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, 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.
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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
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Wake Forest, North Carolina 27587
(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
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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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 10, 2006 there were
issued and outstanding 1,154,661 shares of the Issuer's common stock, $.01 par
value
Transitional Small Business Disclosure Format: Yes No X
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WAKE FOREST BANCSHARES, INC.
CONTENTS
Item 1. Financial Statements
Consolidated statements of financial condition at December 31, 2005 (unaudited)
and September 30, 2005 1
Consolidated statements of income for the three months ended December 31, 2005
and December 31, 2004 (unaudited) 2
Consolidated statements of comprehensive income for the three months ended
December 31, 2005 and December 31, 2004 (unaudited) 3
Consolidated statements of cash flows for the three months ended
December 31, 2005 and December 31, 2004 (unaudited) 4
Notes to consolidated financial statements (unaudited) 5 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 -13
Item 3. Controls and Procedures 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
Signatures 16
Exhibits 17-18
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2005 and September 30, 2005
December 31, September 30,
ASSETS 2005 2005
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(Unaudited) *
Cash and short-term cash investments $ 25,289,450 $ 22,327,400
Investment securities:
Available for sale, at estimated market value 532,850 460,350
FHLB stock 182,300 182,300
Loans receivable, net of loan loss allowances of $910,000 at
December 31, 2005 and $850,000 at September 30, 2005 69,846,000 73,894,100
Accrued interest receivable 172,350 136,200
Foreclosed assets, net 1,003,800 1,003,800
Property and equipment, net 333,450 337,850
Bank owned life insurance 1,066,600 1,058,500
Deferred income taxes, net 270,100 297,150
Prepaid expenses and other assets 92,250 33,700
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Total Assets $ 98,789,150 $ 99,731,350
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 79,506,350 $ 80,905,150
Accrued interest on deposits 43,600 26,950
Accrued expenses and other liabilities 676,300 718,350
Accrued income taxes 161,750 27,950
Dividends payable 88,200 77,650
Redeemable common stock held by the ESOP
net of unearned ESOP shares 580,800 569,100
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Total Liabilities 81,057,000 82,325,150
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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 1,238,106 shares at December 31, 2005 and
1,237,146 shares at September 30, 2005 12,400 12,350
Additional paid-in capital 5,517,600 5,502,050
Accumulated other comprehensive income 325,450 280,500
Retained earnings, substantially restricted 13,155,400 12,868,900
Less: Common stock in treasury, at cost (1,278,700) (1,257,600)
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Total stockholders' equity 17,732,150 17,406,200
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Total liabilities and stockholders' equity $ 98,789,150 $ 99,731,350
============ ============
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, 2005 AND 2004
2005 2004
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Interest and dividend income:
Loans $ 1,442,600 $ 1,323,900
Investment securities 5,950 4,400
Short-term cash investments 233,500 44,550
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Total interest income 1,682,050 1,372,850
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Interest expense:
Interest on deposits 679,950 538,700
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Total interest expense 679,950 538,700
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Net interest income before provision for loan losses 1,002,100 834,150
Provision for loan losses (60,000) (27,500)
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Net interest income after provision for loan losses 942,100 806,650
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Noninterest income:
Service charges and fees 18,400 14,500
Secondary market fee income 7,950 --
Other 11,750 11,150
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38,100 25,650
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Noninterest expense:
Compensation and benefits 207,500 167,950
Occupancy 10,800 10,050
Federal insurance and operating assessments 11,050 10,400
Data processing 32,300 30,500
REO provisions and expense 49,500 -
Other operating expense 62,950 90,500
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374,100 309,400
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Income before income taxes 606,100 522,900
Income taxes 219,700 174,050
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Net income $ 386,400 $ 348,850
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Basic earnings per share $ 0.34 $ 0.30
Diluted earnings per share $ 0.33 $ 0.30
Dividends per share $ 0.17 $ 0.15
See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
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Net income $386,400 $348,850
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Other comprehensive loss, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 44,950 42,750
Less: reclassification adjustments for gains included
in net income - -
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Other comprehensive income 44,950 42,750
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Comprehensive income $431,350 $391,600
======== ========
See Notes to Consolidated Financial Statements.
