FORM 10-QSB - QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
--------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-25999
WAKE FOREST BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
United States of America 56-2131079
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
302 South Brooks Street
Wake Forest, North Carolina 27587
(Address of principal executive offices)
(919)-556-5146
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 5, 1999 there were
issued and outstanding 1,215,862 shares of the Issuer's common stock, $.01 par
value
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONTENTS
PART I - FINANCIAL INFORMATION Pages
-----
Item 1. Financial Statements
Statements of financial condition at June 30, 1999 (unaudited) and
September 30, 1998 1
Statements of income for the three months ended June 30, 1999
and June 30, 1998 (unaudited) 2
Statements of income for the nine months ended June 30, 1999
and June 30, 1998 (unaudited) 3
Statements of comprehensive income for the three and nine months ended
June 30, 1999 and June 30, 1998 (unaudited) 4
Statements of cash flows for the nine months ended June 30, 1999
and June 30, 1998 (unaudited) 5 - 6
Notes to financial statements (unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition 11 - 17
and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
WAKE FOREST BANCSHARES, INC.
STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 7,650,550 $ 15,311,350
Investment securities:
Available for sale, at estimated market value 4,126,750 2,785,100
FHLB stock 280,400 364,100
Loans receivable, net 60,109,300 55,363,450
Accrued interest receivable 123,750 25,550
Property and equipment, net 457,650 459,550
Prepaid expenses and other assets 67,750 51,350
------------------------------
TOTAL ASSETS $ 72,816,150 $ 74,360,450
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 57,724,100 $ 60,037,950
Accrued expenses and other liabilities 485,150 303,200
Dividends payable 145,900 145,900
Note payable- ESOP 220,700 264,850
Deferred income taxes 195,350 170,600
Redeemable common stock held by the ESOP
net of unearned ESOP shares 273,700 270,750
------------------------------
TOTAL LIABILITIES 59,044,900 61,193,250
------------------------------
Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued - -
Common stock, par value $ .01, authorized 5,000,000 shares,
issued and outstanding 1,215,862 shares 12,150 12,150
Additional paid-in capital 4,824,900 4,772,800
Unrealized gain on securities available for sale, net of tax 533,950 477,100
Retained earnings, substantially restricted 8,400,250 7,905,150
------------------------------
TOTAL STOCKHOLDERS' EQUITY 13,771,250 13,167,200
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,816,150 $ 74,360,450
==============================
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
WAKE FOREST BANCSHARES, INC.
STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 1,375,150 $ 1,277,300
Investment securities 46,300 42,150
Short-term cash investments 115,950 189,600
---------------------------------
TOTAL INTEREST INCOME 1,537,400 1,509,050
---------------------------------
Interest expense:
Interest on deposits 726,050 787,800
Interest on ESOP debt 4,650 6,450
---------------------------------
730,700 794,250
---------------------------------
NET INTEREST INCOME 806,700 714,800
---------------------------------
Noninterest income:
Service charges and fees 9,200 7,350
Other 150 50
---------------------------------
9,350 7,400
---------------------------------
Noninterest expense:
Compensation and benefits 188,900 164,750
Occupancy 7,250 8,050
Federal insurance and operating assessments 15,100 13,200
Data processing and outside service fees 27,250 27,400
Other operating expense 93,450 98,650
---------------------------------
331,950 312,050
---------------------------------
INCOME BEFORE INCOME TAXES 484,100 410,150
Income taxes 185,250 155,800
---------------------------------
NET INCOME $ 298,850 $ 254,350
=================================
Basic earnings per share $ 0.25 $ 0.22
=================================
Diluted earnings per share $ 0.25 $ 0.21
=================================
Dividends paid per share $ 0.12 $ 0.12
=================================
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
WAKE FOREST BANCSHARES, INC.
STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 4,065,650 $ 3,785,850
Investment securities 120,350 134,650
Short-term cash investments 462,400 491,400
---------------------------------
TOTAL INTEREST INCOME 4,648,400 4,411,900
---------------------------------
Interest expense:
Interest on deposits 2,286,300 2,245,400
Interest on ESOP debt 14,800 19,900
---------------------------------
2,301,100 2,265,300
---------------------------------
NET INTEREST INCOME 2,347,300 2,146,600
---------------------------------
Noninterest income:
Service charges and fees 25,400 23,250
Other 3,250 1,950
---------------------------------
28,650 25,200
---------------------------------
Noninterest expense:
Compensation and benefits 529,800 499,850
Occupancy 23,550 26,400
Federal insurance and operating assessments 45,000 39,200
Data processing and outside service fees 79,150 76,150
Other operating expense 273,850 274,500
---------------------------------
951,350 916,100
---------------------------------
INCOME BEFORE INCOME TAXES 1,424,600 1,255,700
Income taxes 541,450 482,050
---------------------------------
NET INCOME $ 883,150 $ 773,650
=================================
Basic earnings per share $ 0.75 $ 0.66
=================================
Diluted earnings per share $ 0.75 $ 0.65
=================================
Dividends paid per share $ 0.36 $ 0.34
=================================
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
WAKE FOREST BANCSHARES, INC.
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
THREE MONTH ENDED JUNE 30, 1998 AND 1998
Net income .................................................... $298,850 $254,350
-------- --------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains arising during the period ......... (8,050) (5,900)
Less: reclassification adjustment fore gains included in net
income .................................................... - -
-------- --------
OTHER COMPREHENSIVE INCOME .............................. (8,050) (5,900)
-------- --------
COMPREHENSIVE INCOME .................................... $290,800 $248,450
======== ========
NINE MONTHS ENDED JUNE 30, 1999 AND 1998
Net income .................................................... $883,150 $773,650
-------- --------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period ......... 56,850 174,200
Less: reclassification adjustment for gains included in net
income .................................................... - -
-------- --------
OTHER COMPREHENSIVE INCOME .............................. 56,850 174,200
-------- --------
COMPREHENSIVE INCOME .................................... $940,000 $947,850
======== ========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
WAKE FOREST BANCSHARES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 883,150 $ 773,650
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 24,000 26,350
Gain on sale of real estate acquired in settlement of loans
Amortization of discounts/premiums on investment securities 50 (800)
Deferred income taxes (10,100) -
ESOP contribution expense charged to paid-in capital 9,600 45,600
Amortization of unearned ESOP shares and deferred stock
awards (86,650) 72,500
Changes in assets and liabilities:
Prepaid expenses and other assets (16,400) (32,850)
Accrued interest receivable (98,200) (16,400)
Income tax refund receivable - (10,900)
Accrued expenses and other liabilities 181,950 101,900
----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,060,700 959,050
----------------------------------
Cash Flows From Investing Activities
Net (increase) decrease in loans receivable (4,745,850) (1,220,650)
Purchase of available for sale investment securities (2,250,000) -
Maturity of available for sale investment securities 1,000,000 -
Redemption of FHLB stock 83,700 -
Purchase of property and equipment (22,100) (600)
----------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,934,250) (1,221,250)
----------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits (2,313,850) 9,182,050
Principal payments on ESOP debt (44,150) (44,150)
Issuance of common stock - 30,800
Dividends paid (429,250) (383,800)
----------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,787,250) 8,784,900
----------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,660,800) 8,522,700
Cash and cash equivalents:
Beginning 15,311,350 5,804,650
----------------------------------
Ending $ 7,650,550 $ 14,327,350
==================================
</TABLE>
See Notes to Financial Statements
5
<PAGE>
WAKE FOREST BANCSHARES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 2,300,050 $ 2,277,730
==================================
Cash payments of taxes $ 531,300 $ 385,600
==================================
Supplemental Disclosure of Noncash transactions:
Increase (decrease) in ESOP put option charged to
retained earnings $ 2,950 $ 72,100
Increase in unrealized gain on investment securities 91,700 108,000
Issuance of RRP stock awards - 283,450
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
Wake Forest Bancshares, Inc. (the "Company") is located in Wake Forest, North
Carolina and it is the parent stock holding company of Wake Forest Federal
Savings and Loan Association (the "Association"), it's only subsidiary. The
Company conducts no business other than holding 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
savings deposits and providing mortgage credit to customers in its primary
market area, the counties of Wake, Franklin and Granville, North Carolina. The
Company and the Association's primary regulator is the Office of Thrift
Supervision and its deposits are insured by the Savings Association Insurance
Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).
