FORM 10-QSB - QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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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.
----------------------------
(Exact name of small business issuer as specified in its charter)
United States of America 56-2131079
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
302 South Brooks Street
Wake Forest, North Carolina 27587
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(Address of principal executive offices)
(919)-556-5146
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(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 01, 2005 there were
issued and outstanding 1,155,096 shares of the Issuer's common stock, $.01 par
value
Transitional Small Business Disclosure Format: Yes No X
----- -----
WAKE FOREST BANCSHARES, INC.
CONTENTS
Item 1. Financial Statements
Consolidated statements of financial condition at June 30, 2005 (unaudited)
and September 30, 2004 1
Consolidated statements of income for the three months ended June 30, 2005
and June 30, 2004 (unaudited) 2
Consolidated statements of income for the nine months ended June 30, 2005
and June 30, 2004 (unaudited) 3
Consolidated statements of comprehensive income for the three and nine months ended
June 30, 2005 and June 30, 2004 (unaudited) 4
Consolidated statements of cash flows for the nine months ended
June 30, 2005 and June 30, 2004 (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 16
Signatures 17
Exhibits 18-19
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2005 and September 30, 2004
June 30, September 30,
ASSETS 2005 2004
------------ ------------
(Unaudited) *
Cash and short-term cash investments $ 23,959,150 $ 5,851,250
Investment securities:
Available for sale, at estimated market value 531,900 531,950
FHLB stock 182,300 213,800
Loans receivable, net of loan loss allowances of $820,000 at
June 30, 2005 and $730,400 at September 30, 2004 70,855,550 79,241,350
Accrued interest receivable 147,750 121,550
Foreclosed assets, net 1,503,800 --
Property and equipment, net 342,450 361,400
Bank owned life insurance 1,049,300 1,021,850
Deferred income taxes, net 247,050 223,200
Prepaid expenses and other assets 51,350 83,350
------------ ------------
Total Assets $ 98,870,600 $ 87,649,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 80,074,400 $ 69,891,450
Accrued interest on deposits 27,800 14,850
Accrued expenses and other liabilities 887,600 623,400
Dividends payable 78,750 72,050
Redeemable common stock held by the ESOP
net of unearned ESOP shares 522,100 641,250
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Total Liabilities 81,590,650 71,243,000
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Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, par value $ .01, authorized 5,000,000 shares,
issued 1,234,831 shares at June 30, 2005 and
1,221,183 shares at September 30, 2004 12,350 12,200
Additional paid-in capital 5,431,500 5,257,650
Accumulated other comprehensive income 324,800 324,900
Retained earnings, substantially restricted 12,668,900 11,788,750
Less: Common stock in treasury, at cost (1,157,600) (976,800)
------------ ------------
Total stockholders' equity 17,279,950 16,406,700
------------ ------------
Total liabilities and stockholders' equity $ 98,870,600 $ 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 JUNE 30, 2005 AND 2004
2005 2004
----------- -----------
Interest and dividend income:
Loans $ 1,287,100 $ 1,155,800
Investment securities 4,900 4,300
Short-term cash investments 152,000 25,900
----------- -----------
Total interest income 1,444,000 1,186,000
----------- -----------
Interest expense:
Interest on deposits 602,000 479,700
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Total interest expense 602,000 479,700
----------- -----------
Net interest income before provision for loan losses 842,000 706,300
Provision for loan losses (25,000) (22,500)
----------- -----------
Net interest income after provision for loan losses 817,000 683,800
----------- -----------
Noninterest income:
Service charges and fees 10,200 14,000
Gain on sale of foreclosed assets -- 25,500
Other 9,950 11,250
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20,150 50,750
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Noninterest expense:
Compensation and benefits 185,600 167,600
Occupancy 10,750 11,050
Federal insurance and operating assessments 10,500 9,650
Data processing 30,250 32,550
REO provisions and expense 57,600 5,450
Other operating expense 70,450 63,200
----------- -----------
365,150 289,500
----------- -----------
Income before income taxes 472,000 445,050
Income taxes 167,800 172,400
----------- -----------
Net income $ 304,200 $ 272,650
=========== ===========
Basic earnings per share $ 0.26 $ 0.24
Diluted earnings per share $ 0.26 $ 0.23
Dividends per share $ 0.15 $ 0.14
See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2005 AND 2004
2005 2004
----------- -----------
