Waccamaw Bankshares 10-Q 2005
United States Securities and Exchange Commission
Commission File Number 000-32985
Check whether the registrant (1) has filed all reports required to be filed by Section 13 of 15d 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 to filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
As of August 12, 2005 there were 4,550,287 shares of the issuers common stock, no par value, outstanding.
WACCAMAW BANKSHARES, INC.
WACCAMAW BANKSHARES, INC.
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures required by generally accepted accounting principles for a complete presentation of financial statements. In the opinion of the management, the financial statements contain all adjustments necessary to present fairly the financial condition of Waccamaw Bankshares, Inc. (the Company) and its subsidiary, Waccamaw Bank (the Bank) as of June 30, 2005 and December 31, 2004, and its cash flows for the six months ended June 30, 2005 and 2004. The results of operations for the six months and three months ended June 30, 2005 and 2004 are not necessarily indicative of the results expected for the full year. These consolidated financial statements should be read in conjunction with the Companys 10-KSB for the year ended December 31, 2004.
Waccamaw Bankshares, Inc. is located in Whiteville, North Carolina. The accounting and reporting policies of the Company and Bank follow generally accepted accounting principles and general practices within the financial services industry.
PRESENTATION OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from depository institutions (including cash items in process of collection) and interest-bearing deposits with banks which are considered to be cash equivalents. Federal funds sold are shown separately. Cash flows from demand deposits, NOW accounts and savings accounts are reported net since their original maturities are less than three months. Loans and time deposits are reported net per FASB statement no. 104.
Investments classified as available for sale can be held for indefinite periods of time and include those securities that management may employ as part of asset/liability strategy or that may be sold in response to changes in interest rates, prepayments, regulatory capital requirements or similar factors. These securities are carried at fair value and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Investment securities classified as held to maturity are those debt securities that the Bank has the ability and intent to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premiums and accretion of discount, computed by the interest-method over their contractual lives. At June 30, 2005 and December 31, 2004, the Bank had no investments classified as held to maturity.
Loans are stated at the amount of unpaid principal, reduced by unearned fees and an allowance for loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Bank makes continuous credit reviews of the loan portfolio and considers economic conditions, historical loan loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance balance.
Interest on all loans is accrued daily on the outstanding balance. Accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrowers financial condition is such that collection of interest is doubtful.
Recent Accounting Developments
In December 2004, the Financial Accounting Standards Board (FASB) published FASB Statement No. 123 (R), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. In April 2005, the Securities and Exchange Commission adopted a rule that defers the compliance of FAS 123 (R) from the first reporting period beginning after June 15, 2005 to the first fiscal year beginning after June 15, 2005, January 1, 2006 for the Company. As of the effective date, the Company will apply the statement using a modified version of prospective application. Under that method, compensation cost is recognized for (1) all options granted after the required effective date and to awards modified, cancelled, or repurchased after that date and (2) the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro-forma disclosures under SFAS 123. The impact of this Statement on the Company in 2006 and beyond will depend upon various factors, including compensation strategies.
NOTE 2. EARNINGS PER SHARE
Earnings per share for the six months ended June 30, 2005 and 2004 were calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share for the six months ended June 30, 2005 and 2004 were calculated by dividing net income by the weighted average number of dilutive shares outstanding.
NOTE 3. BALANCE SHEETS
The balance sheet at December 31, 2004 has been taken from the audited financial statements at that date.
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing need of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheets.
The Banks exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Banks commitments at June 30, 2005 and December 31, 2004 is as follows:
This discussion, analysis and related financial information is presented to explain the significant factors which affected Waccamaw Bankshares, Inc. financial condition and results of operations for the six months and three months ending June 30, 2005 and 2004. This discussion should be read in conjunction with the financial statements and related notes included in this report.
Waccamaw Bank is a North Carolina state chartered bank, and is located in Whiteville, North Carolina. The Bank began operations on September 2, 1997. Waccamaw Bankshares, Inc. acquired all outstanding shares of Waccamaw Bank on July 1, 2001.
Net income for the quarter ended June 30, 2005, was $726,954 or $.16 per weighted average share outstanding compared to a $595,044 net profit or $.13 per weighted average share outstanding for the quarter ended June 30, 2004.
On June 30, 2005, Waccamaw Bankshares, Inc. assets totaled $304,698,216 compared to $258,412,441 on December 31, 2004. Net loans were $241,207,253 compared to $206,666,022 on December 31, 2004. Total deposits on June 30, 2005 were $258,045,613 compared to $207,641,694 at the end of 2004. Stockholders equity after adjustments for unrealized losses on securities available for sale as required by FASB 115 increased by $1,169,791 resulting in a June 30, 2005 book value of $4.65 per share, up from $4.39 on December 31, 2004.
