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, 2004
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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
WAKE FOREST BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
United States of America 56-2131079
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
302 South Brooks Street
Wake Forest, North Carolina 27587
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(Address of principal executive offices)
(919)-556-5146
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of February 1, 2005 there were
issued and outstanding 1,155,367 shares of the Issuer's common stock, $.01 par
value
Transitional Small Business Disclosure Format: Yes |_| No |X|
WAKE FOREST BANCSHARES, INC.
CONTENTS
Item 1. Financial Statements
Consolidated statements of financial condition at December 31, 2004 (unaudited)
and September 30, 2004 1
Consolidated statements of income for the three months ended December 31, 2004
and December 31, 2003 (unaudited) 2
Consolidated statements of comprehensive income for the three months ended
December 31, 2004 and December 31, 2003 (unaudited) 3 Consolidated
statements of cash flows for the three months ended
December 31, 2004 and December 31, 2003 (unaudited) 4
Notes to consolidated financial statements (unaudited) 5-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
Item 3. Controls and Procedures 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibits 15-16
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2004 AND SEPTEMBER 30, 2004
December 31, September 30,
ASSETS 2004 2004
------------ ------------
(Unaudited) *
Cash and short-term cash investments $ 12,089,300 $ 5,851,250
Investment securities:
Available for sale, at estimated market value 600,950 531,950
FHLB stock 171,000 213,800
Loans receivable, net of loan loss allowances of $757,900 at
December 31, 2004 and $730,400 at September 30, 2004 74,992,350 79,241,350
Accrued interest receivable 127,400 121,550
Foreclosed assets, net 1,491,000 --
Property and equipment, net 355,100 361,400
Bank owned life insurance 1,032,800 1,021,850
Deferred income taxes, net 216,500 223,200
Prepaid expenses and other assets 59,750 83,350
------------ ------------
Total Assets $ 91,136,150 $ 87,649,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 72,857,950 $ 69,891,450
Accrued interest on deposits 29,850 14,850
Accrued expenses and other liabilities 592,050 592,100
Accrued income taxes 157,900 31,300
Dividends payable 77,950 72,050
Redeemable common stock held by the ESOP
net of unearned ESOP shares 728,700 641,250
------------ ------------
Total Liabilities 74,444,400 71,243,000
------------ ------------
Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, par value $ .01, authorized 5,000,000 shares,
issued 1,226,367 shares at December 31, 2004 and
1,221,183 shares at September 30, 2004 12,250 12,200
Additional paid-in capital 5,323,700 5,257,650
Accumulated other comprehensive income 367,650 324,900
Retained earnings, substantially restricted 11,972,200 11,788,750
Less: Common stock in treasury, at cost (984,050) (976,800)
------------ ------------
Total stockholders' equity 16,691,750 16,406,700
------------ ------------
Total liabilities and stockholders' equity $ 91,136,150 $ 87,649,700
============ ============
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 DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
Interest and dividend income:
Loans $ 1,323,900 $ 1,132,450
Investment securities 4,400 4,100
Short-term cash investments 44,550 34,000
----------- -----------
Total interest income 1,372,850 1,170,550
----------- -----------
Interest expense:
Interest on deposits 538,700 500,350
----------- -----------
Total interest expense 538,700 500,350
----------- -----------
Net interest income before provision for loan losses 834,150 670,200
Provision for loan losses (27,500) (22,500)
----------- -----------
Net interest income after provision for loan losses 806,650 647,700
----------- -----------
Noninterest income:
Service charges and fees 14,500 12,800
Secondary market fee income -- 13,050
Other 11,150 5,650
----------- -----------
25,650 31,500
----------- -----------
Noninterest expense:
Compensation and benefits 167,950 152,200
Occupancy 10,050 11,800
Federal insurance and operating assessments 10,400 9,900
Data processing 30,500 28,600
REO provisions and expense -- 4,850
Other operating expense 90,500 61,050
----------- -----------
309,400 268,400
----------- -----------
Income before income taxes 522,900 410,800
Income taxes 174,050 156,900
----------- -----------
Net income $ 348,850 $ 253,900
=========== ===========
Basic earnings per share $ 0.30 $ 0.22
Diluted earnings per share $ 0.30 $ 0.22
Dividends per share $ 0.15 $ 0.14
See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
-------- --------
Net income $348,850 $253,900
-------- --------
Other comprehensive loss, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 42,750 30,200
Less: reclassification adjustments for gains included
in net income -- --
-------- --------
Other comprehensive income 42,750 30,200
-------- --------
Comprehensive income $391,600 $284,100
======== ========
See Notes to Consolidated Financial Statements.