Interest and dividend income:
Loans $ 3,915,200 $ 3,432,650
Investment securities 13,950 12,800
Short-term cash investments 278,650 91,650
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Total interest income 4,207,800 3,537,100
----------- -----------
Interest expense:
Interest on deposits 1,679,950 1,461,100
----------- -----------
Total interest expense 1,679,950 1,461,100
----------- -----------
Net interest income before provision for loan losses 2,527,850 2,076,000
Provision for loan losses (89,600) (67,500)
----------- -----------
Net interest income after provision for loan losses 2,438,250 2,008,500
----------- -----------
Noninterest income:
Service charges and fees 37,450 43,100
Secondary market fee income 4,000 13,050
Gain on sale of foreclosed assets -- 30,750
Other 28,600 12,250
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70,050 99,150
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Noninterest expense:
Compensation and benefits 543,850 475,900
Occupancy 32,300 34,500
Federal insurance and operating assessments 31,350 29,300
Data processing 94,600 90,150
REO provisions and expense 63,200 15,350
Other operating expense 237,700 204,000
----------- -----------
1,003,000 849,200
----------- -----------
Income before income taxes 1,505,300 1,258,450
Income taxes 509,450 481,850
----------- -----------
Net income $ 995,850 $ 776,600
=========== ===========
Basic earnings per share $ 0.86 $ 0.68
Diluted earnings per share $ 0.85 $ 0.67
Dividends per share $ 0.45 $ 0.42
See Notes to Consolidated Financial Statements
3
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED JUNE 30, 2005 AND 2004
2005 2004
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FOR THE THREE MONTHS ENDED JUNE 30:
Net income $304,200 $272,650
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 10,250 21,400
Less: reclassification adjustments for gains (losses)
included in net income -- --
-------- --------
Other comprehensive income (loss) 10,250 21,400
-------- --------
Comprehensive income $314,450 $294,050
======== ========
2005 2004
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FOR THE NINE MONTHS ENDED JUNE 30:
Net income $ 995,850 $ 776,600
--------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (100) 55,350
Less: reclassification adjustments for gains (losses)
included in net income -- --
--------- ---------
Other comprehensive income (loss) (100) 55,350
--------- ---------
Comprehensive income $ 995,750 $ 831,950
========= =========
See Notes to Consolidated Financial Statements.
4
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2005 AND 2004
2005 2004
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Net income $ 995,850 776,600
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 18,950 20,850
Provision for loan losses 89,600 67,500
Gain on sale of foreclosed assets, net -- (30,750)
Deferred income taxes (23,850) (41,800)
Increase in cash surrender value of life insurance (27,450) (10,950)
Changes in assets and liabilities:
Prepaid expenses and other assets 32,000 (132,100)
Accrued interest receivable (26,200) (32,500)
Accrued interest on deposits 12,950 (6,100)
Accrued expenses and other liabilities 264,200 79,650
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,336,050 690,400
------------ ------------
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable 6,792,400 (6,991,550)
Capital additions to foreclosed assets -- (12,950)
Redemption of FHLB stock 31,500 12,100
Purchase of property and equipment -- (600)
Purchase of bank owned life insurance contracts -- (1,000,000)
Proceeds from sale of foreclosed assets -- 682,500
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,823,900 (7,310,500)
------------ ------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 10,182,950 (125,600)
Proceeds from exercise of stock options 174,000 53,900
Repurchase of common stock for the Treasury (180,800) (1,900)
Dividends paid (228,200) (214,350)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,947,950 (287,950)
------------ ------------
Net increase in cash and cash equivalents 18,107,900 (6,908,050)
Cash and cash equivalents:
Beginning 5,851,250 16,742,200
------------ ------------
Ending $ 23,959,150 $ 9,834,150
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 1,667,000 $ 1,467,200
============ ============
Cash payment of income taxes $ 506,000 $ 446,500
============ ============
Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ (119,150) $ 7,300
============ ============
Transfer of loans to foreclosed assets $ 1,503,800 $ 196,100
============ ============
Increase (decrease) in unrealized gain on investment
securities, net of tax $ (100) $ 55,350
============ ============
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 55.0% 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 and is
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 and nine
month periods ended June 30, 2005 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.
