EXHIBIT 13.1
CONTENTS
<TABLE>
<S> <C>
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SELECTED CONSOLIDATED FINANCIAL DATA 1
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REPORT TO STOCKHOLDERS 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS 3 - 13
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INDEPENDENT AUDITOR'S REPORT 14
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CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated statements of financial condition at September 30, 2000 and 1999 15
Consolidated statements of income for years ended September 30, 2000 and 1999 16
Consolidated statements of stockholders' equity for the years ended
September 30, 2000 and 1999 17 -18
Consolidated statements of cash flows for the years ended
September 30, 2000 and 1999 19 - 20
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 - 37
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COMMON STOCK INFORMATION 38
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CORPORATE INFORMATION 39
</TABLE>
<PAGE>
WAKE FOREST BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
September 30,
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2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Financial Condition Data: (In Thousands)
Total assets $ 83,268 $ 72,396 $ 74,360 $ 63,453 $ 61,812
Investments (1) 9,607 9,635 17,528 8,671 12,742
Loans receivable, net 72,564 61,467 55,363 53,673 47,821
Deposits 67,874 57,654 60,038 50,056 48,956
Stockholders' equity (2) 14,172 13,468 13,167 12,121 11,721
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
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2000 1999 1998 1997 1996
------------- -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Operating Data: (In Thousands, Except Per Share Data)
Interest and dividend income $ 6,797 $ 6,204 $ 5,983 $ 5,183 $ 4,859
Interest expense 3,326 3,027 3,072 2,590 2,730
------------- -------------- ------------- ------------- ------------
Net interest income 3,471 3,177 2,911 2,593 2,129
Provision for loan losses 34 -- -- -- --
Noninterest income 50 42 34 56 37
Noninterest expense 1,356 1,275 1,264 1,195 1,291
------------- -------------- ------------- ------------- ------------
Income before income taxes 2,131 1,944 1,681 1,454 875
Income tax expense 800 741 620 543 322
------------- -------------- ------------- ------------- ------------
Net income $ 1,331 $ 1,203 $ 1,061 $ 911 $ 553
============= ============== ============= ============= ============
Basic earnings per share (2) $ 1.15 $ 1.02 $ 0.91 $ 0.79 $ 0.15
Diluted earnings per share (2) 1.15 1.02 0.89 0.78 0.15
Dividends per share (2) 0.48 0.48 0.46 0.35 0.14
Dividend payout ratio (2) 41.87% 47.06% 51.69% 44.87% 30.15%
Selected Other Data:
Return on average assets (4) 1.71% 1.62% 1.28% 1.47% 0.92%
Return on average equity (4) 9.64% 8.83% 7.26% 7.55% 5.78%
Interest rate spread (4) 3.54% 3.38% 3.39% 3.32% 2.83%
Average equity to average assets (4) 17.74% 18.35% 17.63% 19.47% 15.92%
Net interest margin (4) 4.54% 4.34% 4.26% 4.32% 3.69%
Allowance for loan losses to
nonperforming loans (3) 0.00% 89.51% 196.79% 134.43% 124.64%
Nonperforming loans to total loans (3) 0.00% 0.48% 0.24% 0.36% 0.40%
</TABLE>
(1) Includes interest earning deposits and investment securities
(2) On April 3, 1996, Wake Forest Federal Savings & Loan Association
reorganized from a federally chartered mutual savings association to a
federally chartered stock savings association. Earnings per share for 1996
is based on earnings from April 3, 1996 to September 30, 1996 divided by
the weighted average number of shares outstanding during the period
(3) Nonperforming loans include mortgage loans delinquent more than 90 days
(4) Average balances are derived from month-end balances
1
<PAGE>
REPORT TO STOCKHOLDERS
I am pleased to report that Wake Forest Bancshares, Inc. reported record
earnings of $1.33 million, or $1.15 per share, for our fiscal year ended
September 30, 2000. Earnings during the current year grew by almost 11% while
growth in earnings per share increased by nearly 13%. The Company also reported
record asset growth of $10.9 million, or 15% during 2000. The Board of Directors
and management's primary commitment is to maximize shareholder value by building
a strong and profitable institution. This report demonstrates that during 2000,
our continuing commitment to that goal was achieved.
The Company's return on assets amounted to 1.71% and return on equity increased
by 9% during the current year. The Company's loan portfolio grew by
approximately 18% during the year and asset quality continues to remain strong.
Customer deposits also increased by approximately 18% during 2000. The Company
declared regular dividends of $0.12 per share during each quarter of the current
year, a generous 42% of total 2000 earnings. The Company continues to maintain a
strong capital position and reported operating expenses as a percentage of net
interest income of approximately 39% during 2000, an enviable ratio compared to
our peers in the industry.
Loan demand remains strong in our primary lending market of northern Wake and
southern Franklin counties. The Wake Forest area experienced widespread growth,
both commercially and in residential housing during the current year, and that
growth is expected to continue due to the area's proximity to Raleigh and the
Research Triangle Park. Management is committed to continued but prudent loan
growth as our community expands. We also intend to remain competitive with our
deposit products to ensure continued growth and profitability.
We, the management, directors and employees, pledge to continue to serve our
local market as a home town community-oriented financial institution. We thank
each stockholder for investing in the Company and are grateful for the
opportunity to enhance the value of your investment through the safe and sound
operation of the Company. We encourage your comments and suggestions and truly
appreciate your support and business.
Respectfully,
/s/ Anna O. Sumerlin
Anna O. Sumerlin
President & Chief Executive Officer
2
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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GENERAL
Wake Forest Bancshares, Inc. (the "Company") was formed on May 7, 1999 solely
for the purpose of becoming a savings and loan holding company and had no prior
operating history. The Company owns 100% of the stock of Wake Forest Federal
Savings & Loan Association ("Wake Forest Federal" or the "Association"). The
Company in turn is majority owned by Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company.
The formation of the Company had no impact on the operations of the Association
or the MHC. The Association continues to operate at the same location, with the
same management, and subject to all the rights, obligations and liabilities of
the Association which existed immediately prior to the formation of the Company.
The establishment of the Company 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 its
formation will be substantially the same as those of the Association immediately
prior to the formation, all of which will be shown on the Company's books at
their historical recorded values.
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 principal business of the Association is accepting deposits
from the general public and using those deposits and other sources of funds
primarily to make loans secured by real estate and, to a lesser extent, other
forms of collateral located in the Association's primary market area of Wake and
Franklin counties in North Carolina.
Members of the MHC consist of depositors and certain borrowers of the
Association, who have the sole authority to elect the board of directors of the
MHC for as long as it remains in mutual form. Initially, the MHC's principal
asset consisted of 635,000 shares of the Association's common stock (now
converted to the Company's common stock). The MHC has since received its
proportional share of dividends declared and paid by the Association (now the
Company), and such funds are invested in deposits with the Association. The MHC,
which by law must own in excess of 50% of the stock of the Company, currently
has an ownership interest of 54.2% of the Company. The MHC's Board of Directors,
which is currently the same as the Association's and the Company's Board of
Directors, will generally be able to control the outcome of most matters
presented to the stockholders of the Company for resolution by vote except for
certain matters related to stock compensation plans, a vote regarding conversion
of the mutual holding company to stock form, or other matters which require a
vote only by the minority stockholders. The Company and the MHC are registered
as a savings and loan holding companies and are subject to regulation,
examination, and supervision by the OTS.
The Association's results of operations depend primarily on its net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. The Association's
operations are also affected by noninterest income, such as fees from loans,
customer deposit account service charges, and other sources of revenue. The
Association's principal operating expenses, aside from interest expense, consist
of compensation and related benefits, federal deposit insurance premiums, office
occupancy costs, and other general and administrative expenses.
The following discussion and analysis is intended to assist readers in
understanding the results of operations and changes in financial position at and
for the years ended September 30, 2000 and 1999.
3
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets increased by $10.9 million during 2000, from $72.4 million at
September 30, 1999 to $83.3 million at September 30, 2000. The increase in total
assets resulted primarily from an increase of $10.2 million in customer
deposits. Total investments, including short term interest-earning deposits and
U.S. Treasury and agency obligations decreased slightly by $28,450 during the
current year. The lack of volatility in the Company's investment portfolio is
primarily due to strong loan demand, which resulted in maintaining liquidity and
portfolio balances at current levels. The investment securities portfolio, which
amounted to $3.4 million at September 30, 2000, contains available for sale
securities with net unrealized gains of $800,350. The net gain reflects an
increase of approximately $37,700 over the net unrealized gain on available for
sale securities at September 30, 1999, primarily as a result of unrealized gains
during the current year on the Association's investment in Federal Home Loan
Mortgage Company ("FHLMC") stock.
Loans receivable increased by approximately $11.1 million during 2000 from $61.5
million at September 30, 1999 to $72.6 million at September 30, 2000. Loan
demand in the Association's primary lending markets continues to remain strong,
particularly for new housing starts. The economic base in the Association's
primary lending areas has increased over the last several years, primarily due
to the continuing growth in the Research Triangle/Wake County area and the
expansion of its population base into surrounding communities such as Wake
Forest.
Customer deposits increased by approximately $10.2 million during 2000 and
totaled $67.9 million at September 30, 2000. The increase occurred because the
Association competitively priced its deposit products, which was required in
order to fulfill the funding requirements of increased loan demand.
The Company had no outstanding borrowings during 2000 or 1999, other than the
loan by the Employee Stock Ownership Plan of the Association (the "ESOP") to
purchase shares of stock in the Company, which is shown as a liability of the
Company. The Company has borrowing capacity through the Association's ability to
borrow funds from the Federal Home Loan Bank (the "FHLB") of Atlanta. This
capacity is currently set at 12% of the Association's total assets, subject to
available collateral.
