FORM 10-QSB - QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
---
(Former name, former address and former fiscal
year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of February 12, 2004 there were
issued and outstanding 1,145,296 shares of the Issuer's common stock, $.01 par
value
Transitional Small Business Disclosure Format: Yes No X
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WAKE FOREST BANCSHARES, INC.
CONTENTS
Item 1. Financial Statements
Consolidated statements of financial condition at December 31, 2003 (unaudited)
and September 30, 2003 1
Consolidated statements of income for the three months ended December 31, 2003
and December 31, 2002 (unaudited) 2
Consolidated statements of comprehensive income for the three months ended
December 31, 2003 and December 31, 2002 (unaudited) 3
Consolidated statements of cash flows for the three months ended
December 31, 2003 and December 31, 2002 (unaudited) 4
Notes to consolidated financial statements (unaudited) 5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Item 3. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibits 16-17
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2003 AND SEPTEMBER 30, 2003
December 31, September 30,
ASSETS 2003 2003
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(Unaudited) *
Cash and short-term cash investments $ 14,161,200 $ 16,742,200
Investment securities:
Available for sale, at estimated market value 475,550 426,850
FHLB stock 225,900 225,900
Loans receivable, net of loan loss allowances of $662,900 at
December 31, 2003 and $640,400 at September 30, 2003 69,575,200 67,015,550
Accrued interest receivable 117,550 93,050
Foreclosed assets, net 281,150 442,650
Property and equipment, net 379,400 386,950
Deferred income taxes, net 197,650 205,650
Prepaid expenses and other assets 42,600 135,300
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Total Assets $ 85,456,200 $ 85,674,100
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 68,324,350 $ 68,839,950
Accrued expenses and other liabilities 596,650 637,850
Accrued income taxes 126,250 --
Dividends payable 71,450 71,450
Redeemable common stock held by the ESOP
net of unearned ESOP shares 612,100 582,950
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Total Liabilities 69,730,800 70,132,200
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Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, par value $ .01, authorized 5,000,000 shares,
issued 1,216,612 shares 12,150 12,150
Additional paid-in capital 5,199,400 5,199,450
Accumulated other comprehensive income 289,900 259,700
Retained earnings, substantially restricted 11,198,850 11,045,500
Less: Common stock in treasury, at cost (974,900) (974,900)
-------------- --------------
Total stockholders' equity 15,725,400 15,541,900
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Total liabilities and stockholders' equity $ 85,456,200 $ 85,674,100
============== ==============
See Notes to Consolidated Financial Statements.
* Derived from Audited Financial Statements.
1
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
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Interest and dividend income:
Loans $ 1,132,450 $ 1,425,600
Investment securities 4,100 6,600
Short-term cash investments 34,000 60,950
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Total interest income 1,170,550 1,493,150
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Interest expense:
Interest on deposits 500,350 673,000
Interest on ESOP debt -- 300
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Total interest expense 500,350 673,300
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Net interest income before provision for loan losses 670,200 819,850
Provision for loan losses (22,500) (30,000)
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Net interest income after provision for loan losses 647,700 789,850
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Noninterest income:
Service charges and fees 12,800 9,900
Secondary market fee income 13,050 --
Other 5,650 --
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31,500 9,900
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Noninterest expense:
Compensation and benefits 152,200 172,900
Occupancy 11,800 10,100
Federal insurance and operating assessments 9,900 11,000
Data processing 28,600 27,600
REO provisions and expense 4,850 18,850
Other operating expense 61,050 68,200
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268,400 308,650
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Income before income taxes 410,800 491,100
Income taxes 156,900 189,600
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Net income $ 253,900 $ 301,500
=========== ===========
Basic earnings per share $ 0.22 $ 0.26
Diluted earnings per share $ 0.22 $ 0.26
Dividends per share $ 0.14 $ 0.12
See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
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Net income $253,900 $301,500
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Other comprehensive loss, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 30,200 21,800
Less: reclassification adjustments for gains included
in net income -- --
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Other comprehensive income 30,200 21,800
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Comprehensive income $284,100 $323,300
======== ========
See Notes to Consolidated Financial Statements.
