Wake Forest Bancshares : Annual Report

CONTENTS

REPORT TO STOCKHOLDERS	1-2
SELECTED CONSOLIDATED FINANCIAL DATA	3
YIELDS AND COSTS OF FUNDS	4
INDEPENDENT AUDITORS' REPORT	5
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition at September 30, 2021 and 2020	6
Consolidated Statements of Income for the years ended September 30, 2021 and 2020	7
Consolidated Statements of Comprehensive Income for the years ended September 30, 2021 and 2020	8
Consolidated Statements of Stockholders' Equity for the years ended September 30, 2021 and 2020	9-10
Consolidated Statements of Cash Flows for the years ended September 30, 2021 and 2020	11-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	13-31
COMMON STOCK INFORMATION	32
CORPORATE INFORMATION	33

REPORT TO STOCKHOLDERS

The fiscal year ending September 30, 2021 was another challenging yet overall productive year for Wake Forest Bancshares, Inc. (the "Company"). The COVID-19 pandemic lingered throughout the year and continued to disrupt our local economy, but unlike the previous year when businesses struggled to remain open, many companies had difficulty hiring employees and supply chain issues created inventory shortages. However, the pandemic had very little effect on our local real estate markets and has yet to impact the credit quality of our loan portfolio. The most significant impact to our operations continues to be Federal Reserve monetary policies that have allowed interest rates to remain at historically low levels, causing our margins to narrow.

The Company reported profits of $1,235,550 or $1.13 per share for the current fiscal year. Despite the pandemic related obstacles, the Company's results exceeded our expectations based upon budgetary amounts established at the beginning of the year. The Company reported growth in total assets, loans, and deposits this year. We were pleased with our lending performance this past year particularly since the Company's loan portfolio was not impacted by the origination of any short term PPP or other pandemic related loans. In addition, the Company's operations continue to be positively impacted by the absence of nonperforming assets and its lower level of administrative costs.

The Federal Reserve has been very accommodating with its monetary policies over the past two years, decreasing rates by a combined 150 basis points during March 2020 as a result of the economic impact from the COVID-19 pandemic and has maintained interest rates at those levels through September 30, 2021. As a result, the Company's interest rate margin contracted from 3.69% during 2019 (pre-pandemic) to 3.06% and 3.23% for its current fiscal and prior year, respectively. The Company's yield on its interest earning assets decreased from 4.12% in the prior year to 3.54% this period. Because our loans and investments are generally shorter term and rate sensitive, our interest earning assets are much more susceptible to sizable and sudden rate movements. In comparison, our deposit portfolio has a considerable amount of certificates of deposit that generally do not react as quickly to rate movements. However, we were able to lower our average cost of funds from 1.16% in 2020 to 0.62% for our current fiscal year.

The bulk of the Company's real estate lending during the current year was primarily in our residential and construction loan categories. Those markets were surprisingly strong during the pandemic due in part to historically low mortgage rates. In addition, our real estate markets benefit because we are a part of the Research Triangle area which is consistently recognized as one of the top regions in the country for innovation, growth, economic activity and quality of life factors. Real estate sales, including the new homes market, remained resilient this year despite disruptions created by the pandemic not only due to abnormally low rates, but also because of rising home prices and extremely tight local housing inventories. The pandemic has yet to impact the credit quality of our loan portfolio, perhaps because requested loan modifications and pandemic related financial assistance in the form of stimulus and enhanced unemployment insurance payments may have masked any potential long term effects. Earlier forms of government assistance have ended as have the loan modifications we allowed to certain borrowers adversely and directly impacted by the pandemic. The Company will continue to evaluate the actual impact of the lingering pandemic on credit quality and consider any future adjustments to its loss allowances.

The lack of non-performing assets and delinquencies in general have been noteworthy and the absence of collection concerns and associated expense have undoubtedly contributed to the Company's performance. There were no non- performing loans or foreclosed assets at September 30, 2021. As a result, the Company determined that it did not need to add to its loan loss allowances this year. The Company's loan loss allowance amounted to approximately 2.06% of total loans outstanding at September 30, 2021, which Management feels is adequate to cover any loan issues now or in the immediate future.

The Company continues to remain well capitalized. With a Tier 1 capital leverage ratio of 24.00% at September 30, 2021, the Company is well in excess of regulatory requirements and the capital levels of most other community banks in our market. Due to our strong capital position and continued profitability, the Company was able to declare and pay cash dividends of $0.40 per share in 2021. Although future dividends will be dictated by current operational issues, we are very proud of the fact that the Company has been able to continue to pay dividends without interruption for the past twenty five years.

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The Company remains optimistic about its future. The long-term fundamentals for our market areas are strong and should provide a base for continued profitability and growth. The Board and Management's primary commitment is to maximize shareholder value while continuing to serve as a hometown community-oriented financial institution. We encourage your comments and suggestions and we truly thank you for your continued support, business and your investment in Wake Forest Bancshares, Inc.

Respectfully,

Renee H. Shaw

President & Chief Executive Officer

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