The Company's return on average assets was 1.71% and 1.62% and its return on
average equity was 9.64% and 8.83% for 2000 and 1999, respectively. The increase
in the returns on average assets and average equity during 2000 was primarily
due to a change in the volume and mix of the Company's interest earning assets.
During the current period, the Association's loan portfolio increased and funds
on deposit at the Federal Home Loan Bank of Atlanta decreased in comparison to
average balances maintained in 1999. The overall increase in the volume of loans
outstanding and as a result, interest earning assets, caused interest income to
rise during 2000.
The Company and the Association are required to meet certain capital
requirements as established by the OTS (the "Office of Thrift Supervision"). At
September 30, 2000, all capital requirements were met. (See Note 11 to the
consolidated financial statements). On June 21, 1999, the Board of Directors of
the Company approved the adoption of stock repurchase program authorizing the
Company to repurchase up to 60,793 shares or 5.00% of its outstanding common
stock at such time. The repurchases are made through registered broker-dealers
from shareholders in open market purchases at the discretion of management. The
Company intends to hold the shares repurchased as treasury shares, and may
utilize such shares to fund stock benefit plans or for any other general
corporate purpose as permitted by applicable law. At September 30, 2000, the
Company had repurchased 44,800 shares of its common stock for $605,450. The
program continues until terminated by the Board of Directors.
4
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WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Income. The Company's net income for the years ended September 30, 2000 and
1999 was $1,330,900 and $1,202,550, respectively. Net income in 2000 was higher
than the earnings reported in 1999 primarily due to an increase in the volume
and a change in the mix of interest earning assets, with higher yielding loans
comprising a greater percentage of interest earning assets during 2000.
Net Interest Income. Net interest income represents the difference between
income derived from interest-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is affected by both (i) the
difference between the rates of interest earned on interest-earning assets and
the rates paid on interest-bearing liabilities ("interest rate spread") and (ii)
the relative amounts of interest-earning assets and interest-bearing liabilities
outstanding during the period.
Net interest income increased by $294,150 or 9.26% to $3.5 million for the year
ended September 30, 2000 from $3.2 million reported in 1999. The rise in net
interest income during 2000 was attributable primarily to an overall increase in
interest earnings assets, with an even greater increase occurring in higher
yielding loans. The average balance of interest earning assets and loans
receivable increased by approximately $3.2 million and $9.3 million,
respectively, during 2000. The increase in the volume of loans outstanding
during 2000 allowed the Company's net interest rate spread to increase from
3.38% in 1999 to 3.54% in 2000.
Interest Income. Total interest income increased to $6.8 million for 2000 from
$6.2 million in 1999, an increase of $593,800. The rise in interest income
during 2000 was primarily attributable to a $9.3 million increase in the average
balance of loans outstanding in 2000. The Company's overall yield on interest
earning assets was 8.88% in 2000 as compared with 8.47% in 1999.
Interest Expense. Total interest expense increased from $3.0 million in 1999 to
$3.3 million in 2000, an increase of $299,650. During 2000, the Association's
average balance of outstanding deposits increased by approximately $2.8 million
from 1999. The Association's cost of funds increased from 5.09% in 1999 to 5.34%
in 2000, an increase of 25 basis points. The increase in interest expense from
1999 to 2000 was due almost equally to increases in the volume of outstanding
deposits and the Association's higher cost of funds.
Provision for Loan Losses. The Association provided $34,250 in additional loan
loss provisions during 2000. During the current year, the Association charged
off $17,300 against its loan loss allowance for a non-performing loan which was
subsequently paid off during the period. The Association's management determined
that its loan loss allowances were adequate during 1999 and, accordingly, no
additional provisions were provided in 1999. There were no loans charged off
against the allowances during 1999.
The provision, which is charged to operations, and the resulting loan loss
allowances are amounts the Association's management believes will be adequate to
absorb losses that are estimated to have occurred. Loans are charged off against
the allowance when management believes that uncollectibility is confirmed.
Subsequent recoveries, if any, are credited to the allowance. The allowance for
loan losses is evaluated on a regular basis by management and is based upon
management's periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revisions as more information becomes available.
5
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WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
The Association's level of non-performing loans, defined as loans past due 90
days or more, amounted to .00% and .48% as percentage of total loans outstanding
at September 30, 2000 and 1999, respectively. Management believes that such
loans are adequately collateralized and that the Association's loan loss
allowances are adequate to absorb the loss, if any, that might result from
foreclosure.
Noninterest Income. Noninterest income amounted to $50,100 and $41,750 in 2000
and 1999, respectively. Noninterest income consists primarily of service charges
and fees associated with the Association's loan and deposit accounts.
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums, OTS operating assessments, and data processing charges. Noninterest
expenses amounted to $1,356,250 and $1,274,950 in 2000 and 1999, respectively.
Compensation and related benefits increased from $748,550 in 1999 to $872,200 in
2000. The increase in compensation and benefits occurred primarily due to salary
increases and related bonuses and due to an increase in certain employee
benefits, including a 55.58% increase in the cost of health insurance coverage
for the Company's employees.
Occupancy expense, federal insurance premiums, OTS operating assessments, and
data processing expense changed nominally from 1999 to 2000. Other operating
expense decreased from $323,300 in 1999 to $287,400 during 2000, a decrease of
$35,900. The decrease in other operating expense was due primarily to the
occurrence of one-time costs associated with the establishment of the Company
during 1999. Certain administrative costs are allocated to the MHC as shown in
Note 14 to the Consolidated Financial Statements. The allocations appropriately
reflect the costs associated with the mutual holding company's majority
ownership in the Company.
Income Taxes. The Company's effective income tax rate was 37.5% and 38.1% in
2000 and 1999, respectively. The differences in rates were due to changes in the
components of permanent tax differences.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles (GAAP),
which require the measurement of financial position and operating results in
terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The assets and liabilities
of the Company are primarily monetary in nature and changes in interest rates
have a greater impact on the Company's performance than do the effects of
inflation.
6
<PAGE>
AVERAGE BALANCES, INTEREST, YIELDS AND COSTS
The following table sets forth certain information relating to the Association's
average balance sheets and reflects the average yield on assets and average cost
of liabilities at and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused a material
difference in the information presented.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
At September 30, 2000 2000 1999
----------------------- --------------------------------- -----------------------------
Average Average
Actual Average Yield/ Average Yield/
Balance Yield/Cost Balance Interest Cost Balance Interest Cost
--------- ----------- --------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (Dollars in Thousands)
Interest earning assets:
Interest-earning deposits $ 6,250 6.64% $ 5,155 $ 316 6.13% $11,169 $ 557 4.99%
Investment securities 3,356 5.70% 2,923 166 5.68% 2,974 171 5.75%
Loans receivable (1) 72,564 9.19% 68,435 6,316 9.23% 59,124 5,476 9.26%
--------- -------- ------- ------- -------
Total interest-earning assets 82,170 8.88% 76,513 6,798 8.88% 73,267 $ 6,204 8.47%
------- -------
Non-interest-earning assets 1,098 1,274 1,154
--------- -------- -------
Total $83,268 $77,787 $ $74,421
========= ======== =======
Liabilities and retained earnings:
Interest-bearing liabilities:
ESOP Debt $ 147 9.50% $ 190 $ 17 8.96% $ 238 $ 19 7.98%
Passbook accounts 3,276 3.00% 3,533 106 3.00% 3,433 103 3.00%
NOW and MMDA accounts 9,356 4.28% 9,587 390 4.07% 9,565 327 3.42%
Certificates of deposit 54,505 6.27% 48,936 2,814 5.75% 46,226 2,578 5.58%
--------- ------- ------- ------- -------
Total interest-bearing liabilities 67,284 5.84% 62,246 $ 3,327 5.34% 59,462 $ 3,027 5.09%
------- -------
Non-interest-bearing liabilities 1,812 1,734 1,333
Stockholders' Equity 14,172 13,807 13,626
--------- ------- -------
Total $83,268 $77,787 $ $74,421
========= ======= =======
Net interest income and interest
rate spread (2) 3.04% $ 3,471 3.54% $ 3,177 3.38%
======= =======
Net yield on interest-
earning assets (3) 4.10% 4.54% 4.34%
Ratio of interest-earning assets
to interest-bearing liabilities 122.12% 122.92% 123.22%
</TABLE>
(1) Balance is net of deferred loan fees and loans in process. Non-accrual
loans are included in the balances.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income divided
by average interest-earning assets.
7
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of the Association's interest earning
assets and interest bearing liabilities. The table distinguishes between (i)
changes in net interest income attributable to volume (changes in volume
multiplied by the prior period's interest rate), (ii) changes in net interest
income attributable to rate (changes in interest rates multiplied by the prior
period's volume), and (iii) mixed changes (changes in volume multiplied by
changes in rates).
