FORM 10-QSB - QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-25999
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WAKE FOREST BANCSHARES, INC.
----------------------------
(Exact name of small business issuer as specified in its charter)
United States of America 56-2131079
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
302 South Brooks Street
Wake Forest, North Carolina 27587
---------------------------------
(Address of principal executive offices)
(919)-556-5146
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(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 1, 2000 there were
issued and outstanding 1,171,062 shares of the Issuer's common stock, $.01 par
value
Transitional Small Business Disclosure Format: Yes____ No [X]
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Pages
-----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition at June 30, 2000 (unaudited) and September 30, 1999 1
Consolidated Statements of Income for the three months ended June 30, 2000 and June 30, 1999 (unaudited) 2
Consolidated Statements of Income for the nine months ended June 30, 2000 and June 30, 1999 (unaudited) 3
Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2000
and June 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended June 30, 2000 and June 30, 1999 (unaudited) 5 - 6
Notes to consolidated financial statements (unaudited) 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2000 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
ASSETS 2000 1999
----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash and short term cash investments $ 8,129,800 $ 6,501,050
Investment securities:
Available for sale, at estimated market value 2,840,150 3,527,750
FHLB stock 290,700 280,400
Loans receivable, net 69,259,850 61,467,300
Accrued interest receivable 133,600 101,850
Property and equipment, net 440,700 452,000
Prepaid expenses and other assets 64,200 65,200
------------ ------------
Total Assets $ 81,159,000 $ 72,395,550
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 66,024,400 $ 57,653,900
Accrued expenses and other liabilities 578,350 387,350
Dividends payable 140,900 143,700
Note payable- ESOP 161,850 206,000
Deferred income taxes 70,750 160,800
Redeemable common stock held by the ESOP
net of unearned ESOP shares 327,400 375,950
------------ ------------
Total liabilities 67,303,650 58,927,700
------------ ------------
Stockholders' equity:
Preferred stock, authorized 1,000,000 shares, none issued
Common stock, par value $ .01, authorized 5,000,000 shares,
issued 1,215,862 shares 12,150 12,150
Additional paid-in capital 4,899,400 4,843,600
Accumulated other comprehensive income 356,500 472,900
Retained earnings, substantially restricted 9,155,300 8,490,850
Less: Treasury stock acquired (568,000) (351,650)
------------ ------------
Total stockholders' equity 13,855,350 13,467,850
------------ ------------
Total liabilities and stockholders' equity $ 81,159,000 $ 72,395,550
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Interest and dividend income:
Loans $1,655,650 $1,375,150
Investment securities 38,950 46,300
Short-term cash investments 84,100 115,950
---------- ----------
Total interest income 1,778,700 1,537,400
---------- ----------
Interest expense:
Interest on deposits 867,500 726,050
Interest on ESOP debt 4,200 4,650
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Total interest expense 871,700 730,700
---------- ----------
Net interest income before provision for loan losses 907,000 806,700
Provision for loan losses 9,500 -
---------- ----------
Net interest income after provision for loan losses 897,500 806,700
---------- ----------
Noninterest income:
Service charges and fees 11,700 9,200
Other 100 150
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11,800 9,350
---------- ----------
Noninterest expense:
Compensation and benefits 237,000 188,900
Occupancy 11,050 7,250
Federal insurance and operating assessments 9,200 15,100
Data processing and outside service fees 24,750 27,250
Other operating expense 78,850 93,450
---------- ----------
360,850 331,950
---------- ----------
Income before income taxes 548,450 484,100
Income taxes 207,700 185,250
---------- ----------
Net income $ 340,750 $ 298,850
========== ==========
Basic earnings per share $ 0.30 $ 0.25
========== ==========
Diluted earnings per share $ 0.30 $ 0.25
========== ==========
Dividends paid per share $ 0.12 $ 0.12
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $4,636,300 $4,065,650
Investment securities 127,150 120,350
Short-term cash investments 198,800 462,400
---------- ----------
Total interest income 4,962,250 4,648,400
---------- ----------
Interest expense:
Interest on deposits 2,346,100 2,286,300
Interest on ESOP debt 12,700 14,800
---------- ----------
Total interest expense 2,358,800 2,301,100
---------- ----------
Net interest income before provision for loan losses 2,603,450 2,347,300
Provision for loan losses 25,000 -
---------- ----------
Net interest income after provision for loan losses 2,578,450 2,347,300
---------- ----------
Noninterest income:
Service charges and fees 33,400 25,400
Other 2,900 3,250
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36,300 28,650
---------- ----------
Noninterest expense:
Compensation and benefits 646,150 529,800
Occupancy 35,250 23,550
Federal insurance and operating assessments 33,000 45,000
Data processing and outside service fees 78,700 79,150
Other operating expense 242,450 273,850
---------- ----------
1,035,550 951,350
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Income before income taxes 1,579,200 1,424,600
Income taxes 589,050 541,450
---------- ----------
Net income $ 990,150 $ 883,150
========== ==========