3
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
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Net income $ 386,400 $ 348,850
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Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 5,900 6,300
Provision for loan losses 60,000 27,500
Deferred income taxes (500) (19,550)
Increase in cash surrender value of life insurance (8,100) (10,950)
Changes in assets and liabilities:
Prepaid expenses and other assets (58,550) 23,600
Accrued interest receivable (36,150) (5,850)
Accrued interest on deposits 16,650 15,000
Accrued income taxes 133,800 126,600
Accrued expenses and other liabilities (42,050) (50)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 457,400 511,450
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Cash Flows From Investing Activities:
Net decrease in loans receivable 3,988,100 2,730,500
Purchase of property and equipment (1,500) -
Redemption of FHLB stock - 42,800
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NET CASH PROVIDED BY INVESTING ACTIVITIES 3,986,600 2,773,300
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Cash Flows From Financing Activities:
Net increase (decrease) in deposits (1,398,800) 2,966,500
Proceeds from exercise of stock options 12,200 66,100
Additions to paid in capital from tax effect from exercise of
of stock options 3,400 -
Repurchase of common stock for the Treasury (21,100) (7,250)
Dividends paid (77,650) (72,050)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,481,950) 2,953,300
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Net increase in cash and cash equivalents 2,962,050 6,238,050
Cash and cash equivalents:
Beginning 22,327,400 5,851,250
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Ending $ 25,289,450 $ 12,089,300
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Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 663,300 $ 523,700
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Cash payment of income taxes $ 82,000 $ 65,000
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Supplemental Disclosure of Noncash transactions:
Incr. (decr.) in ESOP put option charged to retained earnings $ 11,700 $ 87,450
============ ============
Transfer of loans to foreclosed assets $ - $ 1,491,000
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Increase in unrealized gain on investment securities, net ot tax $ 44,950 $ 42,750
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See Notes to Consolidated Finanical Statements.
4
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
Wake Forest Bancshares, Inc. (the "Company") is located in Wake Forest, North
Carolina and is the parent stock holding company of Wake Forest Federal Savings
and Loan Association (the "Association" or "Wake Forest Federal"), its only
subsidiary. The Company conducts no business other than holding all of the stock
in the Association, investing dividends received from the Association,
repurchasing its common stock from time to time, and distributing dividends on
its common stock to its shareholders. The Association's principal activities
consist of obtaining deposits and providing mortgage credit to customers in its
primary market area, the counties of Wake and Franklin, North Carolina. The
Company's and the Association's primary regulator is the Office of Thrift
Supervision (OTS) and its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).
NOTE 2. ORGANIZATIONAL STRUCTURE
The Company is majority owned by the Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company. Members of the MHC consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the MHC for as long as it remains in mutual form. Initially, the
MHC's principal assets consisted of 635,000 shares of the Association's common
stock (now converted to the Company's common stock) and $100,000 in cash
received from the Association as initial capital. Prior to 2003 (see Note 4),
the MHC received its proportional share of dividends declared and paid by the
Association (now the Company), and such funds are invested in deposits with the
Association. The MHC, which by law must own in excess of 50% of the stock of the
Company, currently has an ownership interest of 55.1% 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.
NOTE 3. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (except for the
consolidated statement of financial condition at September 30, 2005, 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, 2005 are not necessarily indicative of the results of
operations that may be expected for the Company's fiscal year ending September
30, 2006. The accounting policies followed are as set forth in Note 1 of the
Notes to Consolidated Financial Statements in the Company's September 30, 2005
Annual Report to Stockholders.
NOTE 4. DIVIDENDS DECLARED
On December 19, 2005, the Board of Directors of the Company declared a dividend
of $0.17 a share for stockholders of record as of December 30, 2005 and payable
on January 10, 2006. 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.
5
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2005 and 2004 is presented
below.
For the Three Months Ended December 31 2005 2004
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Weighted average shares outstanding for Basic EPS 1,152,761 1,151,760
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 7,279 14,125
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Weighted average shares outstanding for diluted EPS 1,160,040 1,165,885
========= =========
NOTE 6. STOCK OPTION PLAN
In 1995, the Financial Accounting Standards Board (FASB) issued Standard No.