<TABLE>
<CAPTION>
Year ended September 30, Year ended September 30,
2000 vs. 1999 1999 vs. 1998
--------------------------------------------- -----------------------------------------
Increase (Decrease) Attributable to Increase (Decrease) Attributable to
--------------------------------------------- -----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
---------- -------- ---------- ---------- --------- ------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (In Thousands)
Interest-earnings assets:
Interest-bearing deposits $ (300) $ 128 $ (69) $ (241) $ (79) $ (71) $ 8 $ (142)
Investment securities (3) (2) -- (5) (27) 20 (3) (10)
Loans receivable 862 (19) (3) 840 671 (263) (35) 373
--------- -------- ---------- --------- ---------- ------ ------------- --------
Total 559 107 (72) 594 565 (314) (30) 221
--------- -------- ---------- --------- ---------- ------ ------------- --------
Liabilities:
Interest-bearing liabilities:
ESOP Debt (4) 2 -- (2) (5) (2) -- (7)
Passbook savings 3 -- -- 3 3 -- -- 3
NOW and MMDA accounts 1 62 -- 63 47 (20) (3) 24
Certificates of deposit 151 80 5 236 47 (110) (2) (65)
--------- -------- ---------- --------- ---------- ------ ------------- --------
Total 151 144 5 300 92 (132) (5) (45)
--------- -------- ---------- --------- ---------- ------ ------------- --------
Net interest income $ 408 $ (37) $ (77) $ 294 $ 473 $(182) $ (25) $ 266
========= ======== ========== ========= ========== ====== ============= ========
</TABLE>
8
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
The Company declared dividends of $.12 per share for each quarter during 2000.
Although the Company anticipates that it will continue to declare cash dividends
on a regular basis, the Board of Directors will review its policy on the payment
of dividends on an ongoing basis, and such payment may be subject to dividends
received from the Association to the Company, future earnings, cash flows,
capital needs, and regulatory restrictions.
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities to enhance stockholders' value. More specifically,
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, repayments received on loans, borrowings, the sale or maturity of
investments, or the ability to raise equity capital.
During the current year, cash increased by approximately $1.2 million, and
amounted to $6.7 million at September 30, 2000. Cash flow resulting from
internal operating activities provided increases of $1.5 million in cash during
the year ended September 30, 2000. Cash flows from investing activities utilized
$9.7 million in cash during the current year, with a net growth in loans of
$11.1 million being the primary use of cash. During 2000, the Association
allowed $500,000 in investment securities to mature without reinvesting the
proceeds. In addition, the Association had $1.0 million in certain short term
interest earning time deposits with maturities of 30 days to 364 days from the
FHLB of Atlanta which matured during 2000.
During 2000, financing activities of the Company provided $9.3 million in cash,
including net deposit increases of $10.2 million. The Association's ability to
generate deposits has historically been sufficient to fund its loan demand and
provide for adequate liquidity without the need to access other forms of credit
availability. In addition, the Association has a readily available source of
credit through its borrowing capacity at the FHLB of Atlanta, currently equal to
12% of total assets. Cash provided by operating and financing activities is used
to originate new loans to customers, to maintain the Association's liquid
investment portfolios, and to meet short term liquidity requirements.
OTS regulated institutions, including the Association, are required to maintain
a specified liquidity ratio (presently 4.0%) of cash and specified unpledged
securities to net withdrawable deposit accounts and borrowings due in one year
or less. The Association's liquidity ratio at September 30, 2000, as computed
under OTS regulations, was in excess of such requirements. Given its current
liquidity and its ability to borrow from the FHLB 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.
9
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Interest rate risk can have a material market risk impact on the operating
results of the Company due to the potential of economic losses associated with
future changes in interest rates. These economic losses can be reflected as a
loss of future net interest income and/or loss of current fair market values of
interest sensitive financial instruments. Interest rate risk is the most
significant market risk affecting the Company.
Other types of market risk, such as foreign currency and commodity price risk,
do not arise in the normal course of the Company's business activities. In
addition, the Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. The Company's asset and
liability management objectives are to (i) improve the rate sensitivity of its
interest-earning assets in relation to interest-bearing liabilities, and (ii)
maintain an appropriate ratio of interest-sensitive assets to interest-sensitive
liabilities with comparable maturities. Management realizes certain risks are
inherent and that the goal is to minimize interest rate risk.
In the absence of other factors, the Company's overall yield on interest-earning
assets will increase as will its cost of funds on its interest-bearing
liabilities when market rates increase over an extended period of time.
Conversely, the Company's yields and cost of funds will decrease when market
rates decline. The Company is able to manage these swings to some extent by
attempting to control the maturities or repricing adjustments of its
interest-earning assets and interest-bearing liabilities over given periods of
time.
The Company's "gap" is typically described as the difference between the amounts
of such assets and liabilities which reprice within a period of time. In a
declining interest rate environment, a negative gap or a situation where the
Company's interest-bearing liabilities subject to repricing exceed the level of
interest-earning assets which will mature or reprice, has a favorable impact on
the Company's net interest income. Conversely, an increase in general market
rates will tend to adversely affect the Company's net interest income.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Company's operations,
management has implemented an asset/liability program designed to improve the
Company's interest rate gap. The program primarily emphasizes the origination of
balloon and other short term loans, such as construction and home equity loans,
that are held for investment purposes. In addition, the program emphasizes
investing in short or intermediate term investment securities, and the
solicitation of checking or transaction deposit accounts which are less
sensitive to changes in interest rates and can be repriced rapidly.
The Board of Directors is responsible for reviewing the Company's asset and
liability policies. On a quarterly basis, the Board reviews interest rate risk
and trends. Management of the Company is responsible for administering the
policies established by the Board with respect to asset and liability goals and
strategies.
The following Market Risk Analysis table reflects maturities of interest rate
sensitive assets and liabilities over the next five years.
10
<PAGE>
WAKE FOREST BANCSHARES, INC.
MARKET RISK ANALYSIS
<TABLE>
<CAPTION>
Expected Maturity Date
---------------------------------------------------------------------------------------------------
Year Ended September 30,
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---------- ---------- ---------- ---------- ----------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans-fixed:
Balance $ 21,290 $ 523 $ 37 $ 39 $ 106 $ 2,765 $ 24,760 $ 24,721
Interest rate 9.75% 9.67% 9.13% 10.90% 9.57% 9.31% 9.70% --
Loans-variable (1):
Balance 12,499 12,683 14,816 7,329 477 -- 47,804 47,572
Interest rate 9.97% 8.30% 8.81% 8.45% 8.40% -- 8.93% --
Investments (2):
Balance 8,864 743 -- -- -- -- 9,607 9,607
Interest rate 6.31% 5.60% -- -- -- -- 6.25% --
Liabilities:
Deposits (3):
Balance 13,370 -- -- -- -- -- 13,370 13,370
Interest rate 3.75% -- -- -- -- -- 3.75% --
Deposits-certificates:
Balance 25,693 17,149 3,079 1,530 7,054 -- 54,505 54,361
Interest rate 5.66% 6.91% 6.39% 5.78% 6.87% -- 6.25% --
</TABLE>
-------------------
(1) Maturities of variable rate loans are based on contractual maturity except
home equity loans and commercial lines of credit which are based on the
next repricing date
(2) Includes interest bearing deposits and investment securities
(3) Includes passbook accounts, NOW accounts and money market accounts
11
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
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 change in
the century. Like most financial service providers, the Company through its
wholly owned Association could have been significantly affected by the Year
2000. Software, hardware, and equipment both within and outside the
Association's direct control and with whom the Association electronically or
operationally interfaces (e.g. third party vendors providing data processing,
information system management, maintenance of computer systems, and credit
bureau information) were subject to be affected.
The Company did not experience any Year 2000 related problems as a result of the
changeover to the new millennium. Based upon testing and the occurrence of
subsequent daily operations in January, 2000, the Company's systems reacted and
continue to function in a normal fashion. While there are a few date sensitive
time periods which will still require monitoring, such as December 31, 2000,
management does not expect significant problems to occur.
Monitoring and managing the Year 2000 project resulted in additional direct and
indirect costs to the Company. Direct costs include charges by third party
software vendors for product enhancements, costs involved in testing software
products for Year 2000 compliance, and costs for developing and implementing
contingency plans for critical software products which are not enhanced.
Indirect costs principally consist of the time devoted by existing employees to
monitor software vendor progress, test enhanced software products and implement
any necessary contingency plans. The Company incurred approximately $100,000 in
direct and indirect costs on the Year 2000 project to date and estimates that
any future costs will be immaterial. Both direct and indirect costs of
addressing the Year 2000 problem were charged to earnings as incurred.
FUTURE REGULATORY AND REPORTING REQUIREMENTS
In July of 2000, the OTS issued proposed regulatory changes, supervisory
initiatives and interim final rules, all of which are designed to enhance the
mutual holding company charter. While many of the proposed rules address
amendments to the mutual-to-stock conversion regulations, certain aspects of the
proposed regulations could favorably affect mutual holding companies already in
existence, including Wake Forest Bancorp, MHC. The OTS implemented changes would
generally allow a mutual holding company to engage in the same activities as
permitted for a financial holding company under the Gramm-Leach-Bliley Act.
Also, the OTS amended its MHC dividend waiver provision. Current OTS policy
penalizes the waiver of dividends to a mutual holding company by requiring
dilution of minority shareholders in a full conversion to stock form. The
interim final rule clarifies that the OTS will not consider waived dividends in
determining the appropriate exchange ratio in the event of a full conversion to
stock form. The timing of the regulatory developments in the proposed
regulations varies, but supervisory guidance is expected to be issued during the
next year.
In July 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Finanical Acccounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring balance sheet recognition of all derivative instruments at
fair value. SFAS No. 133 was subsequently amended by SFAS No. 137 in June 1999
and by SFAS No. 138 in June 2000. The statement, as amended, specifies that
changes in the fair value of derivative instruments be recognized currently in
earnings unless specific hedge accounting criteria are met.
12
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
Special accounting for qualifying hedges allows derivative gains and losses to
offset related results on hedged items in the the income statement. The
statement is effective for fiscal years beginning after June 15, 2000. Adoption
is not expected to have an impact on the Company.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140
is a replacement of SFAS No. 125, although SFAS No. 140 carried forward most of
the provisions of SFAS No. 125 without change. SFAS No. 140 is effective for
transfers occurring after March 31, 2001 and for disclosures relating to
securitizations, retained interests, and collateral received and pledged in
reverse repurchase agreements for fiscal years ending after December 15, 2000.