Basic earnings per share $ 0.86 $ 0.75
========== ==========
Diluted earnings per share $ 0.86 $ 0.75
========== ==========
Dividends paid per share $ 0.36 $ 0.36
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Three Months Ended June 30, 2000 and 1999
Net income $ 340,750 $ 298,850
--------- ---------
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during the period (31,150) (8,050)
Less: reclassification adjustment for gains included in
net income - -
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Other comprehensive income (loss) (31,150) (8,050)
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Comprehensive income $ 309,600 $ 290,800
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Nine Months Ended June 30, 2000 and 1999
Net income $ 990,150 $ 883,150
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Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period (116,400) 56,850
Less: reclassification adjustment for gains included in
net income - -
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Other comprehensive income (loss) (116,400) 56,850
--------- ---------
Comprehensive income $ 873,750 $ 940,000
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 990,150 $ 883,150
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 25,800 24,000
Amortization of discounts/premiums on investment securities (100) 50
Provision for loan losses 25,000 -
Deferred income taxes (18,700) (10,100)
ESOP contribution expense charged to paid-in capital 13,100 9,600
Amortization of unearned ESOP shares and deferred stock
awards 86,800 86,650
Changes in assets and liabilities:
Prepaid expenses and other assets 1,000 (16,400)
Accrued interest receivable (31,750) (98,200)
Accrued expenses and other liabilities 191,000 181,950
------------ ------------
Net cash provided by operating activities 1,282,300 1,060,700
------------ ------------
Cash Flows From Investing Activities
Net increase in loans receivable (7,817,550) (4,745,850)
Purchase of available for sale investment securities - (2,250,000)
Maturity of available for sale investment securities 500,000 1,000,000
Redemption (purchase) of FHLB stock (10,300) 83,700
Purchase of property and equipment (14,500) (22,100)
------------ ------------
Net cash used in investing activities (7,342,350) (5,934,250)
------------ ------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits 8,370,500 (2,313,850)
Principal payments on ESOP debt (44,150) (44,150)
Purchase of treasury stock (216,350) -
Dividends paid (421,200) (429,250)
------------ ------------
Net cash provided by (used in) financing activities 7,688,800 (2,787,250)
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,628,750 (7,660,800)
Cash and cash equivalents:
Beginning 6,501,050 15,311,350
------------ ------------
Ending $ 8,129,800 $ 7,650,550
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest $ 2,362,850 $ 2,300,050
=========== ===========
Cash payments of taxes $ 605,100 $ 531,300
=========== ===========
Supplemental Disclosure of Noncash transactions:
Change in fair value of ESOP shares (charged) credited to
retained earnings in association with the ESOP put option $ 92,700 $ 41,200
=========== ===========
Change in unrealized gain (loss) on available for sale securities,
net of tax effect $ (116,400) $ 56,850
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS
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
and 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).
ORGANIZATIONAL STRUCTURE
The Company is majority owned by the 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. Initially, the
MHC's principal assets consisted of 635,000 shares of the Association's common
stock (now converted to the Company's common stock) and $100,000 in cash
received from the Association as initial capital. 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 54.1% 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 Board of Directors of the Association capitalized the Company with $100,000.
Future capitalization of the Company will depend upon dividends declared by the
Association based on future earnings, or the raising of additional capital by
the Company through a future issuance of securities, debt or by other means. The
Board of Directors of the Company has no present plans or intentions with
respect to any future issuance of securities or debt at this time.
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.
7
<PAGE>
Wake Forest Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 3. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (except for the
consolidated statement of financial condition at September 30, 1999, which is
audited) have been prepared in accordance with generally accepted accounting
principles for interim financial information and Regulation S-B. Accordingly,
they do not include all of the information required by generally accepted
accounting principles for complete financial statements. Because the Company was
incorporated on May 7, 1999, the Company's financial results on or after that
date are reported on a consolidated basis with the operating results of the
Association, its wholly-owned subsidiary. Financial results reported prior to
May 7, 1999 include only the activities of the Association. In the opinion of
management, all adjustments (none of which were other than normal recurring
accruals) necessary for a fair presentation of the financial position and
results of operations for the periods presented have been included. The results
of operations for the three and nine month periods ended June 30, 2000 are not
necessarily indicative of the results of operations that may be expected for the
Company's fiscal year ending September 30, 2000.