123, Accounting For Stock-Based Compensation, which requires disclosures
concerning the fair value of options and encourages accounting recognition for
options using the fair value method. The Company has elected to apply the
disclosure-only provisions of the Statement.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (Statement 148). Statement 148 amends
SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Statement 148 is effective for
financial statements for fiscal years ending after December 15, 2002. 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. Accordingly, no compensation cost has been
recorded and none would have been required in 2005 or 2004 because the five year
period over which the options vested and would have been expensed under SFAS No.
123 expired. 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." This Statement focuses primarily on accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements
as services are performed.
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 and expire on January 21, 2007. No options have been
granted since that date and stockholder approval has not been requested for the
issuance of any additional stock options. Previously granted options totaling
13,500 were returned to the Plan due to employment separation of the option
holders and are available for grant, subject to expiration in 2007. 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.
6
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
December 31, 2005 and 2004 is presented below:
2005 2004
------- -------
Stock options outstanding at beginning of the quarter 16,802 32,765
Granted -- --
Exercised (960) (5,184)
Terminated -- --
------- -------
Stock options outstanding at end of the quarter 15,842 27,581
======= =======
Stock options exercisable at end of the quarter 15,842 27,581
======= =======
7
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities and Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which statements represent
the Company's judgment concerning the future and are subject to risks and
uncertainties that could cause the Company's actual operating results to differ
materially. Such forward-looking statements can be identified by the use of
forward-looking terminology, such as "may", "will", "expect", "anticipate",
"estimate", "believe", or "continue", or the negative thereof or other
variations thereof or comparable terminology. The Company cautions that such
forward-looking statements are further qualified by important factors that could
cause the Company's actual operating results to differ materially from those in
the forward-looking statements, as well as the factors set forth in the
Company's periodic reports and other filings with the SEC.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2005
Total assets decreased by $942,200 to $98.8 million at December 31, 2005 from
$99.7 million at September 30, 2005. The decrease in total assets during the
quarter ended December 31, 2005 occurred primarily due to a decrease in deposits
of approximately $1.4 million during the same quarter. Although the Association
continued to price its deposits competitively, customer deposits declined
primarily due to the withdrawal during the quarter of a few large accounts which
had been maintained at the Association on short-term basis. 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 $3.0 million.
Net loans receivable decreased by $4.0 million to $69.9 million at December 31,
2005 from $73.9 million at September 30, 2005. The decrease occurred primarily
because of a $1.8 million decline in the Association's residential mortgage
portfolio and a seasonal decline in outstanding construction loans which
decreased by $2.0 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 decline
in the Company's residential mortgage portfolio was caused by the outside
refinancing of a few large loans. The Company's primary lending area continues
to show signs of improving economic conditions. However, significant and
sustained employment growth across a wide spectrum of the local economic base
will ultimately determine whether loan demand can be maintained. The high tech
sector of the area's employment base has been hit hard during the past couple of
years and has impeded 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.
However, there can be no assurances that such loan demand can or will
materialize in the future.
Investment securities increased by $72,500 to $715,150 at December 31, 2005 from
$642,650 at September 30, 2005. The 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 in order to minimize interest rate risk
and due to the relatively minor differential in investment rates available on
extended maturities. As a result, the Company has not been actively involved in
the buying and selling securities. At December 31, 2005, the Company's
investment portfolio, which consisted of FHLB stock and FHLMC stock, had
approximately $525,000 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 and
provide for other cash requirements. The Company has recorded a liability of
$580,800 at December 31, 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.
8
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND
DECEMBER 31, 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
December 31, 2005 the Company had repurchased 85,345 shares of its common stock.
The program continues until completed or terminated by the Board of Directors.