Financial Condition, Liquidity and Capital Resources
The Bank maintains a portfolio of securities as part of its asset/liability and liquidity management programs which emphasize effective yields and maturities to match its needs. The composition of the investment portfolio is examined periodically and appropriate realignments are initiated to meet liquidity and interest rate sensitivity needs for the Bank.
Held to maturity securities are bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity and which are reported at cost, adjusted by premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. The Bank had no Held to Maturity securities at June 30, 2005 or December 31, 2004.
Available for sale securities are reported at fair value and consist of bonds, notes, debentures and certain equity securities not classified as trading securities or as held to maturity securities.
Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of stockholders equity. Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or to call dates.
Declines in the fair value of individual held to maturity and available for sale securities below cost that are other than temporary are reflected as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses.
Investments in available for sale securities of $29,872,339 consisted of corporate securities, municipal securities, U.S. Governmental agencies and mortgage backed securities (MBS) at June 30, 2005. Included in corporate securities are holdings of Ford Motor Company and General Motors Corporation, which were recently downgraded to junk status. The Company feels this is a temporary impairment and will not be written down due to the strong interest rates associated with these securities and the ability of both companies to turn around their sluggish sales in both the short and long term.
Federal Funds Sold
Federal funds sold consist of short-term loans to other financial institutions. These loans are made to various financial institutions and were $14,173,000 and $4,529,000 on June 30, 2005 and December 31, 2004, respectively. No single loan exceeds Waccamaw Banks legal lending limit. The increases were due to strong deposit growth over the past six months in which these funds were to be used to fund loan demand in the short term.
Net loans outstanding on June 30, 2005, were $241,207,253 compared to $206,666,022 on December 31, 2004. The Bank maintains a loan portfolio dominated by real estate and commercial loans diversified among various industries. The $34,541,231 increase in loans was due to stronger real estate and commercial demand due to local economies improving in the areas covered by Waccamaw Bank. This resulted in increased construction and development during the first six months of 2005.
Deposits on June 30, 2005, were $258,045,613 compared to $207,641,694 on December 31, 2004. Interest-bearing accounts represented 90.99% of total deposits at June 30, 2005 and 90.82% of total deposits at December 31, 2004. The significant increase in deposits was due to the strong loan demand in which deposit rates were increased accordingly through advertising and aggressive marketing programs.
Securities sold under agreements to repurchase on June 30, 2005, was $3,391,000 compared to $3,268,000 on December 31, 2004. Long-term debt on June 30, 2005 was $12,500,000 compared to $18,500,000 on December 31, 2004. The strong increase in deposit demand enabled the Bank to pay down $6,100,000 of long-term debt. All long-term debt is funded by the Federal Home Loan Bank of Atlanta.
Waccamaw Bankshares, Inc. maintains a strong capital position which exceeds all capital adequacy requirements of Federal regulatory authorities. Total stockholders equity at June 30, 2005 was $21,068,348 compared to $19,898,557 at December 31, 2004. This $1,169,791 increase was largely due to operating profits of $1,382,619. The Bank also exceeds all capital requirements under the leverage guidelines.
For the six months ended June 30, 2005, the operating profit of the Bank was $1,382,619 compared to a $1,160,813 profit for the six months ended June 30, 2004.
There have been no cash dividends declared during 2005. On September 30, 2004, a 2 for 1 stock split effective in the form of a 100%stock dividend was paid to stockholders of record as of September 15, 2004. On May 14, 2004, a 6 for 5 stock split effected in the form of a 20% stock dividend was paid to stockholders of record as of April 30, 2004. As a result, all share and per share data have been adjusted to reflect the split.
Shareholders of record approved an amendment to Article II of the Company Articles of Incorporation to increase by 20,000,000 the number of authorized shares of the Companys capital stock. The Company will have 25,000,000 of such shares classified as no par value common stock and 1,000,000 shares classified as preferred stock.
The provision for possible loan losses charged to operations was $480,000 in the first six months of 2005 and $210,500 for the same period of 2004. The reserve for loan losses on June 30, 2005, was $3,144,998 or 1.29% of period end loans. The increase in the loan loss provision was due to stronger loan growth at the end of 2004 and the first six months of 2005.
The level of reserve is established based upon managements evaluation of portfolio composition, current and projected national and local economic conditions and results of independent reviews of the loan portfolio by internal and external examination. Management recognizes the inherent risk associated with commercial and consumer lending, including whether or not a borrowers actual results of operations will correspond to those projected by the borrower when the loan was funded; economic factors such as the number of housing starts and fluctuations in interest rates, etc.; depression of collateral values; and completion of projects within the original cost and time estimates. As a result, management continues to actively monitor the Banks asset quality and lending policies. Management believes that its loan portfolio is diversified so that a downturn in a particular market or industry will not have a significant impact on the loan portfolio or the Banks financial condition.
Management believes that its provision and reserve offer an adequate allowance for future loan losses and provide a sound reserve for the loan portfolio.
At June 30, 2005 the Bank had $422,813 loans in nonaccrual status as compared to $2,250,415 at June 30, 2004. There were no repossessed assets at June 30, 2005 and $139,270 at June 30, 2004.
