FORM 10-QSB - QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
--------------------
[ ] 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
---------------------------------
(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
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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 May 1, 2006 there were issued
and outstanding 1,152,661 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 March 31, 2006 (unaudited)
and September 30, 2005 1
Consolidated statements of income for the three months ended March 31, 2006
and March 31, 2005 (unaudited) 2
Consolidated statements of income for the six months ended March 31, 2006
and March 31, 2005 (unaudited) 3
Consolidated statements of comprehensive income for the three and six months ended
March 31, 2006 and March 31, 2005 (unaudited) 4
Consolidated statements of cash flows for the six months ended
March 31, 2006 and March 31, 2005 (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
March 31, 2006 and September 30, 2005
March 31, September 30,
ASSETS 2006 2005
----------------- -----------------
(Unaudited) *
Cash and short-term cash investments $ 24,128,400 $ 22,327,400
Investment securities:
Available for sale, at estimated market value 497,400 460,350
FHLB stock 197,600 182,300
Loans receivable, net of loan loss allowances of $945,000 at
March 31, 2006 and $850,000 at September 30, 2005 72,700,100 73,894,100
Accrued interest receivable 179,550 136,200
Foreclosed assets, net 1,003,800 1,003,800
Property and equipment, net 349,000 337,850
Bank owned life insurance 1,074,750 1,058,500
Deferred income taxes, net 299,300 297,150
Prepaid expenses and other assets 89,950 33,700
----------------- -----------------
Total Assets $ 100,519,850 $ 99,731,350
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 81,057,200 $ 80,905,150
Accrued interest on deposits 38,800 26,950
Accrued expenses and other liabilities 776,550 746,300
Dividends payable 88,000 77,650
Redeemable common stock held by the ESOP
net of unearned ESOP shares 540,350 569,100
----------------- -----------------
Total Liabilities 82,500,900 82,325,150
----------------- -----------------
Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, par value $ .01, authorized 5,000,000 shares,
issued 1,242,506 shares at March 31, 2006 and
1,237,146 shares at September 30, 2005 12,400 12,350
Additional paid-in capital 5,589,150 5,502,050
Accumulated other comprehensive income 303,450 280,500
Retained earnings, substantially restricted 13,490,950 12,868,900
Less: Common stock in treasury, at cost (1,377,050) (1,257,600)
----------------- -----------------
Total stockholders' equity 18,018,900 17,406,200
----------------- -----------------
Total liabilities and stockholders' equity $ 100,519,800 $ 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 MARCH 31, 2006 AND 2005
2006 2005
----------------- -----------------
Interest and dividend income:
Loans $ 1,423,600 $ 1,304,200
Investment securities 6,300 4,650
Short-term cash investments 269,400 82,100
----------------- -----------------
Total interest income 1,699,300 1,390,950
----------------- -----------------
Interest expense:
Interest on deposits 691,650 539,250
----------------- -----------------
Total interest expense 691,650 539,250
----------------- -----------------
Net interest income before provision for loan losses 1,007,650 851,700
Provision for loan losses (35,000) (37,100)
----------------- -----------------
Net interest income after provision for loan losses 972,650 814,600
----------------- -----------------
Noninterest income:
Service charges and fees 11,850 12,750
Secondary market fee income - 4,000
Other 8,950 7,500
----------------- -----------------
20,800 24,250
----------------- -----------------
Noninterest expense:
Compensation and benefits 211,100 190,300
Occupancy 11,550 11,500
Federal insurance and operating assessments 11,500 10,450
Data processing 46,600 33,800
REO provisions and expense 36,050 5,600
Other operating expense 78,850 76,800
----------------- -----------------
395,650 328,450
----------------- -----------------
Income before income taxes 597,800 510,400
Income taxes 214,700 167,600
----------------- -----------------
Net income $ 383,100 $ 342,800
================= =================
Basic earnings per share $ 0.33 $ 0.30
Diluted earnings per share $ 0.33 $ 0.29
Dividends per share $ 0.17 $ 0.15
See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 2006 AND 2005
2006 2005
----------------- -----------------
Interest and dividend income:
Loans $ 2,866,200 $ 2,628,100
Investment securities 12,250 9,050
Short-term cash investments 502,950 126,650
----------------- -----------------
Total interest income 3,381,400 2,763,800
----------------- -----------------
Interest expense:
Interest on deposits 1,371,650 1,077,950
----------------- -----------------
Total interest expense 1,371,650 1,077,950