3
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Net income $ 348,850 $ 253,900
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 6,300 7,550
Provision for loan losses 27,500 22,500
Gain on sale of foreclosed assets, net -- (5,200)
Deferred income taxes (19,550) (10,500)
Increase in cash surrender value of life insurance (10,950) --
Changes in assets and liabilities:
Prepaid expenses and other assets 23,600 92,700
Accrued interest receivable (5,850) (24,500)
Accrued interest on deposits 15,000 50
Accrued income taxes 126,600 126,250
Accrued expenses and other liabilities (50) (41,250)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 511,450 421,500
------------ ------------
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable 2,730,500 (2,582,150)
Redemption of FHLB stock 42,800 --
Proceeds from sale of foreclosed assets -- 166,700
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,773,300 (2,415,450)
------------ ------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 2,966,500 (515,600)
Proceeds from exercise of stock options 66,100 --
Repurchase of common stock for the Treasury (7,250) --
Dividends paid (72,050) (71,450)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,953,300 (587,050)
------------ ------------
Net increase in cash and cash equivalents
6,238,050 (2,581,000)
Cash and cash equivalents:
Beginning 5,851,250 16,742,200
------------ ------------
Ending $ 12,089,300 $ 14,161,200
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 523,700 $ 500,850
============ ============
Cash payment of income taxes $ 65,000 $ --
============ ============
Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ 87,450 $ 29,150
============ ============
Transfer of loans to foreclosed assets $ 1,491,000 $ --
============ ============
Increase in unrealized gain on investment securities, net ot tax $ 42,750 $ 30,200
============ ============
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 55.0% 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, 2004, 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 month
period ended December 31, 2004 are not necessarily indicative of the results of
operations that may be expected for the Company's fiscal year ending September
30, 2005. The accounting policies followed are as set forth in Note 1 of the
Notes to Consolidated Financial Statements in the Company's September 30, 2004
Annual Report to Stockholders.
5
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DIVIDENDS DECLARED
On December 20, 2004, the Board of Directors of the Company declared a dividend
of $0.15 a share for stockholders of record as of December 31, 2004 and payable
on January 10, 2005. The dividends declared were accrued and reported as
dividends payable in the December 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 month periods ended December 31, 2004 and 2003 is presented
below.
For the Three Months Ended December 31 2004 2003
--------- ---------
Weighted average shares outstanding for Basic EPS 1,151,760 1,144,766
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 14,125 14,461
--------- ---------
Weighted average shares outstanding for diluted EPS 1,165,885 1,159,227
========= =========
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 amended
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 amended 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 was effective for
financial statements for fiscal years ending after December 15, 2002. 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. Effective with the Company's first interim period
after December 15, 2005, the voluntary change to the fair value based method of
accounting for stock based compensation becomes mandatory.
