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Waccamaw Bankshares 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32

United States Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

 

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15d OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2005

 

 

o

TRANSITION REPORT UNDER SECTION 13 OR 15d OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-32985

WACCAMAW BANKSHARES, INC.


(Name of Small Business Issuer in its Charter)


NORTH CAROLINA

 

52-2329563

(State or other Jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)


110 N. Powell Boulevard Whiteville, N.C. 28472


(address of Principal Executive Office)

 

(910) 641-0044


(Issuer’s telephone number, including area code)

 

Not Applicable


(former name, former address and former fiscal year, if changed since last report)

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.

Yes    x

No    o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    

Yes    o

No    x

As of August 12, 2005 there were 4,550,287 shares of the issuer’s common stock, no par value, outstanding.



WACCAMAW BANKSHARES, INC.
INDEX

 

 

 

Page Number

 

 

 


Part I.  FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets June 30, 2005 (Unaudited) and December 31, 2004

1

 

 

 

 

 

 

Consolidated Statements of Income, Six Months  Ended June 30, 2005 and June 30, 2004 (Unaudited)

2

 

 

 

 

 

 

Consolidated Statements of Income, Quarters Ended June 30, 2005 and June 30, 2004 (Unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Cash Flows,  Six Months Ended June 30, 2005 and June 30, 2004 (Unaudited)

4

 

 

 

 

 

 

Notes to Consolidated Financial Statements

5-6

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

7-10

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

11

 

 

 

 

 

Item 4.

Controls and Procedures

11

 

 

 

 

Part II.  OTHER INFORMATION

12-13

 

 

SIGNATURES

14




WACCAMAW BANKSHARES, INC.
Consolidated Balance Sheets
June 30, 2005 and December 31, 2004

 

 

June 30,
2005

 

December 31,
2004

 

 

 



 



 

 

 

(Unaudited)

 

 

 

 

Assets:

 

 

 

 

 

 

 

Cash and due from banks

 

$

3,829,328

 

$

3,751,318

 

Interest-bearing deposits with banks

 

 

937,000

 

 

974,469

 

Federal funds sold

 

 

14,173,000

 

 

4,529,000

 

Investment securities, available for sale

 

 

29,872,339

 

 

28,599,527

 

Restricted equity securities

 

 

1,705,906

 

 

1,632,605

 

Loans, net of allowance for loan losses of $3,144,998 in 2005, and $2,791,008 in 2004

 

 

241,207,253

 

 

206,666,022

 

Other real estate owned

 

 

425,543

 

 

82,475

 

Property and equipment, net

 

 

3,294,710

 

 

3,301,220

 

Intangible assets, net

 

 

991,326

 

 

1,104,916

 

Accrued income

 

 

1,225,300

 

 

1,137,359

 

Bank owned life insurance

 

 

5,110,489

 

 

5,030,074

 

Other assets

 

 

1,926,022

 

 

1,603,456

 

 

 



 



 

Total assets

 

$

304,698,216

 

$

258,412,441

 

 

 



 



 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

23,238,748

 

$

19,065,902

 

Interest-bearing deposits

 

 

234,806,865

 

 

188,575,792

 

 

 



 



 

Total deposits

 

 

258,045,613

 

 

207,641,694

 

Securities sold under agreements to repurchase

 

 

3,391,000

 

 

3,268,000

 

Long-term debt

 

 

12,500,000

 

 

18,500,000

 

Guaranteed preferred beneficial interest in the company’s junior subordinated debentures

 

 

8,248,000

 

 

8,248,000

 

Accrued interest payable

 

 

921,217

 

 

546,324

 

Other liabilities

 

 

524,038

 

 

309,866

 

 

 



 



 

Total liabilities

 

 

283,629,868

 

 

238,513,884

 

 

 



 



 

Commitments and contingencies

 

 

—  

 

 

—  

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, no par value; 1,000,000 shares authorized; none outstanding

 

 

 

 

 

 

 

Common stock, no par value; 25,000,000 shares authorized; 4,533,775 shares issued in 2005 and 4,530,402 shares issued in 2004 (1)

 

 

13,153,296

 

 

13,142,612

 

Retained earnings

 

 

7,912,121

 

 

6,529,502

 

Accumulated other comprehensive income

 

 

2,931

 

 

226,443

 

 

 



 



 

Total stockholders’ equity

 

 

21,068,348

 

 

19,898,557

 

 

 



 



 

Total liabilities and stockholders’ equity

 

$

304,698,216

 

$

258,412,441

 

 

 



 



 



(1)

Shareholders approved increase by 20,000,000 the number of authorized shares of the Company’s capital stock as amendment to Article II of the Articles of Incorporation.