3
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
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Net income $ 253,900 $ 301,500
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,550 7,600
ESOP contribution expense credited to paid-in capital -- 7,850
Provision for loan losses 22,500 30,000
Gain on sale of foreclosed assets, net (5,200) 600
Deferred income taxes (10,500) (16,650)
Amortization of unearned ESOP shares -- 14,700
Changes in assets and liabilities:
Prepaid expenses and other assets 92,700 (13,800)
Accrued interest receivable (24,500) (8,550)
Accrued income taxes 126,250 --
Accrued expenses and other liabilities (41,200) 178,750
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NET CASH PROVIDED BY OPERATING ACTIVITIES 421,500 502,000
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Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable (2,582,150) 4,236,300
Proceeds from sale of foreclosed assets 166,700 64,250
Capital additions to foreclosed assets -- (2,700)
Purchase of property and equipment -- (1,900)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,415,450) 4,295,950
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Cash Flows From Financing Activities:
Net decrease in deposits (515,600) (2,352,500)
Principal payments on ESOP debt -- (14,750)
Repurchase of common stock for the Treasury -- (31,200)
Dividends paid (71,450) (137,750)
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NET CASH USED IN FINANCING ACTIVITIES (587,050) (2,536,200)
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Net increase in cash and cash equivalents (2,581,000) 2,261,750
Cash and cash equivalents:
Beginning 16,742,200 15,303,250
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Ending $ 14,161,200 $ 17,565,000
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 500,850 $ 675,350
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Cash payment of income taxes $ -- $ --
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Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ 29,150 (77,250)
============ ============
Transfer of loans to foreclosed assets $ -- $ 161,700
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Increase in unrealized gain on investment securities, net ot tax $ 30,200 $ 21,800
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See Notes to Consolidated Finanical Statements.
4
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"), its 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 2003 (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, 2003, which is
derived from audited financial statements) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
Regulation S-B. Accordingly, they do not include all of the information required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (none of which were other than
normal recurring accruals) necessary for a fair presentation of the financial
position and results of operations for the periods presented have been included.
The results of operations for the three month period ended December 31, 2003 are
not necessarily indicative of the results of operations that may be expected for
the Company's fiscal year ending September 30, 2004. The accounting policies
followed are as set forth in Note 1 of the Notes to Consolidated Financial
Statements in the Company's September 30, 2003 Annual Report to Stockholders.
5
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DIVIDENDS DECLARED
On December 15, 2003, the Board of Directors of the Company declared a dividend
of $0.14 a share for stockholders of record as of December 31, 2003 and payable
on January 10, 2004. The dividends declared were accrued and reported as
dividends payable in the December 31, 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 month periods ended December 31, 2003 and 2002 is presented
below.
For the Three Months Ended December 31 2003 2002
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Weighted average shares outstanding for Basic EPS 1,144,766 1,144,640
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 14,461 7,041
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Weighted average shares outstanding for diluted EPS 1,159,227 1,151,681
========= =========
NOTE 6. STOCK OPTION PLAN
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (Statement 148). Statement 148 amends
SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Statement 148 is effective for
financial statements for fiscal years ending after December 15, 2002. Early
application of the disclosure provisions is encouraged. The Company continues to
account for its stock-based compensation in accordance with APB 25 and has
adopted the disclosure provisions of Statement 148 effective for all periods
presented herein.
The Company has a stock option plan for the benefit of its officers, directors,
and key employees. Options totaling 54,000 at a grant price of $12.75 were
granted on January 22, 1997. No options have been granted since that date. The
options became exercisable at the rate of 20% annually for years during periods
of service as an employee, officer, or director, and expire after ten years.
