10QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2006
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o |
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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
Commission file number 000-25999
Wake Forest Bancshares, Inc.
(Exact name of small business issuer as specified in its charter)
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United States of America
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56-2131079 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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302 South Brooks Street
Wake Forest, North Carolina 27587
(Address of principal executive offices)
(919)-556-5146
(Issuers 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 þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yeso No þ
State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: As of February 12, 2007 there were issued and outstanding 1,162,503
shares of the Issuers common stock, $.01 par value
Transitional Small Business Disclosure Format: Yeso No þ
WAKE FOREST BANCSHARES, INC.
CONTENTS
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2006 and September 30, 2006
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December 31, |
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September 30, |
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2006 |
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2006 |
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(Unaudited) |
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* |
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ASSETS |
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Cash and short-term cash investments |
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$ |
27,478,200 |
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$ |
23,818,900 |
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Investment securities: |
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Available for sale, at estimated market value |
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553,650 |
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540,850 |
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FHLB stock |
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197,600 |
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197,600 |
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Loans receivable, net of loan loss allowances of $1,097,500 at
December 31, 2006 and $1,042,500 at September 30, 2006 |
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74,957,150 |
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76,635,300 |
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Accrued interest receivable |
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238,750 |
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230,050 |
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Foreclosed assets, net |
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1,003,800 |
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1,003,800 |
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Property and equipment, net |
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387,050 |
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401,800 |
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Bank owned life insurance |
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1,110,400 |
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1,100,050 |
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Deferred income taxes, net |
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319,400 |
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295,100 |
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Prepaid expenses and other assets |
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49,100 |
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55,050 |
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Total Assets |
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$ |
106,295,100 |
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$ |
104,278,500 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits |
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$ |
85,346,900 |
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$ |
83,977,850 |
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Accrued interest on deposits |
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98,200 |
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67,950 |
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Accrued expenses and other liabilities |
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827,700 |
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784,200 |
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Accrued income taxes |
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206,500 |
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Dividends payable |
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99,350 |
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88,700 |
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Redeemable common stock held by the ESOP
net of unearned ESOP shares |
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542,600 |
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553,650 |
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Total Liabilities |
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87,121,250 |
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85,472,350 |
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Stockholders equity: |
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Preferred stock, authorized 1,000,000 shares, none issued |
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Common stock, par value $ .01, authorized 5,000,000 shares,
issued 1,249,448 shares at December 31, 2006 and
1,247,134 shares at September 30, 2006 |
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12,500 |
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12,450 |
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Additional paid-in capital |
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5,706,200 |
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5,665,700 |
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Accumulated other comprehensive income |
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338,300 |
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330,400 |
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Retained earnings, substantially restricted |
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14,530,650 |
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14,187,400 |
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Less: Common stock in treasury, at cost |
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(1,413,800 |
) |
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(1,389,800 |
) |
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Total stockholders equity |
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19,173,850 |
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18,806,150 |
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Total liabilities and stockholders equity |
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$ |
106,295,100 |
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$ |
104,278,500 |
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See Notes to Consolidated Financial Statements.
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* |
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Derived from Audited Consolidated Financial Statements. |
1
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31, 2006 and 2005
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2006 |
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2005 |
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Interest and dividend income: |
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Loans |
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$ |
1,629,950 |
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$ |
1,442,600 |
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Investment securities |
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7,000 |
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5,950 |
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Short-term cash investments |
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334,400 |
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233,500 |
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Total interest income |
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1,971,350 |
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1,682,050 |
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Interest expense: |
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Interest on deposits |
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894,000 |
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679,950 |
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Total interest expense |
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894,000 |
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679,950 |
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Net interest income before provision for loan losses |
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1,077,350 |
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1,002,100 |
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Provision for loan losses |
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(55,000 |
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(60,000 |
) |
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Net interest income after provision for loan losses |
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1,022,350 |
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942,100 |
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Noninterest income: |
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Service charges and fees |
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16,200 |
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18,400 |
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Gain on sale of loans |
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7,950 |
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Other |
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10,900 |
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11,750 |
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27,100 |
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38,100 |
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Noninterest expense: |
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Compensation and benefits |
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207,300 |
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207,500 |
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Occupancy |
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13,700 |
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10,800 |
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Federal insurance and operating assessments |
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11,450 |
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11,050 |
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Data processing |
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26,100 |
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32,300 |
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REO provisions and expense |
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30,050 |
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49,500 |
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Other operating expense |
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91,150 |
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62,950 |
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379,750 |
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374,100 |
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Income before income taxes |
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669,700 |
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606,100 |
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Income taxes |
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238,150 |
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219,700 |
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Net income |
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$ |
431,550 |
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$ |
386,400 |
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Basic earnings per share |
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$ |
0.37 |
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$ |
0.34 |
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Diluted earnings per share |
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$ |
0.37 |
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$ |
0.33 |
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Dividends per share |
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$ |
0.19 |
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$ |
0.17 |
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See Notes to Consolidated Financial Statements.