Retained earnings increased by $286,500 to $13.2 million at December 31, 2005
from $12.9 million at September 30, 2005. The increase is primarily attributable
to the Company's earnings of $386,400 during the quarter ended December 31,
2005, reduced by $88,200 in dividends declared during the period and a $11,700
charge to retained earnings to reflect the change in the fair value of the ESOP
shares subject to the put option. At December 31, 2005 the Company's capital
amounted to $17.7 million, which as a percentage of total assets was 17.95%. The
Company and the Association are both required to meet certain capital
requirements as established by the OTS. At December 31, 2005, all capital
requirements were met.
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 1.02% at December 31, 2005 and 1.78% at September 30, 2005. At December 31,
2005, non-performing assets amounted to $1.0 million and consisted solely of one
foreclosed commercial property which consisted of a convenience store and an
adjacent tract of land, in total 3.81 acres located on a major highway outside
of Wake Forest. While the property's location is considered highly desirable,
the Company decided that a phase II environmental assessment was necessary to
properly market the tract due to the historical uses of the property. Petroleum
contamination consistent with operating a gas station and a truck maintenance
facility over an extended period of time was found on parts of the property.
Environmental assessment reports are currently being reviewed by the appropriate
state agencies. Although the Company does not currently believe the
contamination will have any significant effect on the potential development of
the property, the agencies are expected to be able to assist the Company in
determining the extent of any required clean-up and ongoing monitoring steps. At
this time, the Company does not believe that the ongoing environmental costs
will materially impact the value of the property and no loss is expected on its
ultimate sale. The Company has expensed approximately $110,000 to date on
environmental assessment activities. At December 31, 2005, the Company had no
loans past due 90 days or more. At September 30, 2005, the Company had $770,850
in loans delinquent 90 days or more.
The Company had no loan charge-offs during the current quarter. The Company's
loan loss allowance amounted to $910,000 at December 31, 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. During the past five
years, the Association's loan portfolio has gradually trended towards a greater
concentration of residential construction loans, which generally involves a
greater degree of credit risk and collection issues. As a result, the Company
has provided relatively higher levels of loan loss provisions and resulting
allowances during this period than what has historically been considered
necessary. The allowance for loan losses is evaluated on a regular basis by
management.
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.
9
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 (single-family residential properties, construction loans,
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 MONTHS ENDED
DECEMBER 31, 2005 AND 2004
GENERAL. Net income for the three month period ended December 31, 2005 was
$386,400 ($0.33 per diluted share) as compared to $348,850 ($0.30 per diluted
share) earned during the same quarter in 2004. 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, 2005, as compared
to the same period one year earlier.
INTEREST INCOME. Interest income increased by $309,200 from $1,372,850 for the
three months ended December 31, 2004 to $1,682,050 for the three months ended
December 31, 2005. The increase in interest income resulted from both a 0.65%
increase in the average yield on interest-earning assets and a $8.4 million
increase in the average balance of interest-earning assets outstanding between
the quarters. The Company's yield on interest earning assets was 6.38% for the
quarter ended December 31, 2005 and 5.73% for the quarter ended December 31,
2004. The change in yield occurred primarily due to fluctuations in market rates
outstanding during the periods. A significant amount of the Company's interest
earning assets adjust in tandem with changes to Prime, which has increased in
eight separate increments of 0.25% from December 31, 2004 to December 31, 2005.
INTEREST EXPENSE. Interest expense increased by $141,250 from $538,700 for the
three months ended December 31, 2004 to $679,950 for the three months ended
December 31, 2005. Although the Company's cost of funds increased by 38 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 $7.7 million increase in the average balance of deposits between the
quarters. The Company's cost of funds was 2.92% for the quarter ended December
31, 2004 and 3.30% for the quarter ended December 31, 2005. 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 competitive pricing of deposits by the
Company in order to maintain an acceptable level of liquidity to meet loan
demand, construction loan commitments, and other cash requirements.
NET INTEREST INCOME. Net interest income increased by $167,950 from $834,150 for
the three months ended December 31, 2004 to $1,002,100 for the three months
ended December 31, 2005. As explained above, the increase 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 increases in the level of interest earning assets and
interest-bearing liabilities from the quarter ended December 31, 2004 to the
most recent quarter ended December 31, 2005. The Company's interest rate margin
was 4.15% for the current quarter as compared to 3.78% for the quarter ended
December 31, 2004.
