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 March 31, 2003
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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.
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(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
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(Address of principal executive offices)
(919)-556-5146
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(Issuer's telephone number)
N/A
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(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
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 1, 2003 there were issued
and outstanding 1,145,496 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
PART 1. - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated statements of financial condition at March 31, 2003 (unaudited)
and September 30, 2002 1
Consolidated statements of income for the three months ended March 31, 2003
and March 31, 2002 (unaudited) 2
Consolidated statements of income for the six months ended March 31, 2003
and March 31, 2002 (unaudited) 3
Consolidated statements of comprehensive income for the three and six months ended
March 31, 2003 and March 31, 2002 (unaudited) 4
Consolidated statements of cash flows for the six months ended
March 31, 2003 and March 31, 2002 (unaudited) 5
Notes to consolidated financial statements (unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 -13
Item 3. Internal Controls and Procedures 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 16
Exhibits 17
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2003 AND SEPTEMBER 30, 2002
March 31, September 30,
ASSETS 2003 2002
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(Unaudited) *
Cash and short-term cash investments $ 17,308,850 $ 15,303,250
Investment securities:
Available for sale, at estimated market value 433,000 623,500
FHLB stock 330,400 330,400
Loans receivable, net of loan loss allowances of $585,400 at
March 31, 2003 and $463,250 at September 30, 2002 69,115,000 75,747,400
Accrued interest receivable 88,550 77,350
Foreclosed assets, net 590,700 422,900
Property and equipment, net 391,150 403,700
Deferred income taxes, net 170,300 41,300
Prepaid expenses and other assets 211,600 35,700
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Total Assets $ 88,639,550 $ 92,985,500
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 72,248,200 $ 76,767,500
Accrued expenses and other liabilities 619,000 599,600
Dividends payable 61,250 137,900
Note payable- ESOP -- 29,450
Redeemable common stock held by the ESOP
net of unearned ESOP shares 466,400 611,250
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Total liabilities 73,394,850 78,145,700
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Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, par value $0.01, authorized 5,000,000 shares,
issued 1,216,612 shares 12,150 12,150
Additional paid-in capital 5,078,900 5,062,900
Accumulated other comprehensive income 263,500 379,800
Retained earnings, substantially restricted 10,861,550 10,298,850
Less: Common stock in treasury, at cost (971,400) (913,900)
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Total stockholders' equity 15,244,700 14,839,800
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Total liabilities and stockholders' equity $ 88,639,550 $ 92,985,500
============ ============
See Notes to Consolidated Financial Statements.
* Derived from Audited Financial Statements.
1
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
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Interest and dividend income:
Loans $ 1,243,250 $ 1,567,650
Investment securities 8,850 8,100
Short-term cash investments 50,650 76,200
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Total interest income 1,302,750 1,651,950
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Interest expense:
Interest on deposits 573,050 886,400
Interest on ESOP debt 150 850
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Total interest expense 573,200 887,250
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Net interest income before provision for loan losses 729,550 764,700
Provision for loan losses (130,000) (66,000)
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Net interest income after provision for loan losses 599,550 698,700
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Noninterest income:
Service charges and fees 24,800 14,450
Gain on sale of investments 158,600 195,600
Other 850 4,800
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184,250 214,850
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Noninterest expense:
Compensation and benefits 180,100 206,500
Occupancy 13,400 11,000
Federal insurance and operating assessments 10,750 11,050
Data processing and outside service fees 30,550 25,400
Foreclosed assets, net 11,800 144,400
Other operating expense 71,850 84,250
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318,450 482,600
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Income before income taxes 465,350 430,950
Income taxes 179,700 165,150
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Net income $ 285,650 $ 265,800
=========== ===========
Basic earnings per share $ 0.25 $ 0.23
Diluted earnings per share $ 0.25 $ 0.23
Dividends paid per share $ 0.12 $ 0.12
See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
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Interest and dividend income:
Loans $ 2,668,850 $ 3,213,500
Investment securities 15,500 20,400
Short-term cash investments 111,550 161,000
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Total interest income 2,795,900 3,394,900