2
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended December 31, 2006 and 2005
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2006 |
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2005 |
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Net income |
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$ |
431,550 |
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$ |
386,400 |
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Other comprehensive loss, net of tax: |
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Unrealized gains on securities: |
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Unrealized holding gains arising during period |
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7,900 |
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44,950 |
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Less: reclassification adjustments for gains included
in net income |
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Other comprehensive income |
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7,900 |
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44,950 |
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Comprehensive income |
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$ |
439,450 |
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$ |
431,350 |
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See Notes to Consolidated Financial Statements.
3
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended December 31, 2006 and 2005
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2006 |
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2005 |
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Net income |
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$ |
431,550 |
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$ |
386,400 |
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Adjustments to reconcile net income to net
cash provided by operating activities: |
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Depreciation |
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14,750 |
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5,900 |
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Provision for loan losses |
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55,000 |
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60,000 |
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Deferred income taxes |
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(29,150 |
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(500 |
) |
Increase in cash surrender value of life insurance |
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(10,350 |
) |
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(8,100 |
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Changes in assets and liabilities: |
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Prepaid expenses and other assets |
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5,950 |
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(58,550 |
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Accrued interest receivable |
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(8,700 |
) |
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(36,150 |
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Accrued interest on deposits |
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30,250 |
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16,650 |
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Accrued income taxes |
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206,500 |
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133,800 |
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Accrued expenses and other liabilities |
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43,500 |
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(42,050 |
) |
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Net cash provided by operating activities |
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739,300 |
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457,400 |
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Cash Flows From Investing Activities: |
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Net decrease in loans receivable |
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1,623,150 |
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3,988,100 |
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Purchase of property and equipment |
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(1,500 |
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Net cash provided by investing activities |
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1,623,150 |
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3,986,600 |
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Cash Flows From Financing Activities: |
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Net increase (decrease) in deposits |
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1,369,050 |
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(1,398,800 |
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Proceeds from exercise of stock options |
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29,500 |
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12,200 |
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Additions to paid in capital from tax effect from exercise of stock options |
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11,000 |
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3,400 |
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Repurchase of common stock for the Treasury |
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(24,000 |
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(21,100 |
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Dividends paid |
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(88,700 |
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(77,650 |
) |
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Net cash provided by (used in) financing activities |
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1,296,850 |
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(1,481,950 |
) |
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Net increase in cash and cash equivalents |
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3,659,300 |
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2,962,050 |
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Cash and cash equivalents: |
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Beginning |
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23,818,900 |
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22,327,400 |
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Ending |
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$ |
27,478,200 |
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$ |
25,289,450 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash payments of interest |
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$ |
863,750 |
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$ |
663,300 |
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Cash payment of income taxes |
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$ |
40,000 |
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$ |
82,000 |
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Supplemental Disclosure of Noncash transactions: |
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Incr. (decr.) in ESOP put option charged to retained earnings |
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$ |
(11,050 |
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$ |
11,700 |
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Increase in unrealized gain on investment securities, net ot tax |
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$ |
7,900 |
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$ |
44,950 |
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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 Associations 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 Companys and the Associations 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 MHCs principal assets consisted of 635,000 shares of the
Associations common stock (now converted to the Companys 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 54.8% 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, 2006, 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, 2006 are not necessarily indicative of the results of operations
that may be expected for the Companys fiscal year ending September 30, 2007. The accounting
policies followed are as set forth in Note 1 of the Notes to Consolidated Financial Statements in
the Companys September 30, 2006 Annual Report to Stockholders.
Note 4. Dividends Declared
On December 18, 2006, the Board of Directors of the Company declared a dividend of $0.19 a
share for stockholders of record as of December 29, 2006 and payable on January 10, 2007. The
dividends declared were accrued and reported as dividends payable in the December 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.
