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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Wake Forest Bancshares Inc (PK) | USOTC:WAKE | OTCMarkets | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 34.22 | 34.23 | 34.30 | 0.00 | 01:00:00 |
| þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| United States of America | 56-2131079 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
|
Item 1. Financial Statements
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2007 and September 30, 2007
December 31,
September 30,
2007
2007
(Unaudited)
*
ASSETS
Cash and short-term cash investments
$
18,600,700
$
21,670,500
Bank certificates of deposit
6,831,000
4,158,000
Investment securities:
Available for sale, at estimated market value
1,812,950
1,999,900
FHLB stock
191,400
191,400
Loans receivable, net of loan loss allowances of $1,227,550 at
December 31, 2007 and $1,187,550 at September 30, 2007
77,571,300
76,172,100
Accrued interest receivable
226,900
265,350
Foreclosed assets, net
1,113,750
1,003,800
Property and equipment, net
365,750
357,350
Bank owned life insurance
1,152,400
1,141,350
Deferred income taxes, net
483,050
390,650
Prepaid expenses and other assets
67,150
47,300
Total Assets
$
108,416,350
$
107,397,700
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
$
86,378,200
$
85,659,150
Accrued interest on deposits
78,050
64,750
Accrued expenses and other liabilities
855,600
924,950
Accrued income taxes
214,850
—
Dividends payable
105,000
99,750
Redeemable common stock held by the ESOP
net of unearned ESOP shares
451,950
465,550
Total Liabilities
88,083,650
87,214,150
Stockholders’ equity:
Preferred stock, authorized 1,000,000 shares, none issued
—
—
Common stock, par value $ .01, authorized 5,000,000 shares,
issued 1,253,948 shares at December 31, 2007 and
at September 30, 2007
12,550
12,550
Additional paid-in capital
5,779,500
5,779,500
Accumulated other comprehensive income
189,050
305,000
Retained earnings, substantially restricted
15,830,200
15,555,950
Less: Common stock in treasury, at cost
(1,478,600
)
(1,469,450
)
Total stockholders’ equity
20,332,700
20,183,550
Total liabilities and stockholders’ equity
$
108,416,350
$
107,397,700
See Notes to Consolidated Financial Statements.
*
Derived from Audited Consolidated Financial statements.
Table of Contents
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31, 2007 and 2006
2007
2006
Interest and dividend income:
Loans
$
1,529,100
$
1,629,950
Investment securities
24,300
7,000
Short-term cash investments
297,300
334,400
Total interest income
1,850,700
1,971,350
Interest expense:
Interest on deposits
950,100
894,000
Total interest expense
950,100
894,000
Net interest income before provision for loan losses
900,600
1,077,350
Provision for loan losses
(40,000
)
(55,000
)
Net interest income after provision for loan losses
860,600
1,022,350
Noninterest income:
Service charges and fees
17,250
16,200
Other
11,350
10,900
28,600
27,100
Noninterest expense:
Compensation and benefits
189,650
207,300
Occupancy
11,650
13,700
Federal insurance and operating assessments
12,100
11,450
Data processing
27,100
26,100
REO provisions and expense
4,800
30,050
Other operating expense
75,400
91,150
320,700
379,750
Income before income taxes
568,500
669,700
Income taxes
202,850
238,150
Net income
$
365,650
$
431,550
Basic earnings per share
$
0.32
$
0.37
Diluted earnings per share
$
0.32
$
0.37
Dividends per share
$
0.20
$
0.19
See Notes to Consolidated Financial Statements.
Table of Contents
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended December 31, 2007 and 2006
2007
2006
Net income
$
365,650
$
431,550
Other comprehensive gain (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
(115,950
)
7,900
Less: reclassification adjustments for gains (losses)
included in net income
—
—
Other comprehensive income (loss)
(115,950
)
7,900
Comprehensive income
$
249,700
$
439,450
See Notes to Consolidated Financial Statements.