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Interest expense:
Interest on deposits 1,246,050 1,901,200
Interest on ESOP debt 450 2,000
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Total interest expense 1,246,500 1,903,200
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Net interest income before provision for loan losses 1,549,400 1,491,700
Provision for loan losses (160,000) (81,750)
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Net interest income after provision for loan losses 1,389,400 1,409,950
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Noninterest income:
Service charges and fees 34,700 31,400
Gain on sale of investments 158,600 195,600
Other 850 9,550
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194,150 236,550
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Noninterest expense:
Compensation and benefits 353,000 412,750
Occupancy 23,500 21,100
Federal insurance and operating assessments 21,750 22,000
Data processing and outside service fees 58,100 56,000
Foreclosed assets, net 30,650 146,000
Other operating expense 140,050 143,600
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627,050 801,450
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Income before income taxes 956,500 845,050
Income taxes 369,350 325,350
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Net income $ 587,150 $ 519,700
=========== ===========
Basic earnings per share $ 0.51 $ 0.45
Diluted earnings per share $ 0.51 $ 0.45
Dividends paid per share $ 0.24 $ 0.24
See Notes to Consolidated Financial Statements.
3
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
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Net income $ 285,650 $ 265,800
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Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (39,750) (18,200)
Less: reclassification adjustments for gains included
in net income (98,350) (121,250)
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Other comprehensive income (loss) (138,100) (139,450)
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Comprehensive income $ 147,550 $ 126,350
========= =========
FOR SIX MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
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Net income $ 587,150 $ 519,700
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Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (17,950) (15,800)
Less: reclassification adjustments for gains included
in net income (98,350) (121,250)
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Other comprehensive income (loss) (116,300) (137,050)
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Comprehensive income $ 470,850 $ 382,650
========= =========
See Notes to Consolidated Finanical Statements.
4
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
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Net income $ 587,150 $ 519,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 15,250 16,100
ESOP contribution expense charged to paid-in capital 16,000 20,650
Provision for loan losses 160,000 81,750
Provision for foreclosed assets 2,500 140,000
Gain on sale of investments (158,600) (195,600)
Gain on sale of foreclosed assets, net 250 (8,900)
Amortization of unearned ESOP shares 29,400 29,400
Amortization of unearned RRP shares -- 18,900
Changes in assets and liabilities:
Prepaid expenses and other assets (175,900) 3,650
Accrued interest receivable (11,200) 16,250
Accrued expenses and other liabilities 19,400 (15,750)
Deferred income taxes (57,700) (38,600)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 426,550 587,550
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Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable 6,001,100 (3,020,650)
Proceeds from sale of foreclosed assets 303,450 474,600
Capital additions to foreclosed assets (2,700) (11,200)
Sale of available for sale investment securities 161,550 198,650
Maturity of available for sale investment securities -- 500,000
Redemption (purchase) of FHLB stock -- 19,700
Purchase of property and equipment (2,700) (3,750)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,460,700 (1,842,650)
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Cash Flows From Financing Activities:
Net increase (decrease) in deposits (4,519,300) 3,053,300
Principal payments on ESOP debt (29,450) (29,450)
Repurchase of common stock for the Treasury (57,500) --
Proceeds from stock options exercised -- 9,550
Dividends paid (275,400) (275,600)
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NET CASH PROVIDED BY FINANCING ACTIVITIES (4,881,650) 2,757,800
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Net increase in cash and cash equivalents 2,005,600 1,502,700
Cash and cash equivalents:
Beginning 15,303,250 15,885,100
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Ending $ 17,308,850 $ 17,387,800
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Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 1,253,650 $ 1,922,150
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Cash payment of income taxes 414,250 341,000
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Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ (144,850) $ (52,950)
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Transfer of loans to foreclosed assets $ 471,250 $ 668,400
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Incr. (decr.) in unrealized gain on investment securities $ (116,300) $ (137,050)
============ ============
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 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. Prior to the most recent
dividend (see Note 4) the MHC 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.