On October 23, 1995, the Board of Directors of Wake Forest Federal Savings and
Loan Association adopted a Plan of Reorganization and the Stock Issuance Plan
(collectively the "Plans") under which the Association exchanged its federal
mutual savings and loan charter for a federal stock savings and loan charter,
conducted a minority stock offering, and formed Wake Forest Bancorp MHC (the
"MHC"), a mutual holding company which owns at least 51% of the common stock to
be issued by the Association. The Association conducted its minority stock
offering in February and March of 1996 and the closing occurred on April 3,
1996. The Association issued 515,000 shares in the minority stock offering and
issued an additional 41,200 shares to its Employee Stock Ownership Plan (the
"ESOP") and 635,000 shares to the mutual holding company.
Members of the mutual holding company consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the mutual holding company for as long as it remains in mutual
form. Initially, the mutual holding company's principal assets consisted of
shares of the Association's common stock received in the reorganization and
$100,000 in cash received from the Association. The mutual holding company has
since received its proportional share of dividends declared and paid by the
Association, and such funds are invested in deposits with the Association. The
mutual holding company, which by law must own in excess of 50% of the stock of
the Association, currently has an ownership interest of 52.2% of the Association
(see Note 2). The mutual holding company is registered as a savings and loan
holding company and is subject to regulation, examination, and supervision by
the Office of Thrift Supervision (the "OTS").
NOTE 2. REORGANIZATION
On November 16, 1998, the Board of Directors of the Association approved an
Agreement and Plan of Reorganization (the Plan of Reorganization). The Plan of
Reorganization provided for the establishment of Wake Forest Bancshares, Inc. as
a stock holding company parent of the Association. The Company is majority owned
by the MHC, the Association's mutual holding company. The reorganization into
the "two-tier" mutual holding company structure (the Reorganization) under the
Plan of Reorganization was approved by the Association's stockholders at their
annual meeting held on February 23, 1999 and by regulatory authorities on April
9, 1999. The formation of the Company was consummated pursuant to the Plan of
Reorganization on May 7, 1999.
7
<PAGE>
NOTE 2. REORGANIZATION (CONTINUED)
As a part of the Reorganization, each outstanding share of Association's common
stock was converted into one share of common stock, par value $.01 per share, of
the Company, and the holders of the Association's common stock became the
holders of all of the outstanding shares of the Company's common stock.
Accordingly, as a result of the Reorganization, the Association's minority
shareholders became minority shareholders of the Company.
The Company was formed solely for the purpose of becoming a savings and loan
holding company and had no prior operating history. The Reorganization 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 existing
immediately prior to the Reorganization.
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. Furthermore,
as long as it is in existence, the MHC must own at least a majority of the
Company's outstanding voting stock.
The Reorganization was treated similar to a pooling of interests for accounting
purposes. Therefore, the consolidated capitalization, assets, liabilities,
income and expenses of the Company immediately following the Reorganization will
be substantially the same as those of the Association immediately prior to
consummation of the Reorganization, all of which will be shown on the Company's
books at their historical recorded values.
NOTE 3. BASIS OF PRESENTATION
The accompanying unaudited financial statements (except for the statement of
financial condition at September 30, 1998, which is audited) 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. Because the Company was incorporated on May 7,
1999, the Company's financial results on or after that date are reported on a
consolidated basis with the operating results of the Association, its
wholly-owned subsidiary. Financial results reported prior to May 7, 1999 include
only the activities of the Association. 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 nine
month period ended June 30, 1999 is not necessarily indicative of the results of
operations that may be expected for the Company's fiscal year ending September
30, 1999.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Association's September 30, 1998 Annual Report.