Table of Contents
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended December 31, 2007 and 2006
2007
2006
Net income
$
365,650
$
431,550
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation
11,400
14,750
Provision for loan losses
40,000
55,000
Deferred income taxes
(21,400
)
(29,150
)
Increase in cash surrender value of life insurance
(11,050
)
(10,350
)
Changes in assets and liabilities:
Prepaid expenses and other assets
(19,850
)
5,950
Accrued interest receivable
38,450
(8,700
)
Accrued interest on deposits
13,300
30,250
Accrued income taxes
214,850
206,500
Accrued expenses and other liabilities
(69,350
)
43,500
Net cash provided by operating activities
562,000
739,300
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable
(1,549,150
)
1,623,150
Net (increase) decrease in bank certificates of deposit
(2,673,000
)
—
Purchase of property and equipment
(19,800
)
—
Net cash provided by (used in) investing activities
(4,241,950
)
1,623,150
Cash Flows From Financing Activities:
Net increase (decrease) in deposits
719,050
1,369,050
Proceeds from exercise of stock options
—
29,500
Additions to paid in capital from tax effect from exercise of
of stock options
—
11,000
Repurchase of common stock for the Treasury
(9,150
)
(24,000
)
Dividends paid
(99,750
)
(88,700
)
Net cash provided by financing activities
610,150
1,296,850
Net increase (decrease) in cash and cash equivalents
(3,069,800
)
3,659,300
Cash and cash equivalents:
Beginning
21,670,500
23,818,900
Ending
$
18,600,700
$
27,478,200
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest
$
936,800
$
863,750
Cash payment of income taxes
$
5,000
$
40,000
Supplemental Disclosure of Noncash transactions:
Transfer of loans to foreclosed assets
$
109,950
$
—
Incr. (decr.) in ESOP put option charged to retained earnings
$
(13,600
)
$
(11,050
)
Incr. (decr.) in unrealized gain on investment securities,
net of tax
$
(115,950
)
$
7,900
See Notes to Consolidated Financial Statements.
Table of Contents
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 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, 2007, 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, 2007 are not necessarily indicative of the results of operations that may be
expected for the Company’s fiscal year ending September 30, 2008. The accounting policies followed
are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s
September 30, 2007 Annual Report to Stockholders.
Note 4. Dividends Declared
On December 17, 2007, the Board of Directors of the Company declared a dividend of $0.20 a share
for stockholders of record as of December 31, 2007 and payable on January 10, 2008. The dividends
declared were accrued and reported as dividends payable in the December 31, 2007 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.
Table of Contents
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, 2007 and 2006 is presented below.
For the Three Months Ended December 31
2007
2006
Weighted average shares outstanding for Basic EPS
1,159,988
1,157,548
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans
—
2,206
Weighted average shares outstanding for diluted EPS
1,159,988
1,159,754
Note 6. Future Reporting Requirements
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No. 109,
Accounting for
Income Taxes
. FIN No. 48 prescribes a recognition threshold and measurement approach for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN No. 48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition issues. FIN No. 48 establishes
a two-step process for evaluation of tax positions. The first step is recognition, under which the
enterprise determines whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. The enterprise is required to presume the position will be
examined by the appropriate taxing authority that has full knowledge of all relevant information.
The second step is measurement, under which a tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that is greater than 50%
likely of being realized upon ultimate settlement. The cumulative effect of adopting FIN No. 48 is
required to be reported as an adjustment to the opening balance of retained earnings (or other
appropriate components of equity) for that fiscal year. FIN No. 48 is effective for the Company’s
current fiscal year and its adoption had no impact on Company’s consolidated financial statements.
Table of Contents
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, 2007 and December 31, 2007
Total assets increased by $1.0 million to $108.4 million at December 31, 2007 from $107.4 million
at September 30, 2007. The increase in total assets during the quarter ended December 31, 2007 was
funded primarily from an increase in deposits of approximately $719,000 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.