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 and six month periods ended March 31,
2003 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.
6
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DIVIDENDS DECLARED
On March 17, 2003, the Board of Directors of the Company declared a dividend of
$0.12 a share for stockholders of record as of March 31, 2003 and payable on
April 10, 2003. The dividends declared were accrued and reported as dividends
payable in the March 31, 2003 Consolidated Statement of Financial Condition.
Wake Forest Bancorp, Inc., the mutual holding company, waived the receipt of
dividends declared by the Company for this quarter.
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 and six month periods ended
March 31, 2003 and 2002 is presented below.
FOR THE THREE MONTHS ENDED MARCH 31: 2003 2002
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Weighted average shares outstanding for Basic EPS 1,144,806 1,148,013
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 7,264 7,650
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Weighted average shares outstanding for diluted EPS 1,152,070 1,155,663
========= =========
FOR THE SIX MONTHS ENDED MARCH 31: 2003 2002
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Weighted average shares outstanding for Basic EPS 1,144,722 1,146,361
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 7,150 8,035
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Weighted average shares outstanding for diluted EPS 1,151,872 1,154,396
========= =========
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 March
31, 2003 and 2002 is presented below:
7
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTION PLAN (CONTINUED)
2003 2002
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Stock options outstanding at beginning of the quarter 37,336 38,086
Granted -- --
Exercised -- (750)
Terminated -- --
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Stock options outstanding at end of the quarter 37,336 37,336
====== ======
Stock options exercisable at end of the quarter 37,336 37,336
====== ======
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 and $9,650 ($0.00 per basic and dilutive share) for the
quarter and six months ended March 31, 2002, respectively. There was no fair
value expense effect for the quarter ended March 31, 2003 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%.
8
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 MARCH 31, 2003:
Total assets decreased by $4.4 million to $88.6 million at March 31, 2003 from
$93.0 million at September 30, 2002. Total assets decreased during the six
months ended March 31, 2003 primarily due to a decrease in deposits of
approximately $4.5 million during the same period. Because the Company currently
has a sufficient amount of liquidity, deposits were priced to retain current
amounts but not to attract additional funds from competition. Cash and short
term cash investments increased by approximately $2.0 million for the six month
period due to a decrease in the Company's loan portfolio during the same period.
Net loans receivable decreased by $6.6 million to $69.1 million at March 31,
2003 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 decreased by $190,500 to $763,400 at March 31, 2003 from
$953,900 at September 30, 2002. The decrease is primarily attributable to a
March 2003 sale of 3,000 shares of FHLMC stock which resulted in proceeds
received of $161,500. The remaining $29,000 resulted from unrealized losses on
the 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
March 31, 2003, the Company's investment portfolio, which consisted primarily of
FHLB stock and FHLMC stock, had approximately $425,000 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 six month period, the
Company made principal payments totaling $29,450 plus interest on the ESOP note,
which paid off the remaining balance of the note. The Company made retirement
plan contributions sufficient to amortize the debt over its seven-year term, and
as such, had reported the debt on its balance sheet. The Company recorded
retirement plan expense of approximately $46,850 during the six month period
ended March 31, 2003. The Company also has recorded a liability of $466,400 at
March 31, 2003 for the ESOP put option.
9
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND MARCH 31, 2003
(CONTINUED):
The Company has an ongoing stock repurchase program authorizing management to
repurchase shares of its outstanding common stock. The repurchases are made
primarily 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 March 31, 2003 the Company had repurchased 71,116 shares of
its common stock. The program continues until completed or terminated by the
Board of Directors.
Retained earnings increased by $562,700 to $10.9 million at March 31, 2003 from
$10.3 million at September 30, 2002. The increase is attributable to the
Company's earnings during the six month period ended March 31, 2003, reduced by
$198,750 in dividends paid during the period and a $174,300 credit to retained
earnings to reflect the change in the fair value of the ESOP shares subject to
the put option. At March 31, 2003, the Company's stockholders' equity amounted
to $15.2 million, which as a percentage of total assets was 17.20%, 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 2.03% at March 31, 2003 and
1.38% at September 30, 2002. The Company's non-performing loans amounted to
$1,047,295 and consisted of nine residential properties at September 30, 2002.