During the first quarter of 1999, the Association adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement was adopted effective October 1, 1998 as explained in Note 6 below.
8
<PAGE>
NOTE 4. DIVIDENDS DECLARED
On June 1, 1999, the Board of Directors of the Company declared a dividend of
$0.12 a share for stockholders of record as of June 30, 1999 and payable on July
9, 1999. The dividends declared were accrued and reported as dividends payable
in the June 30, 1999 Statement of Financial Condition. Wake Forest Bancorp,
Inc., the mutual holding company, did not waive the receipt of dividends
declared by the Company.
NOTE 5. EARNINGS PER SHARE
The Association adopted statement of Financial Accounting Standard No. 128
during the quarter ended December 31, 1997. This statement requires dual
presentation of basic and diluted EPS with a reconciliation of the numerator and
denominator of the EPS computations. Basic earnings per share amounts are based
on the weighted average shares of common stock outstanding. Diluted earnings per
share assume 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 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 quarters and nine month periods ended June 30, 1999
and 1998 is presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30: 1999 1998
------------------------------
<S> <C> <C>
Weighted average shares outstanding for Basic EPS 1,180,558 1,171,956
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans - 25,699
------------------------------
Weighted average shares outstanding for diluted EPS 1,180,558 1,197,655
==============================
NINE MONTHS ENDED JUNE 30:
Weighted average shares outstanding for Basic EPS 1,177,984 1,167,754
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans - 26,950
------------------------------
Weighted average shares outstanding for diluted EPS 1,177,984 1,194,704
==============================
</TABLE>
9
<PAGE>
NOTE 6. ADOPTION OF SFAS STATEMENT NO. 130
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," which the
Association was required to adopt as of October 1, 1998. The Statement requires
the classification of items of other comprehensive income by their nature in a
financial statement and to display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. Other comprehensive income
refers to revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but excluded from net
income, and are therefore included in changes in equity. Other comprehensive
income includes all such changes in equity other than those resulting from
investments by owners and distributions to owners.
SFAS No. 130 does not require a specific format for displaying comprehensive
income and its components in a financial statement other than it must be
displayed with the same prominence as other financial statements that constitute
a full set of financial statements. The Company has elected to display
comprehensive income in a separate statement of comprehensive income that begins
with net income. The only item of other comprehensive income that the Company
currently has is associated with changes in unrealized gains and losses on
securities classified as available for sale.
NOTE 7. SUBSEQUENT EVENT
On July 15, 1999, the Company announced a stock repurchase program authorizing
management to repurchase up to 5%, or 60,793 shares of its outstanding stock.
The repurchase program is expected to commence before the end of July, 1999. The
repurchases will be made through registered broker-dealers from shareholders in
open market purchases. 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 purpose that the Board of Directors deems advisable in compliance with
applicable law.
10
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND SEPTEMBER 30, 1998:
Total assets decreased by $1.5 million to $72.8 million at June 30, 1999 from
$74.4 million at September 30, 1998. Total assets decreased during the nine
months ended June 30, 1999 primarily due to an decrease in deposits of
approximately $2.3 million, which was partially offset by internally generated
earnings during the same nine month period. An increase in net loans receivable
of $4.7 million during the period from October 1, 1998 to June 30, 1999 was
funded primarily by utilizing cash and cash equivalents, which decreased by $7.7
million during the nine months ended June 30, 1999.
Net loans receivable increased by $4.7 million to $60.1 million at June 30, 1999
from $55.4 million at September 30, 1998. The increase occurred primarily due to
continued strong demand in residential construction loans in and around Wake
Forest. Assuming interest rates remain fairly stable, management believes that
its loan portfolio has potential for continued growth because the Company
operates in lending markets that have had sustained consistent loan demand over
the past several years. Wake Forest Federal is located in the town of Wake
Forest, which is approximately 20 miles from Raleigh and the Research Triangle
Park (the "Triangle"), areas which have grown substantially over the last
decade. The current trend is for increased residential development in and around
Wake Forest for individuals and families which work in the Triangle. However,
there can be no assurances that such trends and loan demand can or will
continue.