6
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DIVIDENDS DECLARED
On June 20, 2005, the Board of Directors of the Company declared a dividend of
$0.15 a share for stockholders of record as of June 30, 2005 and payable on July
11, 2005. The dividends declared were accrued and reported as dividends payable
in the June 30, 2005 Consolidated Statement of Financial Condition. Wake Forest
Bancorp, Inc., the mutual holding company, waived the receipt of the dividend
declared by the Company this quarter.
NOTE 5. EARNINGS PER SHARE
Basic earnings per share amounts are based on the weighted average shares of
common stock outstanding. Diluted earnings per share assumes the conversion,
exercise or issuance of all potential common stock instruments such as options,
warrants and convertible securities, unless the effect is to reduce a loss or
increase earnings per share. This presentation has been adopted for all periods
presented. There were no adjustments required to net income for any period in
the computation of diluted earnings per share. The reconciliation of weighted
average shares outstanding for the computation of basic and diluted earnings per
share for the three and nine month periods ended June 30, 2005 and 2004 is
presented below.
For the Three Months Ended June 30: 2005 2004
--------- ---------
Weighted average shares outstanding for Basic EPS 1,157,354 1,147,066
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 9,508 15,113
--------- ---------
Weighted average shares outstanding for diluted EPS 1,166,862 1,162,179
========= =========
For the Nine Months Ended June 30: 2005 2004
--------- ---------
Weighted average shares outstanding for Basic EPS 1,154,668 1,145,530
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 11,540 15,755
--------- ---------
Weighted average shares outstanding for diluted EPS 1,166,208 1,161,285
========= =========
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 annual period
beginning after December 15, 2005, the voluntary change to the fair value based
method of accounting for stock based compensation becomes mandatory pursuant to
SFAS No. 123 "Revised."
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
June 30, 2005 and 2004 is presented below:
2005 2004
------- -------
Stock options outstanding at beginning of the quarter 23,246 37,336
Granted -- --
Exercised (4,129) (4,229)
Terminated -- --
------- -------
Stock options outstanding at end of the quarter 19,117 33,107
======= =======
Stock options exercisable at end of the quarter 19,117 33,107
======= =======
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, 2004 AND JUNE 30, 2005
Total assets increased by $11.3 million to $98.9 million at June 30, 2005 from
$87.6 million at September 30, 2004. The increase in total assets during the
nine month period ended June 30, 2005 occurred primarily due to an increase in
deposits of approximately $10.2 million during the same period. 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 nine month period, cash and short term cash
investments increased by approximately $18.1 million.
