CONTENTS

<TABLE>
<CAPTION>

                                                                                                              PAGE
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<S>                                                                                                           <C>


SELECTED CONSOLIDATED FINANCIAL DATA                                                                             1


-------------------------------------------------------------------------------------------------------------------


REPORT TO STOCKHOLDERS                                                                                           2


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MANAGEMENT'S DISCUSSION AND ANALYSIS                                                                        3 - 16


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INDEPENDENT AUDITOR'S REPORT                                                                                    17


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CONSOLIDATED FINANCIAL STATEMENTS:



   Consolidated statements of financial condition at September 30, 1999 and 1998                                18


   Consolidated statements of income for years ended September 30, 1999 and 1998                                19


   Consolidated statements of stockholders' equity for the years ended

      September 30, 1999 and 1998                                                                          20 - 21


   Consolidated Statements of cash flows for the years ended September 30, 1999 and 1998                   22 - 23


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                 24 - 43


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COMMON STOCK INFORMATION                                                                                        44


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CORPORATE INFORMATION                                                                                           45


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</TABLE>

<PAGE>



                          WAKE FOREST BANCSHARES, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>


                                                                        SEPTEMBER 30,

                                           ------------------------------------------------------------------------
                                                1999          1998          1997           1996          1995

                                           ------------------------------------------------------------------------
                                                                           (IN THOUSANDS)

<S>                                       <C>                 <C>            <C>            <C>            <C>
Financial Condition Data:
Total assets                               $       72,396     $  74,360     $  63,453       $ 61,812       $55,136
Investments (1)                                     9,635        17,528         8,671         12,742         8,140
Loans receivable, net                              61,467        55,363        53,673         47,821        45,377
Deposits                                           57,654        60,038        50,056         48,956        48,090
Stockholders' equity (2)                           13,468        13,167        12,121         11,721         6,893

</TABLE>
<TABLE>
<CAPTION>

                                                                  YEARS ENDED SEPTEMBER 30,

                                           ------------------------------------------------------------------------
                                                1999          1998          1997           1996          1995

                                           ------------------------------------------------------------------------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>                 <C>             <C>             <C>           <C>

Operating Data:
Interest and dividend income               $        6,204     $   5,983       $ 5,183         $4,859        $4,122
Interest expense                                    3,027         3,072         2,590          2,730         2,187
                                           ------------------------------------------------------------------------
Net interest income                                 3,177         2,911         2,593          2,129         1,935
Provision for loan losses                              --            --            --            --            180
Noninterest income                                     42            34            56             37            62
Noninterest expense                                 1,275         1,264         1,195          1,291           665
                                           ------------------------------------------------------------------------
Income before income taxes                          1,944         1,681         1,454            875         1,152
Income tax expense                                    741           620           543            322           431
                                           ------------------------------------------------------------------------
Net income                                 $        1,203     $   1,061       $   911         $  553        $  721
                                           ========================================================================
Basic earnings per share (2)               $         1.02     $    0.91       $  0.79          $0.15        $   --
Diluted earnings per share (2)                       1.02          0.89          0.78           0.15            -
Dividends per share (2)                              0.48          0.46          0.35           0.14            --
Dividend payout ratio (2)                          47.06%        51.69%        44.87%         93.33%            --
Selected Other Data:
Return on average assets (4)                        1.62%         1.28%         1.47%           .92%         1.43%
Return on average equity (4)                        8.83%         7.26%         7.55%          5.78%        11.00%
Interest rate spread (4)                            3.38%         3.39%         3.32%          2.83%         3.28%
Average equity to average assets (4)               18.35%        17.63%        19.47%         15.92%        13.00%
Net interest margin (4)                             4.37%         4.26%         4.32%          3.69%         3.92%
Allowance for loan losses to
  nonperforming loans (3)                          89.51%       196.79%       134.43%        124.64%       189.21%
Nonperforming loans to total loans (3)               .48%          .24%          .36%           .40%          .27%
</TABLE>
     (1) Includes interest earning deposits and investment securities

     (2) On April 3,  1996,  Wake  Forest  Federal  Savings  & Loan  Association
         reorganized from a federal  chartered  mutual savings  association to a
         federal  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
         same 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


On May 7, 1999,  Wake Forest Federal  Savings and Loan  Association  formed Wake
Forest Bancshares, Inc. as a stock holding company parent of the Association. As
a part of the  reorganization,  each outstanding  share of Association's  common
stock was  converted  into one share of common stock of the Company.  Holders of
the Association's  common stock became holders of all of the outstanding  shares
of the  Company's  common  stock.  The Company is majority  owned by Wake Forest
Bancorp,  M.H.C., the Association's  mutual holding company.  The reorganization
into the  "two-tier"  mutual  holding  company  structure  was  approved  by the
Association's stockholders at their annual meeting held on February 23, 1999 and
by regulatory  authorities on April 9, 1999. The new structure  provides us with
enhanced operating opportunities unavailable to a standalone thrift which may be
pursued in the future.

The Board of Directors and management of Wake Forest  Bancshares,  Inc.  primary
commitment is to maximize  shareholder value by building a strong and profitable
institution.   This  report   demonstrates  that  during  1999,  our  continuing
commitment to that goal was achieved.  The Company  reported  record earnings in
1999 of $1.2  million,  or $1.02 per  share.  Both  return on assets  and equity
increased during the current year. The Association's loan portfolio increased by
approximately  11% during the year and asset quality continues to remain strong.
The Company declared regular dividends of $0.12 per share during each quarter of
the current year, a generous 47% of total 1999 earnings.

Loan demand  remains very strong in our primary  lending area of Wake,  Franklin
and  Granville  counties and  management  is committed to continuing to grow the
Association's  loan  portfolio  in a prudent  manner.  We also  intend to remain
competitive   with  our  deposit   products  to  ensure   continued  growth  and
profitability.  We, the  management,  directors and employees,  are committed to
serving our local market as a 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
--------------------------------------------------------------------------------

                                     GENERAL

The Board of  Directors  of Wake Forest  Federal  Savings  and Loan  Association
("Wake Forest Federal" or the  "Association")  approved an Agreement and Plan of
Reorganization  (the "Plan of Reorganization") on November 16, 1998. The Plan of
Reorganization  provided for the establishment of Wake Forest  Bancshares,  Inc.
(the  "Company")  as a stock  holding  company  parent of the  Association.  The
Company is majority owned  (approximately  53%) by Wake Forest Bancorp,  M.H.C.,
(the "MHC") the Association's  mutual holding company.  The reorganization  into
the "two-tier"  mutual holding  company  structure  (the  "Reorganization")  was
approved by the  Association's  stockholders  at their  annual  meeting  held on
February 23, 1999 and by regulatory  authorities on April 9, 1999. The formation
of the Company was consummated on May 7, 1999.

As a part of the Reorganization,  each outstanding share of Association's common
stock was converted into one share of common stock, par value $.01 per share, of
the  Company,  and the  holders of the  Association's  common  stock  became the
holders  of  all of the  outstanding  shares  of  the  Company's  common  stock.
Accordingly,  as a result  of the  Reorganization,  the  Association's  minority
shareholders became minority shareholders of the Company. The Company was formed
solely for the  purpose of becoming a savings  and loan  holding  company and is
regulated  by the  Office of Thrift  Supervision  (the  "OTS").  It had no prior
operating  history.  The  Reorganization  had no impact on the operations of the
Association  or the  MHC.  The  Association  continues  to  operate  at the same
location, with the same management,  and subject to all the rights,  obligations
and  liabilities  of  the  Association   existing   immediately   prior  to  the
Reorganization.

The Board of Directors of the Association capitalized the Company with $100,000.
Future  capitalization of the Company will depend upon dividends declared by the
Association  based on future earnings,  or the raising of additional  capital by
the Company through a future issuance of securities, debt or by other means. The
Board of  Directors  of the  Company  has no present  plans or  intentions  with
respect to any future issuance of securities or debt at this time.  Furthermore,
as long as it is in  existence,  the MHC  must own at  least a  majority  of the
Company's outstanding voting stock.

The  Reorganization was treated similar to a pooling of interests for accounting
purposes.  Therefore,  the  consolidated  capitalization,  assets,  liabilities,
income and expenses of the Company immediately following the Reorganization will
be  substantially  the  same as those of the  Association  immediately  prior to
consummation of the Reorganization,  all of which will be shown on the Company's
books at their historical recorded values.

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 MHC
is  registered  as a  savings  and  loan  holding  company  and  is  subject  to
regulation, examination, and supervision by the OTS.



                                       3
<PAGE>

WAKE FOREST BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                                     GENERAL

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,
Franklin and Granville counties in North Carolina.

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, 1999 and 1998.

                               FINANCIAL CONDITION

Total  assets  decreased  by $2.0 million  during  1999,  from $74.4  million at
September 30, 1998 to $72.4 million at September 30, 1999. The decrease in total
assets resulted  primarily from a decrease of $2.4 million in customer deposits.
Total  investments,  including  short term  interest-earning  deposits  and U.S.
Treasury and agency  obligations  decreased  by $7.9 million  during the current
year,  primarily  as a  result  of the  net  growth  of the  Association's  loan
portfolio  and a  decrease  in  customer  deposits.  The  investment  securities
portfolio,  which  amounted to $3.8  million at  September  30,  1999,  contains
available for sale  securities  with net unrealized  gains of $762,650.  The net
gain reflects a decrease of approximately $6,800 over the net unrealized gain on
available for sale  securities  at September 30, 1998,  primarily as a result of
unrealized losses on certain U.S. Treasury and agency bonds during 1999.