Net loans receivable increased by $1.4 million to $77.6 million at December 31, 2007 from $76.2
million at September 30, 2007. The increase was distributed across the various categories of loans
within the Company’s portfolio. The Company’s primary lending area remains relatively healthy but
home sales have declined in recent months when compared to the same periods a year earlier and both
re-sales and newly constructed homes remain on the market for longer periods of time. New home
starts are considerably less this quarter when compared to the same quarter a year ago. The
Company’s local real estate market has experienced significant growth over the last five years,
primarily due to an influx of newcomers from outside the area. Although the Company’s markets have
not experienced a drop in home prices like many areas of the country, local real estate markets are
impacted by newcomers unable to purchase homes here until they are able to sell residences
elsewhere. Population growth and employment expansion across a wide spectrum of the local economic
base combined with moderate interest rate levels will ultimately determine whether consistent loan
demand can be sustained. Assuming local economic conditions continue to improve, management
believes that the long-term fundamentals of its lending markets provide potential for future loan
growth. However, there can be no assurances that such loan demand can or will materialize in the
future.
Investment securities decreased by $186,950 to $2.0 million at December 31, 2007 from $2.2 million
at September 30, 2007. The decrease is attributable to a $203,000 unrealized loss in the Company’s
investment in FHLMC stock. The Company has held its FHLMC investment for many years and considers
it to be a long term investment. The Company has very little cost basis in the stock and retains
an approximately $270,000 unrealized gain in the stock at December 31, 2007. The FHLMC stock has
recently declined due to the issues surrounding sub-prime lending and the market for
mortgage-backed securities. The Company also has an investment of $1.5 million in FHLB bonds. The
Company generally maintains higher levels of short term liquidity in order to minimize interest
rate risk, to fund construction loan commitments, and due to the relatively minor differential in
current investment rates available on extended maturities. As a result, the Company has not been
actively involved in the buying and selling securities but has been purchasing FDIC insured bank
certificates of deposit generally with maturities up to one year to protect against downward
interest rate risk. The Company’s portfolio of bank certificates of deposit amounted to $6.8
million at December 31, 2007. These bank certificates of deposit investments are typically
acquired at interest rates of 1.00% to 1.50% higher than most debt securities currently available
for terms much longer than a year. At December 31, 2007, the Company’s investment portfolio, which
consisted of FHLB stock, FHLMC stock, and FHLB bonds had approximately $305,000 in net unrealized
gains.
Table of Contents
Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Financial Condition at September 30, 2007 and December 31, 2007 (Continued)
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 $451,950 at December 31, 2007 for the ESOP put option which represents the
potential liability owed to participants based on the current market value of the Company’s stock
if all participants were to request the balance of their account from the Company in cash instead
of stock.
The Company has an ongoing stock repurchase program authorizing management to repurchase shares of
its outstanding common stock. The repurchases are made through registered broker-dealers from
shareholders in open market purchases at the discretion of management. The Company intends to hold
the shares repurchased as treasury shares, and may utilize such shares to fund stock benefit plans
or for any other general corporate purposes permitted by applicable law. At December 31, 2007 the
Company had repurchased 94,455 shares of its common stock. The program continues until completed or
terminated by the Board of Directors.
Retained earnings increased by $274,250 to $15.8 million at December 31, 2007 from $15.5 million at
September 30, 2007. The increase is primarily attributable to the Company’s earnings of $365,650
during the quarter ended December 31, 2007, reduced by $105,000 in dividends declared during the
period and a $13,600 credit to retained earnings to reflect the change in the fair value of the
ESOP shares subject to the put option. At December 31, 2007 the Company’s capital amounted to
$20.3 million, which as a percentage of total assets was 18.75%. The Company and the Association
are both required to meet certain capital requirements as established by the OTS. At December 31,
2007, all capital requirements were met.