The new statement eliminates the prior requirement to record collateral received
under certain securities financing transactions and requires reclassification in
the balance sheet of assets pledged under certain conditions. The Adoption of
SFAS No. 140 is not expected to have an impact on the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Statements herein regarding estimated future revenue and 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.
The Company and the Association does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company or the Association.
13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Wake Forest Bancshares, Inc.
Wake Forest, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Wake Forest Bancshares, Inc. and subsidiary as of September 30, 2000 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of Wake
Forest Bancshares, Inc. and subsidiary as of September 30, 1999 were audited by
other auditors whose report dated October 27, 1999 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2000 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wake Forest
Bancshares, Inc. and subsidiary at September 30, 2000, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Dixon Odom PLLC
Dixon Odom PLLC
Sanford, North Carolina
October 19, 2000
14
<PAGE>
WAKE FOREST BANCSHARES, INC.
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------- -------------
<S> <C> <C>
Cash:
Interest-bearing deposits $ 6,250,450 $ 5,827,000
Noninterest-bearing deposits 485,400 674,050
------------- -------------
6,735,850 6,501,050
------------- -------------
Investment securities (Note 2):
Available for sale, at market value 3,065,550 3,527,750
FHLB stock 290,700 280,400
Loans receivable, net (Note 3) 72,564,150 61,467,300
Accrued interest receivable 126,800 101,850
Property and equipment, net (Note 4) 432,900 452,000
Prepaid expenses and other assets 52,400 65,200
------------- -------------
Total assets $ 83,268,350 $ 72,395,550
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:(Note 5)
Noninterest-bearing $ 681,400 $ 303,500
Interest bearing 67,193,000 57,350,400
------------- -------------
Total deposits $ 67,874,400 $ 57,653,900
Accounts payable and accrued expenses 434,500 387,350
Dividends payable 140,550 143,700
Note payable - ESOP (Note 9) 147,150 206,000
Deferred income taxes (Note 10) 152,950 160,800
Redeemable common stock held by the ESOP, net of
unearned ESOP shares (Note 9) 347,250 375,950
------------- -------------
Total liabilities 69,096,800 58,927,700
------------- -------------
Commitments and contingencies (Note 12)
Stockholders' Equity (Note 11):
Preferred stock, authorized 1,000,000 shares, none issued -- --
Common stock, $.01 par value, authorized 5,000,000 shares;
issued 1,215,862 shares 12,150 12,150
Additional paid-in-capital 4,916,450 4,843,600
Accumulated other comprehensive income 496,250 472,900
Retained earnings, substantially restricted (Note 11) 9,352,150 8,490,850
Common stock in treasury, at cost (Note 11) (605,450) (351,650)
------------- -------------
Total stockholders' equity 14,171,550 13,467,850
------------- -------------
$ 83,268,350 $ 72,395,550
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------------- -------------
<S> <C> <C>
Interest and dividend income:
Loans $ 6,316,250 $ 5,476,150
Investment securities 166,050 171,200
Interest-bearing deposits 315,400 556,550
--------------- -------------
6,797,700 6,203,900
--------------- -------------
Interest expense:
Deposits (Note 5) 3,309,750 3,007,350
Borrowings 16,600 19,350
--------------- -------------
3,326,350 3,026,700
--------------- -------------
Net interest income before provision for loan losses 3,471,350 3,177,200
Provision for loan losses (Note 3) (34,250) --
--------------- -------------
Net interest income after provision for loan losses 3,437,100 3,177,200
--------------- -------------
Noninterest income 50,100 41,750
--------------- -------------
Noninterest expense:
Compensation and benefits (Notes 6, 7, 8, and 9) 872,200 748,550
Occupancy 45,900 39,900
Federal insurance premiums and operating assessments 42,300 59,850
Data processing and outside service fees 108,450 103,350
Other operating expense 287,400 323,300
--------------- -------------
1,356,250 1,274,950
--------------- -------------
Income before income taxes 2,130,950 1,944,000
--------------- -------------
Income taxes (Note 10):
Current 822,250 748,650
Deferred (22,200) (7,200)
--------------- -------------
800,050 741,450
--------------- -------------
Net income $ 1,330,900 $ 1,202,550
=============== =============
Basic earnings per share $ 1.15 $ 1.02
Diluted earnings per share $ 1.15 $ 1.02
Dividends paid per share $ 0.48 $ 0.48
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares of Additional
Common Common Paid in
Stock Stock Capital
-------------- ------------- ------------
<S> <C> <C> <C>
Balance at September 30, 1998 1,215,862 $ 12,150 $ 4,772,800
Comprehensive income:
Net income for 1999 -- --
Net change in unrealized gain on securities -- --
Total comprehensive income
Contributions to ESOP (Note 9) -- 14,050
Market value adjustment for redeemable
common stock held by ESOP -- --
Amortization of earned RRP shares (Note 7) -- 56,750
Cash dividends ($0.48 per share) -- --
Acquisition of 25,400 shares of common
stock for the treasury (25,400) -- --
-------------- ------------- ------------
Balance at September 30, 1999 1,190,462 12,150 4,843,600
Comprehensive income:
Net income for 2000 -- --
Net change in unrealized (loss) on securities -- --
Total comprehensive income
Contributions to ESOP (Note 9) -- 16,100
Market value adjustment for redeemable
common stock held by ESOP -- --
Amortization of earned RRP shares (Note 7) 56,750
Cash dividends ($0.48 per share) -- --
Acquisition of 19,400 shares of common
stock for the treasury (19,400) -- --
-------------- ------------- ------------
Balance at September 30, 2000 1,171,062 $ 12,150 $ 4,916,450
============== ============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other Treasury
Comprehensive Retained Stock
Income Earnings Acquired Total
--------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at September 30, 1998 $ 477,100 $ 7,905,150 $ -- $ 13,167,200
Comprehensive income:
Net income for 1999 -- 1,202,550 -- 1,202,550
Net change in unrealized gain on securities (4,200) -- -- (4,200)
-------------
Total comprehensive income 1,198,350
-------------
Contributions to ESOP (Note 9) -- -- -- 14,050
Market value adjustment for redeemable
common stock held by ESOP -- (46,350) -- (46,350)
Amortization of earned RRP shares (Note 7) -- -- -- 56,750
Cash dividends ($0.48 per share) -- (570,500) -- (570,500)
Acquisition of 25,400 shares of common
stock for the treasury -- -- (351,650) (351,650)
-------------- ----------- ----------- ------------
Balance at September 30, 1999 472,900 8,490,850 (351,650) 13,467,850
Comprehensive income:
Net income for 2000 -- 1,330,900 -- 1,330,900
Net change in unrealized (loss) on securities 23,350 -- -- 23,350
------------
Total comprehensive income 1,354,250
------------
Contributions to ESOP (Note 9) -- -- -- 16,100
Market value adjustment for redeemable
common stock held by ESOP -- 87,600 -- 87,600
Amortization of earned RRP shares (Note 7) -- -- -- 56,750
Cash dividends ($0.48 per share) -- (557,200) -- (557,200)
Acquisition of 19,400 shares of common
stock for the treasury -- -- (253,800) (253,800)
-------------- ----------- ----------- ------------
Balance at September 30, 2000 496,250 $ 9,352,150 (605,450) $ 14,171,550
============== =========== =========== ============
</TABLE>
18
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,330,900 $ 1,202,550
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation 33,600 33,200
Provision for loss on loans 34,250 --
Amortization of premiums (discounts) on investments (50) 550
Amortization of unearned RRP shares 56,750 56,750
Amortization of unearned ESOP shares 58,850 58,850
ESOP compensation expense credited to
paid-in-capital 16,100 14,050
Deferred income taxes (22,200) (7,200)
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (24,950) (76,300)
Prepaid expenses and other assets 12,800 (13,850)
Increase (decrease) in:
Accounts payable and accrued expenses 47,150 84,150
------------ -----------
Net cash provided by operating activities 1,543,200 1,352,750
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on loans 36,428,900 45,803,000
Mortgage loans purchased (25,000) (70,000)
Loans originated (47,535,000) (51,836,850)
Purchase of FHLB time deposits -- (3,500,000)
Maturities of FHLB time deposits 1,000,000 2,500,000
Purchase of available for sale investment securities -- (2,250,000)
Maturities of available for sale investment securities 500,000 1,500,000
Purchase (redemption) of FHLB stock (10,300) 83,700
Purchases of property and equipment (14,500) (25,650)
------------ -----------
Net cash used in investing activities (9,655,900) (7,795,800)
------------ -----------
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid $ (560,350) $ (572,700)
Principal payments on ESOP note payable (58,850) (58,850)
Purchase of treasury stock (253,800) (351,650)
Net increase (decrease) in savings accounts 10,220,500 (2,384,050)
---------------- --------------
Net cash provided by (used in) financing activities 9,347,500 (3,367,250)
---------------- --------------
Net increase (decrease) in cash 1,234,800 (9,810,300)
---------------- --------------
Cash:
Beginning 5,501,050 15,311,350
---------------- --------------
Ending $ 6,735,850 $ 5,501,050
================ ==============
Cash and cash Equivalents:
Cash $ 485,400 $ 674,050
Interest bearing overnight funds 6,250,450 4,327,000
Time deposit with original maturity less than 90 days -- 500,000
---------------- --------------
Total cash and cash equivalents 6,735,850 5,501,050
Time deposits with original maturities greater than 90 days -- 1,000,000
---------------- --------------
Cash and interest bearing deposits $ 6,735,850 $ 6,501,050
================ ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,328,050 $ 3,027,100
Income taxes $ 828,950 $ 724,300
Supplemental Schedule of Noncash Investing
and Financing Activities:
Fair value of ESOP shares in excess of unearned
ESOP shares (charged) credited to retained earnings $ 87,600 $ (46,350)
Change in unrealized gain (loss) on available for sale
securities, net of tax effect $ 23,350 $ (4,200)
</TABLE>
20
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Wake Forest Bancshares, Inc. (the "Company") is located in Wake Forest, North
Carolina and is the parent stock holding company of Wake Forest Federal Savings
& Loan Association (the "Association" or "Wake Forest Federal"), it's only
subsidiary. The Company conducts no business other than holding all of the stock
in the Association, investing dividends received from the Association,
repurchasing its common stock from time to time, and distributing dividends on
its common stock to its shareholders. The Association's principal activities
consist of obtaining savings deposits and providing mortgage credit to customers
in its primary market area, the counties of Wake and Franklin, North Carolina.