Loans receivable  increased by approximately $6.1 million during 1999 from $55.4
million at  September  30, 1998 to $61.5  million at September  30,  1999.  Loan
demand in the Association's  primary lending markets continues to be strong. The
economic base in the Association's  primary lending areas has increased over the
last  several  years,  mostly  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  decreased  by  approximately  $2.4  million  during 1999 and
totaled $57.7 million at September 30, 1999. The decrease was planned because of
the excess liquidity that the Association held for the greater part of the year.
When  overall  interest  rates  began to rise  during the  current  period,  the
Association  allowed a certain amount of maturing  deposits to leave rather than
match rates offered by  competition.  During the last quarter,  the  Association
began to more aggressively price its deposits to meet rising loan demand.


                                       4
<PAGE>

WAKE FOREST BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                               FINANCIAL CONDITION

The Company had no outstanding  borrowings  during 1999 or 1998,  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 1.62% and 1.28% and its return on
average equity was 8.83% and 7.26% for 1999 and 1998, respectively. The increase
in the returns on average  assets and average  equity  during 1999 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 1998. The overall increase in the volume of loans
outstanding and as a result,  interest earning assets, caused interest income to
rise during 1999.

The  Company  and  the   Association   are  required  to  meet  certain  capital
requirements  as  established  by the OTS. At September  30,  1999,  all capital
requirements were met. (See Note 11 to the consolidated financial statements).

                              RESULTS OF OPERATING

Net Income.  The Company's net income for the years ended September 30, 1999 and
1998 was $1,202,550 and $1,060,900,  respectively. Net income in 1999 was higher
than the earnings  reported in 1998  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 1999.

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 $265,900 or 9.13% to $3.2 million for the year
ended  September  30, 1999 from $2.9 million  reported in 1998.  The rise in net
interest income during 1999 was attributable primarily to an overall increase in
interest  earnings  assets,  with the  greatest  increase  occurring  in  higher
yielding  loans.  The  average  balance  of  interest  earning  assets and loans
receivable   increased  by   approximately   $4.9  million  and  $6.9   million,
respectively,  during  1999.  The  increase  in the volume of loans  outstanding
during 1999  allowed net interest  income to rise despite a slight  narrowing in
interest rate spread. The Company's interest rate spread decreased from 3.39% in
1998 to 3.38% in 1999.

                                       5
<PAGE>

WAKE FOREST BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------


                              RESULTS OF OPERATING

Interest  Income.  Total interest income increased to $6.2 million for 1999 from
$6.0  million in 1998,  an increase  of  $220,650.  The rise in interest  income
during 1999 was primarily attributable to a $6.9 million increase in the average
balance of loans  outstanding in 1999.  Interest  income rose despite a 28 basis
point decline in the Company's  overall yield on interest  earning  assets which
was 8.47% in 1999 as compared with 8.75% in 1998. A significant dollar amount of
the Association's  loan portfolio is tied to prime,  which decreased by 75 basis
points in the fall of 1998 before rising by 50 basis points during the summer of
1999.

Interest Expense.  Total interest expense decreased to $3.0 million in 1999 from
$3.1 million in 1998,  a decrease of $45,250.  During  1999,  the  Association's
average balance of outstanding  deposits increased by approximately $2.2 million
from 1998. However, during 1999, the Association's cost of funds decreased by 27
basis point,  from 5.36% in 1998 to 5.09% in 1999. The decrease in cost of funds
and corresponding decrease in interest expense was directly related to a decline
in general  market  rates  during the greater  part of 1999.  The decline in the
Association's  cost of funds more than offset the added interest expense created
by an increase in average outstanding deposits during 1999.

Provision for Loan Losses.  There were no provisions for loan losses during 1999
or 1998. The Association's  management  determined that its loan loss allowances
were adequate and, accordingly,  no additional  provisions were provided.  There
were no loans charged off against the allowances during either year.

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 on existing loans that may become uncollectible. Loans are charged
off against the  allowance  when  management  believes  that  collectibility  is
unlikely.  An evaluation  to increase the provision and resulting  allowances is
based  on  factors,  such as  changes  in the  nature  and  volume  of the  loan
portfolio,  overall portfolio  quality,  and current economic  conditions.  Wake
Forest Federal has adopted  policies which it believes  provides for prudent and
adequate levels of loan loss allowances.

The Association's  level of non-performing  loans,  defined as loans past due 90
days or  more,  are  relatively  insignificant  as  percentage  of  total  loans
outstanding  and  amounted  to .48% and .24% at  September  30,  1999 and  1998,
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 $41,750 and $33,600 in 1999
and 1998, respectively. Noninterest income consists primarily of service charges
and fees associated with the Association's loan and deposit accounts.



                                       6
<PAGE>

WAKE FOREST BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                              RESULTS OF OPERATING

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 $1,274,950 and $1,264,150 in 1999 and 1998, respectively.

Compensation and related benefits increased from $698,700 in 1998 to $748,550 in
1999.  The increase was primarily  due to annual  increases in base salaries and
related bonuses and by the addition of two new employees during 1999.

Occupancy expense,  federal insurance premiums, OTS operating  assessments,  and
data  processing  expense changed  nominally from 1998 to 1999.  Other operating
expense  decreased from $368,600 in 1998 to $323,300  during 1999, a decrease of
$45,300. The decrease in other operating expense was due primarily to a decision
by management in 1999 to allocate additional  professional and board of director
expenses to the MHC. 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 38.1% and 36.9% in
1999 and 1998, 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.


                                       7
<PAGE>

                                  RATE/VOLUME ANALYSIS

    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,
                                                                1999 VS. 1998                                  1998 VS 1997
                                                ----------------------------------------    ----------------------------------------
                                                  INCREASE (DECREASE) ATTRIBUTABLE TO          INCREASE (DECREASE) ATTRIBUTABLE TO
                                                ----------------------------------------    ----------------------------------------
                                                                        RATE/                                      RATE/
                                                VOLUME      RATE       VOLUME      NET      VOLUME       RATE     VOLUME      NET
                                                ------      ----       ------      ---      ------       ----     -------     ---
                                                                                   (IN THOUSANDS)

<S>                                              <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Assets:
    Interest-earnings assets:
        Interest-bearing deposits ..........     $ (79)     $ (71)     $   8      $(142)     $ 252      $  14      $   9      $ 275
        Investment securities ..............       (27)        20         (3)       (10)        19        (11)        (2)         6
        Loans receivable ...................       671       (263)       (35)       373        304        201         14        519
                                                 -----      -----      -----      -----      -----      -----      -----      -----
              Total ........................       565       (314)       (30)       221        575        204         21        800
                                                 -----      -----      -----      -----      -----      -----      -----      -----
Liabilities:
    Interest-bearing liabilities:
        ESOP debt ..........................     $  (5)     $  (2)     $  --      $  (7)     $  (5)     $  --      $  --      $  (5)
        Passbook savings ...................         3         --         --          3         10         --         --         10
        NOW and MMDA accounts ..............        47        (20)        (3)        24         (5)        (7)        --        (12)
        Certificates of deposit ............        47       (110)        (2)       (65)       492         (3)        (1)       488
                                                 -----      -----      -----      -----      -----      -----      -----      -----
              Total ........................        92       (132)        (5)       (45)       492        (10)        (1)       481
                                                 -----      -----      -----      -----      -----      -----      -----      -----
              Net Interest income ..........     $ 473      $(182)     $ (25)     $ 266      $  83      $ 214      $  22      $ 319
                                                 =====      =====      =====      =====      =====      =====      =====      =====

</TABLE>
                                       8
<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, 1999                    1999                           1998
                                             -------------------------   ----------------------------   ----------------------------
                                                                                             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>
                                                                                  (DOLLARS IN THOUSANDS)
Assets:
    Interest-earnings assets:
        Interest-bearing deposits.............. $ 5,827       5.25%      $11,169      $  557    4.99%    $12,588    $  699     5.55%
        Investment securities..................   3,808       5.64%        2,974         171    5.75%      3,500       181     5.17%
        Loans receivable(1)....................  61,467       8.65%       59,124       5,476    9.26%     52,257     5,103     9.77%
                                                -------                  -------      ------             -------    ------
    Total interest-earning assets..............  71,102       8.24%       73,267      $6,204    8.47%     68,345     5,983     8.75%
    Non-interest-earning assets................   1,294                    1,154      ------               3,109    ------
                                                -------                  -------                         -------
           Total............................... $72,396                  $74,421                         $71,454
                                                =======                  =======                         =======
Liabilities and retained earnings:
    Interest-bearing liabilities:
        ESOP Debt.............................. $   206       8.25%      $   238          19    7.98%    $   294    $   26     8.50%
        Passbook accounts......................   3,554       3.00%        3,433         103    3.00%      3,338       100     3.00%
        NOW and MMDA accounts..................   9,336       3.90%        9,565         327    3.42%      8,289       303     3.66%
        Certificates of deposit................  44,402       5.35%       46,226       2,578    5.58%     45,423     2,643     5.82%
                                                -------                  -------      ------             -------    ------
    Total interest-bearing liabilities.........  57,498       4.98%       59,462      $3,027    5.09%     57,344    $3,072     5.36%
                                                                                      ------                        ------
    Non interest-bearing liabilities...........   1,430                    1,333                           1,552
    Stockholders' Equity.......................  13,468                   13,626                          12,558
                                                -------                  -------                          ------
            Total...............................$72,396                  $74,421                         $71,454
                                                =======                  =======                         =======
    Net interest income and interest
        rate spread (2).........................              3.26%                   $3,177      3.38%               $2,911   3.39%
                                                                                      ======                          ======
    Net yield on interest-earning
        assets(3)...............................              4.21%                               4.34%                        4.26%
    Ratio of interest-earning assets
        to interest-bearing liabilities.........            123.66%                             123.22%                      119.18%

--------------------
(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.


