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, 2004
----------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------
Commission file number 000-25999
---------
WAKE FOREST BANCSHARES, INC.
----------------------------
(Exact name of small business issuer as specified in its charter)
United States of America 56-2131079
------------------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
302 South Brooks Street
Wake Forest, North Carolina 27587
---------------------------------
(Address of principal executive offices)
(919)-556-5146
--------------
(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 May 1, 2004 there were issued
and outstanding 1,147,508 shares of the Issuer's common stock, $.01 par value
Transitional Small Business Disclosure Format: Yes No X
---- ---
WAKE FOREST BANCSHARES, INC.
CONTENTS
PART 1. - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated statements of financial condition at March 31, 2004 (unaudited)
and September 30, 2003 1
Consolidated statements of income for the three months ended March 31, 2004
and March 31, 2003 (unaudited) 2
Consolidated statements of income for the six months ended March 31, 2004
and March 31, 2003 (unaudited) 3
Consolidated statements of comprehensive income for the three and six months
ended March 31, 2004 and March 31, 2003 (unaudited) 4
Consolidated statements of cash flows for the six months ended
March 31, 2004 and March 31, 2003 (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 -14
Item 3. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibits 18 - 19
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2004 AND SEPTEMBER 30, 2003
March 31, September 30,
ASSETS 2004 2003
------------ ------------
(Unaudited) *
Cash and short-term cash investments $ 15,366,350 $ 16,742,200
Investment securities:
Available for sale, at estimated market value 481,600 426,850
FHLB stock 213,800 225,900
Loans receivable, net of loan loss allowances of $685,400 at
March 31, 2004 and $640,400 at September 30, 2003 72,386,100 67,015,550
Accrued interest receivable 111,900 93,050
Foreclosed assets, net 358,800 442,650
Property and equipment, net 373,650 386,950
Deferred income taxes, net 201,450 205,650
Prepaid expenses and other assets 74,750 135,300
------------ ------------
Total Assets $ 89,568,400 $ 85,674,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 72,399,450 $ 68,839,950
Accrued expenses and other liabilities 577,600 637,850
Dividends payable 71,450 71,450
Redeemable common stock held by the ESOP
net of unearned ESOP shares 728,700 582,950
------------ ------------
Total liabilities 73,777,200 70,132,200
------------ ------------
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 5,199,450 5,199,450
Accumulated other comprehensive income 293,650 259,700
Retained earnings, substantially restricted 11,260,850 11,045,500
Less: Common stock in treasury, at cost (974,900) (974,900)
------------ ------------
Total stockholders' equity 15,791,200 15,541,900
------------ ------------
Total liabilities and stockholders' equity $ 89,568,400 $ 85,674,100
============ ============
See Notes to Consolidated Financial Statements.
* Derived from Audited Consolidated Financial Statements.
1
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
---------- ----------
Interest income:
Loans $1,144,450 $1,243,250
Investment securities 4,400 8,850
Short-term cash investments 31,700 50,650
---------- ----------
Total interest income 1,180,550 1,302,750
---------- ----------
Interest expense:
Interest on deposits 481,100 573,050
Interest on ESOP debt - 150
---------- ----------
Total interest expense 481,100 573,200
---------- ----------
Net interest income before provision for loan losses 699,450 729,550
Provision for loan losses (22,500) (130,000)
---------- ----------
Net interest income after provision for loan losses 676,950 599,550
---------- ----------
Noninterest income:
Service charges and fees 16,350 24,800
Gain on sale of investments - 158,600
Other 600 850
---------- ----------
16,950 184,250
---------- ----------
Noninterest expense:
Compensation and benefits 156,100 180,100
Occupancy 11,650 13,400
Federal insurance and operating assessments 9,700 10,750
Data processing and outside service fees 29,050 30,550
Foreclosed assets, net 5,050 11,800
Other operating expense 79,750 71,850
---------- ----------
291,300 318,450
---------- ----------
Income before income taxes 402,600 465,350
Income taxes 152,550 179,700
---------- ----------
Net income $ 250,050 $ 285,650
========== ==========
Basic earnings per share $ 0.22 $ 0.25
Diluted earnings per share $ 0.22 $ 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)
SIX MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
---------- ----------