Accelerated vesting may occur in certain circumstances as disclosed in the plan
documents. Options are exercisable at the fair value on the date of grant.
A summary of the changes in the Company's options during the quarters ended
December 31, 2003 and 2002 is presented below:
2003 2002
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Stock options outstanding at beginning of the quarter 37,336 37,366
Granted -- --
Exercised -- --
Terminated -- --
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Stock options outstanding at end of the quarter 37,336 37,366
====== ======
Stock options exercisable at end of the quarter 37,336 37,336
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6
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTION PLAN (CONTINUED)
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, there would have been no pro forma impact on
the Company's net income and earnings per share for the quarters ended December
31, 2003 and 2002 because the five year period over which the options vested
(and would have been expensed under SFAS No. 123) expired during the year ended
September 30, 2002. The fair value of each grant was estimated at the grant date
using the Black-Scholes option-pricing model with the following assumptions for
1997 when the options were granted: dividend rate of 2.75%; risk-free interest
rate of 5.87%; expected lives of 10 years; and price volatility of 26.51%.
7
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, 2003 AND DECEMBER 31, 2003:
Total assets decreased by $217,900 to $85.5 million at December 31, 2003 from
$85.7 million at September 30, 2003. The slight decrease in total assets during
the quarter ended December 31, 2003 occurred primarily due to a decrease in
deposits of approximately $515,600 during the same quarter. 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. However, cash and short term cash investments decreased by
approximately $2.6 million during the current quarter primarily due to an
increase in the Company's loan portfolio during the same period.
Net loans receivable increased by $2.6 million to $69.6 million at December 31,
2003 from $67.0 million at September 30, 2003. The increase is a sign of
improving economic conditions in the Company's primary lending markets,
particularly in the area of residential construction. However, any significant
employment growth has not yet been evident and a job creating expansion will
ultimately determine whether the current loan demand is sustainable. The high
tech sector of the area's employment base has been hit hard during the past
couple of years and has negatively impacted growth in 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 until recently had
sustained significant growth and strong loan demand. However, there can be no
assurances that such loan demand can or will materialize in the future.
Investment securities increased by $48,700 to $701,450 at December 31, 2003 from
$652,750 at September 30, 2003. The slight increase is attributable to
unrealized gains in the Company's investment in FHLMC stock. The Company has
decided to maintain higher levels of liquidity due to the historically low
investment rates available in the market and as a result, has not been actively
involved in the buying and selling securities. At December 31, 2003, the
Company's investment portfolio, which consisted primarily of FHLB stock and
FHLMC stock, had approximately $468,000 in unrealized gains.
The Company had no borrowings outstanding during the period because its current
level of liquidity was sufficient to fund the growth in its loan portfolio. The
Company has recorded a liability of $612,100 at December 31, 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.
The Company has an ongoing stock repurchase program authorizing management to
repurchase shares of its outstanding common stock. The repurchases are made
through registered broker-dealers from shareholders in open market purchases at
the discretion of management. The Company intends to hold the shares repurchased
as treasury shares, and may utilize such shares to fund stock benefit plans or
for any other general corporate purposes permitted by applicable law. At
December 31, 2003 the Company had repurchased 71,316 shares of its common stock.
The program continues until completed or terminated by the Board of Directors.
8
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2003
(CONTINUED):
Retained earnings increased by $153,350 to $11.2 million at December 31, 2003
from $11.0 million at September 30, 2003. The increase is primarily attributable
to the Company's earnings of $253,900 during the quarter ended December 31,
2003, reduced by $71,450 in dividends declared during the period and a $29,100
charge to retained earnings to reflect the change in the fair value of the ESOP
shares subject to the put option.. At December 31, 2003 the Company's capital
amounted to $15.7 million, which as a percentage of total assets was 18.40%, 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 3.23% at December 31, 2003
and 0.37% at September 30, 2003. The Company's non-performing loans amounted to
$2,273,750 and consisted of three residential properties and three commercial
properties, including a small church, at December 31, 2003. At September 30,
2003, non-performing loans amounted to $247,200 and consisted of three mortgage
loans. One commercial lending relationship amounting to $1,894,650 accounted for
two of the non-performing loans at December 31, 2003. Both loans, secured by
three convenience stores and a tract of land, were brought current in early
January 2004. Had that relationship been current at December 31, 2003, the
Company's non-performing loans as a percentage of total loans outstanding would
have been 0.53%. 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.