Investment securities increased by $1.3 million to $4.4 million at June 30, 1999
from $3.1 million at September 30, 1998. During the nine months ended June 30,
1999, the Company bought $2.25 million in available for sale investment
securities and received $1.0 million in funds from maturing investments. The
remaining increase is attributable to an increase in the unrealized appreciation
of the Company's available for sale investment securities portfolio of $91,700
less $83,700 from Federal Home Loan Bank ("FHLB") stock redemptions. The
Company's investment portfolio consists of U.S. Government and Agency
securities, FHLMC common stock, and stock in the Federal Home Loan Bank of
Atlanta.
Deposits decreased by $2.3 million to $57.7 million at June 30, 1999 from $60.0
million at September 30, 1998. Because the Association had relatively high
levels of short term liquid assets in a period of tightening spreads and flat
yield curves, the Association decreased deposit rates on its certificates of
deposits offered to deposit customers during the last nine months. That policy
for pricing such certificates of deposit created the decrease in deposits. Near
the end of June 1999, the yield curve began to rise, and the Association started
offering higher rates on certain deposit products which should tend to stabilize
the Association's deposit base.
The Company had no borrowings outstanding during the quarter other than the loan
incurred by the Company's Employee Stock Ownership Plan ("ESOP"), the
Association's retirement plan trust for employees, to purchase common stock in
the Company. The ESOP borrowed $412,000 for its purchase of stock from an
unaffiliated financial institution on April 3, 1996, and the debt is being
repaid quarterly over a seven year period. During the nine month period ended
June 30, 1999, the Association made principal payments totaling $44,150 plus
interest on the ESOP note, reducing the outstanding balance of the note to
$220,700 at June 30, 1999.
11
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND SEPTEMBER 30, 1998
(CONTINUED):
The Association is committed to making retirement plan contributions sufficient
to amortize the debt over its seven year term, and as such, has reported the
debt in the Company's Consolidated Statement of Financial Condition. The
Association recorded retirement plan contributions of approximately $59,000
during the nine month period ended June 30, 1999 for principal and interest
payments on the debt. The Association also reported $9,550 in additional
retirement plan expense and credited paid-in capital equal to the increase in
the fair value of its common stock on ESOP shares allocated to participants in
the Plan during the nine month period ended June 30, 1999.
The ESOP has a put option which requires that the Company repurchase its common
stock from participants in the ESOP who are eligible to receive benefits under
the terms of the plan and elect to receive cash in exchange for their common
stock. The Company is required to reflect as a liability the maximum possible
cash obligation to redeem the shares, which is the fair value of such shares,
whether allocated or unallocated. The put option liability can be reduced by the
unearned ESOP shares, the cost of shares not eligible for allocation to plan
participants. The Company has recorded a net liability of $273,700 at June 30,
1999 for the ESOP put option.
Retained earnings increased by $495,100 to $8.4 million at June 30, 1999 from
$7.9 million at September 30, 1998. The increase is attributable to the
Company's earnings during the nine month period ended June 30, 1999, reduced by
$429,250 in dividends declared during the nine month period ended June 30, 1999
and increased by $41,200 credit to retained earnings to reflect the change in
the fair value of the ESOP shares subject to the put option.
Additional paid in capital increased by $52,100 primarily as a result of the
amortization of the deferred stock awards associated with the Association's
Recognition and Retention Plan. At June 30, 1999, the Company's regulatory
capital amounted to $13.2 million, which as a percentage of total adjusted
assets was 18.4%, and was considerably in excess of the regulatory capital
requirements at such date.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1999 AND 1998:
GENERAL. Net income for the three month period ended June 30, 1999 was $298,850,
or $44,500 more than the $254,350 earned during the same period in 1998. Net
income for the nine month period ended June 30, 1999 of $883,150 exceeded the
income for the same period in 1998 of $773,650 by $109,500. As discussed below,
changes in net interest income between the comparable periods was primarily
responsible for the increase in net income.