Interest income:
Loans $2,276,900 $2,668,850
Investment securities 8,500 15,500
Short-term cash investments 65,700 111,550
---------- ----------
Total interest income 2,351,100 2,795,900
---------- ----------
Interest expense:
Interest on deposits 981,400 1,246,050
Interest on ESOP debt -- 450
---------- ----------
Total interest expense 981,400 1,246,500
---------- ----------
Net interest income before provision for loan losses 1,369,700 1,549,400
Provision for loan losses (45,000) (160,000)
---------- ----------
Net interest income after provision for loan losses 1,324,700 1,389,400
---------- ----------
Noninterest income:
Service charges and fees 29,150 34,700
Secondary market fee income 13,000 --
Gain on sale of investments -- 158,600
Other 6,250 850
---------- ----------
48,400 194,150
---------- ----------
Noninterest expense:
Compensation and benefits 308,300 353,000
Occupancy 23,450 23,500
Federal insurance and operating assessments 19,650 21,750
Data processing and outside service fees 57,650 58,100
Foreclosed assets, net 9,900 30,650
Other operating expense 140,750 140,050
---------- ----------
559,700 627,050
---------- ----------
Income before income taxes 813,400 956,500
Income taxes 309,400 369,350
---------- ----------
Net income $ 504,000 $ 587,150
========== ==========
Basic earnings per share $ 0.44 $ 0.51
Diluted earnings per share $ 0.43 $ 0.51
Dividends per share $ 0.28 $ 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, 2004 AND 2003
2004 2003
--------- ---------
Net income $250,050 $285,650
--------- ---------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 3,750 (39,750)
Less: reclassification adjustments for gains included
in net income -- (98,350)
--------- ---------
Other comprehensive income (loss) 3,750 (138,100)
--------- ---------
Comprehensive income $ 253,800 $ 147,550
========= =========
FOR SIX MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
--------- ---------
Net income $504,000 $587,150
--------- ---------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 33,950 (17,950)
Less: reclassification adjustments for gains included
in net income -- (98,350)
--------- ---------
Other comprehensive income (loss) 33,950 (116,300)
--------- ---------
Comprehensive income $ 537,950 $ 470,850
========= =========
See Notes to Consolidated Finanical Statements.
4
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
------------ ------------
Net income $ 504,000 $ 587,150
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 13,900 15,250
ESOP contribution expense charged to paid-in capital -- 16,000
Provision for loan losses 45,000 160,000
Provision for foreclosed assets -- 2,500
Gain on sale of investments -- (158,600)
(Gain) loss on sale of foreclosed assets, net (3,300) 250
Amortization of unearned ESOP shares -- 29,400
Changes in assets and liabilities:
Prepaid expenses and other assets 60,550 (175,900)
Accrued interest receivable (18,850) (11,200)
Accrued expenses and other liabilities (55,700) 19,400
Deferred income taxes (16,550) (57,700)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 529,050 426,550
------------ ------------
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable (5,611,650) 6,001,100
Proceeds from sale of foreclosed assets 291,600 303,450
Capital additions to foreclosed assets
(12,950) (2,700)
Sale of available for sale investment securities -- 161,550
Redemption of FHLB stock 12,100 --
Purchase of property and equipment (600) (2,700)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,321,500) 6,460,700
------------ ------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 3,559,500 (4,519,300)
Principal payments on ESOP debt -- (29,450)
Repurchase of common stock for the Treasury -- (57,500)
Dividends paid (142,900) (275,400)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,416,600 (4,881,650)
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,375,850) 2,005,600
Cash and cash equivalents:
Beginning 16,742,200 15,303,250
------------ ------------
Ending $ 15,366,350 $ 17,308,850
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 983,950 $ 1,253,650
============ ============
Cash payment of income taxes $ 290,500 $ 414,250
============ ============
Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ 145,750 $ (144,850)
============ ============
Transfer of loans to foreclosed assets $ 196,100 $ 471,250
============ ============
Incr. (decr.) in unrealized gain on investment securities, net of tax $ 33,950 $ (116,300)
============ ============
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"), 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 consolidated 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, 2004 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.