Net loans receivable decreased by $8.4 million to $70.8 million at June 30, 2005
from $79.2 million at September 30, 2004. The decrease occurred primarily
because of a decline in outstanding construction loans which decreased by $9.2
million during the current nine month period. The Company's construction loan
portfolio decreased primarily because many builders have elected to maintain
lower levels of outstanding speculative loans. In addition, other competing
institutions have entered our local market with aggressive pricing plans. The
Company's primary lending area continues to show signs of improving economic
conditions and steady employment growth across a wide spectrum of the local
economic base has started to occur. Typically, these factors contribute to
sustainable loan demand. However, the high tech sector of the area's employment
base has been hit hard during the past several years and has somewhat 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 shown 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 decreased by $31,550 to $714,200 at June 30, 2005 from
$745,750 at September 30, 2004. The slight decrease is primarily attributable to
a required $31,500 redemption in the Company's FHLB stock during the same
period. The Company has decided to maintain higher levels of short term
liquidity due to the relatively flat yield curve for investments with longer
maturities. Management decided that the resulting interest rate risk on longer
term investments did not warrant the minimal additional returns available. As a
result, the Company has not been actively involved in the buying and selling of
securities. At June 30, 2005, the Company's investment portfolio consisted of
FHLB stock and FHLMC stock. The FHLMC stock had approximately $523,900 in
unrealized gains at the end of the current quarter.
The Company had no borrowings outstanding during the period because its current
level of liquidity was sufficient to fund lending and other cash commitments.
The Company has recorded a liability of $522,100 at June 30, 2005 for the ESOP
put option which represents the potential liability owed to participants based
on the current market value of the Company's stock if all participants were to
request the balance of their account from the Company in cash instead of stock.
9
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND JUNE 30, 2005
(CONTINUED)
The Company has an ongoing stock repurchase program authorizing management to
repurchase shares of its outstanding common stock. The repurchases are made
through registered broker-dealers from shareholders in open market purchases at
the discretion of management. The Company intends to hold the shares repurchased
as treasury shares, and may utilize such shares to fund stock benefit plans or
for any other general corporate purposes permitted by applicable law. At June
30, 2005 the Company had repurchased 79,735 shares of its common stock. The
program continues until completed or terminated by the Board of Directors.
Retained earnings increased by $880,150 to $12.7 million at June 30, 2005 from
$11.8 million at September 30, 2004. The increase is primarily attributable to
the Company's earnings of $995,850 during the nine month period ended June 30,
2005, reduced by $234,850 in dividends declared during the period and a $119,150
recovery of prior charges to retained earnings to reflect the change in the fair
value of the ESOP shares subject to the put option. At June 30, 2005 the
Company's capital amounted to $17.3 million, which as a percentage of total
assets was 17.48%, 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 1.76% at June 30, 2005 and 1.70% at September 30, 2004. At June 30, 2005,
non-performing assets amounted to $1,774,100 and consisted of 1) a foreclosed
commercial property ($1,503,800) consisting of two convenience stores and an
adjacent tract of land and 2) one single-family residential loan amounting to
$240,300. The borrower of the commercial property 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. A Phase II environmental
assessment is currently being conducted on one of the tracts so that the
property can be properly marketed. At this time, the Company does not expect to
incur a loss on the ultimate sale of this foreclosed property. We also believe
that the fair market value of the single-family residential property is higher
than our outstanding loan balance and we will not incur a loss on the ultimate
disposition of that loan.
The Company had no loan charge-offs during the current quarter or nine month
period ended June 30, 2005. The Company's loan loss allowance amounted to
$820,000 at June 30, 2005 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 based upon probable
losses that 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.
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 under the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", and a formula allowance for the remainder
of the portfolio under the provisions of SFAS No. 5, "Accounting for
Contingencies." Because the Company only originates loans securing by real
estate, specific problem loans are graded using the standard regulatory
classifications and are evaluated for impairment under SFAS No. 114 based upon
the collateral's fair value less estimated cost of disposal.
10
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ASSET QUALITY (CONTINUED)
All other loans with unidentified impairment issues are pooled and segmented by
major loan types (residential properties, commercial real estate, land, etc.).