</TABLE>








                                       9
<PAGE>

WAKE FOREST BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                         CAPITAL RESOURCES AND LIQUIDITY

The Company  (the  Association,  previous to the  Company's  formation on May 7,
1999)  declared  dividends  of $.12 per  share  for each  quarter  during  1999.
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, a significant  source of liquidity,  decreased by
approximately $9.8 million,  and amounted to $6.5 million at September 30, 1999.
Cash flow resulting from internal  operating  activities  provided  increases of
$1.4 million in cash during the year ended  September 30, 1999.  Cash flows from
investing activities utilized $7.8 million in cash during the current year, with
a net  growth in loans of $6.0  million  being the  primary  use.  During  1999,
financing  activities  also utilized  cash.  Total  financing  activities of the
Company  required  $3.4 million in cash,  with net deposit  withdrawals  of $2.4
million creating the largest use. 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
approximately $8.5 million.  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.
During 1999, the Association purchased  approximately $2.3 million in investment
securities and had $1.5 million in investment  securities  mature.  In addition,
the  Association  purchases  short term  interest  earning  time  deposits  with
maturities  of 30 days to 364 days from the FHLB of Atlanta.  At  September  30,
1999, cash in the Company's  consolidated balance sheet includes $1.5 million in
time deposits which all mature prior to December 31, 1999.

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, 1999, as computed
under OTS  regulations,  was in excess of such  requirements.  Given its current
liquidity  and its ability to borrow from the Federal Home Loan Bank of Atlanta,
the  Company  believes  that it will have  sufficient  funds  available  to meet
anticipated future loan commitments,  unexpected deposit withdrawals,  and other
cash requirements.



                                       10
<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,  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.



                                       11
<PAGE>

                             MARKET RISK ANALYSIS

<TABLE>
<CAPTION>
                                                                 EXPECTED MATURITY DATE
                            --------------------------------------------------------------------------------------------------
                                                                YEAR ENDED SEPTEMBER 30,
                            --------------------------------------------------------------------------------------------------
                                2000         2001         2002         2003       2004     THEREAFTER    TOTAL      FAIR VALUE
                                ----         ----         ----         ----       ----     ----------    -----      ----------
<S>                         <C>          <C>          <C>          <C>        <C>          <C>        <C>           <C>
Assets:
  Loans - fixed:
    Balance                 $15,988,000  $ 1,130,900  $   536,550  $   38,050  $   48,950  $4,046,550  $21,789,000  $21,980,500
    Interest Rate                 8.73%        9.25%        9.24%       9.46%      10.89%       9.66%        8.94%           -
  Loans - variable (1):
    Balance                   9,995,850    8,082,200   14,922,050   3,667,000   2,975,700      35,500   39,678,300   39,678,300
    Interest rate                 8.57%        8.84%        8.32%       8.49%       8.13%       8.25%        8.49%           -
  Investments (2):
    Balance                   6,622,500    2,250,000           -           -           -           -     9,635,150    9,635,150
    Interest rate                 5.32%        5.44%           -           -           -           -         5.35%           -
Liabilities:
  Deposits (3):
    Balance                  12,890,050           -            -           -           -           -    12,890,050   12,890,050
    Interest rate                 3.67%           -            -           -           -           -         3.67%           -
  Deposits - certificates:
    Balance                  26,050,500   11,570,200    2,166,050   2,220,500   2,395,200          -    44,402,450   45,032,950
    Interest rate                 5.21%        5.30%        6.01%       5.80%       5.58%          -         5.35%           -
</TABLE>

(1)  Maturities  of variable  rate loans based on  contractual  maturity  except
     equity  line  mortgages  and  lines  of  credit,  which  are  based on next
     repricing date
(2)  Includes interest bearing deposits and investment securities
(3)  Includes passbook accounts, NOW accounts and money market accounts







                                       12
<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 upcoming
change  in the  century.  With the  impending  millennium,  these  programs  and
computers  may recognize  "00" as the year 1900 rather than the year 2000.  Like
most financial service providers,  the Company and its operations are subject to
risk for the Year 2000  Problem due to the nature of its  financial  information
processing.

Software,  hardware,  and equipment both within and outside the Company's direct
control and with whom the Association electronically or operationally interfaces
(e.g.  third  party  vendors  providing  data  processing,   information  system
management,  maintenance of computer systems, and credit bureau information) may
be affected.  Furthermore,  if computer  systems are not  adequately  changed to
identify  the  Year  2000,  many  computer  applications  could  fail or  create
erroneous results.  As a result,  many calculations which rely on the date field
information,  such  as  interest,  payment  or due  dates  and  other  operating
functions,  could  generate  results which would be  misstated,  and the Company
could experience a temporary inability to process transactions, send invoices or
engage in similar normal business activities.

In  addition,   non-information  technology  systems,  such  as  equipment  like
telephones and copiers may also contain  embedded  technology which controls its
operation and which may be effected by the Year 2000 Problem. When the Year 2000
arrives,  systems,  including  some of those with embedded  chips,  may not work
properly because of the way they store date information. They may not be able to
deal  with  the  date  01/01/00,  and may not be able to deal  with  operational
"cycles" such as "do X every 100 days." Thus,  even  non-information  technology
systems may affect the normal  operations of the Company upon the arrival of the
Year 2000. Under certain  circumstances,  failure to adequately address the Year
2000 Problem could adversely affect the viability of the Company's suppliers and
creditors and the  creditworthiness  of its  borrowers.  Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Company's products, services and competitive condition.

In order to address the Year 2000 Issue and to minimize  its  potential  adverse
impact,  management has identified areas that could be affected by the Year 2000
Problem and assessed  their  potential  impact on the operations of the Company.
The Company has been monitoring the progress of third party software vendors who
have been  addressing  the  matter,  and has tested  changes  provided  by these
vendors.




                                       13
<PAGE>

WAKE FOREST BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------


                                 YEAR 2000 ISSUE

A committee of senior officers of the Company was formed to evaluate the effects
that the upcoming  Year 2000 issue could have on computer  programs  utilized by
the Company. The Company's plan is divided into the five phases:

     (1)  Awareness.  Define the problem,  obtain  executive  level  support and
          develop an overall strategy. This phase was completed in April 1998.

     (2)  Assessment.  Identify all systems and the  criticality of the systems.
          This phase was completed in June 1998.

     (3)  Renovation.  Program  enhancements,  hardware and  software  upgrades,
          system  replacements,  and  vendor  certifications.   This  phase  was
          completed in December 1998.

     (4)  Validation. Test and verify system changes and coordinate with outside
          parties. This phase was completed in June 1999.

     (5)  Implementation.  Components certified as Year 2000 compliant and moved
          to production. This phase was completed in June 1999.

Third party vendors provide the majority of software used by the Company. All of
the Company's vendors are aware of the Year 2000 situation, and each has assured
the  Company  that its  software  is now Year 2000  compliant.  Testing  for the
critical  applications began in April 1998. The Company utilizes the services of
a third  party  vendor to provide  the  software  which is used to  process  and
maintain most mortgage and deposit  customer-related  accounts.  This vendor has
provided the Company with a software version which has been certified to be Year
2000 compliant.  Testing by the Company has been completed to verify  compliance
for its  application  and usage.  The Company  presently  believes that with the
modifications  to existing  software and  conversions to new software,  the Year
2000 Problem will be mitigated  without causing a material adverse impact on the
operations of the Company.  However,  if such modifications and conversions have
remaining  undetected  bugs,  the Year 2000 Problem  could have an impact on the
operations of the Company.

The  Company's  business  resumption  contingency  plan, in the event of a major
software failure  associated with processing  customer  accounts,  calls for the
temporary  reversion to a manual record keeping  system.  The Company  currently
maintains  manual  ledger  cards on most types of  customer  accounts  and could
operate  in  such a  manner  for a  reasonably  short  period  of  time.  Manual
transactions  would  subsequently  be inputted with prior  effective  processing
dates back into the software once the date issues are resolved.

In  addition,  monitoring  and  managing  the Year 2000  project has resulted in
additional  direct and  indirect  costs to the  Company.  Direct  costs  include
charges by third  party  software  vendors for  product  enhancements  and costs
involved in testing software  products for Year 2000 compliance.  Indirect costs
principally  consist of the time  devoted by existing  employees  in  monitoring
software vendor progress,  testing enhanced  software  products and implementing
any necessary contingency plans.