The Company's and the Association's primary regulator is the Office of Thrift
Supervision (OTS) and its deposits are insured by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).
The Company is majority owned by Wake Forest Bancorp, M.H.C., (the "MHC") a
mutual holding company. Members of the MHC consist of depositors and certain
borrowers of the Association, who have the sole authority to elect the board of
directors of the MHC for as long as it remains in mutual form. The MHC's
principal assets consist of 635,000 shares of the Company's common stock and
deposits at the Association for accumulated dividends paid on those shares. The
MHC, which by law must own in excess of 50% of the stock of the Company,
currently has an ownership interest of 54.2% of the Company. The mutual holding
company is registered as a savings and loan holding company and is subject to
regulation, examination, and supervision by the OTS.
The Company was formed on May 7, 1999 solely for the purpose of becoming a
savings and loan holding company and had no prior operating history. The
formation of the Company had no impact on the operations of the Association or
the MHC. The Association continues to operate at the same location, with the
same management, and subject to all the rights, obligations and liabilities of
the Association which existed immediately prior to the formation of the Company.
The establishment of the Company 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 its
formation will be substantially the same as those of the Association immediately
prior to the formation, all of which will be shown on the Company's books at
their historical recorded values.
A summary of the Company's significant accounting policies follows:
Basis of financial statement presentation: The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts or revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Consolidation: The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Wake Forest Federal. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all interest-bearing deposits with maturities of less than three
months at acquisition, noninterest-bearing deposits, and cash on hand to be cash
and cash equivalents. At times, the Association maintains deposits in
correspondent banks in amounts that may be in excess of the FDIC insurance
limit.
21
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Investment securities: The Company carries its investments at fair market value
or amortized cost depending on its classification of such securities.
Classification of securities and the Company's accounting policies are as
follows:
Securities held to maturity: Securities classified as held to maturity
are those debt securities the Company has both the intent and ability
to hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premiums or
accretion of discounts, computed by a method which approximates the
interest method, over their contractual lives. The Company currently
has no securities which are classified as held to maturity.
Securities available for sale: Securities classified as available for
sale are those debt securities that the Company intends to hold for an
indefinite period of time but not necessarily to maturity and equity
securities not classified as held for trading. Any decision to sell a
security classified as available for sale would be based on various
factors, including significant movements in interest rates, changes in
the maturity mix of its securities, liquidity needs and other
significant factors. Securities available for sale are carried at fair
value adjusted for amortization of premiums or accretion of discounts.
Unrealized gains and losses are reported as a separate component of
equity, net of related tax effects. Realized gains and losses are
included in earnings.
Securities held for trading: Trading securities are held in
anticipation of short-term market gains. Such securities are carried at
fair value with realized and unrealized gains and losses included in
earnings. The Company currently has no securities which are classified
as trading.
Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses and net deferred loan origination fees. The
Association's loan portfolio consists principally of mortgage loans
collateralized by first trust deeds on single family residences, other
residential property, commercial property and land.
Loan fees: The Association receives fees for originating mortgage loans. The
Association defers all loan fees less certain direct costs as an adjustment to
yield with subsequent amortization into income over the life of the related
loan.
Allowance for loan losses: The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Such evaluation includes a review of loans for which
collectibility appears doubtful and other factors, including the nature and
volume of the portfolio, historical experience, estimated value of any
underlying collateral, and current economic conditions. While management uses
the best information available to make evaluations, future adjustments may be
necessary, if economic or other conditions differ substantially from the
assumptions used.
The Association establishes specific loan loss allowances for impaired loans if
it is doubtful that all principal and interest due according to the loan terms
will be collected. An allowance is recorded if the present value of the loan's
future cash flows, discounted using the loan's effective interest rate, is less
than the carrying value of the loan.
22
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
An impaired loan can also be valued at its fair value in the market place or on
the basis of its underlying collateral if the loan is primarily collateral
dependent. If foreclosure is imminent, and the loan is collateral dependent, the
loan is valued based upon the fair value of the underlying collateral. The
Association had no loans outstanding during the years ended September 30, 2000
and 1999 which it considers to be impaired. Therefore, there is no specific
allowance for impaired loans at September 30, 2000 and 1999.
Interest income: The Association does not record interest on loans delinquent 90
days or more unless in the opinion of management, collectibility is assured. If
collectibility is not certain, the Association establishes a reserve for
uncollected interest. Interest collected while the loan is in such status is
credited to income in the period received. If the loan is brought to a status in
which it is no longer delinquent 90 days, the reserve for uncollected interest
is reversed and interest income is recognized. The Association anticipates that
it will account for interest on impaired loans in a similar fashion in the
future if and when it has impaired loans. Such interest when ultimately
collected is credited to income in the period received.
Property, equipment and depreciation: Property and equipment are stated at cost
less accumulated depreciation. Depreciation is computed primarily by use of the
straight-line method.
Real estate acquired in settlement of loans: Real estate acquired through, or in
lieu of, loan foreclosure is initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of cost or fair value minus costs to sell. Revenue and expenses from holding the
properties and additions or recoveries to the valuation allowance are included
in operations. The Association had no real estate acquired in settlement of
loans during 2000 or 1999.
Income taxes: Deferred income taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by valuation
allowances if in the opinion of management it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Earnings per share: Statement of Financial Accounting Standard (SFAS) No. 128
requires dual presentation of basic and diluted earnings per share (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. Shares owned by the Company's Employee Stock Ownership Plan
(the "ESOP") that have not been committed to be released are not considered to
be outstanding for the purposes of computing earnings per share. No adjustments
were required to net income for any period presented in the computation of
diluted earnings per share.
23
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The basic and diluted weighted average shares outstanding for 2000 and 1999 are
as follows:
<TABLE>
<CAPTION>
2000 1999
------------------ -----------------
<S> <C> <C>
Weighted average outstanding shares used for basic EPS 1,153,048 1,177,248
Plus incremental shares from assumed issuances
pursuant to stock options and stock award plans -- 360
------------------ -----------------
Weighted average outstanding shares used for diluted EPS 1,153,048 1,177,608
================== =================
</TABLE>
Off-balance-sheet risk and credit risk: The Association is a party to financial
instruments with off-balance-sheet risk such as commitments to extend credit.
Management assesses the risk related to these instruments for potential loss.
The Association lends primarily on one-to-four family residential properties
throughout its primary lending area, Wake and Franklin counties of North
Carolina.
Fair value of financial instruments: Estimated fair values have been determined
by the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to develop the
estimates of fair value. Accordingly, the estimates for the fair value of the
Company's financial instruments are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different
market assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts. The fair value estimates are based on pertinent
information available to management as of September 30, 2000. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:
Cash and accrued interest receivable: The carrying amounts reported in the
statement of financial condition approximate those assets' fair values.
Investment securities: The fair values of investment securities are
determined based on quoted market values. For the Association's investment in
Federal Home Loan Bank stock, no ready market exists and it has no quoted
market value. For disclosure purposes, such stock is assumed to have a fair
value which is equal to its cost.
Loans receivable: The fair value for all loans, except short-term
construction loans, home equity loans and commercial lines of credit, has
been estimated by discounting projected future cash flows using the current
rate at which loans with similar maturities would be made to borrowers with
similar credit ratings. Certain prepayment assumptions were made to the
Association's portfolio of long-term fixed rate mortgage loans. The fair
value of construction loans, home equity loans, and commercial lines of
credit is assumed to be equal to their recorded amounts because such loans
have relatively short terms.
Deposits: The fair value of deposits with no stated maturities is estimated
to be equal to the amount payable on demand. The fair value of certificates
of deposit is based upon the discounted value of future contractual cash
flows. The discount rate is estimated using rates offered for deposits of
similar remaining maturities.
24
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESOP note payable: The fair value of the ESOP note is assumed to be equal to
its recorded amount because the terms of the note are similar to the terms
that could currently be obtained for comparable debt instruments.
Off-balance-sheet commitments: Because the Association's commitments, which
consist entirely of loan commitments, are either short-term in nature or
subject to immediate repricing, no fair value has been assigned to these
off-balance-sheet items.