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. A summary of the changes in the Company's
options during the quarters ended December 31, 2004 and 2003 is presented below:
2004 2003
------- -------
Stock options outstanding at beginning of the quarter 32,765 37,336
Granted -- --
Exercised (5,184) --
Terminated -- --
------- -------
Stock options outstanding at end of the quarter 27,581 37,336
======= =======
Stock options exercisable at end of the quarter 27,581 37,336
======= =======
6
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, 2004 AND DECEMBER 31, 2004:
Total assets increased by $3.5 million to $91.1 million at December 31, 2004
from $87.6 million at September 30, 2004. The increase in total assets during
the quarter ended December 31, 2004 occurred primarily due to an increase in
deposits of approximately $3.0 million during the same quarter. Deposits were
priced aggressively to retain certain accounts and to attract additional funds
from competition. The Company attempts to maintain a certain level of liquidity
to fund loan growth and to provide a cushion for its construction loan
commitments. During the current quarter, cash and short term cash investments
increased by approximately $6.2 million.
Net loans receivable decreased by $4.2 million to $75.0 million at December 31,
2004 from $79.2 million at September 30, 2004. The decrease occurred primarily
because of a seasonal decline in outstanding construction loans which decreased
by $4.7 million during the current quarter. The Company's construction loan
portfolio characteristically expands in the spring corresponding with the area's
typical selling season and declines in the fall and winter. The Company's
primary lending area continues to show signs of improving economic conditions.
However, significant employment growth across a wide spectrum of the local
economic base has not yet been evident and a job creating expansion will
ultimately determine whether the 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 slowed growth in the overall real estate market. Assuming economic
conditions continue to improve, management believes that the long-term
fundamentals of its lending markets provide potential for future loan expansion
because the Company operates in markets that have historically 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 $26,200 to $771,950 at December 31, 2004 from
$745,750 at September 30, 2004. 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 short term 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,
2004, the Company's investment portfolio, which consisted primarily of FHLB
stock and FHLMC stock, had approximately $593,000 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 December 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 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, 2004 the Company had repurchased 71,691 shares of its common stock.
The program continues until completed or terminated by the Board of Directors.
7
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2004
(CONTINUED):
Retained earnings increased by $183,450 to $12.0 million at December 31, 2004
from $11.8 million at September 30, 2004. The increase is primarily attributable
to the Company's earnings of $348,850 during the quarter ended December 31,
2004, reduced by $77,950 in dividends declared during the period and a $87,450
charge to retained earnings to reflect the change in the fair value of the ESOP
shares subject to the put option. At December 31, 2004 the Company's capital
amounted to $16.7 million, which as a percentage of total assets was 18.32%, and
was considerably in excess of the regulatory capital requirements at such date.
ASSET QUALITY:
The Company's level of non-performing assets, defined as loans past due 90 days
or more and foreclosed real estate, as a percentage of total assets outstanding,
was 1.64% at December 31, 2004 and 1.70% at September 30, 2004. At December 31,
2004, non-performing assets amounted to $1,491,000 and consisted solely of one
foreclosed loan consisting of two convenience stores and an adjacent tract of
land. The borrower filed for Chapter 11 bankruptcy after the Company started
foreclosure proceedings in the spring of 2004. However, during the fall of 2004
the Bankruptcy Court released the property from the bankruptcy action and the
Company acquired the property as a part of the foreclosure process in December
2004. At this time, the Company does not expect to incur a loss on the ultimate
sale of the foreclosed property. At December 31, 2004, the Company had no loans
past due 90 days or more.
The Company had no loan charge-offs during the current quarter. The Company's
loan loss allowance amounted to $757,900 at December 31, 2004 and management
believes that it has sufficient loan loss allowances established to cover any
loss associated with its loan portfolio. 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 $27,500 were provided during the three month
period ended December 31, 2004. The Company's allowance for loan losses
expressed as a percentage of gross loans outstanding was 1.00% at December 31,
2004 as compared to 0.91% at September 30, 2004.
8
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, 2004 AND
2003:
GENERAL. Net income for the three month period ended December 31, 2004 was
$348,850 ($0.30 per share) as compared to $253,923 ($0.22 per share) earned
during the same quarter in 2003. As discussed below, changes in net interest
income between the comparable periods was primarily responsible for the change
in net income during the quarter ended December 31, 2004 as compared to the same
period one year earlier.