                                       14
<PAGE>

WAKE FOREST BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

                                 YEAR 2000 ISSUE

The Company has spent  approximately  $92,000 on Year 2000 related costs to date
and estimates that it will spend an additional $12,000 for Year 2000 compliance.
Both direct and  indirect  costs of  addressing  the Year 2000  Problem  will be
charged to earnings as  incurred.  The Company  does not believe that such costs
will have a material effect on its results of operations.  However, there can be
no guarantee  that the systems of other vendors on which the  Company's  systems
rely will be Y2K  compliant,  and thus  have a  material  adverse  effect on the
Company.

The  remaining  costs of the project and the  Company's  assertion  of being Y2K
compliant are based on management's best estimates, which were derived utilizing
numerous  assumptions of future events  including the continued  availability of
certain resources,  third party modification plans, and other factors.  However,
there can be no  guarantee  that these  estimates  will be  achieved  and actual
results could differ  materially from those plans.  Specific  factors that might
cause such material  differences include, but are not limited to, the ability to
locate and  correct  all  relevant  computer  codes,  power and  telephone  line
failures, and similar uncertainties.

                          FUTURE REPORTING REQUIREMENTS

The  Financial  Accounting  Standards  Board  ("FASB")  has issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  Accounting  for  Derivative
Instruments and Hedging Activities.  The statement, which is effective for years
beginning after June 15, 2000,  establishes  accounting and reporting  standards
for  derivative  instruments  and for hedging  activities.  It requires  that an
entity  recognize  all  derivatives  as  either  assets  or  liabilities  in the
statement of financial position and measure those instruments at fair value. The
Company  does not  believe  that the  statement  will  have  any  impact  on its
financial  position or operating  results because the Company does not currently
hold or intend to invest in derivative instruments.

                               RECENT LEGISLATION

Landmark financial services  legislation,  titled the "Graham-Leach  Bliley Act"
was signed into law by President  Clinton on November 12, 1999.  The Act removes
many of the barriers between banking, insurance, and investment banking. It also
provides  for  significant  changes  in how the  Federal  Home Loan Bank  system
operates and will allow for improved access to the system's  credit  facilities.
The Act also  prevents  unitary  thrift  holding  companies  from  being sold to
commercial firms and provides expanded powers for mutual holding companies.  The
Company  has not  reviewed  all  aspects  of the  Act,  but  believes  that  the
legislation  will not have a material  impact on the current  operations  of the
Company.


                                       15
<PAGE>

WAKE FOREST BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------


                           FORWARD LOOKING STATEMENTS

Forward-looking  statements based on management's current views and assumptions,
are made in certain  areas of this  Management's  Discussion  and  Analysis  and
elsewhere  in this  report to  shareholders.  These  statements,  consisting  of
estimates  with respect to the financial  condition,  results of operations  and
other  business of the Company  are subject to certain  risks and  uncertainties
that could cause actual results to differ materially from historical results and
those presently anticipated or projected.  The words "aim," "believe," "expect,"
"anticipate,"  "intend," and  "estimate"  and other  expressions  which indicate
future events and trends identify forward-looking statements.  Among the various
factors  which  could  cause  actual  results  to differ  materially  from those
estimates  include changes in general and local economic  conditions,  demand in
the Company's local real estate market,  legislative and regulatory  conditions,
and an adverse interest rate environment.


                                       16
<PAGE>



                          INDEPENDENT AUDITOR'S REPORT





To the Board of Directors
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, 1999 and 1998
and the related  consolidated  statements of income,  stockholders'  equity, and
cash  flows  for the  years  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 audits.

We  conducted  our  audits  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 audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Wake Forest Bancshares,  Inc.
and  subsidiary  as of  September  30,  1999 and 1998 and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.




Raleigh, North Carolina                            /s/  McGladrey & Pullen, LLP
October 27, 1999

                                       17
<PAGE>



WAKE FOREST BANCSHARES, INC.

STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
SEPTEMBER 30, 1999 AND 1998

<TABLE>
<CAPTION>

ASSETS                                                                             1999                1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                         <C>

Cash:

   Interest-bearing deposits                                               $         5,827,000         $14,378,700
   Noninterest-bearing deposits                                                        674,050             932,650
                                                                           ----------------------------------------
                                                                                     6,501,050          15,311,350
                                                                           ----------------------------------------
Investment securities (Note 2):
   Available for sale, at market value                                               3,527,750           2,785,100
   FHLB stock                                                                          280,400             364,100
Loans receivable, net (Note 3)                                                      61,467,300          55,363,450
Accrued interest receivable                                                            101,850              25,550
Property and equipment, net (Note 4)                                                   452,000             459,550
Prepaid expenses and other assets                                                       65,200              51,350
                                                                           ----------------------------------------
        Total assets                                                       $        72,395,550         $74,360,450
                                                                           ========================================

LIABILITIES AND EQUITY
Liabilities:
   Deposits (Note 5)                                                       $        57,653,900         $60,037,950
   Accounts payable and accrued expenses                                               387,350             303,200
   Dividends payable                                                                   143,700             145,900
   Note payable - ESOP (Note 9)                                                        206,000             264,850
   Deferred income taxes (Note 10)                                                     160,800             170,600
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares (Note 9)                                                    375,950             270,750
                                                                           ----------------------------------------
        Total liabilities                                                           58,927,700          61,193,250
                                                                           ----------------------------------------
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                                                        4,843,600           4,772,800
   Accumulated other comprehensive income                                              472,900             477,100
   Retained  earnings, substantially restricted (Note 11)                            8,490,850           7,905,150
   Less: Treasury stock acquired (Note 11)                                           (351,650)                  --
                                                                           ----------------------------------------
        Total stockholders' equity                                                  13,467,850          13,167,200
                                                                           ----------------------------------------
                                                                           $        72,395,550         $74,360,450
                                                                           ========================================

</TABLE>

See Notes to Consolidated Financial Statements.



                                       18
<PAGE>


WAKE FOREST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999 AND 1998

<TABLE>
<CAPTION>

                                                                                   1999               1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                         <C>
Interest and dividend income:
   Loans                                                                   $         5,476,150         $5,103,450
   Investment securities                                                               171,200            180,950
   Interest-bearing deposits                                                           556,550            698,850
                                                                           ---------------------------------------
                                                                                     6,203,900          5,983,250
                                                                           ---------------------------------------
Interest expense:
   Deposits (Note 5)                                                                 3,007,350          3,046,000
   Borrowings                                                                           19,350             25,950
                                                                           ---------------------------------------
                                                                                     3,026,700          3,071,950
                                                                           ---------------------------------------
              NET INTEREST INCOME                                                    3,177,200          2,911,300
                                                                           ---------------------------------------
Noninterest income                                                                      41,750             33,600
                                                                           ---------------------------------------
Noninterest expense:
   Compensation and benefits (Notes 6, 7, 8, and 9)                                    748,550            698,700
   Occupancy                                                                            39,900             40,900
   Federal insurance premiums and operating assessments                                 59,850             55,300
   Data processing and outside service fees                                            103,350            100,650
   Other operating expense                                                             323,300            368,600
                                                                           ---------------------------------------
                                                                                     1,274,950          1,264,150
                                                                           ---------------------------------------
              INCOME BEFORE INCOME TAXES                                             1,944,000          1,680,750
                                                                           ---------------------------------------
Income taxes (Note 10):
   Current                                                                             748,650            642,500
   Deferred                                                                            (7,200)           (22,650)
                                                                           ---------------------------------------
                                                                                       741,450            619,850
                                                                           ---------------------------------------
              NET INCOME                                                   $         1,202,550         $1,060,900
                                                                           =======================================
Basic earnings per share                                                   $              1.02         $     0.91
                                                                           =======================================
Diluted earnings per share                                                 $              1.02         $     0.89
                                                                           =======================================
Dividends paid per share                                                   $              0.48         $     0.46
                                                                           =======================================
</TABLE>


See Notes to Consolidated Financial Statements.



                                       19
<PAGE>


WAKE FOREST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998

<TABLE>
<CAPTION>

                                                                                            ADDITIONAL
                                                                          COMMON             PAID IN
                                                                           STOCK             CAPITAL
-------------------------------------------------------------------------------------------------------------------


<S>                                                                    <C>                    <C>
Balance at September 30, 1997 .....................................    $  11,900              $  4,592,750
   Comprehensive income:
      Net income for 1998 .........................................          --                        --
      Net change in unrealized gain on securities .................          --                        --
           TOTAL COMPREHENSIVE INCOME
      Contributions to ESOP (Note 9) ..............................          --                    55,000
      Market value adjustment for redeemable common stock
        held by ESOP ..............................................          --                        --
      Issuance of stock to the RRP (Note 7) .......................         200                   283,400
      Deferral of RRP shares issued but not earned (Note 7) .......                              (222,200)
      Amortization of earned RRP shares (Note 7) ..................          --                    33,100
      Stock options exercised (2,414 shares) ......................          50                    30,750
      Cash dividends ($0.46 per share) ............................          --                        --
                                                                       ----------------------------------
Balance at September 30, 1998 .....................................      12,150                 4,772,800
   Comprehensive income:
      Net income for 1999 .........................................          --                        --
      Net change in unrealized (loss) 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          --                        --
                                                                      -----------------------------------
Balance at September 30, 1999 .....................................   $  12,150              $  4,843,600
                                                                      ===================================
</TABLE>


See Notes to Consolidated Financial Statements.