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, 2006 and 2005 is presented below.
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For the Three Months Ended December 31 |
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2006 |
|
2005 |
Weighted average shares outstanding for Basic EPS |
|
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1,157,548 |
|
|
|
1,152,761 |
|
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans |
|
|
2,206 |
|
|
|
7,279 |
|
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|
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Weighted average shares outstanding for diluted EPS |
|
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1,159,754 |
|
|
|
1,160,040 |
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Note 6. Stock Option Plan
In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation
(SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. This Statement focuses
primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. Awards to most non-employee directors will be accounted for as
employee awards. 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. Prior
to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions
of this Statement are effective for this quarter end. The adoption of the statement did not have
had an impact of the Companys financial statements for the three months ended December 31, 2006
because all of the Companys stock options were issued and vested in periods earlier than this
quarter.
In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, which contains guidance on
applying the requirements in SFAS No. 123(R) including valuation techniques, development of
assumptions used in valuing employee stock options and related MD&A disclosures. SAB No. 107 is
effective for the period in which SFAS No. 123(R) is adopted. The adoption of SAB No. 107 did not
have an impact on the Companys financial statements for the three months ended December 31, 2006.
The Company has a stock option plan for the benefit of its officers, directors, and key
employees. Options totaling 54,000 at an exercise price of $12.75 were granted on January 22,
1997. No options have been granted since that date. The options became exercisable at the
rate of 20% annually for years during periods of service as an employee, officer, or director,
and expire after ten years. Accelerated vesting may occur in certain circumstances as
disclosed in the plan documents. Options are exercisable at the fair value on the date of
grant. A summary of the changes in the Companys options during the quarters ended December
31, 2006 and 2005 is presented below:
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|
2006 |
|
2005 |
Stock options outstanding at beginning of the quarter |
|
|
6,814 |
|
|
|
16,802 |
|
Granted |
|
|
|
|
|
|
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Exercised |
|
|
(2,314 |
) |
|
|
(960 |
) |
Terminated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at end of the quarter |
|
|
4,500 |
|
|
|
15,842 |
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at end of the quarter |
|
|
4,500 |
|
|
|
15,842 |
|
|
|
|
|
|
|
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6
Wake
Forest Bancshares, Inc.
Managements 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 Companys judgment concerning the future and are subject to risks
and uncertainties that could cause the Companys 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 Companys actual operating results to differ materially from
those in the forward-looking statements, as well as the factors set forth in
the Companys periodic reports and other filings with the SEC.
Comparison of Financial Condition at September 30, 2006 and December 31, 2006
Total assets increased by $2.0 million to $106.3 million at December 31, 2006 from $104.3
million at September 30, 2006. The increase in total assets during the quarter ended December 31,
2006 was funded primarily from an increase in deposits of approximately $1.4 million and cash
generated from internal operating activities during the same quarter. Due to adequate levels of
current liquidity, deposits were priced to meet competition and retain certain accounts but not to
aggressively attract additional funds. 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 $3.7
million.
Net loans receivable decreased by $1.7 million to $74.9 million at December 31, 2006 from $76.6
million at September 30, 2006. The decrease occurred primarily because of a seasonal decline in
outstanding construction loans which decreased by $2.4 million during the current quarter. The
Companys construction loan portfolio characteristically expands in the spring corresponding with
the areas typical selling season and declines in the fall and winter. The Companys primary
lending area continues to demonstrate signs of a healthy real estate market. However, sustained
employment growth across a wide spectrum of the local economic base and moderate interest rate
levels will ultimately determine whether loan demand can be maintained. The high tech sector of
the areas employment base has been hit hard during the past several years and its sporadic
recovery has somewhat hindered growth in the overall real estate market. Assuming local 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 $12,800 to $751,250 at December 31, 2006 from $738,450 at
September 30, 2006. The increase is attributable to unrealized gains in the Companys 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, 2006, the Companys investment
portfolio, which consisted of FHLB stock and FHLMC stock, had approximately $546,000 in unrealized
gains.
The Company had no borrowings outstanding during the period because its current level of liquidity
was sufficient to fund loan originations and provide for other cash requirements. The Company has
recorded a liability of $542,600 at December 31, 2006 for the ESOP put option which represents the
potential liability owed to participants based on the current market value of the Companys stock
if all participants were to request the balance of their account from the Company in cash instead
of stock.