At March 31, 2003, non-performing loans amounted to $1,420,850 and consisted of
eight loans. Three of the loans are to the same borrower. Another loan is on a
single family property and adjacent horse facility amounting to approximately
$800,000. The Company believes that it has sufficient allowances established to
cover any loss associated with these loans. The Company charged off one loan,
collateralized by a single family home, for a loss of $37,850 during the current
quarter. No loans were charged off during the first quarter of the current year.
Based on management's analysis of the adequacy of its allowances, including
recent trends towards higher delinquencies and a slower economy, loan loss
provisions totaling $130,000 and $30,000 were made during the three month
periods ended March 31, 2003 and December 31, 2002, respectively. This higher
provision resulting in an increase in the allowance for loan losses expressed as
a percentage of gross loans to 0.84% at March 31, 2003 in comparison to 0.61% at
September 30, 2002. The Company's loan loss allowance was $585,400 at March 31,
2003.
The Company's allowance for loan losses is established through a provision for
loan losses charged to operations and is evaluated by management to ensure it is
adequate to absorb probable losses inherent in the loan portfolio. 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 $590,650 in foreclosed assets consisting of five
residential properties at March 31, 2003. Three of the properties were partially
completed homes from the same builder and will be marketed for sale during the
next couple of months. Another property was foreclosed upon during the first
quarter and consists of several residential rental houses. The fifth property is
a small single family home. Marketing of these properties will begin shortly.
The Company believes that all of the properties have been adequately reserved at
March 31, 2003 and no further loss is expected.
10
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002:
GENERAL. Net income for the three month period ended March 31, 2003 was
$285,650, or $19,850 more than the $265,800 earned during the same quarter in
2002. Net income for the six month period ended March 31, 2003 was $587,150, or
$67,450 more than the $519,700 earned during the same period in 2002. As
discussed below, changes in net interest income between the comparable periods
coupled with decreases in non-interest expenses were primarily responsible for
the change in net income during the current quarter and six month period.
INTEREST INCOME. Interest income decreased by $349,200 from $1,651,950 for the
three months ended March 31, 2002 to $1,302,750 for the three months ended March
31, 2003. The decline in interest income resulted from both a 81 basis point
decrease in the average yield on interest earning assets between the quarters
and a decline of $8.5 million in the average balance of interest-earning assets
outstanding between the periods. Interest income decreased by $599,000 from
$3,394,900 for the six months ended March 31, 2002 to $2,795,900 for the six
months ended March 31, 2003. The decline in interest income resulted from both a
92 basis point decrease in the yield on interest-earning assets between the
periods and a decline of $6.4 million in the average balance of interest-earning
assets outstanding between the six month periods. The Company's yield on
interest earning assets was 6.49% and 6.76% for the quarter and six month period
ended March 31, 2002; respectively, and 5.68% and 5.84% for the quarter and six
month period ended March 31, 2003; respectively. The changes in yield occurred
primarily due to fluctuations in market rates outstanding during the periods.
INTEREST EXPENSE. Interest expense decreased by $314,050 from $887,250 for the
three months ended March 31, 2002 to $573,200 for the three months ended March
31, 2003. Interest expense decreased by $656,700 from $1,903,200 for the six
months ended March 31, 2002 to $1,246,500 for the six months ended March 31,
2003. The decreases were primarily the result of a decrease in the Company's
cost of funds between the periods, which decreased by 1.26% and 1.38% for the
three and six month periods ended March 31, 2003 as compared to the same periods
a year earlier. As a result of overall lower market rates, the Company's cost of
funds decreased from 4.49% and 4.73% for the quarter and six month period ended
March 31, 2002; respectively, to 3.23% and 3.35% for the quarter and six month
period ended March 31, 2003, respectively.