6
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DIVIDENDS DECLARED
On March 15, 2003, the Board of Directors of the Company declared a dividend of
$0.14 a share for stockholders of record as of March 31, 2004 and payable on
April 12, 2004. The dividends declared were accrued and reported as dividends
payable in the March 31, 2004 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 six month periods ended March 31, 2004 and 2003 is
presented below.
FOR THE THREE MONTHS ENDED MARCH 31: 2004 2003
--------- ---------
Weighted average shares outstanding for Basic EPS 1,144,766 1,144,806
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 17,460 7,264
--------- ---------
Weighted average shares outstanding for diluted EPS 1,162,226 1,152,070
========= =========
FOR THE SIX MONTHS ENDED MARCH 31: 2004 2003
--------- ---------
Weighted average shares outstanding for Basic EPS 1,144,766 1,144,722
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 16,065 7,150
--------- ---------
Weighted average shares outstanding for diluted EPS 1,160,831 1,151,872
========= =========
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.
Previously granted options totaling 13,500 were returned to the Plan due to
employment separation of the option holders. The options are exercisable at the
rate of 20% annually for years during periods of service as an employee 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
March 31, 2004 and 2003 is presented below:
2004 2003
------ ------
Stock options outstanding at beginning of the quarter 37,336 37,336
Granted -- --
Exercised -- --
Terminated -- --
------ ------
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, there would have been no pro forma impact on
the Company's net income and earnings per share for the quarters or six month
periods ended March 31, 2004 and 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, 2003 AND MARCH 31, 2004
Total assets increased by $3.9 million to $89.6 million at March 31, 2004 from
$85.7 million at September 30, 2003. The increase in total assets during the six
month period ended March 31, 2004 occurred primarily due to an increase in
deposits of approximately $3.6 million during the same period. Deposits were
priced aggressively to retain certain accounts and to attract additional funds
from competition due to a higher level of loan demand, particularly in
construction lending. However, cash and short term cash investments still
decreased by approximately $1.4 million during the six month period primarily
due to an increase in the Company's loan portfolio during the same period.
Net loans receivable increased by $5.4 million to $72.4 million at March 31,
2004 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 where the Company
experienced the bulk of its loan growth. However, significant employment growth
has not yet materialized 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
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 $42,650 to $695,400 at March 31, 2004 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
maintained higher levels of liquidity due to loan demand and the historically
low investment rates available in the market. For the past couple of years, the
Company's intent has been to retain a short position in its investments due to
the interest rate risk associated with extending the maturities of its
investment portfolio should rates begin to rise. As a result, the Company has
not been actively involved in the buying and selling securities. At March 31,
2004, the Company's investment portfolio, which consisted primarily of FHLB
stock and FHLMC stock, had approximately $474,000 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 $728,700 at March 31, 2004 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 in the unlikely event, all
participants were to request the balance of their account from the Company in
cash instead of stock. Should that occur, the Company would repurchase those
shares as treasury 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, 2003 AND MARCH 31, 2004
(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 March
31, 2004 the Company had repurchased 71,316 shares of its common stock. The
program continues until completed or terminated by the Board of Directors.
Retained earnings increased by $215,350 to $11.2 million at March 31, 2004 from
$11.0 million at September 30, 2003. The increase is primarily attributable to
the Company's earnings of $504,000 during the six month period ended March 31,
2004, reduced by $142,900 in dividends declared during the period and a $145,750
charge to retained earnings to reflect the change in the fair value of the ESOP
shares subject to the put option. At March 31, 2004 the Company's stockholders'
equity amounted to $15.8 million, which as a percentage of total assets was
17.63%. Under the OTS's prompt corrective action regulations, the Company and
the Association are considered well capitalized if their ratio of total capital
to risk-weighted assets is at least 10%, their ratio of core capital (Tier 1) to
risk-weighted assets is at least 6.0%, and their ratio of core capital to total
average assets is at least 5.0%. Both the Company and the Association met all of
the above requirements and are considered well capitalized.
ASSET QUALITY
The Company's level of non-performing loans, defined as loans past due 90 days
or more, as a percentage of loans outstanding was 0.37% at September 30, 2003
and 2.03% at March 31, 2004. At September 30, 2003, non-performing loans
amounted to $247,200 and consisted of three mortgage loans. Non-performing loans
amounted to $1,880,092 at March 31, 2004 consisted solely of two commercial
loans collateralized by three convenience stores and an adjacent tract of land
to the same borrower. One of the loans was brought current in April 2004, and
the borrower is attempting to sell the stores or refinance the loans elsewhere.