7
Wake Forest Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Financial Condition at September 30, 2006 and December 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 December 31,
2006 the Company had repurchased 91,445 shares of its common stock. The program continues until
completed or terminated by the Board of Directors.
Retained earnings increased by $343,250 to $14.5 million at December 31, 2006 from $14.2 million at
September 30, 2006. The increase is primarily attributable to the Companys earnings of $431,550
during the quarter ended December 31, 2006, reduced by $99,350 in dividends declared during the
period and a $11,050 credit to retained earnings to reflect the change in the fair value of the
ESOP shares subject to the put option. At December 31, 2006 the Companys capital amounted to
$19.2 million, which as a percentage of total assets was 18.04%. The Company and the Association
are both required to meet certain capital requirements as established by the OTS. At December 31,
2006, all capital requirements were met.
Asset Quality
The Companys level of non-performing loans, consisting of loans past due 90 days or more,
amounted to $515,000 and a percentage of loans outstanding, was 0.68% at December 31, 2006. At
December 31, 2005, the Company had no loans past due 90 days or more. Non-performing loans
amounted to $666,400 or 0.86% as percentage of loans outstanding at September 30, 2006. At December
31, 2006, non-performing loans consisted of two residential property loans amounting to $57,600 and
one commercial property loan totaling $457,350, which is collateralized by two mini storage
facilities and an office building on 3.6 acres in Wendell, N.C. The commercial property loan is
scheduled to be refinanced elsewhere in early February 2007. We believe that the fair market value
of all these properties is higher than the outstanding loan balances and we will not incur a loss
on the ultimate disposition of any of these loans. All of the loans have been placed on
non-accrual status.
At December 31, 2006, non-performing assets also included a foreclosed commercial property
($1,003,800) 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, North Carolina. While the propertys
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. As a result,
site assessment reports were filed with various state environmental agencies. Petroleum
contamination and other trace elements consistent with operating a gas station and a truck
maintenance facility over an extended period of time were found on parts of the property. The
Company is in the process of applying for brownfields status for the site which should make the
tract more attractive to prospective developers of the property. Although the Company does not
currently believe the contamination will have a detrimental 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 that will be required. 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. During the current quarter, the Company
expensed $30,000 in environmentally related cost for this property.
The Company had no loan charge-offs during the current quarter. The Companys loan loss allowance
amounted to $1,097,500 at December 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
Associations loan portfolio has gradually trended towards a greater concentration of residential
construction and land loans, which generally involve 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.
8
Wake Forest Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
Asset Quality (Continued):
The Company records provisions for loan losses based upon known problem loans and estimated
deficiencies in the existing loan portfolio. The Companys 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 Statement of
Financial Accounting Standards (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 secured 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 collaterals fair value less estimated
cost of disposal.
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 and lending
concentrations, local economic conditions, and delinquency trends are also considered in
determining the Companys 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, 2006 and 2005
General. Net income for the three month period ended December 31, 2006 was $431,550
($0.37 per diluted share) as compared to $386,400 ($0.33 per diluted share) earned during the same
quarter in 2005. 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, 2006, as compared to the same period one year earlier.
Interest income. Interest income increased by $289,300 from $1,682,050 for the three
months ended December 31, 2005 to $1,971,350 for the three months ended December 31, 2006. The
increase in interest income resulted from both a 0.89% increase in the average yield on
interest-earning assets and a $5.9 million increase in the average balance of interest-earning
assets outstanding between the quarters. The Companys yield on interest earning assets was 7.27%
for the quarter ended December 31, 2006 and 6.38% for the quarter ended December 31, 2005. The
change in yield occurred primarily due to fluctuations in market rates outstanding during the
periods. A significant amount of the Companys interest earning assets adjust in tandem with
changes to Prime, which has increased by one percent from December 31, 2005 to December 31, 2006.
Interest Expense. Interest expense increased by $214,050 from $679,950 the three
months ended December 31, 2005 to $894,000 for the three months ended December 31, 2006. The
primary reasons for the increased interest expense were a 94 basis point increase in the Companys
cost of funds during the current quarter as compared to the same quarter a year earlier and a $4.3
million increase in the average balance of deposits between the quarters. The Companys cost of
funds was 3.30% for the quarter ended December 31, 2005 and 4.24% for the quarter ended December
31, 2006. The change in the Companys 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.