----------------- -----------------
Net interest income before provision for loan losses 2,009,750 1,685,850
Provision for loan losses (95,000) (64,600)
----------------- -----------------
Net interest income after provision for loan losses 1,914,750 1,621,250
----------------- -----------------
Noninterest income:
Service charges and fees 30,250 27,250
Secondary market fee income 8,000 4,000
Other 20,700 18,650
----------------- -----------------
58,950 49,900
----------------- -----------------
Noninterest expense:
Compensation and benefits 418,600 358,250
Occupancy 22,350 21,500
Federal insurance and operating assessments 22,550 20,850
Data processing 78,950 64,350
REO provisions and expense 85,550 5,600
Other operating expense 141,800 167,300
----------------- -----------------
769,800 637,850
----------------- -----------------
Income before income taxes 1,203,900 1,033,300
Income taxes 434,400 341,650
----------------- -----------------
Net income $ 769,500 $ 691,650
================= =================
Basic earnings per share $ 0.67 $ 0.60
Diluted earnings per share $ 0.66 $ 0.60
Dividends per share $ 0.34 $ 0.30
See Notes to Consolidated Financial Statements.
3
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005
2006 2005
----------------- -----------------
FOR THE THREE MONTHS ENDED MARCH 31:
Net income $ 383,100 $ 342,800
----------------- -----------------
Other comprehensive (loss), net of tax:
Unrealized (losses) on securities:
Unrealized holding (losses) arising during period (22,000) (53,100)
Less: reclassification adjustments for (losses)
included in net income -- --
----------------- -----------------
Other comprehensive (loss) (22,000) (53,100)
----------------- -----------------
Comprehensive income $ 361,100 $ 289,700
================= =================
2005 2005
----------------- -----------------
FOR THE SIX MONTHS ENDED MARCH 31:
Net income $ 769,500 $ 691,650
----------------- -----------------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 22,950 (10,350)
Less: reclassification adjustments for gains (losses)
included in net income -- --
----------------- -----------------
Other comprehensive income (loss) 22,950 (10,350)
----------------- -----------------
Comprehensive income $ 792,450 $ 681,300
================= =================
See Notes to Consolidated Financial Statements.
4
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 2006 AND 2005
2006 2005
------------------- ------------------
Net income $ 769,500 691,650
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 19,100 12,650
Provision for loan losses 95,000 64,600
Gain on sale of foreclosed assets, net - -
Deferred income taxes (16,250) (13,250)
Increase in cash surrender value of life insurance (16,250) (17,700)
Changes in assets and liabilities:
Prepaid expenses and other assets (56,250) (2,850)
Accrued interest receivable (43,350) (17,200)
Accrued interest on deposits 11,850 7,700
Accrued expenses and other liabilities 30,250 24,100
------------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 793,600 749,700
------------------- ------------------
Cash Flows From Investing Activities:
Net decrease in loans receivable 1,099,000 6,157,700
Redemption of FHLB stock - 31,500
Purchase of FHLB stock (15,300) -
Purchase of property and equipment (30,250) -
------------------- ------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,053,450 6,189,200
------------------- ------------------
Cash Flows From Financing Activities:
Net increase in deposits 152,050 7,460,900
Proceeds from exercise of stock options 68,350 121,400
Additions to paid in capital from tax effect from exercise of
of stock options 18,850 -
Repurchase of common stock for the Treasury (119,450) (80,300)
Dividends paid (165,850) (150,100)
------------------- ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (46,050) 7,351,900
------------------- ------------------
Net increase in cash and cash equivalents 1,801,000 14,290,800
Cash and cash equivalents:
Beginning 22,327,400 5,851,250
------------------- ------------------
Ending $ 24,128,400 $ 20,142,050
=================== ==================
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 1,359,800 $ 1,070,250
=================== ==================
Cash payment of income taxes $ 464,500 $ 406,750
=================== ==================
Supplemental Disclosure of Noncash transactions:
Decrease in ESOP put option charged to retained earnings $ (28,750) $ (1,700)
=================== ==================
Transfer of loans to foreclosed assets $ -- $ 1,503,800
=================== ==================
Increase (decrease) in unrealized gain on investment
securities, net of tax $ 22,950 $ (10,350)
=================== ==================
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 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 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.
