation includes a review of loans for which collectibility appears doubtful
and other factors, including the nature and volume of the portfolio, historical
experience, estimated value of any underlying collateral, and current economic
conditions. While management uses the best information available to make
evaluations, future adjustments may be necessary, if economic or other
conditions differ substantially from the assumptions used.
The Company also has $522,450 in foreclosed assets consisting of four
residential properties at December 31, 2002. Three of the properties were
partially completed homes from the same builder and will be marketed for sale
during the next couple of months. The fourth property was foreclosed upon during
the current quarter and consists of several residential rental houses. Marketing
of this property will begin shortly. The Company believes that all of the
properties have been adequately reserved at December 31, 2002 and no further
loss is expected.
9
<page>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE QUARTERS ENDED DECEMBER 31, 2002 AND 2001:
GENERAL. Net income for the three month period ended December 31, 2002 was
$301,500, or $47,600 more than the $253,900 earned during the same period in
2001. As discussed below, increases in net interest income between the
comparable periods was primarily responsible for the change in net income.
INTEREST INCOME. Interest income decreased by $249,800 from $1,742,950 for the
three months ended December 31, 2001 to $1,493,150 for the three months ended
December 31, 2002. The change in interest income resulted from a 104 basis point
decrease in the overall yield on interest earning assets. The Company's yield on
interest earning assets decreased from 7.04% for the quarter ending December 31,
2001 to 6.00% for the current quarter. The decrease in yield occurred primarily
due to a lower level of market rates outstanding during the current quarter as
compared to the same quarter a year earlier. A substantial portion of the
Association's interest earning assets are tied to the Prime rate or are
short-term in duration.
INTEREST EXPENSE. Interest expense decreased by $342,650 from $1,015,950 for the
three months ended December 31, 2001 to $673,300 for the three months ended
December 31, 2002. The decrease was primarily the result of a decrease in the
Association's cost of funds, which decreased by 150 basis points from 4.97% for
the quarter ended December 31, 2001 to 3.47% for the current quarter. The
decrease in interest expense was also the result of a $4.7 million decline in
deposits in the current quarter as compared to the same period a year earlier.
The decline in the volume of interest-bearing deposits occurred due to a less
aggressive marketing campaign for deposits.
NET INTEREST INCOME. Net interest income increased by $92,850 from $727,000 for
the three months ended December 31, 2001 to $819,850 for the three months ended
December 31, 2002. As explained above, the increase in net interest income
resulted primarily from a more significant decrease in the Association's cost of
funds versus the decline in its yield on interest earning assets. The Company's
interest rate margin was 2.53% for the current quarter as compared to 2.07% for
the quarter ended December 31, 2001.
PROVISION FOR LOAN LOSSES. The Company provided $30,000 and $15,750 in loan loss
provisions during the current quarter and the same quarter a year earlier,
respectively. 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. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.
NONINTEREST EXPENSE. Noninterest expense decreased by $10,200 to $308,650 for
the three month period ended December 31, 2002 from $318,850 for the comparable
quarter in 2001. Compensation and related benefits decreased from $206,250
during the quarter ended December 31, 2001 to $172,900 during the current
quarter. The decrease in compensation and benefits occurred primarily due to the
retirement of the Company's then Chief Executive Officer in March 2002 and
because of the expiration of the vesting of MRP (management recognition plan)
shares expense, which occurred in December, 2001. REO expense increased from
$1,600 in the quarter ended December 31, 2001 to $18,850 during the current
quarter. The REO expense is associated with holding foreclosed property while
such properties are being prepared for sale or during the marketing phase.
10
<page>
WAKE FOREST BANCSHARES, INC.
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 three month period ended December 31, 2002, cash and cash
equivalents, a significant source of liquidity, increased by approximately $2.3
million. Proceeds from the Company's operations contributed an $502,000 in cash
during the period. A decrease in deposits of approximately $2.4 million and
dividends payments of $137,750 were the primary uses of approximately $2.5
million of cash from financing activities. Net loan repayments of approximately
$4.2 million during the quarter provided the largest single source of cash
during the current quarter.
Given the Company's 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's 2002 Annual Report on Form 10KSB. The
Company has not experienced any material change in its critical accounting
policies since September 30, 2002.
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments regarding uncertainties that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing
basis, the Company evaluates its estimates which are based upon historical
experience and on other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers the following accounting
policies to be most critical in their potential effect on its financial position
or results of operations:
Allowance for Loan Losses:
The most critical estimate concerns the Company's allowance for loan losses. The
Company records provisions for loan losses based upon known problem loans and
estimated deficiencies in the existing loan portfolio. The Company's methodology
for assessing the appropriations of the allowance for loan losses consists of
two key components, which are a specific allowance for identified problem or
impaired loans and a formula allowance for the remainder of the portfolio.
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WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Identified problem and impaired loans are measured for impairment based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change. The adequacy of the allowance is also reviewed by management
based upon its evaluation of then-existing economic and business conditions
affecting the key lending areas of the Company and other conditions, such as new
loan products, collateral values, loan concentrations, changes in the mix and
volume of the loan portfolio; trends in portfolio credit quality, including
delinquency and charge-off rates; and current economic conditions that may
affect a borrower's ability to repay. Although management believes it has
established and maintained the allowance for loan losses at appropriate levels,
future adjustments may be necessary if economic, real estate and other
conditions differ substantially from the current operating environment.
Interest Income Recognition.
Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or more
past due unless the loans are adequately secured and in the process of
collection. Interest is not accrued on other loans when management believes
collection is doubtful. All loans considered impaired are non-accruing. Interest
on non-accruing loans is recognized as payments are received when the ultimate
collectibility of interest is no longer considered doubtful. When a loan is
placed on non-accrual status, all interest previously accrued is reversed
against current-period interest income.
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WAKE FOREST BANCSHARES, INC.
ITEM 3. INTERNAL CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
Filings. There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
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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. From time to time, the Company through
its wholly owned 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
None
Item 6. Exhibits and Reports on Form 8-K
a) No reports on Form 8-K were filed for the period covered by
this report
b) Exhibit 99.1 Certification of Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
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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 February 13, 2003 By: /s/ Robert C. White
--------------------------- -------------------------------------
Robert C. White
Chief Executive Officer
and Chief Financial Officer
I, Robert C. White, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Wake Forest
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
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a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Robert C. White
--------------------------------
Robert C. White
Chief Executive Officer
and Chief Financial Officer
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