INTEREST INCOME. Interest income increased by $28,350 from $1,509,050 for the
three months ended June 30, 1998 to $1,537,400 for the three months ended June
30, 1999. Interest income increased by $236,500 from $4,411,900 for the nine
months ended June 30, 1998 to $4,648,400 for the nine months ended June 30,
1999. The increase for the nine month period was attributable primarily to an
overall increase in the volume and mix of interest-earning assets outstanding,
which were higher during the nine month period ended June 30, 1999 than the
comparable period in 1998. The increase for the three month period ended June
30, 1999 was attributable primarily to a larger volume of loans receivable
outstanding during the current quarter as compared to the same period a year
earlier.
12
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1999 AND 1998:
INTEREST INCOME (CONTINUED) The volume of interest-earning assets was higher
during the nine month period ended June 30, 1999 as a result of an increase in
deposits, and because the mix of the resulting funds was more heavily invested
in loans and investment securities, which typically have higher yields than
short term interest earning deposits. The overall yield on interest earning
assets was 8.08% and 7.99% for the three and nine months ended June 30, 1999.
INTEREST EXPENSE. Interest expense decreased by $63,550 from $794,250 for the
three months ended June 30, 1998 to $730,700 for the three months ended June 30,
1999. Interest expense increased by $35,800 from $2,265,300 for the nine months
ended June 30, 1998 to $2,301,100 for the nine months ended June 30, 1999. The
decrease in interest expense for the current quarter was primarily the result of
a decrease in the Company's cost of funds between the quarters. The Company's
cost of funds was 4.94% and 4.98% for the three months ended June 30, 1999 and
1998, respectively. The Company's cost of funds was 5.09% and 5.37% for the nine
months ended June 30, 1999 and 1998, respectively, and the increase in interest
expense between the nine month periods is attributable solely to an increase in
the average balance of deposits outstanding.
NET INTEREST INCOME. Net interest income increased by $91,900 from $714,800 for
the three months ended June 30, 1998 to $806,700 for the three months ended June
30, 1999. Net interest income increased by $200,700 from $2,146,600 for the nine
months ended June 30, 1998 to $2,347,300 for the nine months ended June 30,
1999. The increase resulted primarily from an increase in the volume and mix of
interest earning assets coupled with a decline in the Company's cost of funds
between the periods.
PROVISION FOR LOAN LOSSES. No provisions for loan losses were made during the
three and nine month periods ended June 30, 1999 and 1998. 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 on existing
loans that may become uncollectible. Loans are charged off against the allowance
when management believes that collectibility is unlikely. The evaluation to
increase or decrease the provision and resulting allowances is based both on
prior loan loss experience and other factors, such as changes in the nature and
volume of the loan portfolio, overall portfolio quality, and current economic
conditions. While Management uses the best information available to make the
evaluations, future adjustments to the allowance may be necessary, if economic
or other conditions differ substantially from the assumptions used.
The Company's level of non-performing loans remained low in relation to prior
periods and total loans outstanding during the three and nine month periods
ended June 30, 1999. The Company's ratio of non-performing loans to total loans
outstanding at June 30, 1999 was 0.19%. In addition, the Company did not
charge-off any loans during the three or nine month periods ended June 30, 1999.
At June 30, 1999, the Company's level of general valuation allowances for loan
losses amounted to $263,000, which management believes is adequate to absorb any
existing inherent losses in its loan portfolio.