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance 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 any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available. 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. In addition, regulatory examiners may
require the Association to recognize adjustments to the allowance for loan
losses based on their judgments about information available to them at the time
of their examination.
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. Based on management's analysis of the adequacy of its allowances,
loan loss provisions totaling $22,500 were provided during the three month
period ended December 31, 2003, respectively. The Company's allowance for loan
losses expressed as a percentage of gross loans outstanding was 0.94% at
December 31, 2003 as compared to 0.95% at September 30, 2003. The Company's loan
loss allowance was $662,900 at December 31, 2003.
The Company also has $281,150 in foreclosed assets consisting of two residential
properties at December 31, 2003. These two residential homes are currently
listed for sale. The Company believes that both of the properties have been
adequately reserved at December 31, 2003.
9
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND
2002:
GENERAL. Net income for the three month period ended December 31, 2003 was
$253,900 ($0.22 per share) as compared to $301,500 ($0.26 per share) earned
during the same quarter in 2002. As discussed below, changes in net interest
income between the comparable periods was primarily responsible for the change
in net income during the current quarter ended December 31, 2003 as compared to
the same period one year earlier.
INTEREST INCOME. Interest income decreased by $322,600 from $1,493,150 for the
three months ended December 31, 2002 to $1,170,550 for the three months ended
December 31, 2003. The decline in interest income resulted from both a 0.76%
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.
The Company's yield on interest earning assets was 6.00% for the quarter ended
December 31, 2002 and 5.24% for the quarter ended December 31, 2003. The changes
in yield occurred primarily due to fluctuations in market rates outstanding
during the periods and due to the refinancing and subsequent payoff of certain
residential mortgages which resulted in a decline in portfolio rates. Customer
refinancings, primarily for long-term fixed rate mortgages, was the primary
cause for the lower amount of interest earning assets. The Company has
historically not placed long-term fixed rate mortgages in its portfolio,
particularly in a low interest rate environment, due to the interest rate risk
associated with an eventual rise in market rates.
INTEREST EXPENSE. Interest expense decreased by $172,950 from $673,300 for the
three months ended December 31, 2002 to $500,350 for the three months ended
December 31, 2003. The decrease was the result of both a 0.60% decrease in the
Company's cost of funds and a $6.7 million decline in the average balance of
interest-bearing liabilities between the quarters. The Company's cost of funds
was 3.47% for the quarter ended December 31, 2002 and 2.87% for the quarter
ended December 31, 2003. The change in the Company's cost of funds occurred
primarily due to fluctuations in market rates between the periods. The decline
in the average balance of interest-bearing liabilities occurred primarily due to
the aggressive competition for deposits in the Company's geographic market and
the Company's decision to allow certain deposits to leave the Association due to
the Company's level of liquidity.
NET INTEREST INCOME. Net interest income decreased by $149,650 from $819,850 for
the three months ended December 31, 2002 to $670,200 for the three months ended
December 31, 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
as well as changes in the level of interest earning assets and interest-bearing
liabilities. The Company's interest rate margin was 3.23% for the current
quarter as compared to 3.67% for the quarter ended December 31, 2002.
PROVISION FOR LOAN LOSSES. The Company provided $22,500 and $30,000 in loan loss
provisions during the current quarter and the same quarter a year earlier.
