FORM 10-QSB - QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
----------------------------
(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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 12, 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
--- ---
WAKE FOREST BANCSHARES, INC.
CONTENTS
Item 1. Financial Statements
Consolidated statements of financial condition at June 30, 2003 (unaudited)
and September 30, 2002 1
Consolidated statements of income for the three months ended June 30, 2003
and June 30, 2002 (unaudited) 2
Consolidated statements of income for the nine months ended June 30, 2003
and June 30, 2002 (unaudited) 3
Consolidated statements of comprehensive income for the three and nine months ended
June 30, 2003 and June 30, 2002 (unaudited) 4
Consolidated statements of cash flows for the nine months ended
June 30, 2003 and June 30, 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. 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
Exhibits 17-18
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2003 AND SEPTEMBER 30, 2002
June 30, September 30,
ASSETS 2003 2002
------------ ------------
(Unaudited) *
Cash and short-term cash investments $ 19,064,400 $ 15,303,250
Investment securities:
Available for sale, at estimated market value 414,000 623,500
FHLB stock 225,900 330,400
Loans receivable, net of loan loss allowances of $615,400
at June 30, 2003 and $463,250 at September 30, 2002 65,787,750 75,747,400
Accrued interest receivable 96,100 77,350
Foreclosed assets, net 1,168,650 422,900
Property and equipment, net 386,150 403,700
Deferred income taxes, net 194,000 41,300
Prepaid expenses and other assets 363,700 35,700
------------ ------------
Total Assets $ 87,700,650 $ 92,985,500
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 71,016,500 $ 76,767,500
Accrued expenses and other liabilities 677,950 599,600
Dividends payable 71,500 137,900
Note payable- ESOP -- 29,450
Redeemable common stock held by the ESOP
net of unearned ESOP shares 504,250 611,250
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Total Liabilities 72,270,200 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 shares 12,150 12,150
Additional paid-in capital 5,078,900 5,062,900
Accumulated other comprehensive income 251,700 379,800
Retained earnings, substantially restricted 11,059,100 10,298,850
Less: Common stock in treasury, at cost (971,400) (913,900)
------------ ------------
Total stockholders' equity 15,430,450 14,839,800
------------ ------------
Total liabilities and stockholders' equity $ 87,700,650 $ 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 JUNE 30, 2003 AND 2002
2003 2002
----------- -----------
Interest and dividend income:
Loans $ 1,256,800 $ 1,522,200
Investment securities 5,050 7,050
Short-term cash investments 49,650 58,100
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Total interest income 1,311,500 1,587,350
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Interest expense:
Interest on deposits 546,600 784,400
Interest on ESOP debt -- 700
----------- -----------
Total interest expense 546,600 785,100
----------- -----------
Net interest income before provision for loan losses 764,900 802,250
Provision for loan losses (30,000) (32,500)
----------- -----------
Net interest income after provision for loan losses 734,900 769,750
----------- -----------
Noninterest income:
Service charges and fees 18,450 14,000
Secondary market fee income 51,800 --
Gain on sale of investments -- 77,900
Other 800 200
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71,050 92,100
----------- -----------
Noninterest expense:
Compensation and benefits 165,550 186,150
Occupancy 11,050 13,150
Federal insurance and operating assessments 10,500 11,050
Data processing 28,550 34,600
REO provisions and expense 12,450 76,950
Other operating expense 82,400 69,850
----------- -----------
310,500 391,750
----------- -----------
Income before income taxes 495,450 470,100
Income taxes 188,550 179,250
----------- -----------
Net income $ 306,900 $ 290,850
=========== ===========
Basic earnings per share $ 0.27 $ 0.25
Diluted earnings per share $ 0.27 $ 0.25
Dividends per share $ 0.14 $ 0.12
See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
2003 2002
----------- -----------
Interest and dividend income:
Loans $ 3,925,650 $ 4,735,700
Investment securities 18,200 27,450
Short-term cash investments 163,500 219,150
----------- -----------
Total interest income 4,107,350 4,982,300
----------- -----------
Interest expense:
Interest on deposits 1,792,650 2,685,650
Interest on ESOP debt 450 2,700
----------- -----------
Total interest expense 1,793,100 2,688,350
----------- -----------
Net interest income before provision for loan losses 2,314,250 2,293,950
Provision for loan losses (190,000) (114,250)
----------- -----------
Net interest income after provision for loan losses 2,124,250 2,179,700
----------- -----------
Noninterest income:
Service charges and fees 44,100 45,400
Secondary market fee income 60,850 --
Gain on sale of investments 158,600 273,450
Other 1,650 9,750
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265,200 328,600
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Noninterest expense:
Compensation and benefits 518,550 598,900
Occupancy 34,550 34,200
Federal insurance and operating assessments 32,250 33,100
Data processing 86,650 90,600
REO provisions and expense 43,100 222,950
Other operating expense 222,450 213,400
----------- -----------
937,550 1,193,150
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Income before income taxes 1,451,900 1,315,150
Income taxes 557,850 504,600
----------- -----------
Net income $ 894,050 $ 810,550
=========== ===========
Basic earnings per share $ 0.78 $ 0.70
Diluted earnings per share $ 0.78 $ 0.70
Dividends per share $ 0.38 $ 0.36
See Notes to Consolidated Financial Statements.