The accounting policies followed are as set forth in Note 1 of the Notes to
Consolidated Financial Statements in the Company's September 30, 1999 Annual
Report to Stockholders.
NOTE 4. DIVIDENDS DECLARED
On June 19, 2000, the Board of Directors of the Company declared a dividend of
$0.12 a share for stockholders of record as of June 30, 2000 and payable on July
10, 2000. The dividends declared were accrued and reported as dividends payable
in the June 30, 2000 Consolidated Statement of Financial Condition. Wake Forest
Bancorp, Inc., the mutual holding company, did not waive the receipt of
dividends declared by the Company.
8
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. EARNINGS PER SHARE
Statement of Financial Accounting Standard 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. This presentation has been adopted for all periods presented. There were
no adjustments required to net income for any period in the computation of
diluted earnings per share. The reconciliation of weighted average shares
outstanding for the computation of basic and diluted earnings per share for the
three and nine month periods ended June 30, 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
Three Months Ended June 30: 2000 1999
--------- ---------
<S> <C> <C>
Weighted average shares outstanding for Basic EPS 1,149,946 1,180,558
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans - -
--------- ---------
Weighted average shares outstanding for diluted EPS 1,149,946 1,180,558
========= =========
Nine Months Ended June 30:
Weighted average shares outstanding for Basic EPS 1,154,275 1,177,984
Plus incremental shares from assumed issuances of shares
pursuant to stock option and stock award plans 524 -
--------- ---------
Weighted average shares outstanding for diluted EPS 1,154,799 1,177,984
========= =========
</TABLE>
9
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND SEPTEMBER 30, 1999:
Total assets increased by $8.8 million to $81.2 million at June 30, 2000 from
$72.4 million at September 30, 1999. Total assets increased during the nine
months ended March 31, 2000 primarily due to an increase in deposits of
approximately $8.4 million and internally generated earnings. An increase in net
loans receivable of $7.8 million during the period from October 1, 1999 to June
30, 2000 was funded by utilizing the deposit growth. Deposit growth, which
exceeded loan growth during the nine month period ended June 30, 2000,
translated into an increase in cash and short term cash investments of $1.6
million during the same period.
Net loans receivable increased by $7.8 million to $69.3 million at June 30, 2000
from $61.5 million at September 30, 1999. The increase occurred primarily due to
continued strong demand for residential loans in and around Wake Forest.
Management believes that its loan portfolio has potential for continued growth
because the Association operates in lending markets that have had sustained
consistent loan demand over the past several years. Wake Forest Federal is
located in the town of Wake Forest, which is approximately 20 miles from Raleigh
and the Research Triangle Park (the "Triangle"), areas which have grown
substantially over the last decade. The current trend is for increased
residential development in and around Wake Forest for individuals and families
which work in the Triangle. However, there can be no assurances that such trends
and loan demand can or will continue. For example, loan demand during the
current quarter was not as strong as that which occurred during the second
quarter of this year, primarily due to rising interest rates.
Investment securities decreased by $677,300 to $3.1 million at June 30, 2000
from $3.8 million at September 30, 1999. During the nine months ended June 30,
2000, the Association received $500,000 from maturing investments and purchased
$10,300 in additional FHLB stock. The remaining decrease is attributable to a
decrease in the fair value of the Association's available for sale investment
securities portfolio. Growth within the Association's investment portfolio has
been limited due to consistent loan demand. The Association's investment
portfolio consists of U.S. Agency securities, FHLMC common stock, and stock in
the Federal Home Loan Bank.
Deposits increased by $8.4 million to $66.0 million at June 30, 2000 from $57.6
million at September 30, 1999. The increase is part of a relatively steady trend
in deposit growth over the last few years caused primarily by economic growth in
the area and competitive pricing. The Association's current policy is to
aggressively price certificates of deposit to continue deposit growth. This
policy will continue as long as loan demand remains strong.
The Company had no borrowings outstanding during the quarter other than the loan
incurred by its Employee Stock Ownership Plan (the "ESOP") for the purchase of
41,200 shares of the Company's common stock. The ESOP borrowed $412,000 for its
purchase of stock from an outside financial institution on April 3, 1996. During
the first nine months of its fiscal year, the Association made principal
payments totaling $44,150 plus interest on the ESOP note, reducing the
outstanding balance of the note to $161,850 at June 30, 2000. The Association is
committed to making retirement plan contributions sufficient to amortize the
debt over its seven year term, and as such, has reported the debt on its balance
sheet.