13
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NONINTEREST EXPENSE. Noninterest expense increased by $19,900 to $331,950 for
the three month period ended June 30, 1999 from $312,050 for the comparable
quarter in 1998. Noninterest expense increased by $35,250 for the nine month
period ended June 30, 1999 to $951,350 from $916,100 for the nine month period
ended June 30, 1998. There were no significant changes in any category of
noninterest expense during the current quarter or nine month period ended June
30, 1999 as compared to the same quarter and nine month period a year earlier,
except for increases in the category of compensation and benefits. Compensation
and benefits increased by $24,150 and $29,950 for the current quarter and nine
month period ended June 30, 1999, respectively, as compared with the same
periods a year earlier due to adding an additional employee and increases in the
cost of health insurance.
ASSET QUALITY:
The Company's level of non-performing loans, defined as loans past due 90 days
or more, as a percentage of loans outstanding, was .19% and .24% at June 30,
1999 and September 30, 1998, respectively. The Company has no other
non-performing assets at June 30, 1999. During the three and nine month periods
ended June 30, 1999 and 1998, the Company's level of non-performing loans has
remained consistently low in relation to prior periods and total loans
outstanding. The Company did not charge off any loans during the nine month
periods ended June 30, 1999 and 1998. As a result, and based on management's
analysis of the adequacy of its allowances, no provision for additional loan
loss allowances was made during the nine month period ended June 30, 1999.
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 nine month period ended June 30, 1999, cash and cash equivalents, a
significant source of liquidity, decreased by approximately $7.7 million.
Proceeds from the Company's operations contributed $1,060,700 in cash during the
period. Cash was utilized to fund loan originations, which net of repayments,
increased by $4.7 during the nine month period ended June 30, 1999. Investments
also increased by $1,166,300 during the current nine month period, and thus
utilized cash. Dividends paid to stockholders of $429,250 also required cash, as
did an overall decrease of $2.3 million in deposits during the nine months ended
June 30, 1999.
The Company's wholly owned subsidiary, Wake Forest Federal, must maintain
minimum regulatory liquidity requirements. The Association's liquidity ratio at
June 30, 1999 was considerably in excess of such requirements. Given its current
liquidity and ability to borrow funds 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.
14
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE:
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations are at risk for
the Year 2000 Problem due to the nature of its financial information processing.
Software, hardware, and equipment both within and outside the Company's direct
control and with whom the Company electronically or operationally interfaces
(e.g. third party vendors providing data processing, information system
management, maintenance of computer systems, and credit bureau information) are
likely to be affected. Furthermore, if computer systems are not adequately
changed to identify the Year 2000, many computer applications could fail or
create erroneous results. As a result, many calculations which rely on the date
field information, such as interest, payment or due dates and other operating
functions, could generate results which would be misstated, and the Company
could experience a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
In addition, non-information technology systems, such as equipment like
telephones and copiers may also contain embedded technology which controls its
operation and which may be effected by the Year 2000 Problem. When the Year 2000
arrives, systems, including some of those with embedded chips, may not work
properly because of the way they store date information. They may not be able to
deal with the date 01/01/00, and may not be able to deal with operational
'cycles' such as 'do X every 100 days'. Thus, even non-information technology
systems may affect the normal operations of the Company upon the arrival of the
Year 2000. Under certain circumstances, failure to adequately address the Year
2000 Problem could adversely affect the viability of the Company's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Company's products, services and competitive condition.
In order to address the Year 2000 Issue and to minimize its potential adverse
impact, management has identified areas that could be affected by the Year 2000
Problem and assessed their potential impact on the operations of the Company.
The Company continues to monitor the progress of third party software vendors
who are addressing the matter, and testing changes provided by these vendors.
The Company has also developed a business resumption contingency plan for
critical systems which may not be effectively reprogrammed. The Company's
alternative method of doing business relies upon a dual system of operation
instituted several years ago, using equipment and record keeping medium which is
not date sensitive. Transactions and computations would be computed and captured
manually, and then re-keyed and checked for accuracy once the software bug is
corrected.
A committee of senior officers of the Company has been formed to evaluate the
effects that the upcoming Year 2000 issue could have on computer programs
utilized by the Company. The Company's plan is divided into the five phases:
15
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE (CONTINUED):
(1) Awareness. Define the problem, obtain executive level support and
develop an overall strategy. This phase was completed in April 1998.