3
FOR THREE MONTHS ENDED JUNE 30: 2003 2002
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Net income $ 306,900 $ 290,850
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Other comprehensive loss, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (11,800) (13,300)
Less: reclassification adjustments for gains included
in net income -- (48,300)
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Other comprehensive loss (11,800) (61,600)
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Comprehensive income $ 295,100 $ 229,250
========= =========
FOR NINE MONTHS ENDED JUNE 30: 2003 2002
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Net income $ 894,050 $ 810,550
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Other comprehensive loss, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (29,750) (29,100)
Less: reclassification adjustments for gains included
in net income (98,350) (169,550)
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Other comprehensive loss (128,100) (198,650)
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Comprehensive income $ 765,950 $ 611,900
========= =========
See Notes to Consolidated Financial Statements.
4
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
2003 2002
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Net income $ 894,050 $ 810,550
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 23,150 24,950
ESOP contribution expense credited to paid-in capital 16,000 28,850
Provision for loan losses 190,000 114,250
Provision for foreclosed assets 2,500 206,000
Gain on sale of investments (158,600) (273,450)
Gain on sale of foreclosed assets, net (250) (8,900)
Deferred income taxes (74,200) (54,800)
Amortization of unearned ESOP shares 29,400 44,150
Amortization of unearned RRP shares -- 18,900
Changes in assets and liabilities:
Prepaid expenses and other assets (328,000) 38,750
Accrued interest receivable (18,750) 7,200
Accrued expenses and other liabilities 73,750 67,350
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NET CASH PROVIDED BY OPERATING ACTIVITIES 649,050 1,023,800
------------ ------------
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable 8,619,850 (2,099,200)
Proceeds from sale of foreclosed assets 408,100 672,400
Redemption of FHLB stock 104,500 --
Capital additions to foreclosed assets (1,700) (21,700)
Proceeds from sale of available for sale investment securities 161,500 277,700
Maturity of available for sale investment securities -- 500,000
Purchase of property and equipment (5,600) (7,050)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,286,650 (677,850)
------------ ------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits (5,751,000) (445,800)
Principal payments on ESOP debt (29,450) (44,150)
Proceeds from stock options exercised -- 9,550
Repurchase of common stock for the Treasury (57,500) (92,000)
Dividends paid (336,600) (413,750)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (6,174,550) (986,150)
------------ ------------
Net increase in cash and cash equivalents 3,761,150 (640,200)
Cash and cash equivalents:
Beginning 15,303,250 15,885,100
------------ ------------
Ending $ 19,064,400 $ 15,244,900
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 1,803,150 $ 2,704,600
============ ============
Cash payment of income taxes $ 627,250 $ 500,000
============ ============
Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ (107,000) $ 35,900
============ ============
Transfer of loans to foreclosed assets $ 1,149,800 $ 990,000
============ ============
Incr. (decr.) in unrealized gain on investment securities $ (128,100) $ (198,650)
============ ============
See Notes to Consolidated Finanical Statements.