Management does not believe that there are any significant factors outstanding
between the two quarters which would warrant a material change in the level of
loan loss provisions. 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.
10
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 second quarter of
our fiscal year ended September 30, 2003. The Company did not have any
investment sales in the current quarter or during the same quarter a year
earlier. The refinance market which had been very active six to nine months ago
has been relatively slow during the current quarter and the Company generated
less fee income from its secondary market operations as a result.
NON-INTEREST EXPENSE. Non-interest expense decreased by $40,250 to $268,400 for
the three month period ended December 31, 2003 from $308,650 for the comparable
quarter in 2002. Only two categories of expense changed significantly between
the periods. Expenses associated with foreclosed assets totaled $18,850 for the
three month period ended December 31, 2002 as compared to expenses of $4,850 for
the three month period ended December 31, 2003. Expense associated with
foreclosed assets has declined as the number of foreclosed properties held and
managed for resale has dropped. Compensation and related benefits decreased from
$172,900 during the quarter ended December 31, 2002 to $152,200 in the current
quarter. The decrease in compensation and benefits occurred primarily because
certain stock related benefits associated with the Company's ESOP expired during
the second quarter of the fiscal year ended September 30, 2003.
CAPITAL RESOURCES AND LIQUIDITY:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits.
During the three month period ended December 31, 2003, cash and cash
equivalents, a significant source of liquidity, decreased by approximately $2.6
million. Net new loan originations increased by approximately $2.6 million
during the current quarter and were the primary use of cash during the three
month period. Proceeds from the Company's operations contributed $421,500 in
cash during the period. A decrease in deposits of approximately $515,600 also
contributed to the utilization of cash during the current quarter. 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.
OFF-BALANCE SHEET TRANSACTIONS
In the normal course of business, the Association engages in a variety of
financial transactions that, under generally accepted accounting principles,
either are not recorded on the balance sheet or are recorded on the balance
sheet in amounts that differ from the full contract or notional amounts.
Primarily the Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, revolving lines of credit, and the undisbursed portion of
construction loans. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
statement of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Association has in particular
classes of financial instruments. The Association's exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual notional amount
of those instruments. The Association uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. At December 31, 2003, the Association had outstanding loan
commitments amounting to $6,381,000. The undisbursed portion of construction
loans amounted to $17.8 million and unused lines of credit amounted to $4.6
million at September 30, 2003.
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WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's 2003 Annual Report on Form 10-KSB. The
Company has not experienced any material change in its critical accounting
policies since September 30, 2003. 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.
A loan is considered impaired when, based on current information and events, it
is probable that the Association will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable 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. Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment. Accordingly, the
Association does not separately identify individual residential loans for
impairment disclosures.
The adequacy of the allowance is also reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of the Company and other conditions, such as new loan products,
collateral values, loan concentrations, changes in the mix and volume of the
loan portfolio; trends in portfolio credit quality, including delinquency and
charge-off rates; and current economic conditions that may affect a borrower's
ability to repay. Although management believes it has established and maintained
the allowance for loan losses at appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ substantially
from the current operating environment.
Interest Income Recognition:
Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or more
past due unless the loans are adequately secured and in the process of
collection. Interest is not accrued on other loans when management believes
collection is doubtful. All loans considered impaired are non-accruing. Interest
on non-accruing loans is recognized as payments are received when the ultimate
collectibility of interest is no longer considered doubtful. When a loan is
placed on non-accrual status, all interest previously accrued is reversed
against current-period interest income.
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WAKE FOREST BANCSHARES, INC.
ITEM 3. 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.
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WAKE FOREST BANCSHARES, INC.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any material legal proceedings
at the present time. 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 October 24, 2003 to
disclose its fiscal year end September 30, 2003 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAKE FOREST BANCSHARES, INC.
Dated February 13, 2004 By: /s/ Robert C. White
------------------------------ ---------------------------
Robert C. White
Chief Executive Officer and
Chief Financial Officer
15