NOTE 2. INVESTMENT SECURITIES
The amortized cost, estimated market value and gross unrealized gains and losses
of the Association's investment securities at September 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
2000
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Available for sale securities:
Marketable equity securities:
FHLMC stock $ 15,200 $ 822,950 $ -- 838,150
Debt securities:
U.S. Treasury and agency securities 2,250,000 -- (22,600) 2,227,400
------------- ------------- ------------ -----------
2,265,200 822,950 (22,600) 3,065,550
Nonmarketable equity securities:
Federal Home Loan Bank stock 290,700 -- -- 290,700
------------- ------------- ------------ -----------
$ 2,555,900 $ 822,950 $ (22,600) $ 3,356,250
------------- ------------- ------------ -----------
1999
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Available for sale securities:
Marketable equity securities:
FHLMC stock $ 15,200 $ 791,000 $ -- $ 806,200
Debt securities:
U.S. Treasury and agency securities 2,749,900 -- (28,350) 2,721,550
------------- ------------- ------------ -----------
2,765,100 791,000 (28,350) 3,527,750
Nonmarketable equity securities:
Federal Home Loan Bank stock 280,400 -- -- 280,400
------------- ------------- ------------ -----------
$ 3,045,500 $ 791,000 $ (28,350) $ 3,808,150
============= ============= ============ ===========
</TABLE>
There were no sales of investment securities during the years ended September
30, 2000 and 1999.
25
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market values of available for sale debt
securities at September 30, 2000 by contractual maturity are shown below:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
----------------- ------------------
<S> <C> <C>
Due in one year or less $ 1,500,000 $ 1,484,800
Due in one year through five years 750,000 742,600
----------------- ------------------
$ 2,250,000 $ 2,227,400
================= ==================
</TABLE>
The change during 2000 and 1999 in net unrealized gains and losses associated
with available for sale securities is as follows:
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
<S> <C> <C>
Balance in equity component, beginning of year $ 472,900 $ 477,100
Change in unrealized gains 37,700 (6,800)
Change in related deferred income taxes (14,350) 2,600
----------------- ------------------
Balance in equity component, end of year $ 496,250 $ 472,900
================= ==================
</TABLE>
The Association, as a member of the Federal Home Loan Bank system, maintains an
investment in capital stock of the Federal Home Loan Bank. No ready market
exists for the bank stock. For disclosure purposes, such stock is assumed to
have a market value which is equal to cost.
NOTE 3. LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable consist of the following: 2000 1999
--------------- -----------------
<S> <C> <C>
First mortgage loans:
Single family, one-to-four units $ 27,073,250 $ 24,394,050
Multifamily, residential 186,850 183,800
Commercial real estate 10,594,750 8,460,250
Land 6,342,450 8,231,950
Residential construction 26,859,100 24,693,100
Commercial construction 3,932,750 2,351,000
Lines of credit 5,785,750 2,718,650
----------------- ------------------
80,774,900 71,032,800
Equity line mortgages 3,338,100 3,106,600
Loans on savings accounts 643,750 222,350
----------------- ------------------
84,756,750 74,361,750
----------------- ------------------
Less:
Undisbursed portion of loans in process 11,708,850 12,460,100
Allowance for loan losses 280,000 263,000
Deferred loan fees 203,750 171,350
----------------- ------------------
12,192,600 12,894,450
----------------- ------------------
$ 72,564,150 $ 61,467,300
================= ==================
Weighted average yield on loans receivable 9.19% 8.65%
</TABLE>
26
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE (CONTINUED)
The change in the Association's allowance for loan losses is as follows for the
years ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------------------ ----------------
<S> <C> <C>
Balance, beginning of year $ 263,000 $ 263,000
Provision for loan loss 34,250 --
Charge-offs (17,250) --
------------------ ----------------
Balance, end of year $ 280,000 $ 263,000
================== ================
</TABLE>
The Association does not accrue interest on loans past due 90 days or more if,
in the opinion of management, collectibility is in doubt. Such interest is
removed from income through the establishment of a reserve for uncollected
interest. At September 30, 1999, a reserve for uncollected interest on loans
delinquent more than 90 days was not established because management expected all
such interest to be fully collectible. At September 30, 2000, there were no
loans delinquent more than 90 days. The balance of accruing loans past due more
than 90 days was approximately $293,800 at September 30, 1999.
Shareholders of the Company with 10% or more ownership and officers and
directors, including their families and companies of which they are principal
owners, are considered to be related parties. These related parties were loan
customers of, and had other transactions with the Association in the ordinary
course of business. In management's opinion, these loans and transactions were
on the same terms as those for comparable loans and transactions with
non-related parties during the years ended September 30, 2000 and 1999.
Aggregate loan transactions with related parties during the years ended
September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
<S> <C> <C>
Beginning balance $ 296,250 $ 341,650
New loans 247,500 13,800
Reductions (102,000) (59,200)
----------------- -----------------
Ending balance $ 441,750 $ 296,250
================= =================
Maximum balance during the year $ 523,800 $ 341,650
================= =================
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
<S> <C> <C>
Land $ 20,950 $ 20,950
Office buildings and improvements 608,550 601,550
Furniture and fixtures 170,600 181,300
----------------- ------------------
800,100 803,800
Less accumulated depreciation (367,200) (351,800)
----------------- ------------------
$ 432,900 $ 452,000
================= ==================
</TABLE>
27
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5. DEPOSITS
Deposits at September 30, 2000 and 1999 consist of the following:
<TABLE>
<CAPTION>
2000 1999
------------------ -----------------
<S> <C> <C>
Passbook accounts, weighted average rate of 3.00%
(3.00% in 1999) $ 3,276,150 $ 3,554,050
MMDA accounts, weighted average rate of 4.65%
(4.15% in 1999) 7,766,150 7,922,800
NOW accounts, weighted average rate of 2.50%
(2.50% in 1999) 1,589,700 1,413,200
Noninterest-bearing accounts 681,400 303,500
------------------ -----------------
13,313,400 13,193,550
------------------ -----------------
Certificate of deposit accounts:
3.00% to 5.00% 5,134,150 16,919,050
5.01% to 7.00% 42,321,650 27,379,050
7.01% to 8.00% 7,049,000 104,350
------------------ -----------------
54,504,800 44,402,450
------------------ -----------------
Accrued interest on deposits 56,200 57,900
------------------ -----------------
$ 67,874,400 $ 57,653,900
================== =================
Weighted average cost of deposits 5.77% 4.93%
================== =================
</TABLE>
Certificate of deposit by range of rate and maturity at September 30, 2000 are
summarized as follows:
<TABLE>
<CAPTION>
Amounts Maturing During
-------------------------------------------------------------------------------------------
Rate Range: 2001 2002 2003 Thereafter Total
----------------- ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
3.00% to 5.00% $ 4,765,500 $ 164,300 $ 28,500 $ 175,850 $ 5,134,150
5.01% to 7.00% 20,826,850 10,566,150 3,050,500 7,878,150 42,321,650
7.01% to 8.00% 100,250 6,418,750 -- 530,000 7,049,000
----------------- ----------------- ---------------- ---------------- -----------------
$ 25,692,600 $ 17,149,200 $ 3,079,000 $ 8,584,000 $ 54,504,800
================= ================= ================ ================ =================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 included in the table above is as follows:
<TABLE>
<CAPTION>
<S> <C>
Maturity Period:
Within three months $ 1,448,500
After three months but within six months 672,000
After six months but within twelve months 2,993,950
After twelve months but within twenty four months 4,667,500
After twenty four months 3,696,600
----------------
$ 13,478,550
================
</TABLE>
Eligible deposits are insured to $100,000 by the Savings Association Insurance
Fund (SAIF) which is administered by the FDIC.
28
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5. DEPOSITS (CONTINUED)
Interest expense on deposits for the years ended September 30, 2000 and 1999 is
summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
<S> <C> <C>
Passbook accounts $ 106,300 $ 103,300
MMDA and NOW accounts 389,900 327,500
Certificate of deposit accounts 2,826,900 2,584,800
----------------- ------------------
3,323,100 3,015,600
Forfeitures (13,350) (8,250)
----------------- ------------------
$ 3,309,750 $ 3,007,350
================= ==================
</TABLE>
NOTE 6. EMPLOYEES AND DIRECTORS BENEFIT PLANS
The Association has a noncontributory 401k plan for substantially all employees.
The Association has no obligation to make contributions to the plan, but pays
administrative costs of the Plan. Plan expenses amounted to $2,950 and $1,750
during 2000 and 1999, respectively.
The Association has a non-qualified noncontributory retirement plan covering its
directors. Retirement plan expense is computed based on the discounted present
value of expected future payments over the expected service years for the
directors. Under the plan, directors will receive upon retirement, monthly
payments for ten years in amounts not to exceed $5,000 annually. Other
stipulations and limitations based on years of service, death and disability,
change of control, and early termination apply. Expense associated with the plan
amounted to $26,200 and $30,300 for 2000 and 1999, respectively.
The Association has also entered into employment agreements with its three key
executives. The agreements provide for a three year term, but upon each
anniversary, the agreements automatically extend so that the terms shall always
be three years, unless either party gives notice that the agreement will not be
renewed. Performance reviews by a committee of the Board will be conducted
annually and the agreements can be terminated by the Association at anytime for
cause as defined in the agreements. The agreements provide for a base salary
plus performance bonus to be determined annually. In the event of termination
other than for cause, the employees are entitled to a lump sum cash payment in
an amount equal to the present value of the base salary, bonus payments, and
other benefits as described and determined in the agreements.
NOTE 7. RECOGNITION AND RETENTION PLAN
The Company has a Recognition and Retention Plan (the "RRP") whereby 22,248
shares of common stock were awarded to employees and directors. In January,
1998, the Association issued shares of common stock from authorized but unissued
shares to fund the plan. The RRP shares vest over a five year period and at
September 30, 2000, 60% of the shares had vested. Accelerated vesting may occur
in certain circumstances as disclosed in the plan documents. Compensation
expense is incurred over the vesting period. Expense associated with the plan
for years ended September 30, 2000 and 1999 was $52,550 and $49,000,
respectively.