9
Wake Forest Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Operating Results for the Three Months Ended December 31, 2006 and 2005
(Continued)
Net interest income. Net interest income increased by $75,250 from $1,002,100 for the
three months ended December 31, 2005 to $1,077,350 for the three months ended December 31, 2006.
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, 2005 to the most recent quarter
ended December 31, 2006. The Companys interest rate margin was 4.21% for the current quarter as
compared to 4.15% for the quarter ended December 31, 2005.
Provision for loan losses. The Company provided $55,000 and $60,000 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
Companys 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
Associations loan portfolio has gradually trended towards a greater concentration of builder
construction loans, land, and land development 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 current periods than what has historically been considered necessary. In addition, the
Company has experienced an increased level of delinquent loans during recent reporting periods as
compared to what has historically occurred. The increased delinquencies have impacted the level of
loan loss provisions 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 Companys 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 origination and sales.
The Company did not have any investment sales during any of the periods being reported upon. In
addition, the Company has primarily originated 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 slightly increased to $379,750 for the
three month period ended December 31, 2006 from $374,100 for the comparable quarter in 2005. Data
processing expense dropped by approximately $6,200 during the current quarter as compared to same
quarter a year earlier because the Company had increased cost associated with a computer conversion
last year. REO provisions and expense associated with environmental assessment activities for the
Companys foreclosed tract on highway 98 outside of Wake Forest, North Carolina were $19,450 lower
during the current quarter versus the same quarter a year earlier. The lower REO expense was
primarily due to a greater amount of assessment activities during the quarter ended December 31,
2005 as compared to the most recent quarter. Other operating expense increased by $28,200 from
$62,950 for the quarter ended December 31, 2005 to $91,150 for the current quarter. The increase
in other operating expense occurred primarily because during the current quarter the Company had
higher amounts of depreciation expense associated with its recently completed computer system
conversion and upgrade compared to the same quarter a year earlier. Also, the Company experienced
higher levels of expense during the current quarter associated with accruals established for
attendance of statewide conventions by directors and executive officers. No other category of
non-interest expense changed significantly between the two quarters.
10
Wake Forest Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
Capital Resources and Liquidity:
The term liquidity generally refers to an organizations 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, 2006, cash and cash equivalents, a significant
source of liquidity, increased by approximately $3.7 million. Net principal reductions from loans
amounting to $1.6 million, an increase in deposits of $1.4 million and proceeds from the Companys
internal operations totaling $739,300 all contributed to the increase in cash during the quarter.
Given its excess liquidity and its ability to borrow from the Federal Home Loan Bank of Atlanta,
the Company believes that it will have sufficient funds available to meet anticipated future loan
commitments, unexpected deposit withdrawals, and other cash requirements.
Off-Balance Sheet Transactions
In the normal course of business, the Association engages in a variety of financial
transactions that, under generally accepted accounting principles, either are not recorded on the
balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or
notional amounts. Primarily the Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit, revolving lines of
credit, and the undisbursed portion of construction loans. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts recognized in the
statement of financial condition. The contract or notional amounts of those instruments reflect
the extent of involvement the Association has in particular classes of financial instruments. The
Associations 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, 2006, the
Association had outstanding loan commitments amounting to approximately $3.8 million. The
undisbursed portion of construction loans amounted to $11.9 million and unused lines of credit
amounted to $6.6 million at December 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 Companys 2006 Annual Report on Form 10-KSB. The Company has not experienced any
material change in its critical accounting policies since September 30, 2006. The Companys
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:
11
Wake Forest Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
Allowance for Loan Losses
The most critical estimate concerns the Companys 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 Companys 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 borrowers 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 loans effective interest rate, the loans 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 borrowers 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.
12
Wake Forest Bancshares, Inc.
December 31, 2006
Item 3. Controls and Procedures
Management, including the Companys Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Companys 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 Companys internal control over financial reporting identified in
connection with the evaluation that occurred during the Companys last fiscal quarter that has
materially affected, or that is reasonably likely to materially affect, the Companys internal
control over financial reporting.
13
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. |
14
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.
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Wake Forest Bancshares, Inc. |
|
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Dated February 12, 2007
|
|
By:
|
|
/s/ Robert C. White
|
|
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|
Robert C. White |
|
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|
Chief Executive Officer and |
|
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Chief Financial Officer |
|
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15