5
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
Wake Forest Bancshares, Inc. (the "Company") is located in Wake Forest, North
Carolina and is the parent stock holding company of Wake Forest Federal Savings
and Loan Association (the "Association" or "Wake Forest Federal"), it's only
subsidiary. The Company conducts no business other than holding all of the stock
in the Association, investing dividends received from the Association,
repurchasing its common stock from time to time, and distributing dividends on
its common stock to its shareholders. The Association's principal activities
consist of obtaining deposits and providing mortgage credit to customers in its
primary market area, the counties of Wake and Franklin, North Carolina. The
Company's and the Association's primary regulator is the Office of Thrift
Supervision (OTS) and its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).
NOTE 2. ORGANIZATIONAL STRUCTURE
The Company is majority owned by the Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company. Members of the MHC consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the MHC for as long as it remains in mutual form. Initially, the
MHC's principal assets consisted of 635,000 shares of the Association's common
stock (now converted to the Company's common stock) and $100,000 in cash
received from the Association as initial capital. Prior to the two most recent
dividend payments (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 nine month periods ended June 30,
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 June 16, 2003, the Board of Directors of the Company declared a dividend of
$0.14 a share for stockholders of record as of June 30, 2003 and payable on July
10, 2003. The dividends declared were accrued and reported as dividends payable
in the June 30, 2003 Consolidated Statement of Financial Condition. Wake Forest
Bancorp, Inc., the mutual holding company, waived the receipt of the dividend
declared by the Company 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. This presentation has been adopted for all periods
presented. There were no adjustments required to net income for any period in
the computation of diluted earnings per share. The reconciliation of weighted
average shares outstanding for the computation of basic and diluted earnings per
share for the three and nine month periods ended June 30, 2003 and 2002 is
presented below.
For the Three Months Ended June 30: 2003 2002
--------- ---------
Weighted average shares outstanding for Basic EPS 1,144,966 1,146,881
Plus incremental shares from assumed issuances of
shares pursuant to stock option and stock award plans 9,311 8,426
--------- ---------
Weighted average shares outstanding for diluted EPS 1,154,277 1,155,307
========= =========
For the Nine Months Ended June 30: 2003 2002
--------- ---------
Weighted average shares outstanding for Basic EPS 1,144,742 1,146,534
Plus incremental shares from assumed issuances of
shares pursuant to stock option and stock award plans 7,909 8,168
--------- ---------
Weighted average shares outstanding for diluted EPS 1,152,651 1,154,702
========= =========
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.
7
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTION PLAN (CONTINUED)
A summary of the changes in the Company's options during the quarters ended June
30, 2003 and 2002 is presented below:
2003 2002
------ ------
Stock options outstanding at beginning of the quarter 37,336 37,366
Granted -- --
Exercised -- --
Terminated -- --
------ ------
Stock options outstanding at end of the quarter 37,336 37,366
====== ======
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 nine months ended June 30, 2002, respectively. There was no fair
value expense effect for the quarter and nine months ended June 30, 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 JUNE 30, 2003:
Total assets decreased by $5.3 million to $87.7 million at June 30, 2003 from
$93.0 million at September 30, 2002. Total assets decreased during the nine
months ended June 30, 2003 primarily due to a decrease in deposits of
approximately $5.8 million during the same period. Because the Company currently
has a sufficient amount of liquidity, deposits were not priced aggressively to
retain certain accounts or to attract additional funds from competition. Cash
and short term cash investments increased by approximately $3.8 million for the
nine month period due to a decrease in the Company's loan portfolio during the
same period.
Net loans receivable decreased by $9.9 million to $65.8 million at June 30, 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 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 $314,000 to $639,900 at June 30, 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 and a May 2003 required FHLB stock redemption of $104,500.
The remaining $48,000 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 June 30,
2003, the Company's investment portfolio, which consisted primarily of FHLB
stock and FHLMC stock, had approximately $406,000 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 nine month period,
the Company made principal payments of $29,450 which repaid the ESOP note. The
Company also has recorded a liability of $504,250 at June 30, 2003 for the ESOP
put option which represents the potential liability owed to participants based
on the current market value of the Company's stock if all participants were to
request the balance of their account from the Company in cash instead of stock.