Loan loss rates for these categories are then generated by capturing historical
loan losses net of recoveries over a five and ten year period, with added weight
given to the more recent five year period. Qualitative factors that may affect
loan collectibility such as geographical concentrations, local economic
conditions, and delinquency trends are also considered in determining the
Company's best estimate of the range of credit losses. 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 values 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.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2005 AND 2004
GENERAL. Net income for the three month period ended June 30, 2005 was $304,200,
or $31,550 more than the $272,650 earned during the same quarter in 2004. Net
income for the nine month period ended June 30, 2005 was $995,850, or $219,250
more than the $776,600 earned during the same period in 2004. As discussed
below, changes in net interest income between the comparable periods were
primarily responsible for the change in net income during the current quarter
and nine month period end June 30,2005 when compared to the same periods a year
earlier.
INTEREST INCOME. Interest income increased by $258,000 from $1,186,000 for the
three months ended June 30, 2004 to $1,444,000 for the three months ended June
30, 2005. The increase in interest income resulted from both a 47 basis point
increase in the average yield on interest earning assets between the quarters
and an increase of $9.9 million in the average balance of interest-earning
assets outstanding between the periods. Interest income increased by $670,700
from $3,537,100 for the nine months ended June 30, 2004 to $4,207,800 for the
nine months ended June 30, 2005. The rise in interest income resulted from both
a 50 basis point increase in the yield on interest-earning assets between the
periods and an increase of $6.5 million in the average balance of
interest-earning assets outstanding between the nine month periods. The
Company's yield on interest earning assets was 5.81% and 5.77% for the quarter
and nine month period ended June 30, 2005; respectively, and 5.34% and 5.27% for
the quarter and nine month period ended June 30, 2004; respectively. The changes
in yield occurred primarily due to fluctuations in market rates outstanding
during the periods. A significant portion of the Company's assets are able to
re-price fairly quickly when market rates influenced by Federal Reserve rate
movements change.
INTEREST EXPENSE. Interest expense increased by $122,300 from $479,700 for the
three months ended June 30, 2004 to $602,000 for the three months ended June 30,
2005. Interest expense increased by $218,850 from $1,461,100 for the nine months
ended June 30, 2004 to $1,679,950 for the nine months ended June 30, 2005. The
increases were primarily the result of an increase in the Company's cost of
funds and an increase in the average balance of outstanding deposits between the
periods. The Company's cost of funds increased by 30 basis points and 17 basis
points for the three and nine month periods ended June 30, 2005; respectively,
as compared to the same periods a year earlier. As a result of overall higher
market rates, the Company's cost of funds increased from 2.79% and 2.83% for the
quarter and nine month period ended June 30, 2004; respectively, to 3.09% and
3.00% for the quarter and nine month period ended June 30, 2005, respectively.
The average balance of outstanding deposits increased by $9.7 million $6.8
million for the three and nine months ended June 30, 2005, respectively, as
compared to the same periods a year earlier.
11
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2005 AND 2004
(CONTINUED)
NET INTEREST INCOME. Net interest income increased by $135,700 from $706,300 for
the three months ended June 30, 2004 to $842,000 for the three months ended June
30, 2005. Net interest income increased by $451,850 from $2,076,000 for the nine
months ended June 30, 2004 to $2,527,850 for the nine months ended June 30,
2005. 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. In
general, a greater portion of the Company's interest earning assets are able to
re-price over shorter periods of time than its interest bearing deposits. The
Company's net interest margin was 3.60% and 3.73% for the current quarter and
nine months ended June 30, 2005 versus 3.38% and 3.30% for the same quarter and
nine month period a year earlier.
PROVISION FOR LOAN LOSSES. The Company provided $25,000 and $89,600 in loan loss
provisions during the current quarter and nine month period ended June 30, 2005;
respectively, as compared to $22,500 and $67,500 during the three and nine 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 in the portfolio. Loans are charged off against the allowance when
management believes that uncollectibility is confirmed. Subsequent recoveries,
if any, are credited to the allowance. 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. None of the
provisions provided during the reported periods occurred due to the impairment
of specific loans as required by SFAS No. 114.