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 and six
month periods ended March 31, 2006 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 March 20, 2006, the Board of Directors of the Company declared a dividend of
$0.17 a share for stockholders of record as of March 31, 2006 and payable on
April 10, 2006. The dividends declared were accrued and reported as dividends
payable in the March 31, 2006 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.
6
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 and six month periods ended March 31, 2006 and 2005 is
presented below.
For the Three Months Ended March 31: 2006 2005
----------------- -----------------
Weighted average shares outstanding for Basic EPS 1,152,704 1,154,925
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 5,383 11,080
----------------- -----------------
Weighted average shares outstanding for diluted EPS 1,158,087 1,166,005
================= =================
For the Six Months Ended March 31: 2005 2005
----------------- -----------------
Weighted average shares outstanding for Basic EPS 1,152,733 1,153,325
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 6,313 12,585
----------------- -----------------
Weighted average shares outstanding for diluted EPS 1,159,046 1,165,910
================= =================
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 2006 or 2005 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.
7
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTION PLAN (CONTINUED)
A summary of the changes in the Company's options during the quarters ended
March 31, 2006 and 2005 is presented below:
2006 2005
----------------- ------------------
Stock options outstanding at beginning of the quarter 15,842 27,581
Granted - -
Exercised (4,400) (4,335)
Terminated - -
----------------- ------------------
Stock options outstanding at end of the quarter 11,442 23,246
================= ==================
Stock options exercisable at end of the quarter 11,442 23,246
================= ==================
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, 2005 AND MARCH 31, 2006
Total assets increased by $788,500 to $100.5 million at March 31, 2006 from
$99.7 million at September 30, 2005. The increase in total assets during the six
month period ended March 31, 2006 occurred primarily due to income retained from
operations during the same period. Due to adequate levels of current liquidity,
deposits were priced to meet competition and retain certain accounts but not to
aggressively attract additional funds. Deposits increased by $152,050 during the
six month period ended March 31, 2006. 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 six month period, cash and
short term cash investments increased by approximately $1.8 million.
Net loans receivable decreased by $1.2 million to $72.7 million at March 31,
2006 from $73.9 million at September 30, 2005. The decrease occurred primarily
because of a number of balloon or prime based commercial loans were refinanced
by borrowers elsewhere to obtain longer term fixed rate financing. Federal
Reserve rate hikes have made these types of loans less desirable and because of
possible interest rate risk exposure, the Company does not offer commercial or
investment loans with long term fixed rates. However, the Company's construction
loan portfolio increased by $1.7 million during the six month period ended March
31, 2006. 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 several 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 $52,350 to $695,000 at March 31, 2006 from
$642,650 at September 30, 2005. The slight increase is attributable to a $37,050
unrealized gain in the Company's investment in FHLMC stock during the past six
months and a required $15,300 purchase of FHLB stock during the same period. 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 March 31,
2006, the Company's investment portfolio, which consisted of FHLB stock and
FHLMC stock, had approximately $489,000 in unrealized gains.
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 $540,350 at March 31, 2006 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, 2005 AND MARCH 31, 2006
(CONTINUED)
The Company has an ongoing stock repurchase program authorizing management to
repurchase shares of its outstanding common stock. The repurchases are made
through registered broker-dealers from shareholders in open market purchases at
the discretion of management. The Company intends to hold the shares repurchased
as treasury shares, and may utilize such shares to fund stock benefit plans or
for any other general corporate purposes permitted by applicable law. At March
31, 2006 the Company had repurchased 89,845 shares of its common stock. The
program continues until completed or terminated by the Board of Directors.