10
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, 2005
AND 2004 (CONTINUED)
PROVISION FOR LOAN LOSSES. The Company provided $60,000 and $27,500 in loan loss
provisions during the current quarter and the same quarter a year earlier,
respectively. 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 loan
portfolio. The Association's loan portfolio has gradually trended towards a
greater concentration of builder construction loans, land and land development
loans, and commercial loans which generally involve a greater degree of credit
risk and collection issues. Also, many of these types of loans involve lending
relationships which are larger than what the Company has traditionally
maintained. As a result, the Company has provided relatively higher levels of
loan loss provisions and resulting allowances during this period than what has
historically been considered necessary.
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. There were no significant changes in any other category of non-interest
income between the quarters other than the Company received $7,950 from the sale
of certain loan participations previously held through a statewide loan
consortium during the current quarter.
NON-INTEREST EXPENSE. Non-interest expense increased by $64,700 to $374,100 for
the three month period ended December 31, 2005 from $309,400 for the comparable
quarter in 2004. Compensation and related benefits increased $39,550 from
$167,950 during the quarter ended December 31, 2004 to $207,500 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.
REO provisions and expense was $49,500 higher during the current quarter versus
the same quarter a year earlier as a result of environmental assessment
activities associated with the Company's foreclosed 3.81 acre tract on highway
98 outside of Wake Forest, North Carolina. Other operating expense decreased by
$27,550 from $90,500 for the quarter ended December 31, 2004 to $62,950 for the
current quarter. The decrease in other operating expense occurred primarily
because the Company's state franchise tax expense was $26,750 higher during the
quarter ended December 31, 2004 as compared to the current quarter. No other
category of non-interest expense changed significantly between the two quarters.
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, 2005, cash and cash
equivalents, a significant source of liquidity, increased by approximately $3.0
million. Net principal reductions amounting to $4.0 million and proceeds from
the Company's operations totaling $457,400 contributed to the increase in cash
during the quarter while a net decrease in deposits of approximately $1.4
million was the primary utilization of cash during the current quarter. Given
its excess liquidity and its ability to borrow from the Federal Home Loan Bank
of Atlanta, the Company believes that it will have sufficient funds available to
meet anticipated future loan commitments, unexpected deposit withdrawals, and
other cash requirements.
11
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2005, the Association had outstanding loan
commitments amounting to approximately $4.4 million. The undisbursed portion of
construction loans amounted to $16.5 million and unused lines of credit amounted
to $5.1 million at December 31, 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 2005 Annual Report on Form 10-KSB. The
Company has not experienced any material change in its critical accounting
policies since September 30, 2005. 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.
12
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Allowance for Loan Losses (continued)
The adequacy of the allowance is also reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of the Company and other conditions, such as new loan products,
collateral values, loan concentrations, changes in the mix and volume of the
loan portfolio; trends in portfolio credit quality, including delinquency and
charge-off rates; and current economic conditions that may affect a borrower's
ability to repay. Although management believes it has established and maintained
the allowance for loan losses at appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ substantially
from the current operating environment.
Interest Income Recognition:
Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or more
past due unless the loans are adequately secured and in the process of
collection. Interest is not accrued on other loans when management believes
collection is doubtful. All loans considered impaired are non-accruing. Interest
on non-accruing loans is recognized as payments are received when the ultimate
collectibility of interest is no longer considered doubtful. When a loan is
placed on non-accrual status, all interest previously accrued is reversed
against current-period interest income.
13
WAKE FOREST BANCSHARES, INC.
DECEMBER 31, 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.
14
WAKE FOREST BANCSHARES, INC.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any material legal proceedings
at the present time. Occasionally, the Association is a party
to legal proceedings within the normal course of business
wherein it enforces its security interest in loans made by it,
and other matters of a similar nature.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
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.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAKE FOREST BANCSHARES, INC.
Dated February 13, 2006 By: s/s Robert C. White
------------------------ --------------------------
Robert C. White
Chief Executive Officer and
Chief Financial Officer
16