10
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND SEPTEMBER 30, 1999
(CONTINUED):
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 to the participants. The put option liability
can be reduced by the unearned ESOP shares, the cost of shares not currently
eligible for allocation to plan participants. The Company has recorded a net
liability of $327,400 at June 30, 2000 for the ESOP put option.
On June 21, 1999, the Board of Directors of the Company approved the adoption of
a stock repurchase program authorizing the Company to repurchase up to 60,793
shares or 5.00% of its outstanding common stock. The repurchases are to be 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 purposes permitted by applicable law. At June
30, 2000 the Company had repurchased 41,800 shares of its common stock. The
program continues until terminated by the Board of Directors. Retained earnings
increased by $664,450 to $9.2 million at June 30, 2000 from $8.5 million at
September 30, 1999. The increase is attributable to the Company's earnings
during the nine month period ended June 30, 2000, reduced by $418,400 in
dividends declared during the same period, and a $92,700 credit to retained
earnings to reflect the change in the fair value of the ESOP shares subject to
the put option. At June 30, 2000, the Company's regulatory capital amounted to
$13.5 million, which as a percentage of adjusted total assets was 16.75%, and
considerably in excess of the regulatory capital requirements at such date.
ASSET QUALITY:
The Association's level of non-performing loans, defined as loans past due 90
days or more, as a percentage of loans outstanding, was 0.04% and 0.48% at June
30, 2000 and September 30, 1999, respectively. At June 30, 2000, the Association
had no other non-performing assets, such as foreclosed real estate or impaired
investments. During the three and nine month periods ended June 30, 2000 and
1999, the Association's level of non-performing loans remained consistently low
in relation to prior periods and total loans outstanding. However, during the
nine months ended June 30, 2000, the Association charged off $17,300 against its
loan loss allowance for a non-performing loan which was subsequently paid off
during the period. Management believes that its general valuation loan loss
allowance of $270,700 at June 30, 2000 is adequate to absorb inherent losses on
existing loans that may become uncollectible. The Association has not recorded
any specific allowances for non-performing loans at June 30, 2000.
11
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
2000 AND 1999:
GENERAL. Net income for the three month period ended June 30, 2000 was $340,750
($0.30 per share), or $41,900 more than the $298,850 ($0.25 per share) earned
during the same period in 1999. Net income for the nine month period ended June
30, 2000 of $990,150 ($0.86 per share) exceeded net income for the same period
in 1999 of $883,150 ($0.75 per share) by $107,000. As discussed below, changes
in net interest income between the comparable periods was primarily responsible
for the increase in net income.
INTEREST INCOME. Interest income increased by $241,300 from $1,537,400 for the
three months ended June 30, 1999 to $1,778,700 for the three months ended June
30, 2000. Interest income increased by $313,850 from $4,648,400 for the nine
months ended June 30, 1999 to $4,962,250 for the nine months ended June 30,
2000. The increase was attributable primarily to an overall increase in the
yield on interest-earning assets, which was 0.56% and 0.50% higher during the
three and nine month periods ended June 30, 2000, respectively, than the
comparable periods in 1999. An increase in the volume of interest earning assets
of approximately $6.2 million during the current quarter over the same period a
year earlier also contributed to the increase in interest income for the
quarter. The increase in yield occurred primarily because the Association had a
higher percentage of outstanding loans in the overall mix of interest earning
assets during the current nine month period as compared to the same period in
1999. The Association's loan portfolio yield is considerably higher than the
yield on its investment portfolio and other shorter-term liquid assets. The rise
in general market rates during the past nine months also impacted the
Association's yields. The overall yield on interest earning assets was 8.65% and
8.50% for the three and nine months ended June 30, 2000, respectively, as
compared to 8.09% and 8.00% for the comparable periods in 1999.
INTEREST EXPENSE. Interest expense increased by $141,000 from $730,700 for the
three months ended June 30, 1999 to $871,700 for the three months ended June 30,
2000. Interest expense increased by $57,700 from $2,301,100 for the nine months
ended June 30, 1999 to $2,358,800 for the nine months ended June 30, 2000. The
increase in interest expense for the current quarter was due to both a $6.4
million increase in the volume of interest bearing liabilities outstanding and a
0.59% increase in the Association's cost of funds during the three months ended
June 30, 2000 as compared to the same period in 1999. The increase in interest
expense for the nine months ended June 30, 2000 as compared with the same period
in 1999 was due primarily to a 0.14% increase in the Association's cost of funds
between the periods. The Association's cost of funds was 5.52% and 4.93% for the
three months ended June 30, 2000 and 1999, respectively. The Association's cost
of funds was 5.22% and 5.08% for the nine months ended June 30, 2000 and 1999,
respectively.