Retained earnings increased by $622,050 to $13.5 million at March 31, 2006 from
$12.9 million at September 30, 2005. The increase is primarily attributable to
the Company's earnings of $769,500 during the six month period ended March 31,
2006, reduced by $176,200 in dividends declared during the period and a $28,750
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 March 31, 2006 the
Company's capital amounted to $18.0 million, which as a percentage of total
assets was 17.93%. The Company and the Association are both required to meet
certain capital requirements as established by the OTS. At March 31, 2006, 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 1.00% at March 31, 2006 and 1.78% at September 30, 2005. At March 31, 2006,
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 an 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 is currently ongoing. Although the Company does not
currently believe the contamination will have any significant effect on the
potential development of the property, the Company is committed to determining
the extent of any required clean-up and ongoing monitoring steps in order to
properly preserve the value of the property. 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 $145,000 to date on environmental assessment activities.
At March 31, 2006, 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 or six month
period ended March 31, 2006. The Company's loan loss allowance amounted to
$945,000 at March 31, 2006 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.
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 (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 AND SIX MONTHS ENDED MARCH 31,
2006 AND 2005
GENERAL. Net income for the three month period ended March 31, 2006 was
$383,100, or $40,300 more than the $342,800 earned during the same quarter in
2005. Net income for the six month period ended March 31, 2006 was $769,500, or
$77,850 more than the $691,650 earned during the same period in 2005. 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 six month period end March 31,2006 when compared to the same periods
a year earlier.
INTEREST INCOME. Interest income increased by $308,350 from $1,390,950 for the
three months ended March 31, 2005 to $1,699,300 for the three months ended March
31, 2006. The increase in interest income resulted from both a 98 basis point
increase in the average yield on interest earning assets between the quarters
and an increase of $8.2 million in the average balance of interest-earning
assets outstanding between the periods. Interest income increased by $617,600
from $2,763,800 for the six months ended March 31, 2005 to $3,381,400 for the
six months ended March 31, 2006. The increase in interest income resulted from
both an 82 basis point increase in the average yield on interest earning assets
between the six month periods and an increase of $8.3 million in the average
balance of interest-earning assets outstanding between the periods. The
Company's yield on interest earning assets was 6.74% and 6.56% for the quarter
and six month period ended March 31, 2006; respectively, and 5.76% and 5.74% for
the quarter and six month period ended March 31, 2005; 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 quickly when market rates influenced by Federal Reserve rate movements
change.
INTEREST EXPENSE. Interest expense increased by $152,400 from $539,250 for the
three months ended March 31, 2005 to $691,650 for the three months ended March
31, 2006. Interest expense increased by $293,700 from $1,077,950 for the six
months ended March 31, 2005 to $1,371,650 for the six months ended March 31,
2006. The increases were the result of both an increase in the Company's cost of
funds between the periods and an increase in the average balance of deposits
outstanding between the periods. The Company's cost of funds increased by 58
basis points and 48 basis points for the three and six month periods ended March
31, 2006; 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 2.99% and 2.96% for the quarter and six month period ended March 31, 2005;
respectively, to 3.57% and 3.44% for the quarter and six month period ended
March 31, 2006, respectively. The Company's average balance of deposits
outstanding increased by $5.4 million and $6.5 million for the three and six
month periods ended March 31, 2006, 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 SIX MONTHS ENDED MARCH 31,
2006 AND 2005 (CONTINUED)
NET INTEREST INCOME. Net interest income increased by $155,950 from $851,700 for
the three months ended March 31, 2005 to $1,007,650 for the three months ended
March 31, 2006. Net interest income increased by $323,900 from $1,685,850 for
the six months ended March 31, 2005 to $2,009,750 for the six months ended March
31, 2006. As explained above, the changes in net interest income resulted
primarily from fluctuations in both the yields on interest-earning assets and
the cost of funds on interest-bearing liabilities between the periods as well as
changes in the level of interest earning assets and interest-bearing
liabilities. The Company's net interest margin was 4.13% and 4.14% for the
current quarter and six months ended March 31, 2006 versus 3.81% and 3.80% for
the same quarter and six month period a year earlier.
PROVISION FOR LOAN LOSSES. The Company provided $35,000 and $95,000 in loan loss
provisions during the current quarter and six month period ended March 31, 2005;
respectively, as compared to $37,100 and $64,600 during the three and six month
periods; respectively, a year earlier. Provisions, which are charged to
operations, and the resulting loan loss allowances are amounts the Company's
management believes will be adequate to absorb losses that are estimated to have
occurred 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. 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. 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 on
various fees and service charges on customer accounts, income from bank owned
life insurance products, 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 periods
being reported upon and therefore very little secondary marketing income has
been generated over those same periods.