Asset Quality
The Company’s level of non-performing loans, consisting of loans past due 90 days or more, amounted
to $799,200 or 1.01% as a percentage of loans outstanding at December 31, 2007. Non-performing
loans amounted to $595,650 or 0.77% as a percentage of loans outstanding at September 30, 2007. At
December 31, 2007, non-performing loans were comprised of six residential construction loans, four
of which were to the same borrower. The Company is currently foreclosing on all six of the
non-performing loans. At this time, all but one of these non-performing loans are considered to be
impaired and the Company has set aside a total of $67,500 in allocated loss reserves to cover
assumed losses on the ultimate disposition of the loans.
Non-performing assets also includes real estate acquired through foreclosure. At December 31,
2007, 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 commercial 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. 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 has obtained brownfields
status for the site which should make the tract more attractive to prospective developers of the
property. In addition, the Company obtained Trust Fund status for the site which will allow
certain environmental cost to be reimbursed. Although the Company does not currently believe the
contamination will have a significant detrimental effect on the potential development of the
property, the agencies are assisting the Company in determining the extent of any required clean-up
and ongoing monitoring steps that will be required. The Company has set aside $150,000 at December
31, 2007 for such testing and clean-up activities. At this time, the Company does not believe that
the ongoing environmental costs will materially impact the value of the property. At December 31,
2007, the Company had entered into a contract to sale the property which would result in very
little gain or loss. The contract is in the due diligence phase and the Company is not assured of
its ultimate sale.
Table of Contents
Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Asset Quality (Continued):
The Company had no loan charge-offs during the current quarter. The Company’s loan loss allowance
amounted to $1,227,550 at December 31, 2007 and management believes that it has sufficient
allowances established to cover losses 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 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.
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 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 collateral’s 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 Company’s best estimate of the range of credit losses. This evaluation is
inherently subjective as it requires estimates that are susceptible to significant revision as more
information becomes available. Although management believes it has established and maintained the
allowance for loan losses at appropriate levels, future adjustments may be necessary if economic,
real estate values and other conditions differ substantially from the current operating
environment. In addition, regulatory examiners may require the Association to recognize adjustments
to the allowance for loan losses based on their judgments about information available to them at
the time of their examination.
Comparison of Operating Results for the Three Months Ended December 31, 2007 and 2006
General.
Net income for the three month period ended December 31, 2007 was $365,650 ($0.32 per
diluted share) as compared to $431,550 ($0.37 per diluted share) earned during the same quarter in
2006. 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, 2007, as
compared to the same period one year earlier.
Interest income.
Interest income decreased by $120,650 from $1,971,350 for the three months ended
December 31, 2006 to $1,850,700 for the three months ended December 31, 2007. The decrease in
interest income during the current quarter resulted from a 0.41% decrease in the average yield on
interest-earning assets offset partially by a $2.6 million increase in the average balance of
interest-earning assets outstanding between the quarters. The Company’s yield on interest earning
assets was 6.86% for the quarter ended December 31, 2007 and 7.27% for the quarter ended December
31, 2006. The change in yield occurred primarily due to fluctuations in market rates outstanding
during the periods. A significant amount of the Company’s interest earning assets adjust in tandem
with changes to Prime, which decreased by one percent from December 31, 2006 to December 31,
2007.
Table of Contents
Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Operating Results for the Three Months Ended December 31, 2007 and 2006
(Continued)
Interest Expense.
Interest expense increased by $56,100 from $894,000 the three months ended
December 31, 2006 to $950,100 for the three months ended December 31, 2007. The primary reason for
the increased interest expense was a 11 basis point increase in the Company’s cost of funds during
the current quarter as compared to the same quarter a year earlier and a $1.6 million increase in
the average balance of outstanding deposits between the quarters. The Company’s cost of funds was
4.35% for the quarter ended December 31, 2007 and 4.24% for the quarter ended December 31, 2006.
The change in the Company’s cost of funds occurred primarily due to fluctuations in market rates
between the periods. The increase in the average balance of interest-bearing liabilities occurred
primarily due to the competitive pricing of deposits by the Company in order to maintain an
acceptable level of liquidity to meet loan demand, construction loan commitments, and other cash
requirements.
Net interest income.