INTEREST INCOME. Interest income increased by $202,300 from $1,170,550 for the
three months ended December 31, 2003 to $1,372,850 for the three months ended
December 31, 2004. The increase in interest income resulted from both a 0.49%
increase in the average yield on interest-earning assets and a $5.2 million
increase in the average balance of interest-earning assets outstanding between
the quarters. The Company's yield on interest earning assets was 5.73% for the
quarter ended December 31, 2004 and 5.24% for the quarter ended December 31,
2003. The change in yield occurred primarily due to fluctuations in market rates
outstanding during the periods and an increase in the mix of loans as a
percentage of overall interest earning assets during the current quarter as
compared to the same period in 2003. The average balance of outstanding loans
increased by more than $9.4 million during the current quarter as compared to
same quarter a year earlier.
INTEREST EXPENSE. Interest expense increased by $38,350 from $500,350 for the
three months ended December 31, 2003 to $538,700 for the three months ended
December 31, 2004. Although the Company's cost of funds increased by 5 basis
points during the current quarter as compared to the same quarter a year
earlier, the primary reason for the increase in the Company's interest expense
was a $4.8 million increase in the average balance of deposits between the
quarters. The Company's cost of funds was 2.87% for the quarter ended December
31, 2003 and 2.92% for the quarter ended December 31, 2004. The change in the
Company's cost of funds occurred primarily due to fluctuations in market rates
between the periods. The increase in the average balance of interest-bearing
liabilities occurred primarily due to the aggressive pricing of deposits by the
Company in order to maintain an acceptable level of liquidity to meet loan
demand.
NET INTEREST INCOME. Net interest income increased by $163,950 from $670,200 for
the three months ended December 31, 2003 to $834,150 for the three months ended
December 31, 2004. 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 3.78% for the current
quarter as compared to 3.23% for the quarter ended December 31, 2003.
PROVISION FOR LOAN LOSSES. The Company provided $27,500 and $22,500 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.
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 did not have any
investment sales in the current quarter or during the same quarter a year
earlier. In addition, the Company has been originating residential mortgage
loans for its own portfolio over the past eighteen months and therefore very
little secondary marketing income has been generated over that same period.
9
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-INTEREST EXPENSE. Non-interest expense increased by $41,000 to $309,400 for
the three month period ended December 31, 2004 from $268,400 for the comparable
quarter in 2003. Only two categories of expense changed significantly between
the periods. Compensation and related benefits increased from $152,200 during
the quarter ended December 31, 2003 to $167,950 in the current quarter. The
increase in compensation and benefits occurred primarily because the Company has
accrued a higher level of bonuses associated with the greater earnings in the
current quarter as compared to the same quarter a year earlier. Other operating
expense increased by $29,450 from $61,050 for the quarter ended December 31,
2003 to $90,500 for the current quarter. The increase in other operating expense
occurred primarily because of an increase in the Company's state franchise tax
expense which increased by $28,550 in the current quarter as compared to the
same quarter a year earlier.
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, 2004, cash and cash
equivalents, a significant source of liquidity, decreased by approximately $6.2
million. Net principal reductions amounting to $2.7 million and proceeds from
the Company's operations totaling $511,450 contributed to the increase in cash
during the quarter. In addition, an increase in deposits of approximately $3.0
million also contributed to the increase in 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, 2004, the Association had outstanding loan
commitments amounting to approximately $3.6 million. The undisbursed portion of
construction loans amounted to $13.0 million and unused lines of credit amounted
to $3.1 million at December 31, 2004.
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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 2004 Annual Report on Form 10-KSB. The
Company has not experienced any material change in its critical accounting
policies since September 30, 2004. 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.
DECEMBER 31, 2004
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.
12
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 November 01, 2004 to
disclose its fiscal year end September 30, 2004
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.
13
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 11, 2005 By: s/s Robert C. White
------------------- -------------------------------
Robert C. White
Chief Executive Officer and
Chief Financial Officer
14