1



WACCAMAW BANKSHARES, INC.
Consolidated Statements of Income
Six-months ended June 30, 2005 and Six-months ended June 30, 2004 (Unaudited)

 

 

Six-Months
Ended
June 30, 2005

 

Six-Months
Ended
June 30, 2004

 

 

 



 



 

Interest income

 

 

 

 

 

 

 

Loans and fees on loans

 

$

7,220,592

 

$

4,562,664

 

Federal funds sold

 

 

157,732

 

 

11,636

 

Investment securities, taxable

 

 

644,621

 

 

563,056

 

Investment securities, nontaxable

 

 

45,980

 

 

53,874

 

 

 



 



 

Total interest income

 

 

8,068,925

 

 

5,191,230

 

 

 



 



 

Interest expense

 

 

 

 

 

 

 

Deposits

 

 

2,664,945

 

 

1,288,368

 

Fed funds purchased and securities sold under agreements to repurchase

 

 

35,850

 

 

19,520

 

Other borrowed funds

 

 

553,831

 

 

323,330

 

 

 



 



 

Total interest expense

 

 

3,254,626

 

 

1,631,218

 

 

 



 



 

Net interest income

 

 

4,814,299

 

 

3,560,012

 

Provision for loan losses

 

 

480,000

 

 

210,500

 

 

 



 



 

Net interest income after provision for loan losses

 

 

4,334,299

 

 

3,349,512

 

 

 



 



 

Noninterest income

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

532,955

 

 

465,765

 

Mortgage origination income

 

 

125,083

 

 

91,679

 

Other operating income

 

 

356,169

 

 

304,830

 

Income from mortgage banking investee

 

 

—  

 

 

79,731

 

Earnings on bank owned life insurance

 

 

87,807

 

 

113,580

 

Net realized gains on sale or maturity of investment securities

 

 

(111

)

 

14,800

 

 

 



 



 

Total noninterest income

 

 

1,101,903

 

 

1,070,385

 

 

 



 



 

Noninterest expense

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

1,771,870

 

 

1,429,463

 

Occupancy expense

 

 

393,327

 

 

314,027

 

Data Processing

 

 

312,513

 

 

191,855

 

Amortization expense of intangible assets

 

 

126,357

 

 

113,590

 

Other expense

 

 

661,351

 

 

595,084

 

 

 



 



 

Total noninterest expense

 

 

3,265,418

 

 

2,644,019

 

 

 



 



 

Income before income taxes

 

 

2,170,784

 

 

1,775,878

 

Income tax expense

 

 

788,165

 

 

615,065

 

 

 



 



 

Net income

 

$

1,382,619

 

$

1,160,813

 

 

 



 



 

Basic earnings per share

 

$

.31

 

$

.26

 

 

 



 



 

Diluted earnings income per share

 

$

.29

 

$

.25

 

 

 



 



 

Weighted average shares outstanding

 

 

4,532,827

 

 

4,498,829

 

 

 



 



 

Diluted average shares outstanding

 

 

4,739,335

 

 

4,721,514

 

 

 



 



 

2



WACCAMAW BANKSHARES, INC.
Consolidated Statements of Income
Quarter ended June 30, 2005 and Quarter ended June 30, 2004 (Unaudited)

 

 

Quarter Ended
June 30, 2005

 

Quarter Ended
June 30, 2004

 

 

 



 



 

Interest income

 

 

 

 

 

 

 

Loans and fees on loans

 

$

3,849,037

 

$

2,362,983

 

Federal funds sold

 

 

92,644

 

 

6,297

 

Investment securities, taxable

 

 

345,631

 

 

296,348

 

Investment securities, nontaxable

 

 

22,990

 

 

22,288

 

 

 



 



 

Total interest income

 

 

4,310,302

 

 

2,687,916

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

 

1,463,850

 

 

663,681

 

Federal funds purchased and securities sold under agreements to repurchase

 

 

21,310

 

 

10,559

 

Other borrowed funds

 

 

296,130

 

 

173,625

 

 

 



 



 

Total interest expense

 

 

1,781,290

 

 

847,865

 

 

 



 



 

Net interest income

 

 

2,529,012

 

 

1,840,051

 

Provision for loan losses

 

 

255,000

 

 

60,500

 

 

 



 



 

Net interest income after provision for loan losses

 

 

2,274,012

 

 

1,779,551

 

 

 



 



 