Net interest income decreased by $176,750 from $1,077,350 for the three
months ended December 31, 2006 to $900,600 for the three months ended December 31, 2007. As
explained above, the decrease 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, 2006 to the most recent quarter ended December 31,
2007. The Company’s interest rate margin was 3.43% for the current quarter as compared to 4.21%
for the quarter ended December 31, 2006.
Provision for loan losses
. The Company provided $40,000 and $55,000 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 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 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 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 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.
Table of Contents
Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Operating Results for the Three Months Ended December 31, 2007 and 2006
(Continued)
Non-interest expense
. Non-interest expense decreased by $59,050 to $320,700 for the three month
period ended December 31, 2007 from $379,750 for the comparable quarter in 2006. Compensation and
benefits decreased by $17,650 during the quarter as compared to the same quarter a year earlier due
to the accrual of a lesser amount of employee bonuses. REO provisions and expense associated with
environmental assessment activities for the Company’s foreclosed tract on highway 98 outside of
Wake Forest, North Carolina were approximately $30,000 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, 2006 as compared to the most recent
quarter. Other operating expense decreased by $15,750 from $91,150 for the quarter ended December
31, 2006 to $75,400 for the current quarter. The decrease in other operating expense occurred
primarily because the Company had expensed higher amounts of costs associated with its computer
system conversion and upgrade last year as compared to current quarter. Also, the Company
experienced higher levels of expense during the quarter ended December 31, 2006 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.
Capital Resources and Liquidity:
The term “liquidity” generally refers to an organization’s ability to generate adequate amounts of
funds to meet its needs for cash. More specifically for financial institutions, liquidity ensures
that adequate funds are available to meet deposit withdrawals, fund loan and capital expenditure
commitments, maintain reserve requirements, pay operating expenses, and provide funds for debt
service, dividends to stockholders, and other institutional commitments. Funds are primarily
provided through financial resources from operating activities, expansion of the deposit base,
borrowings, through the sale or maturity of investments, the ability to raise equity capital, or
maintenance of shorter term interest-earning deposits.
During the three month period ended December 31, 2007, cash and cash equivalents, a significant
source of liquidity, decreased by approximately $397,000. Net principal increases in loans
amounting to $1.5 million, offset by an increase in deposits of $719,050 and proceeds from the
Company’s internal operations totaling $562,000 contributed to the net utilization of 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 Association’s exposure to
credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual notional amount of those
instruments. The Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At December 31, 2007, the Association had
outstanding loan commitments amounting to approximately $1.2 million. The undisbursed portion of
construction loans amounted to $11.5 million and unused lines of credit amounted to $3.8 million at
December 31, 2007.
Table of Contents
Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies and Estimates
The accounting policies followed are as set forth in Note 1 of the Notes to Financial Statements in
the Company’s 2007 Annual Report on Form 10-KSB. The Company has not experienced any material
change in its critical accounting policies since September 30, 2007. The Company’s discussion and
analysis of its financial condition and results of operations are based upon its consolidated
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires the Company
to make estimates and judgments regarding uncertainties that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, the Company evaluates its estimates
which are based upon historical experience and on other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The Company considers the following accounting policies to be
most critical in their potential effect on its financial position or results of operations:
Allowance for Loan Losses
The most critical estimate concerns the Company’s allowance for loan losses. The Company records
provisions for loan losses based upon known problem loans and estimated deficiencies in the
existing loan portfolio. The Company’s methodology for assessing the appropriations of the
allowance for loan losses consists of two key components, which are a specific allowance for
identified problem or impaired loans and a formula allowance for the remainder of the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that
the Association will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis 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.
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.
Table of Contents
Wake Forest Bancshares, Inc.
December 31, 2007
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.
Table of Contents
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. Unregistered Sales of Equity Securities and Use of Proceeds
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.
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Wake Forest Bancshares, Inc.
Dated February 12, 2008
By:
s/s Robert C. White
Robert C. White
Chief Executive Officer and
Chief Financial Officer
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