The Company has started foreclosure proceedings on the remaining delinquent
loan. No loss is expected on the ultimate collection of these two loans. The
Company had no loan 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 appropriateness 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 and $45,000 were provided during the three
and six month periods ended March 31, 2004, respectively. The Company's
allowance for loan losses expressed as a percentage of gross loans outstanding
was 0.94% at March 31, 2004 as compared to 0.95% at September 30, 2003. The
Company's loan loss allowance was $685,400 at March 31, 2004.
10
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ASSET QUALITY (CONTINUED):
The Company also has $358,800 in foreclosed assets consisting of two residential
properties at March 31, 2004. These two residential homes are currently listed
for sale. The Company believes that both of the properties have been adequately
reserved at March 31, 2004. During the current quarter, the Association sold
foreclosed property with a cost basis of $131,400 and incurred a $1,900 loss.
For the six month period March 31, 2004, the Company had a net gain of $3,300 on
the disposal of foreclosed properties. The Company had foreclosure related
expense of $5,050 during the current quarter as compared to expense of $11,800
for the same quarter a year earlier.
OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003:
GENERAL. Net income for the three month period ended March 31, 2004 was
$250,050, or $35,600 less than the $285,650 earned during the same quarter in
2003. Net income for the six month period ended March 31, 2004 was $504,000, or
$83,150 less than the $587,150 earned during the same period in 2003. As
discussed below, changes in net interest income between the comparable periods
coupled with decreases in non-interest expense, gains on sale of investments,
and fluctuations in the Association's loan loss provisions were primarily
responsible for the change in net income during the current quarter and six
month period end March 31,2004 when compared to the same periods a year earlier.
INTEREST INCOME. Interest income decreased by $122,200 from $1,302,750 for the
three months ended March 31, 2003 to $1,180,550 for the three months ended March
31, 2004. The decline in interest income resulted from both a 45 basis point
decrease in the average yield on interest earning assets between the quarters
and a decline of $1.1 million in the average balance of interest-earning assets
outstanding between the periods. Interest income decreased by $444,800 from
$2,795,900 for the six months ended March 31, 2003 to $2,351,100 for the six
months ended March 31, 2004. The decline in interest income resulted from both a
60 basis point decrease in the yield on interest-earning assets between the
periods and a decline of $3.8 million in the average balance of interest-earning
assets outstanding between the six month periods. The Company's yield on
interest earning assets was 5.68% and 5.84% for the quarter and six month period
ended March 31, 2003; respectively, and 5.23% and 5.24% for the quarter and six
month period ended March 31, 2004; respectively. The changes in yield occurred
primarily due to fluctuations in market rates outstanding during the periods and
a significant amount of refinancings and rate modifications of the Company
higher yielding loans during the current periods.
INTEREST EXPENSE. Interest expense decreased by $92,100 from $573,200 for the
three months ended March 31, 2003 to $481,100 for the three months ended March
31, 2004. Interest expense decreased by $265,100 from $1,246,500 for the six
months ended March 31, 2003 to $981,400 for the six months ended March 31, 2004.
The decreases were primarily the result of a decrease in the Company's cost of
funds between the periods, which decreased by 40 basis points and 50 basis
points for the three and six month periods ended March 31, 2004; respectively,
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 3.23% and 3.35% for the
quarter and six month period ended March 31, 2003; respectively, to 2.83% and
2.85% for the quarter and six month period ended March 31, 2004, respectively.
NET INTEREST INCOME. Net interest income decreased by $30,100 from $729,550 for
the three months ended March 31, 2003 to $699,450 for the three months ended
March 31, 2004. Net interest income decreased by $179,700 from $1,549,400 for
the six months ended March 31, 2003 to $1,369,700 for the six months ended March
31, 2004. The Company's net interest margin was 3.29% and 3.26% for the current
quarter and six months ended March 31, 2004 versus 3.38% and 3.53% for the same
quarter and six month period a year earlier.