Results of Operations
Net income was $726,954, or $0.16 per common share, for the quarter ended June 30, 2005 as compared to $595,044, or $0.13 per common share, for the quarter ended June 30, 2004. Net income was $1,382,619, or $0.31 per common share, for the six months ended June 30, 2005 as compared to $1,160,813, or $0.26 per common share, for the six months ended June 30, 2004. The improvement in net income can be attributed to net interest income increasing to $2,529,012 for the quarter ended June 30, 2005 from $1,840,051 for the quarter ended June 30, 2004. Net interest income increased to $4,814,299 for the six months ended June 30, 2005 from $3,560,012 for the six months ended June 30, 2004. These increases to both interest income and interest expense can be attributed to the strong loan demand over the past six months and rising rates which has helped both net interest income and net interest margins. The increase in non interest income of approximately $78,000 for the quarter ended June 30, 2005 was attributable to the increases in service charges and mortgage origination fees. The increase in mortgage origination income was attributable to the hiring of an additional originator in Brunswick County along with the demand in Brunswick County. The increase in non interest expense of approximately $342,000 for the quarter ended June 30, 2005 was attributable to increases in personnel expense of approximately $194,000 and data processing expense of approximately $61,000. Personnel expenses increased due to the additional staffing of corporate needs as these expenses are expected to increase over the near term.
Interest Sensitivity and Liquidity
One of the principal duties of the Banks Asset/Liability Management Committee is management of interest rate risk. The Bank utilizes quarterly asset/liability reports prepared internally to project the impact on net interest income that might occur with hypothetical interest rate changes. The committee monitors and manages asset and liability strategies and pricing.
Another function of the Asset/Liability Committee is maintaining adequate liquidity and planning for future liquidity needs. Having adequate liquidity means the ability to meet current needs, including deposit withdrawals and commitments, in an orderly manner without sacrificing earnings. The Bank funds its investing activities, including making loans and purchasing investments, by attracting deposits and utilizing short-term borrowings when necessary.
At June 30, 2005, the liquidity position of the Bank was strong, with short-term liquid assets of $32,234,217 or 10.58% of total assets.
The Company accounts for its stock-based compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company is not required to adopt the fair value based recognition provisions prescribed under SFAS No. 123, Accounting for Stock Based Compensation, but complies with the disclosure requirements set forth in the Statement (as amended by SFAS No. 148), which include disclosing pro forma net income as if the fair value based method of accounting had been applied.
Stock Option Plans
The shareholders approved an amendment to the Waccamaw Bankshares, Inc. 1998 Nonstatutory Stock Option Plan (the NSSO Plan) to increase the total number of shares available for grant upon the exercise of options granted under the NSSO Plan. The amendment provides that an aggregate of 138,136 shares will be added to the 320,122 shares currently reserved by the Company for issuance upon the exercise of stock options granted from time to time under the NSSO Plan. The shareholders approved an amendment to the Waccamaw Bankshares, Inc. 1998 Incentive Stock Option Plan (the ISO Plan) to increase the total number of shares available for grant upon the exercise of options granted under the ISO Plan. The amendment provides that an aggregate of 138,136 shares will be added to the 320,122 shares currently reserved by the Company for issuance upon the exercise of stock options granted from time to time under the ISO Plan.
The Company has adopted both the 1998 Incentive Stock Option Plan (Incentive Plan) and the 1998 Nonstatutory Stock Option Plan (Nonstatutory Plan). Under each plan up to 458,258 shares may be issued for a total of 916,516 shares (adjusted for stock dividends). Options granted under both plans expire no more than 10 years from date of grant. Option exercise price, under both plans shall be set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Under both plans, vesting is determined by the specific option agreements. Information related to pro forma net income for the periods presented is as follows:
The Companys profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-bearing assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Companys primary market risk is interest rate risk, which is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities with the goals of minimizing interest rate fluctuations in its net interest income.
The Companys Asset/Liability Committee (ALCO) meets on a monthly basis in order to assess interest rate risk, liquidity, capital and overall balance sheet management through rate shock analysis measuring various interest rate scenarios over the future 12 months. Through ALCO, the Company is able to determine fluctuations to net interest income from changes in the Prime Rate of up to 300 basis points up or down during a 12-month period. ALCO also reviews policies and procedures related to funds management and interest rate risk based on local, national and global economic conditions along with funding strategies and balance sheet management to minimize the potential impact of earnings and liquidity from interest rate movements.
Additional information regarding interest rate risk is included in the Companys Annual Report of Form 10-KSB for the year ended December 31, 2004. The Company has not had any material changes in the overall interest rate risk since December 31, 2004.
Based on their evaluation, as of the end of the period covered by the report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Companys management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure. There have not been any changes in the Companys internal control over financial reporting that occurred during the companys last quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Pursuant to the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.