                                       20
<PAGE>


<TABLE>
<CAPTION>

                                                                         ACCUMULATED
                                                                            OTHER                        TREASURY
                                                                        COMPREHENSIVE     RETAINED         STOCK
                                                                           INCOME         EARNINGS        ACQUIRED       TOTAL
                                                                    ---------------------------------------------------------------
<S>                                                                   <C>             <C>              <C>           <C>
Balance at September 30, 1997 .....................................   $    334,950    $  7,181,600     $        --   $ 12,121,200
   Comprehensive income:
      Net income for 1998 .........................................             --       1,060,900              --      1,060,900
      Net change in unrealized gain on securities .................        142,150             --               --        142,150
                                                                                                                       ----------
           TOTAL COMPREHENSIVE INCOME .............................                                                     1,203,050
                                                                                                                       ----------
      Contributions to ESOP (Note 9) ..............................             --             --              --         55,000
      Market value adjustment for redeemable common stock
         held by ESOP                                                           --        206,050              --        206,050
         Issuance of stock to the RRP (Note 7)                                  --            --               --        283,600
         Deferral of RRP shares issued but not earned (Note 7)                  --            --               --       (222,200)
         Amortization of earned RRP shares (Note 7)                             --            --               --         33,100
         Stock options exercised (2,414 shares)                                 --            --               --         30,800
         Cash dividends ($0.46 per share)                                       --      (543,400)              --       (543,400)
                                                                          ---------------------------------------------------------
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 (loss) 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
                                                                        ===========================================================

</TABLE>


                                       21
<PAGE>


WAKE FOREST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                      1999               1998
------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                        <C>
Cash Flows From Operating Activities

   Net income                                                              $         1,202,550        $ 1,060,900
   Adjustments to reconcile net income to net
       cash provided  by operations:
      Depreciation                                                                      33,200             35,700
      Amortization of premiums (discounts) on investments                                  550            (11,650)
      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                                                                 14,050             55,000
      Deferred income taxes                                                             (7,200)           (22,650)
      Changes in assets and liabilities:
        (Increase) decrease in:
           Accrued interest receivable                                                 (76,300)             9,850
           Prepaid expenses and other assets                                           (13,850)           (11,350)
        Increase (decrease) in:
           Accounts payable and accrued expenses                                        84,150             31,300
                                                                           ---------------------------------------
              NET CASH PROVIDED BY OPERATING ACTIVITIES                              1,352,750          1,262,700
                                                                           ---------------------------------------


Cash Flows From Investing Activities
   Principal collected on  loans                                                    45,803,000         31,343,900
   Mortgage loans purchased                                                            (70,000)           (90,000)
   Loans originated                                                                (51,836,850)       (32,944,850)
   Purchase of FHLB time deposits                                                   (3,500,000)                --
   Maturities of FHLB time deposits                                                  2,500,000                 --
   Purchase of available for sale investment securities                             (2,250,000)          (499,500)
   Maturities of available for sale investment securities                            1,500,000          1,000,000
   Redemption of FHLB stock                                                             83,700                 --
   Purchases of property and equipment                                                 (25,650)            (3,100)
                                                                           ---------------------------------------
              NET CASH USED IN INVESTING ACTIVITIES                                 (7,795,800)        (1,193,550)
                                                                           ---------------------------------------

</TABLE>

See Notes to Consolidated Financial Statements.



                                       22
<PAGE>


<TABLE>
<CAPTION>




                                                                                   1999               1998

-------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities

<S>                                                                        <C>                       <C>
   Cash dividends paid                                                     $         (572,700)       $   (516,600)
   Payments received on exercised options                                                  --              30,800
   Principal payments on ESOP note payable                                            (58,850)            (58,850)
   Purchase of treasury stock                                                        (351,650)                 --
   Net increase (decrease) in savings accounts                                     (2,384,050)          9,982,200
                                                                          ---------------------------------------
              NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                  (3,367,250)          9,437,550
                                                                          ---------------------------------------
              NET INCREASE (DECREASE) IN CASH                                      (9,810,300)          9,506,700

Cash:
   Beginning                                                                        15,311,350          5,804,650
                                                                           ---------------------------------------
   Ending                                                                  $         5,501,050        $15,311,350
                                                                           =======================================


Cash and cash Equivalents:
   Cash                                                                    $           674,050        $   932,650
   Interest bearing overnight funds                                                  4,327,000         14,378,700
   Time deposit with original maturity less than 90 days                               500,000                 --
                                                                           ---------------------------------------
             Total cash and cash equivalents                                         5,501,050         15,311,350
   Time deposits with original maturities greater than 90 days                       1,000,000                 --
                                                                           =======================================
           Cash and interest bearing deposits                              $         6,501,050        $15,311,350
                                                                           =======================================


Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest                                                             $         3,027,100        $ 3,083,600
                                                                           =======================================
      Income taxes                                                         $           724,300        $   649,950
                                                                           =======================================


Supplemental Schedule of Noncash Investing
    and Financing Activities:
   Net RRP shares issued                                                   $                --      $      94,500
                                                                           =======================================
   Fair value of ESOP shares in excess of unearned
      ESOP shares (charged) credited to retained earnings                  $          (46,350)      $     206,050
                                                                           =======================================
   Dividends accrued                                                       $           143,700      $     145,900
                                                                           =======================================
   Change in unrealized gain (loss) on available for sale
      securities, net of tax effect                                        $           (4,200)      $     142,150
                                                                           =======================================
</TABLE>
                                       23
<PAGE>


WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business:  Wake Forest Bancshares,  Inc. (the "Company") is located in
Wake Forest,  North Carolina and it is the parent stock holding  company of Wake
Forest  Federal  Savings and Loan  Association  (the  "Association"),  it's only
subsidiary.  The Company  conducts no business  other than holding  stock in the
Association, investing dividends received from the Association, repurchasing its
common stock from time to time, and  distributing  dividends on its common stock
to its shareholders. The Association's principal activities consist of obtaining
savings  deposits  and  providing  mortgage  credit to  customers in its primary
market area, the counties of Wake, Franklin and Granville,  North Carolina.  The
Company  and  the  Association's  primary  regulator  is the  Office  of  Thrift
Supervision  and its deposits are insured by the Savings  Association  Insurance
Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC).

Reorganization:  On November 16, 1998, the Board of Directors of the Association
approved an Agreement and Plan of Reorganization  (the Plan of  Reorganization).
The  Plan of  Reorganization  provided  for  the  establishment  of Wake  Forest
Bancshares,  Inc. as a stock  holding  company  parent of the  Association.  The
Company is majority owned  (approximately  53%) by Wake Forest Bancorp,  M.H.C.,
(the "MHC") the Association's  mutual holding company.  The reorganization  into
the "two-tier" mutual holding company structure (the  Reorganization)  under the
Plan of Reorganization  was approved by the Association's  stockholders at their
annual meeting held on February 23, 1999 and by regulatory  authorities on April
9, 1999.  The formation of the Company was  consummated  pursuant to the Plan of
Reorganization on May 7, 1999.

As a part of the Reorganization,  each outstanding share of Association's common
stock was converted into one share of common stock, par value $.01 per share, of
the  Company,  and the  holders of the  Association's  common  stock  became the
holders  of  all of the  outstanding  shares  of  the  Company's  common  stock.
Accordingly,  as a result  of the  Reorganization,  the  Association's  minority
shareholders became minority shareholders of the Company. The Company was formed
solely for the purpose of becoming a savings and loan holding company and had no
prior operating  history.  The Reorganization had no impact on the operations of
the  Association  or the MHC. The  Association  continues to operate at the same
location, with the same management,  and subject to all the rights,  obligations
and  liabilities  of  the  Association   existing   immediately   prior  to  the
Reorganization.

The Board of Directors of the Association capitalized the Company with $100,000.
Future  capitalization of the Company will depend upon dividends declared by the
Association  based on future earnings,  or the raising of additional  capital by
the Company through a future issuance of securities, debt or by other means. The
Board of  Directors  of the  Company  has no present  plans or  intentions  with
respect to any future issuance of securities or debt at this time.  Furthermore,
as long as it is in  existence,  the MHC  must own at  least a  majority  of the
Company's outstanding voting stock.

The  Reorganization was treated similar to a pooling of interests for accounting
purposes.  Therefore,  the  consolidated  capitalization,  assets,  liabilities,
income and expenses of the Company immediately following the Reorganization will
be  substantially  the  same as those of the  Association  immediately  prior to
consummation of the Reorganization,  all of which will be shown on the Company's
books at their historical recorded values.



                                       24
<PAGE>

WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

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.

Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") Statement No. 130, Reporting  Comprehensive Income.  Statement
No. 130  establishes  new rules for the reporting  and display of  comprehensive
income  and its  components,  but has no effect on the  Company's  net income or
total  stockholders'  equity.  Statement No. 130 requires  unrealized  gains and
losses on the Company's  available-for-sale  securities, which prior to adoption
were  reported   separately  in   stockholders'   equity,   to  be  included  in
comprehensive  income. Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130. The Company has no other items
of other comprehensive income.