29
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8. STOCK OPTION PLAN
The Company has a stock option plan for the benefit of its officers, directors,
and key employees. Options totaling 54,000 at a grant price of $12.75 were
granted on January 22, 1997. The options become exercisable at the rate of 20%
annually for five years during such periods of service as an employee, officer,
or director, and expire after ten years. Accelerated vesting may occur in
certain circumstances as disclosed in the plan documents. Options are
exercisable at the fair value on the date of grant. There were no additional
options granted, exercised or forfeited during 2000 or 1999. At September 30,
2000 and 1999, 30,952 and 19,186 options, respectively, were exercisable at the
weighted average exercise price of $12.75 per share.
Grants of options under the plan are accounted for following Accounting
Principles Board (APB) Opinion No. 25 and related interpretations. Accordingly,
no compensation cost has been recorded. In 1995, the Financial Accounting
Standards Board issued Standard No. 123, which requires disclosures concerning
the fair value of options and encourages accounting recognition for options
using the fair value method. The Company has elected to apply the
disclosure-only provisions of the Statement.
However, had compensation cost been recorded based on the fair value ($4.17 per
share) of awards at the grant date, the pro forma impact on the Company's net
income and net income per common share would have been to reduce such amounts by
approximately $28,000 and $0.02 per basic and dilutive share, respectively, for
2000 and 1999. The fair value of each grant is estimated at the grant date using
the Black-Scholes option-pricing model with the following assumptions for 1997
when the options were granted: dividend rate of 2.75%; risk-free interest rate
of 5.87%; expected lives of 10 years; and price volatility of 26.51%.
NOTE 9. EMPLOYEE STOCK OPTION PLAN (ESOP)
The Association has an ESOP to benefit substantially all employees. As a part of
the Association's initial public offering in April 1996, the ESOP purchased
41,200 shares of common stock with the proceeds from a loan received from a
third party financial institution. The note requires quarterly principal
payments of $14,714 plus interest at the lending institution's prime rate (9.50%
at September 30, 2000) until March, 2003. The Association is expected to make
quarterly contributions to the ESOP in amounts sufficient to allow the ESOP to
make its scheduled principal and interest payments on the note. The ESOP shares
are pledged as collateral for the debt. Dividends on unallocated shares may be
used by the ESOP to repay the debt and are not reported as dividends in the
financial statements. As the debt is repaid, shares are released from collateral
and allocated to active employees, based on the proportion of debt service paid
in the year. The debt of the ESOP is recorded as debt in the Company's
accompanying consolidated balance sheet.
At September 30, 2000, future principal payments are due as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ended:
September 30, 2001 $ 58,856
September 30, 2002 58,856
September 30, 2003 29,438
-----------------
$ 147,150
=================
</TABLE>
30
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9. EMPLOYEE STOCK OPTION PLAN (ESOP) (CONTINUED)
The Association makes cash contributions to the ESOP sufficient to amortize the
debt, but records expense based upon the fair value of the shares allocated to
plan participants each year. The difference between the cash contributions and
the amount expensed is credited or charged to additional paid-in capital. ESOP
compensation expense was $76,700 and $76,150 for the years ended September 30,
2000 and 1999, respectively.
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 initial purchase of common stock by the
ESOP is treated as a reduction in stockholder's equity and as a liability for
the put option. The liability for the put option has been reduced to the extent
of the unearned ESOP shares at the end of each fiscal year end. The liability
for the put option at September 30, 2000, based upon the fair value of the ESOP
shares at that time of $12.00, was $347,250. The liability for the put option
will fluctuate based upon the fair value of the shares with the resulting
increase or decrease reflected as change to retained earnings.
Shares of the Company held by the ESOP at September 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
Shares held by the ESOP 41,200 41,200
Shares released for allocation (26,486) (20,600)
--------------- ---------------
Unreleased (unearned) shares 14,714 20,600
=============== ===============
Fair value of unreleased (unearned) shares $176,550 $290,950
=============== ===============
</TABLE>
NOTE 10. INCOME TAXES
At September 30, 2000 and 1999, retained earnings contain $1,434,000 in tax
related bad debt reserves for which no deferred income taxes have been provided
because the Association does not intend to use the reserves for purposes other
than to absorb losses. The balance represents the Association's bad debt
reserves at September 30, 1988, and the unrecorded deferred income taxes amount
to approximately $545,000. If amounts which qualified as bad debt deductions are
used for purposes other than to absorb losses or adjustments arising from the
carryback of net operating losses, income taxes may be imposed at the then
existing rates.
The Association also must recapture its tax bad debt reserves which have
accumulated since 1988 (the "base year") amounting to approximately $189,000.
The tax associated with the recaptured reserves is approximately $72,000 and is
being paid out over a six year period beginning with the 1999 year. At September
30, 2000, the remaining liability associated with the recaptured reserves is
approximately $47,900. Deferred income taxes have been established for the taxes
associated with the recaptured reserves.
31
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Income tax expense differs from the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
2000 1999
----------------- -----------------
<S> <C> <C>
Statutory federal income tax rate
34.00 % 34.00%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit 3.65 3.15
Other, net
(0.11) 0.99
----------------- -----------------
Effective tax rate
37.54 % 38.14%
================= =================
</TABLE>
Deferred income taxes consist of the following components as of September 30,
2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
<S> <C> <C>
Deferred tax assets:
Loan loss allowances $ 106,400 $ 99,950
Deferred loan fees 15,600 20,800
Health insurance accrual 18,150 15,850
Retirement plan accrual 82,300 74,250
----------------- ------------------
222,450 210,850
----------------- ------------------
Deferred tax liabilities:
Tax bad debt reserves 47,900 59,900
Excess accumulated tax depreciation 23,350 21,950
Unrealized net appreciation, investments 304,150 289,800
----------------- ------------------
375,400 371,650
----------------- ------------------
$ (152,950) $ (160,800)
================= ==================
</TABLE>
NOTE 11. CAPITAL
Concurrent with the reorganization in 1996, the Association established a
liquidation account in an amount equal to its net worth as reflected in its
latest statement of financial condition used in its final offering circular. The
liquidation account will be maintained for the benefit of eligible deposit
account holders and supplemental eligible deposit account holders who continue
to maintain their deposit accounts in the Association after the reorganization.
Only in the event of a complete liquidation will eligible deposit account
holders and supplemental eligible deposit account holders be entitled to receive
a liquidation distribution from the liquidation account adjusted for
transactions since the reorganization. Dividends paid by the Association to the
Company subsequent to the reorganization cannot be paid from this liquidation
account.
Subject to applicable law, the Boards of Directors of the Company and the
Association may each provide for the payment of dividends. Future declarations
of cash dividends, if any, by the Company may depend upon dividend payments by
the Association to the Company. Subject to regulations promulgated by the OTS,
the Association will not be permitted to pay dividends on its common stock if
its net worth would be reduced below the amount required for the liquidation
account or its minimum regulatory capital requirements. In addition, as an
institution which is considered well capitalized under the OTS's Prompt
Corrective Action regulations, the Association may pay a cash dividend to Wake
Forest Bancshares, Inc., with prior notification to the OTS, if the total amount
of all capital distributions (including the proposed distribution) for the
applicable calendar year does not exceed the Association's net income for the
year plus retained net income (net income minus capital distributions) for the
preceding two years. However, the OTS retains the right to deny any capital
distribution if it raises safety and soundness concerns.
32
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Association is subject to the capital requirements established by the Office
of Thrift Supervision (OTS). The OTS requires that the Association meet three
separate capital standards; tangible capital of at least 1.5% of total assets,
core capital of at least 3% of total assets, and risk-based capital of at least
8% of risk-weighted assets. At September 30, 2000, the Association met and
exceeded all of the capital requirements described above as shown in the table
below:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
Requirement Requirement Requirement
------------------ ------------------ ------------------
<S> <C> <C> <C>
Equity (GAAP) $ 14,171,550 $ 14,171,550 $ 14,171,550
Equity of Wake Forest Bancshares (276,350) (276,350) (276,350)
Net unrealized gain on investment securities (496,250) (496,250) (496,250)
Supplemental capital items:
General valuation allowances -- -- 280,000
------------------ ------------------ ------------------
Regulatory capital 13,398,950 13,398,950 13,678,950
Minimum capital requirement 1,237,000 2,474,050 4,685,300
------------------ ------------------ ------------------
Excess regulatory capital $ 12,161,950 $ 10,924,900 $ 8,993,650
================== ================== ==================
Total assets at September 30, 2000 less fair
market value adjustment of securities $ 82,467,950 $ 82,467,950 --
Risk-weighted assets at September 30, 2000 -- -- $ 58,566,350
Capital as a percentage of assets:
Actual 16.25% 16.25% 23.36%
Required
1.50 3.00 8.00
------------------ ------------------ -----------------
Excess 14.75% 13.25% 15.36%
================== ================== =================
</TABLE>
Under the OTS prompt corrective action regulations, a savings association is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted assets is at
least 6.0%, and its ratio of core capital to total average assets is at least
5.0%. The Association meets all of the above requirements and is considered to
be well capitalized under the prompt corrective action regulations.
On June 21, 1999, the Board of Directors of the Company approved the adoption of
stock repurchase program authorizing the Company to repurchase up to 60,793
shares or 5.00% of its outstanding common stock. The repurchases are made
through registered broker-dealers from shareholders in open market purchases at
the discretion of management. The Company intends to hold the shares repurchased
as treasury shares, and may utilize such shares to fund stock benefit plans or
for any other general corporate purpose as permitted by applicable law. At
September 30, 2000, the Company had repurchased 44,800 shares of its common
stock. The program continues until terminated by the Board of Directors.