NET INTEREST INCOME. Net interest income decreased by $35,150 from $764,700 for
the three months ended March 31, 2002 to $729,550 for the three months ended
March 31, 2003. Net interest income increased by $57,700 from $1,491,700 for the
six months ended March 31, 2002 to $1,549,400 for the six months ended March 31,
2003. The Company's net interest margin was 3.38% and 3.53% for the current
quarter and six months ended March 31, 2003 versus 3.27% and 3.17% for the same
quarter and six month period a year earlier.
PROVISION FOR LOAN LOSSES. The Company provided $130,000 and $160,000 in loan
loss provisions during the current quarter and six month period ended March 31,
2003; respectively, as compared to $66,000 and $81,750 during the three and six
month periods; 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.
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. Although
management uses a systematic method for determining the adequacy of its
allowances, the evaluation is inherently subjective as it requires estimates
that are susceptible to significant revisions as more information becomes
available.
11
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-INTEREST INCOME. During the current quarter, the Company sold 3,000 shares
of FHLMC stock with a cost basis of approximately $2,950 and realized a gain of
$158,600. During the same quarter a year earlier, the Company sold 3,100 shares
of FHLMC stock with a cost basis of approximately $3,000 for a realized gain of
$195,600. There were no other investment sales during the six month periods
ended March 31, 2003 and 2002. The Company continues to hold 8,154 shares of
FHLMC stock in its investment portfolio.
NON-INTEREST EXPENSE. Non-interest expense decreased by $164,150 to $318,450 for
the three month period ended March 31, 2003 from $482,600 for the comparable
quarter in 2002. Non-interest expense decreased by $174,400 to $627,050 for the
six month period ended March 31, 2003 from $801,450 for the same period a year
earlier. Only two categories of expense changed significantly between the
periods. Expenses associated with foreclosed assets totaled $144,400 and
$146,000 for the three and six month periods ended March 31, 2002 as compared to
expenses of $11,800 and $30,650 for the three and six month periods ended March
31, 2003. The largest portion of the 2002 expense occurred when the Company
charged earnings for $140,000 of specific allowances established on foreclosed
assets during the March 2002 quarter. Compensation and related benefits
decreased from $206,500 during the quarter ended March 31, 2002 to $180,100 in
the current quarter, and from $412,750 during the six month period ended March
31, 2002 to $353,000 in the six months ended March 31, 2003. The decrease in
compensation and benefits occurred primarily because compensation was higher in
2002 prior to the retirement of the Company's then Chief Executive Officer on
March 31, 2002.
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 six month period ended March 31, 2003, cash and cash equivalents, a
significant source of liquidity, increased by approximately $2.0 million.
Proceeds from the Company's operations contributed $426,550 in cash during the
period. A decrease in loans receivable of $6.0 million, partially offset by a
decrease in deposits of approximately $4.5 million provided the largest source
of increased liquidity during the six month period ended March 31, 2003. 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:
12
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED):
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.
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.
13
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.
14
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
On February 18, 2003, the annual meeting of stockholders was held to
consider and vote upon the election of four directors of the Company and
to ratify the appointment of Dixon Odom PLLC as independent auditors for
the Company's fiscal year ending September 30, 2003. All items were
approved by the stockholders as shown below.
Vote concerning the election of directors of the Company:
For Against Withheld Total
------------------------------------------
Paul K. Brixhoff 989,464 -- 7,438 996,902
Anna O. Sumerlin 995,514 -- 1,388 996,902
Harold Washington 995,314 -- 1,588 996,902
Robert C. White 995,514 -- 1,388 996,902
Vote concerning ratification of Dixon Odom PLLC as independent auditors
for the year ending September 30, 2003:
For Against Abstained Total
------------------------------------------
996,902 -- -- 996,902
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.
15
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 May 10, 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):
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: May 10, 2003 /s/ Robert C. White
-------------------------- ---------------------------
Robert C. White
Chief Executive Officer
and Chief Financial Officer
16
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 May 10, 2003 By: /s/ Robert C. White
-------------------------- ----------------------------------
Robert C. White
Chief Executive Officer and
Chief Financial Officer
17