Consolidation: The consolidated financial statements include the accounts of the
Company and its  wholly-owned  subsidiary,  Wake Forest Federal Savings and Loan
Association.   All  significant  intercompany  accounts  and  transactions  have
eliminated in consolidation.

Cash:  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.  At
times, the Association maintains deposits in correspondent banks in amounts that
may be in excess of the FDIC insurance limit.

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.


                                       25
<PAGE>

WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 1.     NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         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:  A provision for loan losses is charged to operations
based on the  Association's  evaluation  of the  potential  and inherent risk of
losses in its loan  portfolio.  Such  evaluation  includes a review of loans for
which full  collectibility  appears  doubtful and other  factors,  including the
nature and volume of the portfolio,  overall loan quality,  and current economic
conditions,   which  in  the  Association's   judgment  deserve  recognition  in
estimating such potential  losses.  Provisions not  specifically  identified are
based on the Association's  experience and other factors.  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. 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,  1999 and 1998 which it  considers  to be  impaired.
Therefore,  there is no specific  allowance for impaired  loans at September 30,
1999 and 1998.

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.


                                       26
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 1.     NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


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 1999 or 1998.

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.  Accordingly,
this  presentation has been adopted for both periods  presented.  No adjustments
were  required  to net income for any period  presented  in the  computation  of
diluted  earnings  per share.  The basic and  diluted  weighted  average  shares
outstanding for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>

                                                                                     1999               1998

                                                                               ------------------------------------


<S>                                                                                   <C>                <C>
Weighted average outstanding shares used for basic EPS                                1,177,248          1,169,464
Plus incremental shares from assumed issuances pursuant to
   stock options and stock award plans                                                      360             24,178
                                                                               ------------------------------------
Weighted average outstanding shares used for diluted EPS                              1,177,608          1,193,642
                                                                               ====================================

</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,  Franklin and Granville  counties of
North Carolina.



                                       27
<PAGE>

WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 1.     NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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,  1999.  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, 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 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.

   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.

                                       28
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

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, 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>

                                                                                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
                                                 ==================================================================


                                                                                1998

                                                 ------------------------------------------------------------------
                                                                      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   $     752,250   $     --         $      767,450
   Debt securities:
      U.S. Treasury obligations                         2,000,450          17,200         --              2,017,650
                                                 ------------------------------------------------------------------
                                                        2,015,650         769,450         --              2,785,100
                                                 ------------------------------------------------------------------
Nonmarketable equity securities:
   Federal Home Loan Bank stock                           364,100              --           --              364,100
                                                 ------------------------------------------------------------------
                                                 $      2,379,750   $     769,450   $        --      $    3,149,200
                                                 ==================================================================

</TABLE>



                                       29
<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, 1999 by contractual maturity are shown below:
<TABLE>
<CAPTION>

                                                                                                     ESTIMATED
                                                                                    AMORTIZED         MARKET
                                                                                      COST             VALUE
                                                                                -----------------------------------


<S>                                                                             <C>                      <C>
Due in one year or less                                                         $         499,900       $  500,800
Due in one year through five years                                                      2,250,000        2,220,750
                                                                                -----------------------------------
                                                                                $       2,749,900       $2,721,550
                                                                                ===================================
</TABLE>


There were no sales of investment  securities  during the years ended  September
30, 1999 and 1998.

The change during 1999 and 1998 in net  unrealized  gains and losses  associated
with available for sale securities is as follows:
<TABLE>
<CAPTION>

                                                                                       1999            1998
                                                                                ----------------------------------
<S>                                                                             <C>                     <C>
Balance in equity component, beginning of year                                  $         477,100       $ 334,950
   Change in unrealized gains                                                             (6,800)         229,250
   Change in related deferred income taxes                                                  2,600         (87,100)
                                                                                ----------------------------------
Balance in equity component, end of year                                        $         472,900       $ 477,100
                                                                                ==================================
</TABLE>


The Association,  as a member of the Federal Home Loan Bank system,  is required
to maintain an  investment  in capital stock of the Federal Home Loan Bank in an
amount equal to the greater of 1% of its outstanding home loans or one-twentieth
of its  outstanding  advances.  No ready market exists for the bank stock and it
has no quoted market value.  For disclosure  purposes,  such stock is assumed to
have a market value which is equal to cost.



                                       30
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 3. LOANS RECEIVABLE

Loans receivable consist of the following:
<TABLE>
<CAPTION>

                                                                                    1999               1998
                                                                             --------------------------------------
<S>                                                                        <C>                         <C>
First mortgage loans:

   Single family, one-to-four units                                          $       24,394,050        $25,479,350
   Multifamily, residential                                                             183,800            289,400
   Commercial real estate                                                             8,460,250          5,830,600
   Land                                                                               8,231,950          4,840,200
   Residential construction                                                          24,693,100         25,339,700
   Commercial construction                                                            2,351,000          2,246,850
   Lines of credit                                                                    2,718,650            865,950
                                                                             --------------------------------------
                                                                                     71,032,800         64,892,050
Equity line mortgages                                                                 3,106,600          1,295,800
Loans on savings accounts                                                               222,350            201,000
                                                                             --------------------------------------
                                                                                     74,361,750         66,388,850
                                                                             --------------------------------------
   Less:

      Undisbursed portion of loans in process                                        12,460,100         10,602,600
      Allowance for loan losses                                                         263,000            263,000
      Deferred loan fees                                                                171,350            159,800
                                                                             --------------------------------------
                                                                                     12,894,450         11,025,400
                                                                             --------------------------------------
                                                                             $       61,467,300        $55,363,450
                                                                             ======================================
Weighted average yield on loans receivable                                                8.65%              8.96%
                                                                             ======================================

</TABLE>

At September 30, 1999 and 1998,  the  Association's  level of general  valuation
allowances  for loan losses  amounted to $263,000.  There were no provisions for
loan losses made or  charge-offs  of any loans during the years ended  September
30, 1999 and 1998.

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 and 1998, a reserve for uncollected interest on
loans  delinquent  more  than 90 days  was not  established  because  management
expects  that all such  interest is fully  collectible.  The balance of accruing
loans past due more than 90 days was  approximately  $293,800  and  $133,650  at
September 30, 1999 and 1998, respectively.



                                       31
<PAGE>

WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 3. LOANS RECEIVABLE (CONTINUED)

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, 1999 and 1998.

Aggregate  loan  transactions  with  related  parties  during  the  years  ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>


                                                                                    1999               1998
                                                                            ---------------------------------------
<S>                                                                         <C>                          <C>
Beginning balance                                                           $           341,650          $ 247,800
New loans                                                                                13,800            101,250
Reductions                                                                             (59,200)             (7,400)
                                                                            ---------------------------------------
Ending balance                                                              $           296,250          $ 341,650
                                                                            =======================================
Maximum balance during the year                                             $           341,650          $ 349,050
                                                                            =======================================

</TABLE>

NOTE 4.        PROPERTY AND EQUIPMENT

Property and equipment at September 30, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>

                                                                                    1999               1998
                                                                            ---------------------------------------

<S>                                                                         <C>                         <C>
Land                                                                        $            20,950         $   20,950
Office buildings and improvements                                                       601,550            584,300
Furniture and fixtures                                                                  181,300            172,900
                                                                            ---------------------------------------
                                                                                        803,800            778,150
Less accumulated depreciation                                                          (351,800)          (318,600)
                                                                            ---------------------------------------
                                                                            $           452,000         $  459,550
                                                                            =======================================
</TABLE>


                                       32
<PAGE>

WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 5. DEPOSITS

Deposits at September 30, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>


                                                                                    1999               1998
                                                                             --------------------------------------
<S>                                                                          <C>                        <C>

Passbook accounts, weighted average rate of  3.00%
   (3.00% in 1998)                                                           $        3,554,050         $3,599,150
MMDA accounts, weighted average rate of 4.15%
   (3.50% in 1998)                                                                    7,922,800          7,100,300
NOW accounts, weighted average rate of  2.50%
   (2.50% in 1998)                                                                    1,413,200          1,277,400
Noninterest-bearing accounts                                                            303,500            333,950
                                                                             --------------------------------------
                                                                                     13,193,550         12,310,800
                                                                             --------------------------------------
Certificate of deposit accounts:

   3.00% to 5.00%                                                                    16,919,050            599,600
   5.01% to 7.00%                                                                    27,379,050         46,862,300
   7.01% to 8.00%                                                                       104,350            213,550
                                                                             --------------------------------------
                                                                                     44,402,450         47,675,450
                                                                             --------------------------------------
Accrued interest on deposits                                                             57,900             51,700
                                                                             --------------------------------------
                                                                             $       57,653,900        $60,037,950
                                                                             ======================================
Weighted average cost of deposits                                                         4.93%              5.15%
                                                                             ======================================

</TABLE>

Certificates  of deposit by range of rate and maturity at September 30, 1999 are
summarized as follows:
<TABLE>
<CAPTION>