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 JUNE 30, 2003
(CONTINUED):
The Company has an ongoing stock repurchase program authorizing management to
repurchase shares of its outstanding common stock. The repurchases are made
through registered broker-dealers from shareholders in open market purchases at
the discretion of management. The Company intends to hold the shares repurchased
as treasury shares, and may utilize such shares to fund stock benefit plans or
for any other general corporate purposes permitted by applicable law. At June
30, 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 $760,250 to $11.1 million at June 30, 2003 from
$10.3 million at September 30, 2002. The increase is attributable to the
Company's earnings of $894,050 during the nine month period ended June 30, 2003,
reduced by $270,200 in dividends declared during the period and a $136,400
credit to retained earnings to reflect the change in the fair value of the ESOP
shares subject to the put option.. At June 30, 2003 the Company's capital
amounted to $15.4 million, which as a percentage of total assets was 17.59%, 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 1.21% at June 30, 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 June 30, 2003, non-performing loans amounted to $773,842 and consisted of six
loans. One of the loans amounting to $340,800 has subsequently been repaid. The
Company believes that it has sufficient allowances established to cover any loss
associated with these loans. The Company had no charge-offs during the current
quarter. Loans amounting to $37,847 were charged off during the first six months
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 $30,000 and $190,000 were made during the three and nine
month periods ended June 30, 2003, respectively. The provisions resulted in an
increase in the allowance for loan losses expressed as a percentage of gross
loans from 0.61% at September 30, 2002 to 0.93% at June 30, 2003. The Company's
loan loss allowance was $615,400 at June 30, 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 $1,168,650 in foreclosed assets consisting of seven
residential properties and a 32 lot development at June 30, 2003. Five of the
residential properties and the development tract were under sales contract at
June 30, 2003. The other two residential homes are currently listed for sale.
The Company believes that all of the properties have been adequately reserved at
June 30, 2003.
10
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
2003 AND 2002:
GENERAL. Net income for the three month period ended June 30, 2003 was $306,900
($0.27 per share) as compared to $290,850 ($0.25 per share) earned during the
same quarter in 2002. Net income for the nine month period ended June 30, 2003
was $894,050 ($0.78 per share) as compared to $810,550 ($0.70 per share) 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
income and non-interest expense were primarily responsible for the change in net
income during the current quarter and nine month period ended June 30, 2003 as
compared to the same periods one year earlier.
INTEREST INCOME. Interest income decreased by $275,850 from $1,587,350 for the
three months ended June 30, 2002 to $1,311,500 for the three months ended June
30, 2003. The decline in interest income resulted from both a 0.91% decrease in
the average yield on interest-earning assets and a $6.4 million decrease in the
average balance of interest-earning assets between the quarters. Interest income
decreased by $874,950 from $4,982,300 for the nine months ended June 30, 2002 to
$4,107,350 for the nine months ended June 30, 2003. The decline in interest
income resulted from both a 0.92% basis point decrease in the yield on
interest-earning assets and a $6.4 million decrease in the average balance of
interest-earning assets between the nine month periods. The Company's yield on
interest earning assets was 6.41% and 6.65% for the quarter and nine month
period ended June 30, 2002, respectively, and 5.50% and 5.73% for the quarter
and nine month period ended June 30, 2003, respectively. The changes in yield
occurred primarily due to fluctuations in market rates outstanding during the
periods.
INTEREST EXPENSE. Interest expense decreased by $238,500 from $785,100 for the
three months ended June 30, 2002 to $546,600 for the three months ended June 30,
2003. The decrease was the result of both a 0.89% decrease in the Company's cost
of funds and a $6.1 million decline in the average balance of interest-bearing
liabilities between the quarters. Interest expense decreased by $895,250 from
$2,688,350 for the nine months ended June 30, 2002 to $1,793,100 for the nine
months ended June 30, 2003. The decrease was the result of both a 1.22% decrease
in the Company's cost of funds and a $6.4 million decline in the average balance
of interest-bearing liabilities between the nine month periods. The Company's
cost of funds was 3.97% and 4.48% for the quarter and nine month period ended
June 30, 2002, respectively, and 3.08% and 3.26% for the quarter and nine month
period ended June 30, 2003, respectively. The change in the Company's cost of
funds occurred primarily due to fluctuations in market rates between the
periods.