NON-INTEREST EXPENSE. Non-interest expense increased by $67,200 to $395,650 for
the three month period ended March 31, 2006 from $328,450 for the comparable
quarter in 2005. Non-interest expense increased by $131,950 to $769,800 for the
six month period ended March 31, 2006 from $637,850 for the same period a year
earlier. Compensation and related benefits increased by $20,800 and $60,350
during the quarter and six months ended March 31, 2006, respectively, as
compared to the same periods a year earlier.
The increase in compensation and benefits occurred primarily because the Company
has accrued a higher level of bonuses associated with the greater earnings in
2006 as compared to the same periods a year earlier, and healthcare costs have
risen by approximately 25% during the current year. REO provisions and expense
have increased by $30,450 and $79,950 during the current quarter and six month
period ended March 31, 2006, respectively, versus the same periods 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. Data processing expense increased by $12,800 and $14,600 during the
three and the six month periods ended March 31, 2006, respectively, as compared
to the same periods a year earlier because the Company is currently implementing
a computer systems upgrade and conversion.
Other operating expense decreased by $25,500 from $167,300 for the six month
period ended March 31, 2005 to $141,800 for the six month period ended March 31,
2006. The decrease in other operating expense occurred primarily because the
Company's state franchise tax expense was $26,750 higher in 2005 as compared to
2006. No other category of non-interest expense changed significantly between
the periods being reported upon.
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 six month period ended March 31, 2006, cash and cash equivalents, a
significant source of liquidity, increased by approximately $1.8 million. Net
principal loan reductions of $1.1 million and net cash provided by operating
activities of $793,600 were the primary factors which contributed to the
increase in cash during the current six month period. There were no significant
uses of cash during the six month period ended March 31, 2006. 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 March 31, 2006, the Association had outstanding loan commitments
amounting to approximately $4.7 million. The undisbursed portion of construction
loans amounted to $15.5 million and unused lines of credit amounted to $5.6
million at March 31, 2006.
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:
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 and a formula allowance for the remainder of the portfolio.
A loan is considered impaired when, based on current information and events, it
is probable that the Association will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent. This
evaluation is inherently subjective as it requires material estimates that may
be susceptible to significant change. Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment. Accordingly, the
Association does not separately identify individual residential loans for
impairment disclosures.
The adequacy of the allowance is also reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of the Company and other conditions, such as new loan products,
collateral values, loan concentrations, changes in the mix and volume of the
loan portfolio; trends in portfolio credit quality, including delinquency and
charge-off rates; and current economic conditions that may affect a borrower's
ability to repay. Although management believes it has established and maintained
the allowance for loan losses at appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ substantially
from the current operating environment.
Interest Income Recognition:
Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or more
past due unless the loans are adequately secured and in the process of
collection. Interest is not accrued on other loans when management believes
collection is doubtful. All loans considered impaired are non-accruing. Interest
on non-accruing loans is recognized as payments are received when the ultimate
collectibility of interest is no longer considered doubtful. When a loan is
placed on non-accrual status, all interest previously accrued is reversed
against current-period interest income.
14
WAKE FOREST BANCSHARES, INC.
MARCH 31, 2006
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
On February 21, 2006, the annual meeting of stockholders was
held to consider and vote upon the election of two directors of the
Company and to ratify the appointment of Dixon Hughes PLLC as
independent auditors for the Company's fiscal year ending September 30,
2006. All items were approved by the stockholders as shown below.
Vote concerning the election of directors of the Company:
For Against Withheld Total
------------------------------------------------------------------------
Anna O. Sumerlin 1,009,403 - 925 1,010,328
Harold R. Washington 1,009,503 - 825 1,010,328
Vote concerning ratification of Dixon Hughes PLLC as independent auditors for
the year ending September 30, 2006:
For Against Abstained Total
------------------------------------------------------------------------
1,003,353 4,200 2,775 1,010,328
The foregoing matters are described in detail in the Company's proxy statement
dated January 19, 2006 for the 2006 Annual Meeting of stockholders.
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 May 12, 2006 By: s/s Robert C. White
--------------------- --------------------------------
Robert C. White
Chief Executive Officer and
Chief Financial Officer
17