                                                           Amounts Maturing During
                         ------------------------------------------------------------------------------------------
Rate Range                      2000              2001              2002           Thereafter          Total
-------------------------------------------------------------------------------------------------------------------
<S>                    <C>                         <C>               <C>               <C>              <C>
3.00% to 5.00%           $       12,474,200        $4,095,000        $  247,650       $  102,200       $16,919,050
5.01% to 7.00%                   13,471,950         7,475,200         1,918,400        4,513,500        27,379,050
7.01% to 8.00%                      104,350                --                --               --           104,350
                         ------------------------------------------------------------------------------------------
                         $       26,050,500        $11,570,200       $2,166,050       $4,615,700       $44,402,450
                         ==========================================================================================

</TABLE>

The aggregate  amount of certificates of deposit with a minimum  denomination of
$100,000 included in the table above is as follows:

Maturity Period:
<TABLE>
<CAPTION>

<S>                                                                                           <C>
   Within three months                                                                        $          2,304,600
   After three months but within six months                                                              1,914,550
   After six months but within twelve months                                                             1,939,400
   After twelve months but within twenty four months                                                     2,538,200
   After twenty four months                                                                              1,526,400
                                                                                              ---------------------
                                                                                              $         10,223,150
                                                                                              =====================
</TABLE>


                                       33
<PAGE>

WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 5.          DEPOSITS (CONTINUED)

Interest  expense on deposits for the years ended September 30, 1999 and 1998 is
summarized as follows:
<TABLE>
<CAPTION>

                                                                                    1999                  1998
                                                                            ---------------------------------------
<S>                                                                         <C>                         <C>
Passbook accounts                                                           $           103,300         $  100,050
MMDA and NOW accounts                                                                   327,500            302,750
Certificate of deposit accounts                                                       2,584,800          2,662,100
                                                                            ---------------------------------------
                                                                                      3,015,600          3,064,900
Forfeitures                                                                              (8,250)           (18,900)
                                                                            ---------------------------------------
                                                                            $         3,007,350         $3,046,000
                                                                            =======================================
</TABLE>


Eligible deposits are insured to $100,000 by the Savings  Association  Insurance
Fund (SAIF) which is administered by the FDIC.

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.  There were no costs associated with the Plan
during 1999 and 1998.

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 $30,300 and $39,250 for 1999 and 1998, 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.


                                       34
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


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, 1999, 40% 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,  1999  and  1998  was  $49,000  and  $56,750,
respectively.

NOTE 8.        STOCK OPTION PLAN

The Company has a stock option plan for the benefit of its officers,  directors,
and key employees.

A summary of the status of the stock  option  plan at  September  30, 1999 is as
follows:
<TABLE>
<CAPTION>
                                                                                                     WEIGHTED
                                                                                                     AVERAGE
OPTIONS:                                                                       SHARES             EXERCISE PRICE
------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                       <C>
Outstanding at September 30, 1997                                                   54,000               $  12.75
Granted                                                                                 --                     --
Exercised                                                                          (2,414)                  12.75
Forfeited                                                                              --                      --
                                                                          ----------------------------------------
Outstanding at September 30, 1998                                                   51,586                  12.75
Granted                                                                                 --                     --
Exercised                                                                               --                      --
Forfeited                                                                               --                      --
                                                                          ----------------------------------------
Outstanding at September 30, 1999                                                   51,586               $  12.75
                                                                          ========================================
</TABLE>


The options were granted on January 22, 1997 and become  exercisable at the rate
of 20%  annually  for five years during such periods of services as an employee,
officer, or director, expiring 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.  At September  30, 1999 and
1998, 19,186 and 8,386 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.



                                       35
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 8.       STOCK OPTION PLAN (CONTINUED)

However,  had compensation cost been recorded based on the fair value ($8.38 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 $55,000 and $0.05 per basic and dilutive share, respectively,  for
1999 and 1998. 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 1.56%; risk-free interest rates
of 5.88%; expected lives of 7 years; and price volatility of 29.94%.

NOTE 9.        EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

The Association has an ESOP to benefit substantially all employees. The ESOP has
purchased  41,200  shares of common stock with the  proceeds  from a loan from a
third  party  financial  institution.  The  note  requires  quarterly  principal
payments of $14,714 plus interest at the lending institution's prime rate (8.25%
at September 30, 1999) 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, 1999, future principal payments are due as follows:

<TABLE>
<CAPTION>
<S>                                                                                           <C>
 2000                                                                                         $             58,856
 2001                                                                                                       58,856
 2002                                                                                                       58,856
 2003                                                                                                       29,432
                                                                                                 ------------------
                                                                                              $            206,000
                                                                                              =====================
</TABLE>


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 $76,150 and $116,650 for the years ended September 30,
1999 and 1998, 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, 1999,  based upon the fair value of the ESOP
shares at that time of $14.125,  was $375,950.  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.

                                       36
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 9.         EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) (CONTINUED)

Shares of the  Company  held by the ESOP at  September  30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>

                                                                                        1999               1998
                                                                            ---------------------------------------
<S>                                                                         <C>                 <C>
Shares held by the ESOP                                                                  41,200             41,200
Shares released for allocation                                                         (20,600)           (14,710)
                                                                            ---------------------------------------
Unreleased (unearned) shares                                                             20,600             26,490
                                                                            =======================================

Fair value of unreleased (unearned) shares                                   $          290,950 $          344,350
                                                                            =======================================
</TABLE>


NOTE 10.        INCOME TAXES

At September 30, 1999 and 1998,  retained  earnings contain certain additions to
bad debt  reserves  for income tax  purposes of  approximately  $1,434,000,  the
balance at September  30, 1988,  for which no deferred  taxes have been provided
because the Association does not intend to use these reserves for purposes other
than to absorb  losses.  The amount of the  deferred  taxes on such tax bad debt
reserves which is unrecorded amounted to approximately $545,000 at September 30,
1999 and 1998. 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 current  period.  At
September  30, 1999,  the remaining  liability  associated  with the  recaptured
reserves is approximately  $59,900.  Deferred income taxes have been established
for the taxes associated with the recaptured reserves.

Income tax expense differs from the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
                                                                                      1999              1998
                                                                              --------------------------------------
<S>                                                                                      <C>              <C>
Statutory federal income tax rate                                                        34.00%           34.00%
Increase (decrease) in income taxes resulting from:
   Nontaxable income, net                                                                   --             (0.10)
   State income taxes, net of federal benefit                                             3.15              2.68
   Other, net                                                                             0.99              0.30
                                                                              --------------------------------------
                                                                                         38.14%            36.88%
                                                                              ======================================
</TABLE>

                                       37
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 10.        INCOME TAXES (CONTINUED)

Deferred  income taxes consist of the  following  components as of September 30,
1999 and 1998:
<TABLE>
<CAPTION>
                                                                                    1999               1998
                                                                             --------------------------------------
<S>                                                                          <C>                    <C>
Deferred tax assets:
   Loan loss allowances                                                      $           99,950     $       99,950
   Deferred loan fees                                                                    20,800             22,950
   Health insurance accrual                                                              15,850             15,850
   MRP expense accrual                                                                       --             14,400
   Retirement plan accrual                                                               74,250             64,600
                                                                             --------------------------------------
                                                                                        210,850            217,750
                                                                             --------------------------------------
Deferred tax liabilities:
   Tax bad debt reserves                                                                 59,900             71,850
   Excess accumulated tax depreciation                                                   21,950             24,100
   Unrealized net appreciation, investments                                             289,800            292,400
                                                                             --------------------------------------
                                                                                        371,650            388,350
                                                                             --------------------------------------
                                                                             $        (160,800)     $     (170,600)
                                                                             ======================================
</TABLE>


NOTE 11.        CAPITAL

Concurrent  with the  reorganization  in 1996, the Association has 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 Board 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.  During 1999,  the  Association  paid upstream
dividends  to  the  Company  amounting  to  $868,000.   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.

                                       38
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 11.         CAPITAL (CONTINUED)

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, 1999,  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)                                             $        13,467,850   $   13,467,850     $   13,467,850
Standalone equity of Wake Forest Bancshares, Inc.                   (520,350)         (520,350)          (520,350)
Net unrealized gain on investment securities                        (472,900)         (472,900)          (472,900)
Supplemental capital items:
   General valuation allowances                                           --                --            263,000
                                                          ---------------------------------------------------------
Regulatory capital                                                 12,474,600        12,474,600         12,737,600
Minimum capital requirement                                         1,074,500         2,149,000          4,015,650
                                                          ---------------------------------------------------------
Excess regulatory capital                                 $        11,400,100   $    10,325,600    $     8,721,950
                                                          =========================================================

Total assets at September 30, 1999 less fair
   market value adjustment of securities                  $        71,632,850   $    71,632,850                 --

Risk-weighted assets at September 30, 1999                                 --                --    $    50,195,600

Capital as a percentage of assets:
   Actual                                                               17.41%            17.41%             25.38%
   Required                                                              1.50              3.00               8.00
                                                            -------------------------------------------------------
   Excess                                                               15.91%            14.41%             17.38%
                                                            =======================================================
</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  will 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 as permitted by  applicable  law. At
September  30, 1999,  the Company had  repurchased  25,400  shares of its common
stock. The program continues until terminated by the Board of Directors.

                                       39
<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, 1999
the Association had outstanding  loan commitments  amounting to $1,709,000.  The
undisbursed  portion of  construction  loans amounted to $12,460,100  and unused
lines of credit amounted to $3,219,000 at September 30, 1999.