33
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12. CONCENTRATION OF CREDIT RISK AND OFF-BALANCE-SHEET RISK
The Association is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and the
undisbursed portion of construction loans. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the statement of financial condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Association
has in particular classes of financial instruments.
The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At September 30, 2000
the Association had outstanding loan commitments amounting to $2,073,000. The
undisbursed portion of construction loans amounted to $11,708,850 and unused
lines of credit amounted to $3,258,000 at September 30, 2000.
The Association evaluates each customer's credit worthiness on a case-by-case
basis. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Association upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held is the underlying real
estate.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at September 30, 2000 and 1999. See Note 1
for a description of the Company's accounting policies and the limitations of
its disclosures in reporting on the fair value of its financial instruments.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------
2000 1999
------------------------------------------ ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------- -------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 6,735,850 $ 6,735,850 $ 6,501,050 $ 6,501,050
Investment securities 3,065,550 3,065,550 3,527,750 3,527,750
FHLB stock 290,700 290,700 280,400 280,400
Loans receivable 72,564,150 72,292,850 61,467,300 61,658,800
Accrued interest receivable 126,800 126,800 101,850 101,850
Financial liabilities:
Deposits 67,874,400 67,730,450 57,653,900 58,284,400
Note payable - ESOP 147,150 147,150 206,000 206,000
</TABLE>
34
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14. MUTUAL HOLDING COMPANY FINANCIAL DATA
The MHC owns approximately 54% of the Company's common stock. 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. The mutual holding company is registered as a savings
and loan holding company and is subject to regulation, examination, and
supervision by the OTS.
The following is a summary of the condensed financial statements of Wake Forest
Bancorp, M.H.C. as of and for the periods indicated:
Condensed Balance Sheets
September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 878,400 $ 691,000
Accrued dividends receivable, subsidiary 72,200 76,200
Investment in Wake Forest Bancshares, Inc. 5,137,500 4,726,850
----------- ----------
Total assets $ 6,092,100 $5,494,050
=========== ==========
Liabilities:
Accounts payable and accrued expenses $ -- $ 11,200
----------- ----------
Equity:
Capitalization by Wake Forest Federal 106,350 106,350
Equity in Wake Forest Bancshares, Inc. 3,854,700 3,854,700
Retained earnings 2,131,050 1,521,800
----------- ----------
Total equity 6,092,100 5,482,850
----------- ----------
Total liabillity and equity $ 6,092,100 $5,494,050
=========== ==========
</TABLE>
Condensed Balance Sheets
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
<S> <C> <C>
Interest income $ 40,250 $ 30,400
Equity in earnings of subsidiary 715,450 627,300
Accounting and tax expense (17,850) (19,800)
Attorney Fees (20,000) (43,750)
Director's fees (91,650) (84,950)
Other (16,950) (23,400)
----------- ----------
$ 609,250 $ 485,800
=========== =========
</TABLE>
35
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14. MUTUAL HOLDING COMPANY FINANCIAL DATA (CONTINUED)
Condensed Statements of Cash Flows
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Cash Flows from Operating Activities: 2000 1999
-------------------- --------------------
<S> <C> <C>
Net income $ 609,250 $ 485,800
Noncash income items:
Equity in earnings of Wake Forest Federal (715,450) (627,300)
Change in assets and liabilities:
Decrease in investment in subsidiary - dividends 304,800 304,900
Increase (decrease) in accounts payable (11,200) 700
-------------------- --------------------
Net cash provided by operating activities 187,400 164,100
Cash and cash equivalents- beginning 691,000 526,900
-------------------- --------------------
Cash and cash equivalents- ending $ 878,400 $ 691,000
==================== ====================
</TABLE>
NOTE 15. PARENT COMPANY ONLY FINANCIAL DATA
The following is a summary of the condensed financial statements of Wake Forest
Bancshares, Inc. for the periods indicated:
Condensed Balance Sheets
September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 279,700 522,900
Accrued dividends receivable, Wake Forest Federal 140,550 143,700
Investment in Wake Forest Federal 13,738,300 12,982,500
-------------------- --------------------
$ 14,158,550 $ 13,649,100
==================== ====================
Liabilities:
Accrued dividends payable $ 140,550 $ 143,700
Income taxes payable 3,350 2,550
-------------------- --------------------
143,900 146,250
-------------------- --------------------
Equity:
Common stock 12,150 12,150
Additional paid-in capital 13,715,850 13,715,850
Retained earnings 892,100 126,500
Treasury stock acquired (605,450) (351,650)
-------------------- --------------------
14,014,650 13,502,850
-------------------- --------------------
$ 14,158,550 $ 13,649,100
==================== ====================
</TABLE>
36
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY ONLY FINANCIAL DATA (CONTINUED)
Condensed Statements of Income
For the Years Ended September 30, 2000 and from May 7, 1999 to
September 30, 1999
<TABLE>
<CAPTION>
2000 1999
---------------------- ----------------------
<S> <C> <C>
Interest income $ 16,800 $ 6,550
Equity in earnings of Wake Forest Federal 1,321,100 412,100
Miscellaneous expense (850) (50)
Income tax expense (6,150) (2,500)
---------------------- ----------------------
Net income $ 1,330,900 $ 416,100
====================== ======================
</TABLE>
Condensed Statement of Cash Flows
For the Year Ended September 30, 2000 and Period from May 7, 1999 to
September 30, 1999
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,330,900 $ 416,100
Noncash income items:
Equity in earnings of Wake Forest Federal (1,321,100) (412,100)
Change in assets and liabilities:
(Increase) decrease in accrued dividends receivable 3,150 (143,700)
Increase (decrease) in accrued dividends payable (3,150) 143,700
Increase in income tax payable 800 2,550
------------------- -------------------
Net cash provided by operating activities 10,600 6,550
------------------- -------------------
Cash Flows from Financing Activities:
Treasury stock acquired (253,800) (351,650)
Dividends received from Wake Forest Federal 560,350 1,157,600
Dividends paid (560,350) (289,600)
------------------- -------------------
Net cash provided from financing activities (253,800) 516,350
------------------- -------------------
Increase (decrease) in cash (243,200) 522,900
Cash and cash equivalents- beginning 522,900 --
------------------- -------------------
Cash and cash equivalents- ending $ 279,700 $ 522,900
=================== ===================
</TABLE>
NOTE 16. RECLASSIFICATIONS
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform with classifications used in 2000.
37
<PAGE>
WAKE FOREST BANCSHARES, INC.
COMMON STOCK INFORMATION
------------------------------------------------------------------------------
The Company's stock (previously as Wake Forest Federal Savings and Loan
Association) began trading on April 3, 1996. There are 1,171,062 shares of
common stock outstanding (net of treasury shares) of which approximately 42%
were held by 265 stockholders of record on September 30, 2000. The MHC, ESOP and
RRP Trust hold approximately 58%. The Company's stock is not actively traded,
although the stock is quoted on the OTC Electronic Bulletin Board under the
symbol "WAKE." The table below reflects the stock trading and dividend payment
frequency of the Company's stock for the years ended September 30, 2000 and
1999, based upon information provided to management of the Company by certain
securities firms effecting transactions in the Company's stock on an agency
basis.
<TABLE>
<CAPTION>
Stock Price
---------------------------
Dividends High Low
------------- ------------- -----------
<S> <C> <C> <C>
2000
----
First Quarter $ 0.12 $ 14 1/8 $ 13
Second Quarter 0.12 14 12 1/2
Third Quarter 0.12 12 3/4 10
Fourth Quarter 0.12 12 3/4 11 7/8
1999
----
First Quarter $ 0.12 $ 16 $ 10 1/2
Second Quarter 0.12 15 11
Third Quarter 0.12 13 1/4 11 1/4
Fourth Quarter 0.12 14 7/8 11 3/4
</TABLE>
38
<PAGE>
WAKE FOREST BANCSHARES, INC.
CORPORATE INFORMATION
CORPORATE INFORMATION
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
Anna O. Sumerlin Carlton E.Chappell Robert C. White
President and CEO Vice President/Secretary & Vice President and CFO
Treasurer
DIRECTORS
Howard Brown Rodney M. Privette R. W. Wilkinson III
Chairman of the Board Owner of Insurance Agency Vice Chairman of the Board
Former Owner of Former Managing Officer
Oil Distribution Company of Wake Forest Federal
John D. Lyon Paul Brixhoff Anna O. Sumerlin
Owner of Appraisal Company Former Owner of Auto CEO of the Company and
Supply Company Wake Forest Federal
Harold R. Washington William S. Wooten Leelan A. Woodlief
Former Owner of Dentist Owner of Farm Supply
Automobile Distributorship Company
STOCK TRANSFER AGENT SPECIAL LEGAL COUNSEL INDEPENDENT AUDITORS
-------------------- --------------------- --------------------
ChaseMellon Shareholder Services Thacher, Proffitt & Wood Dixon Odom PLLC
P.O. Box 3315 1700 Pennsylvania Ave. N.W. 408 Summit Drive
South Hackensack, NJ 07606 Washington, DC 20006 PO Box 70
Sanford, NC 27331
</TABLE>
ANNUAL MEETING
The 2001 annual meeting of stockholders of Wake Forest
Bancshares, Inc. will be held at 2:00 pm on Tuesday,
February 20, 2001 at the Wake Forest Police and Justice
Center at 401 Elm Avenue, Wake Forest, N.C.
FORM 10-KSB
A COPY OF THE ANNUAL REPORT ON FORM 10-KSB AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED
WITHOUT CHARGE TO STOCKHOLDERS UPON WRITTEN REQUEST TO WAKE
FOREST BANCSHARES, INC., PO BOX 1167, WAKE FOREST, N.C.
27588.
39