11
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES. The Company provided $22,500 and $45,000 in loan loss
provisions during the current quarter and six month period ended March 31, 2004;
respectively, as compared to $130,000 and $160,000 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 primary causes for the higher than normal loan loss
provisions in the previous year were due in part to a surge in loan
delinquencies and a continued pattern of sluggish local economic conditions at
that time. In large part, those factors have stabilized or lessened during the
current year and the Company's loan loss provisions reflect those dynamics.
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.
NON-INTEREST INCOME. During the current quarter and six months year-to-date, the
Company generated other non-interest income primarily from service charges of
$16,950 and $48,400, respectively. During the three months ended March 31, 2003,
the Company sold 3,000 shares of FHLMC stock with a cost basis of approximately
$2,950 and realized a gain of $158,600. There were no other investment sales
during the six month periods ended March 31, 2004 and 2003. The Company
continues to hold 8,154 shares of FHLMC stock in its investment portfolio.
NON-INTEREST EXPENSE. Non-interest expense decreased by $27,150 to $291,300 for
the three month period ended March 31, 2004 from $318,450 for the comparable
quarter in 2003. Non-interest expense decreased by $67,350 to $559,700 for the
six month period ended March 31, 2004 from $627,050 for the same period a year
earlier. Only three categories of expense changed significantly between the
periods. Expense associated with foreclosed assets totaled $11,800 and $30,650
for the three and six month periods ended March 31, 2003 as compared to expense
of $5,050 and $9,900 for the three and six month periods ended March 31, 2004.
The reduction in foreclosed asset expense is directly related to a drop in the
number of foreclosed properties managed between the periods. Compensation and
related benefits decreased from $180,100 during the quarter ended March 31, 2003
to $156,100 in the current quarter, and from $353,000 during the six month
period ended March 31, 2003 to $308,300 in the six months ended March 31, 2004.
The decrease in compensation and benefits occurred primarily because the
Company's ESOP retirement plan was fully funded last year. The Company
implemented an employer match to its existing 401k plan at the time the ESOP
plan was fully funded, but at a significantly lower level of expense. Other
operating expense amounted to $79,750 for the current quarter as compared to
$71,850 for the quarter ended March 31, 2003. The increased cost was spread over
several categories of expense, including office supplies, inspection fees on
construction loans, contributions, and stockholder related expense.
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.
12
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
During the six month period ended March 31, 2004, cash and cash equivalents, a
significant source of liquidity, decreased by approximately $1.4 million but
still amounted to $15.4 million or 17.16% of total assets at March 31, 2004.
Proceeds from the Company's operations contributed $529,050 in cash during the
period. A increase in loans receivable of $5.6 million, partially offset by a
increase in deposits of approximately $3.6 million, provided the largest use of
liquidity during the six month period ended March 31, 2004. 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.
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 March 31, 2004, the Association had outstanding loan commitments
amounting to $3,260,000. The undisbursed portion of construction loans amounted
to $18.1 million and unused lines of credit amounted to $4.4 million at March
31, 2004.
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.
13
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
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.
14
WAKE FOREST BANCSHARES, INC.
ITEM 3. INTERNAL 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.
15
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 17, 2004, 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 Hughes
PLLC as independent auditors for the Company's fiscal year
ending September 30, 2004. All items were approved by the
stockholders as shown below.
Vote concerning the election of directors of the Company:
For Against Withheld Total
--- ------- -------- -----
John D. Lyon 972,049 -- 650 972,699
Rodney M. Privette 972,049 -- 650 972,699
Leelan A. Woodlief 970,849 -- 1,850 972,699
William S. Wooten 971,049 -- 1,650 972,699
Vote concerning ratification of Dixon Hughes PLLC as independent auditors for
the year ending September 30, 2004:
For Against Abstained Total
--- ------- --------- -----
971,824 -- 875 972,699
The foregoing matters are described in detail in the Company's proxy statement
dated January 16, 2004 for the 2004 Annual Meeting of stockholders.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) The Company filed a Form 8-K on January 21, 2004 to
disclose its earnings for the quarter ended December 31,
2003.
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.
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, 2004 By: s/s Robert C. White
----------------- ----------------------------
Robert C. White
Chief Executive Officer and
Chief Financial Officer
17