(2) Assessment. Identify all systems and the criticality of the systems.
This phase was completed in June 1998.
(3) Renovation. Program enhancements, hardware and software upgrades,
system replacements, and vendor certifications. This phase was
completed in December 1998.
(4) Validation. Test and verify system changes and coordinate with outside
parties. This phase was completed in June 1999.
(5) Implementation. Components certified as Year 2000 compliant and moved
to production. This phase was completed in June 1999.
Third party vendors provide the majority of software used by the Company. All of
the Company's vendors are aware of the Year 2000 situation, and each has assured
the Company that its software is now Year 2000 compliant. Testing for the
critical applications began in April 1998. The Company utilizes the service of a
third party vendor to provide the software which is used to process and maintain
most mortgage and deposit customer-related accounts. This vendor has provided
the Company with a software version which has been certified to be Year 2000
compliant. Testing by the Company has been completed to verify compliance for
its application and usage. The Company presently believes that with the
modifications to existing software and conversions to new software, the Year
2000 Problem will be mitigated without causing a material adverse impact on the
operations of the Company. However, if such modifications and conversions have
remaining undetected bugs, the Year 2000 Problem could have an impact on the
operations of the Company.
The Company's business resumption contingency plan, in the event of a major
software failure associated with processing customer accounts, calls for the
temporary reversion to a manual record keeping system. The Company currently
maintains manual ledger cards on most types of customer accounts and could
operate in such a manner for a reasonably short period of time. Manual
transactions would subsequently be inputted with prior effective processing
dates back onto the software once the date issues are resolved.
In addition, monitoring and managing the Year 2000 project has resulted in
additional direct and indirect costs to the Company. Direct costs include
charges by third party software vendors for product enhancements and costs
involved in testing software products for Year 2000 compliance. Indirect costs
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans.
16
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE (CONTINUED):
The Company has spent approximately $80,000 on Year 2000 related costs to date
and estimates that it will spend an additional $25,000 for Year 2000 compliance.
Both direct and indirect costs of addressing the Year 2000 Problem will be
charged to earnings as incurred. The Company does not believe that such costs
will have a material effect on results of operations. However, there can be no
guarantee that the systems of other vendors on which the Company's systems rely
will be timely converted, or that a failure to convert by another vendor or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The remaining costs of the project and the Company's assertion of being Y2K
compliant are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third party modification plans, and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but are not limited to, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Statements herein regarding estimated future expense levels and other matters
may constitute forward-looking statements under the federal securities laws.
Such statements are subject to certain risks and uncertainties including changes
in general and local market conditions, legislative and regulatory conditions
and an adverse interest rate environment. Undue reliance should not be placed on
this information. These estimates are based on the current expectations of
management, which may change in the future due to a large number of potential
events, including unanticipated future developments.
17
<PAGE>
WAKE FOREST BANCSHARES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings at the
present time other than legal proceedings within the normal
course of business to enforce its security interest in a loan.
Item 2. Changes in Securities and Use of Proceeds
The Association received regulatory approval on April 9, 1999 to
reorganize, establishing a mid-tier stock holding company which was
incorporated on May 7, 1999 (See note 2 to the financial statements).
As a part of the reorganization, each shareholder of the Association
received one share of common stock in the Company for each share
owned in the Association. Exchange of existing certificates was not
required, however new certificates with a new cusip number will be
issued for future purchases of the Company's stock.
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. a) exhibits and b) Reports on Form 8-K
a) Not applicable
b) A Form 8-K was filed on May 7, 1999 to report the
effectiveness of the reorganization described in note
2 to the financial statements.
18
<PAGE>
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 August 13, 1999 By: Anna O. Sumerlin
--------------------------- -------------------------------
Anna O. Sumerlin
President and CEO
Dated August 13, 1999 By: Robert C. White
--------------------------- -------------------------------
Robert C. White
Vice President and CFO
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE STATEMENTS OF INCOME OF WAKE FOREST
BANCSHARES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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