NON-INTEREST INCOME. The Company's non-interest income is primarily comprised of
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 during any of the periods being reported upon. 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.
NON-INTEREST EXPENSE. Non-interest expense increased by $75,650 to $365,150 for
the three month period ended June 30, 2005 from $289,500 for the comparable
quarter in 2004. Non-interest expense increased by $153,800 to $1,003,000 for
the nine month period ended June 30, 2005 from $849,200 for the same period a
year earlier. Only two categories of expense changed significantly between the
current quarter and same quarter a year earlier. Compensation and related
benefits increased by $18,000 from $167,600 during the quarter ended June 30,
2004 to $185,600 in the current quarter. Compensation and related benefits
increased by $67,950 during the current nine month period ended June 30, 2005 as
compared to the same period a year earlier. The increases in compensation and
benefits occurred primarily because of increased health insurance cost and
because the Company accrued a higher level of bonuses associated with the
greater earnings in the current year as compared to the same periods a year
earlier. REO expense increased by $52,150 and $47,850 during the current quarter
and nine months ended June 30, 2005, respectively, as compared to the same
periods a year earlier because of cost incurred during the current quarter to
conduct a phase II environmental study on one of the commercial tracts that the
Company foreclosed upon during 2005. The only other item with significant change
was "other operating expense" which increased by $33,700 from $204,000 for the
nine month period ended June 30, 2004 to $237,700 for the current nine month
period. The increase in other operating expense occurred primarily because of an
increase in the Company's state franchise tax expense which increased by $30,900
in the current year as compared to the same period a year earlier.
INCOME TAXES. The effective tax rate was 36% and 34% for the current and nine
month period ended June 30, 2005 and 39% and 38% for the quarter and nine month
period ended June 30, 2004. The rate decreased during the current period due to
certain tax exempt earnings and other deductible transactions.
12
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits.
During the nine month period ended June 30, 2005, cash and cash equivalents, a
significant source of liquidity, increased by approximately $18.1 million. Net
principal reductions of $6.8 million and an increase in deposits of
approximately $10.2 million were the primary factors which contributed to the
increase in cash during the current nine month period. There were no significant
uses of cash during the nine month period ended June 30, 2005. 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 June 30, 2005, the Association had outstanding loan commitments
amounting to approximately $3.7 million. The undisbursed portion of construction
loans amounted to $15.0 million and unused lines of credit amounted to $3.9
million at June 30, 2005.
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:
13
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
Allowance for Loan Losses
The most critical estimate concerns the Company's allowance for loan losses. The
Company records provisions for loan losses based upon known problem loans and
estimated deficiencies in the existing loan portfolio. The Company's methodology
for assessing the appropriations of the allowance for loan losses consists of
two key components, which are a specific allowance for identified problem or
impaired loans as described in SFAS No. 114 and a formula allowance for the
remainder of the portfolio as permitted by SFAS No. 5.
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 large and other specifically identified
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. Because
substantially all of the Company's loans are collateral dependent, the fair
value methodology is perfered manner of measuring impairment. This evaluation is
inherently subjective as it requires material estimates that may be susceptible
to significant change over time.
All other loans with unidentified impairment issues are pooled and segmented by
major loan types. Loan loss rates for these categories of loans are then
generated by capturing historical loan losses net of recoveries over a five and
ten year period, giving emphasis to the more recent five year period.
Qualitative factors that may affect loan collectibility such as geographical
concentrations, local economic conditions, delinquency trends, and changes in
the mix and volume of the portfolio are also considered in determining the
Company's best estimate of the range of credit losses in the Company's loan
portfolio. 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 values 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.
JUNE 30, 2005
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.
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. 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
a) 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.
b) 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 August 12, 2005 By: s/s Robert C. White
--------------------- --------------------------------
Robert C. White
Chief Executive Officer and
Chief Financial Officer
17