Noninterest income

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

273,698

 

 

243,821

 

Mortgage origination income

 

 

73,259

 

 

40,190

 

Other operating income

 

 

186,288

 

 

90,913

 

Income from mortgage banking investee

 

 

—  

 

 

44,634

 

Earnings on bank owned life insurance

 

 

34,958

 

 

56,790

 

Net realized gains on sale or maturity of investment securities

 

 

(111

)

 

13,929

 

 

 



 



 

Total noninterest income

 

 

568,092

 

 

490,277

 

 

 



 



 

Noninterest expense

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

923,968

 

 

729,645

 

Occupancy expense

 

 

201,307

 

 

158,351

 

Data processing

 

 

163,976

 

 

102,612

 

Amortization expense of intangible assets

 

 

63,178

 

 

56,795

 

Other expense

 

 

343,844

 

 

307,414

 

 

 



 



 

Total noninterest expense

 

 

1,696,273

 

 

1,354,817

 

 

 



 



 

Income before income taxes

 

 

1,145,831

 

 

915,011

 

Income tax expense

 

 

418,877

 

 

319,967

 

 

 



 



 

Net income

 

$

726,954

 

$

595,044

 

 

 



 



 

Basic earnings income per share

 

$

.16

 

$

.13

 

 

 



 



 

Diluted earnings income per share

 

$

.15

 

$

.13

 

 

 



 



 

Weighted average shares outstanding

 

 

4,533,738

 

 

4,506,264

 

 

 



 



 

Diluted average shares outstanding

 

 

4,736,970

 

 

4,728,948

 

 

 



 



 

3



WACCAMAW BANKSHARES, INC.
Consolidated Statements of Cash Flows
Six-months ended June 30, 2005 and Six-months ended June 30, 2004 (Unaudited)

 

 

Six-Months
Ended
June 30, 2005

 

Six-Months
Ended
June 30, 2004

 

 

 



 



 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

1,382,619

 

$

1,160,813

 

Adjustments to reconcile net income to net cash used by operations:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

256,351

 

 

237,790

 

Provision for loan losses

 

 

480,000

 

 

210,500

 

Accretion of discount on securities, net of amortization of premiums

 

 

48,017

 

 

39,808

 

(Gain) loss on sale of investments

 

 

111

 

 

(14,800

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accrued Income

 

 

(87,941

)

 

(81,345

)

Other assets

 

 

(287,839

)

 

(548,408

)

Accrued interest payable

 

 

374,893

 

 

(152,033

)

Other liabilities

 

 

214,172

 

 

(691,553

)

 

 



 



 

Net cash provided (used)  by operating activities

 

 

2,380,383

 

 

160,772

 

 

 



 



 

Cash flows from investing activities

 

 

 

 

 

 

 

Net increase/(decrease) in federal funds sold

 

 

(9,644,000

)

 

4,644,000

 

Purchases of investment securities

 

 

(6,683,403

)

 

(10,123,814

)

Maturities of investments and paydowns of MBS

 

 

3,589,155

 

 

3,250,385

 

Net increase in loans

 

 

(35,364,299

)

 

(24,678,286

)

Sales of investment securities

 

 

1,361,353

 

 

780,262

 

Purchases of property and equipment

 

 

(136,251

)

 

(67,365

)

 

 



 



 

Net cash used in investing activities

 

 

(46,877,445

)

 

(26,194,818

)

 

 



 



 

Cash flows from financing activities

 

 

 

 

 

 

 

Net increase in noninterest-bearing deposits

 

 

4,172,846

 

 

343,336

 

Net increase in interest-bearing deposits

 

 

46,231,073

 

 

10,921,176

 

Net increase in securities sold under agreements to repurchase

 

 

123,000

 

 

10,211,000

 

(Repayments) proceeds from long-term debt

 

 

(6,000,000

)

 

5,000,000

 

Proceeds from exercise of stock options

 

 

10,684

 

 

191,791

 

Proceeds from sale of common stock

 

 

—  

 

 

103,652

 

 

 



 



 

Net cash provided by financing activities

 

 

44,537,603

 

 

26,770,955

 

 

 



 



 

Net increase/(decrease) in cash and cash equivalents

 

 

40,541

 

 

736,909

 

Cash and cash equivalents, beginning

 

 

4,725,787

 

 

5,363,317

 

 

 



 



 

Cash and cash equivalents, ending

 

$

4,766,328

 

$

6,100,226

 

 

 



 



 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

2,879,733

 

$

1,783,252

 

 

 



 



 

Taxes paid

 

$

751,460

 

$

1,099,365

 

 

 



 



 

Supplemental disclosure of non cash activity

 

 

 

 

 

 

 

Other real estate acquired in settlement of loans

 

$

343,068

 

$

1,631

 

 

 



 



 

4



WACCAMAW BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Company’s 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.   