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, 1999 and 1998. 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,
                                                             1999                              1998
                                              ---------------------------------------------------------------------
                                                  Carrying           Fair           Carrying           Fair
                                                   Amount            Value           Amount            Value
                                              ---------------------------------------------------------------------
<S>                                           <C>                    <C>            <C>                <C>
Financial assets:
   Cash                                       $       6,501,050     $  6,501,050    $  15,311,350      $15,311,350
   Available for sale investment securities           3,527,750        3,527,750        2,785,100        2,785,100
   FHLB stock                                           280,400          280,400          364,100          364,100
   Loans receivable                                  61,467,300       61,658,800       55,363,450       55,359,400
   Accrued interest receivable                          101,850          101,850           25,550           25,550
Financial liabilities:
   Deposits                                          57,653,900       58,284,400       60,037,950       60,262,250
   Note payable - ESOP                                  206,000          206,000          264,850          264,850
</TABLE>

                                       40
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE 14.     MUTUAL HOLDING COMPANY FINANCIAL DATA

The MHC owns  approximately  53% 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, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                    1999               1998
                                                                            ---------------------------------------
<S>                                                                         <C>                      <C>
Assets:
   Cash and cash equivalents                                                $           691,000      $     526,900
   Accrued dividends receivable, subsidiary                                              76,200             76,200
   Investment in Wake Forest Bancshares, Inc.                                         4,726,850                 --
   Investment in Wake Forest Federal                                                         --          4,404,450
                                                                            ---------------------------------------
                                                                            $         5,494,050      $   5,007,550
                                                                            =======================================
Liabilities and Equity:
   Liabilities:
      Accounts payable and accrued expenses                                 $            11,200      $      10,500
                                                                           ---------------------------------------
   Equity:
      Capitalization by Wake Forest Federal                                             106,350            106,350
      Equity in Wake Forest Federal                                                          --          3,854,700
      Equity in Wake Forest Bancshares, Inc.                                          3,854,700                 --
      Retained earnings                                                               1,521,800          1,036,000
                                                                            ---------------------------------------
                                                                                      5,482,850          4,997,050
                                                                            ---------------------------------------
                                                                            $         5,494,050      $   5,007,550
                                                                            =======================================
</TABLE>

                                          CONDENSED STATEMENTS OF INCOME
                                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                    1999               1998
                                                                            ---------------------------------------
<S>                                                                         <C>                 <C>
Interest income                                                             $            30,400 $           19,650
Equity in earnings of subsidiary                                                        627,300            565,550
Accounting and tax expense                                                              (19,800)           (12,700)
Attorney Fees                                                                           (43,750)           (21,100)
Director's fees                                                                         (84,950)           (43,500)
Other                                                                                   (23,400)            (2,000)
                                                                            ---------------------------------------
                                                                            $           485,800  $         505,900
                                                                            =======================================
</TABLE>

                                       41
<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, 1999 AND 1998
<TABLE>
<CAPTION>


Cash Flows from Operating Activities:                                               1999               1998
                                                                            ---------------------------------------
<S>                                                                         <C>                      <C>
   Net income                                                               $           485,800      $     505,900
   Noncash income items:
      Equity in earnings of Wake Forest Federal                                       (627,300)           (565,550)
   Change in assets and liabilities:
      (Increase) in accrued dividends receivable                                            --             (12,700)
      Decrease in income tax refund receivable                                              --               7,800
      Decrease in investment in subsidiary - dividends                                  304,900            292,050
      Increase in accounts payable                                                          700                 --
                                                                            ---------------------------------------
        Net cash provided by operating activities                                       164,100            227,500
   Cash and cash equivalents- beginning                                                 526,900            299,400
                                                                               ------------------------------------
   Cash and cash equivalents- ending                                        $           691,000      $     526,900
                                                                               ====================================
</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 SHEET
                                                SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
<S>                                                                                         <C>
Assets:
   Cash and cash equivalents                                                                $             522,900
   Accrued dividends receivable, Wake Forest Federal                                                      143,700
   Investment in Wake Forest Federal                                                                   12,982,500
                                                                                            ----------------------
                                                                                            $          13,649,100
                                                                                            ======================
Liabilities:
   Accrued dividends payable                                                                $             143,700
   Income taxes payable                                                                                     2,550
                                                                                            ----------------------
                                                                                                          146,250
                                                                                            ----------------------
Equity:
   Common stock                                                                                            12,150
   Additional paid-in capital                                                                          13,715,850
   Retained earnings                                                                                      126,500
   Treasury stock acquired                                                                               (351,650)
                                                                                            ----------------------
                                                                                                       13,502,850
                                                                                            ----------------------
                                                                                            $          13,649,100
                                                                                            ======================
</TABLE>

                                       42
<PAGE>
WAKE FOREST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


NOTE 15.       PARENT COMPANY ONLY FINANCIAL DATA (CONTINUED)

<TABLE>
<CAPTION>
                                          CONDENSED STATEMENT OF INCOME
                    FOR THE PERIOD FROM MAY 7, 1999 (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
<S>                                                                                            <C>
Interest income                                                                                $             6,550
Equity in earnings of Wake Forest Federal                                                                  412,100
Miscellaneous expense                                                                                          (50)
Income tax expense                                                                                          (2,500)
                                                                                               ====================
           Net income                                                                          $           416,100
                                                                                               ====================
</TABLE>

<TABLE>
<CAPTION>


                                        CONDENSED STATEMENT OF CASH FLOWS
                    FOR THE PERIOD FROM MAY 7, 1999 (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
<S>                                                                                            <C>
Cash Flows from Operating Activities:

   Net income                                                                                  $           416,100
   Noncash income items:
      Equity in earnings of Wake Forest Federal                                                           (412,100)
   Change in assets and liabilities:
      (Increase) in accrued dividends receivable                                                          (143,700)
      Increase in accrued dividends payable                                                                143,700
      Increase in income tax payable                                                                         2,550
                                                                                               --------------------
        Net cash provided by operating activities                                                            6,550
                                                                                               --------------------
Cash Flows from Financing Activities:
   Treasury stock acquired                                                                                (351,650)
   Dividends received from Wake Forest Federal                                                             868,000
                                                                                               --------------------
        Net cash provided from financing activities                                                        516,350
                                                                                               --------------------
   Increase in cash                                                                                        522,900
                                                                                               --------------------
   Cash and cash equivalents- beginning                                                                         --
                                                                                               --------------------
   Cash and cash equivalents- ending                                                           $           522,900
                                                                                               ====================
</TABLE>


NOTE 16.        RECLASSIFICATIONS

Certain  amounts in the 1998  financial  statements  have been  reclassified  to
conform with classifications used in 1999.

                                       43
<PAGE>


                            COMMON STOCK INFORMATION


The  Company's  stock  (previously  as Wake  Forest  Federal  Savings  and  Loan
Association)  began  trading on April 3,  1996.  There are  1,190,462  shares of
common stock  outstanding  (net of treasury shares) of which  approximately  41%
were held by 252 stockholders of record on September 30, 1999. The MHC, ESOP and
RRP Trust hold  approximately  59%. 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, 1999 and
1998,  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>
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

 1998:
 First Quarter                                             $            0.10  $          23 1/2 $           19 1/4
 Second Quarter                                                         0.12             23 1/2             20 5/8
 Third Quarter                                                          0.12             23 1/4                 18
 Fourth Quarter                                                         0.12             21 1/2                 13

</TABLE>

                                       44
<PAGE>
                              CORPORATE INFORMATION


                               EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
<S>                                   <C>                                          <C>
           Anna O. Sumerlin                    Carlton E.Chappell                     Robert C. White
          PRESIDENT AND CEO            VICE PRESIDENT/SECRETARY, TREASURER         VICE PRESIDENT AND CFO


                                                    DIRECTORS
             Howard Brown                      Rodney M. Privette                   R. W. Wilkinson III
        CHAIRMAN OF THE BOARD                                                    VICE CHAIRMAN OF THE BOARD



             John D. Lyon                         Paul Brixhoff                       Anna O. Sumerlin


         Harold R. Washington                   William S. Wooten                    Leelan A. Woodlief


         STOCK TRANSFER AGENT                 SPECIAL LEGAL COUNSEL                 INDEPENDENT AUDITORS
   ChaseMellon Shareholder Services         Thacher, Proffitt & Wood              McGladrey & Pullen, LLP
      450 W. 33rd St. 10th Floor           1700 Pennsylvania Ave. N.W.              2418 Blue Ridge Road
          New York, NY 10001                  Washington, DC 20006                      PO Box 10366
                                                                                    Raleigh, N.C. 27605



                                                CORPORATE OFFICE

                                                302 S. Brooks St.

                                             Wake Forest, N.C. 27587






                                                  ANNUAL MEETING

                         THE 2000 ANNUAL MEETING OF  STOCKHOLDERS OF WAKE FOREST
                         BANCSHARES,  INC.  WILL BE HELD AT 2:00 PM ON  TUESDAY,
                         FEBRUARY 22, 2000 AT THE WAKE FOREST POLICE AND JUSTICE
                         CENTER AT 401 ELM AVENUE, WAKE FOREST, N.C.


                                                   FORM 10-KSB

                         A COPY OF 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., P O BOX
                         1167, WAKE FOREST, N.C.  27588.

</TABLE>