NET INTEREST INCOME. Net interest income decreased by $37,350 from $802,250 for
the three months ended June 30, 2002 to $764,900 for the three months ended June
30, 2003. Net interest income increased by $20,300 from $2,293,950 for the nine
months ended June 30, 2002 to $2,314,250 for the nine months ended June 30,
2003. As explained above, the changes in net interest income resulted primarily
from fluctuations in both the yields on interest-earning assets and the cost of
funds on interest-bearing liabilities between the periods. The Company's
interest rate margin was 3.62% and 3.56% for the current quarter and nine month
period ended June 30, 2003; respectively, as compared to 3.53% and 3.28% for the
quarter and nine month period ended June 30, 2002; respectively.
PROVISION FOR LOAN LOSSES. The Company provided $30,000 and $190,000 in loan
loss provisions during the current quarter and nine month period ended June 30,
2003, respectively, as compared to $32,500 and $114,250 during the three and
nine month period; respectively, a year earlier. Provisions, which are charged
to operations, and the resulting loan loss allowances are amounts the Company's
management believes will be adequate to absorb losses that are estimated to have
occurred. Loans are charged off against the allowance when management believes
that uncollectibility is confirmed. Subsequent recoveries, if any, are credited
to the allowance. 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. The Company's non-interest income is primarily comprised on
various fees and service charges on customer accounts as well as security gains
and fees earned from secondary market originations. The Company began
originating loans to sell in the secondary market during the current year. The
Company did not have any investment sales during the current quarter, but
previously sold 3,000 shares of FHLMC stock with a cost basis of approximately
$2,950 and realized a gain of $158,600 during the second quarter of its fiscal
year. During the same quarter a year earlier, the Company sold 1,250 shares of
FHLMC stock with a cost basis of approximately $1,250 for a realized gain of
$78,000, and during the second quarter of 2002 the Company sold 3,100 shares for
a realized gain of approximately $196,000. The Company continues to hold 8,154
shares of FHLMC stock in its investment portfolio.
NON-INTEREST EXPENSE. Non-interest expense decreased by $81,250 to $310,500 for
the three month period ended June 30, 2003 from $391,750 for the comparable
quarter in 2002. Non-interest expense decreased by $255,600 to $937,550 for the
nine month period ended June 30, 2003 from $1,193,150 for the same period a year
earlier. Only two categories of expense changed significantly between the
periods. Expenses associated with foreclosed assets totaled $76,950 and $222,950
for the three and nine month periods ended June 30, 2002 as compared to expenses
of $12,450 and $43,100 for the three and nine month periods ended June 30, 2003.
The largest portion of the 2002 expense occurred when the Company charged
earnings for $206,000 of specific allowances established on foreclosed assets
during the first nine months of 2002. The provisions in 2002 related to
foreclosures on five loans collateralized by residential properties to the same
borrower. As of June 30, 2003, three of the five properties have been sold and
management does not expect additional significant expense associated with the
remaining properties. Compensation and related benefits decreased from $186,150
during the quarter ended June 30, 2002 to $165,550 in the current quarter, and
from $598,900 during the nine month period ended June 30, 2002 to $518,550 in
the nine months ended June 30, 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. In
addition, certain stock related benefits associated with the Company's ESOP and
Management Recognition Plan (MRP) expired during the current year.
CAPITAL RESOURCES AND LIQUIDITY:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits.
During the nine month period ended June 30, 2003, cash and cash equivalents, a
significant source of liquidity, increased by approximately $3.8 million. Net
loan repayments of approximately $8.6 million were the primary source of the
increase in cash during the nine month period. Proceeds from the Company's
operations also contributed $649,050 in cash during the period. A decrease in
deposits of approximately $5.8 million was the primary utilization of cash
during the nine months ended June 30, 2003.
Given its excess liquidity and its ability to borrow from the Federal Home Loan
Bank of Atlanta, the Company believes that it will have sufficient funds
available to meet anticipated future loan commitments, unexpected deposit
withdrawals, and other cash requirements.
12
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 10-KSB. 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.
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. CONTROLS AND PROCEDURES
Management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(e)) as of
the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during the
Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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. Occasionally, the Association is a party
to legal proceedings within the normal course of business
wherein it enforces its security interest in loans made by it,
and other matters of a similar nature.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) The Company filed a Form 8-K on April 22, 2003 to disclose
its second quarter earnings.
b) Exhibit 31 Certification of
Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
c) Exhibit 32 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 August 12, 2003 By: s/s Robert C. White
------------------- ---------------------------
Robert C. White
Chief Executive Officer and
Chief Financial Officer
16