Investment Securities

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

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 borrower’s financial condition is such that collection of interest is doubtful.

5



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 Bank’s 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 Bank’s commitments at June 30, 2005 and December 31, 2004 is as follows:

 

 

June 30, 2005

 

December 31, 2004

 

 

 



 



 

Commitment to extend credit

 

 

48,998,000

 

 

47,127,000

 

Standby letters of credit

 

 

551,000

 

 

371,000

 

6



ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

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.

Highlights

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

Investments

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.

7



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 Bank’s 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.

Loans

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

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.

Liabilities

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.

Stockholders’ Equity

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 Company’s 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.

Asset Quality

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.

8



The level of reserve is established based upon management’s 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 borrower’s 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 Bank’s 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 Bank’s 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 Bank’s 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.

Stock-based Compensation

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.

9



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:

 

 

June 30,

 

 

 


 

 

 

2005

 

2004

 

 

 



 



 

Compensation cost recognized in income for all stock-based compensation awards

 

$

—  

 

$

—  

 

 

 



 



 

Pro forma net income, based on SFAS No. 123

 

$

965,456

 

$

907,380

 

 

 



 



 

Pro forma earnings per common share, based on SFAS No. 123

 

$

.21

 

$

.25

 

 

 



 



 

Pro forma earnings per fully dilutive common share, based on SFAS No. 123

 

$

.20

 

$

.24

 

 

 



 



 

10



Item 3.     Quantitative and Qualitative Disclosures about Market Risk

The Company’s 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 Company’s 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 Company’s 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 Company’s 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.

Item 4.     Controls and Procedures

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 Company’s 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 Company’s internal control over financial reporting that occurred during the company’s last quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

11



PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

 

 

 

No significant changes in legal proceedings occurred during the quarter.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

Not Applicable

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

Not Applicable

 

 

Item 4.

Submission of Matters to a Vote of  Security Holders

 

 

 

At the bank’s annual meeting of shareholders held on April 21, 2005, the shareholders 1. Amended Article II of the Copmpany’s Articles of Incorporation increasing by 20,000,000 the number of authorized shares of the Company’s capital stock 2. Elected M.B. (“Bo”) Biggs, James G. Graham and J. Densil Worthington to serve as directors of the bank 3. Amended 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 that provides that an aggregate of 138,136 shares will be added to the 320,122 shares currently reserved by the Company 4. Amended 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 that provides that an aggregate of 138,136 shares will be added to the 320,122 shares currently reserved by the Company and 5. Ratified the appointment of Larrowe & Company, P.L.C. as the Company’s independent public accountants for 2005.

 

 

 

The following proposals were voted for:

 

 

 

Proposal 1 – Amendment to Article II of the Articles of Incorporation

 

votes for  3,781,376          against   64,222          abstain  24,564


 

Proposal 2 – Election of  Directors

 

M.B. (“Bo”) Biggs

votes for 3,854,472

withheld  15,690

abstain  -0-

 

James G. Graham

votes for 3,833,499

withheld  36,663

abstain - 0-

 

J. Densil Worthington

votes for 3,848,976

withheld  21,186

abstain - 0-


 

Proposal 3 – To approve an amendment to the 1998 Nonstatutory Stock Option Plan.

 

 

 

Votes for 3,199,154          against 199,487          abstain 54,886

 

 

 

Proposal 4 – To approve an amendment to the 1998 Incentive Stock Option Plan.

 

 

 

Votes for 3,199,154          against 200,617          abstain 58,726

 

 

 

Proposal 5 – To ratify the selection of Larrowe & Company, P.L.C.  as the Company’s independent accountants for 2005.

 

 

 

Votes for 3,840,266          against 5,880              abstain 24,016

 

 

Item 5.

Other Information

 

 

 

Not Applicable

12



Item 6.

Exhibits

 

 

 

31.1          Section 302 Certification – CEO

 

 

 

31.2          Section 302 Certification – CFO

 

 

 

32             Section 906 Certification

13



SIGNATURES

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.

 

WACCAMAW BANKSHARES, INC.

 

 

Date: August 11, 2005

By:

/s/DAVID A. GODWIN

 

 


 

 

David A. Godwin

 

 

Chief Financial Officer

 

 

(Principle Financial Officer)

14


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