NET INTEREST INCOME. Net interest income increased by $100,300 from $806,700 for
the three months ended June 30, 1999 to $907,000 for the three months ended June
30, 2000. Net interest income increased by $256,150 from $2,347,300 for the nine
months ended June 30, 1999 to $2,603,450 for the nine months ended June 30,
2000. The increase in net interest income during the current periods as compared
to prior periods resulted primarily from an increase in the volume of interest
earning assets coupled with a increase in the Association's yields during the
three and nine months ended June 30, 2000 as compared to the same periods last
year.
12
<PAGE>
WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES. The Association provided loan loss provisions of
$9,500 and $25,000 for the current quarter and nine month period ended June 30,
2000, respectively. No provisions for loan losses were made during the three and
nine month periods ended June 30, 1999. Provisions, which are charged to
operations, and the resulting loan loss allowances are amounts the Association's
management believes will be adequate to absorb potential losses on existing
loans that may become uncollectible. Loans are charged off against the allowance
when management believes that collectibility is unlikely. The evaluation to
increase or decrease the provision and resulting allowances is based both on
prior loan loss experience and other factors, such as changes in the nature and
volume of the loan portfolio, overall portfolio quality, and current economic
conditions. While Management uses the best information available to make the
evaluations, future adjustments to the allowance may be necessary, if economic
or other conditions differ substantially from the assumptions used.
The Association had non-performing loans of $30,100 at June 30, 2000. At June
30, 1999, the Association had $111,900 in non-performing loans. The Association
charged off $-0- and $17,300 against its loan loss allowance during the three
and nine month periods ended June 30, 2000, respectively. The charge-off, which
occurred during the first quarter of this year, was in connection with a
non-performing loan that was paid off at the same time. The Association did not
charge-off any loans during the three or nine month periods ended June 30, 1999.
NONINTEREST EXPENSE. Noninterest expense increased by $28,900 to $360,850 for
the three month period ended June 30, 2000 from $331,950 for the comparable
quarter in 1999. Noninterest expense increased by $84,200 to $1,035,550 for the
nine month period ended June 30, 2000 from $951,350 for the nine month period
ended June 30, 1999. The only significant dollar increase in any category of
noninterest expense occurred in area of compensation and related benefits, which
increased from $188,900 and $529,800 during the three and nine month periods
ended June 30, 1999, respectively, to $237,000 and $646,150 for the three and
nine month periods ended June 30, 2000, respectively. The increase in
compensation and benefits occurred due to salary increases and an increase in
certain employee benefits, primarily an increase in the cost of health insurance
coverage for the Company's employees.
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WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits.
During the nine month period ended June 30, 2000, cash and short term cash
investments, a significant source of liquidity, increased by approximately $1.6
million. An increase in deposits of $8.4 million during the nine month period
ended June 30, 2000 provided a significant source of cash. In addition, proceeds
from the Association's operations contributed $1.3 million in cash during the
period. Cash was utilized to fund loan originations, which net of repayments,
increased by $7.8 during the nine month period ended June 30, 2000. Net proceeds
from maturing investments also amounted to $489,700 during the current nine
month period, and thus provided cash. Dividends paid to stockholders of $421,200
and repurchases of the Company's common stock amounting to $216,350 represented
additional uses of cash.
As a federally chartered savings association, Wake Forest Federal must maintain
minimum liquidity requirements. The Association's liquidity ratio at June 30,
2000 was in excess of such requirements. Given its excess liquidity and its
ability to borrow from the Federal Home Loan Bank, the Association believes that
it will have sufficient funds available to meet anticipated future loan
commitments, unexpected deposit withdrawals, and other cash requirements.
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 it
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.
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WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE (CONTINUED):
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.
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.
15
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Wake Forest Bancshares, Inc.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings at the present time
other than legal proceedings within the normal course of business to
enforce its security interest in a loan.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. a) exhibits and b) Reports on Form 8-K
a) Exhibit 27.01 - Financial Data Schedule
b) No reports on Form 8-K were filed for the period covered by
this report
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wake Forest Bancshares, Inc.
Dated August 1, 2000 By: Anna O. Sumerlin
-------------------------- ----------------
Anna O. Sumerlin
President and CEO
Dated August 1, 2000 By: Robert C. White
-------------------------- ---------------
Robert C. White
Vice President and CFO
17
