EXHIBIT 13.1

                                    CONTENTS

<TABLE>
<S>                                                                                                 <C>
-------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA                                                                       1
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REPORT TO STOCKHOLDERS                                                                                     2
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MANAGEMENT'S DISCUSSION AND ANALYSIS                                                                  3 - 13
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INDEPENDENT AUDITOR'S REPORT                                                                              14
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CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated statements of financial condition at September 30, 2000 and 1999                             15

Consolidated statements of income for years ended September 30, 2000 and 1999                             16

Consolidated statements of stockholders' equity for the years ended
September 30, 2000 and 1999                                                                           17 -18

Consolidated statements of cash flows for the years ended
September 30, 2000 and 1999                                                                          19 - 20
-------------------------------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                           21 - 37
-------------------------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION                                                                                  38
-------------------------------------------------------------------------------------------------------------
CORPORATE INFORMATION                                                                                     39

</TABLE>




<PAGE>

                          WAKE FOREST BANCSHARES, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                             September 30,
                                                -------------------------------------------------------------------
                                                     2000          1999          1998           1997         1996
                                                ------------- -------------- -----------   ------------  -----------
<S>                                             <C>           <C>            <C>           <C>           <C>
Financial Condition Data:                                                   (In Thousands)
Total assets                                    $   83,268      $   72,396     $  74,360     $  63,453    $  61,812
Investments (1)                                      9,607           9,635        17,528         8,671       12,742
Loans receivable, net                               72,564          61,467        55,363        53,673       47,821
Deposits                                            67,874          57,654        60,038        50,056       48,956
Stockholders' equity (2)                            14,172          13,468        13,167        12,121       11,721
</TABLE>

<TABLE>
<CAPTION>
                                                                       Years Ended September 30,
                                                    --------------------------------------------------------------------
                                                        2000          1999           1998          1997         1996
                                                    ------------- -------------- ------------- ------------- -----------
<S>                                              <C>             <C>            <C>           <C>           <C>
Operating Data:                                                   (In Thousands, Except Per Share Data)
Interest and dividend income                            $ 6,797      $  6,204       $  5,983      $  5,183     $  4,859
Interest expense                                          3,326         3,027          3,072         2,590        2,730
                                                    ------------- -------------- ------------- ------------- ------------
Net interest income                                       3,471         3,177          2,911         2,593        2,129
Provision for loan losses                                    34            --             --            --           --
Noninterest income                                           50            42             34            56           37
Noninterest expense                                       1,356         1,275          1,264         1,195        1,291
                                                    ------------- -------------- ------------- ------------- ------------
Income before income taxes                                2,131         1,944          1,681         1,454          875
Income tax expense                                          800           741            620           543          322
                                                    ------------- -------------- ------------- ------------- ------------
Net income                                              $ 1,331       $ 1,203        $ 1,061       $   911      $   553
                                                    ============= ============== ============= ============= ============

Basic earnings per share (2)                            $  1.15       $  1.02        $  0.91       $  0.79      $  0.15
Diluted earnings per share (2)                             1.15          1.02           0.89          0.78         0.15
Dividends per share (2)                                    0.48          0.48           0.46          0.35         0.14
Dividend payout ratio (2)                                 41.87%        47.06%         51.69%        44.87%       30.15%
Selected Other Data:
Return on average assets (4)                               1.71%         1.62%          1.28%         1.47%        0.92%
Return on average equity (4)                               9.64%         8.83%          7.26%         7.55%        5.78%
Interest rate spread (4)                                   3.54%         3.38%          3.39%         3.32%        2.83%
Average equity to average assets (4)                      17.74%        18.35%         17.63%        19.47%       15.92%
Net interest margin (4)                                    4.54%         4.34%          4.26%         4.32%        3.69%
Allowance for loan losses to
nonperforming loans (3)                                    0.00%        89.51%        196.79%       134.43%      124.64%
Nonperforming loans to total loans (3)                     0.00%         0.48%          0.24%         0.36%        0.40%
</TABLE>

(1)  Includes interest earning deposits and investment securities
(2)  On  April  3,  1996,  Wake  Forest  Federal  Savings  &  Loan   Association
     reorganized  from a federally  chartered  mutual  savings  association to a
     federally chartered stock savings association.  Earnings per share for 1996
     is based on earnings  from April 3, 1996 to  September  30, 1996 divided by
     the weighted average number of shares outstanding during the period
(3)  Nonperforming loans include mortgage loans delinquent more than 90 days
(4)  Average balances are derived from month-end balances



                                       1
<PAGE>


                             REPORT TO STOCKHOLDERS

I am  pleased  to report  that Wake  Forest  Bancshares,  Inc.  reported  record
earnings  of $1.33  million,  or $1.15 per  share,  for our  fiscal  year  ended
September  30, 2000.  Earnings  during the current year grew by almost 11% while
growth in earnings per share  increased by nearly 13%. The Company also reported
record asset growth of $10.9 million, or 15% during 2000. The Board of Directors
and management's primary commitment is to maximize shareholder value by building
a strong and profitable institution.  This report demonstrates that during 2000,
our continuing commitment to that goal was achieved.

The Company's  return on assets amounted to 1.71% and return on equity increased
by  9%  during  the  current  year.   The  Company's   loan  portfolio  grew  by
approximately  18% during the year and asset quality continues to remain strong.
Customer  deposits also increased by approximately  18% during 2000. The Company
declared regular dividends of $0.12 per share during each quarter of the current
year, a generous 42% of total 2000 earnings. The Company continues to maintain a
strong capital position and reported  operating  expenses as a percentage of net
interest income of approximately  39% during 2000, an enviable ratio compared to
our peers in the industry.

Loan demand  remains  strong in our primary  lending market of northern Wake and
southern Franklin counties.  The Wake Forest area experienced widespread growth,
both  commercially and in residential  housing during the current year, and that
growth is expected to continue  due to the area's  proximity  to Raleigh and the
Research  Triangle  Park.  Management is committed to continued but prudent loan
growth as our community  expands.  We also intend to remain competitive with our
deposit products to ensure continued growth and profitability.

We, the  management,  directors and  employees,  pledge to continue to serve our
local market as a home town community-oriented  financial institution.  We thank
each  stockholder  for  investing  in the  Company  and  are  grateful  for  the
opportunity to enhance the value of your  investment  through the safe and sound
operation of the Company.  We encourage your comments and  suggestions and truly
appreciate your support and business.



                                        Respectfully,

                                        /s/ Anna O. Sumerlin
                                        Anna O. Sumerlin
                                        President & Chief Executive Officer


                                       2
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                                     GENERAL

Wake Forest  Bancshares,  Inc. (the  "Company") was formed on May 7, 1999 solely
for the purpose of becoming a savings and loan holding  company and had no prior
operating  history.  The Company  owns 100% of the stock of Wake Forest  Federal
Savings & Loan  Association  ("Wake Forest Federal" or the  "Association").  The
Company in turn is majority owned by Wake Forest Bancorp,  M.H.C., (the "MHC") a
mutual holding company.

The formation of the Company had no impact on the operations of the  Association
or the MHC. The Association continues to operate at the same location,  with the
same management,  and subject to all the rights,  obligations and liabilities of
the Association which existed immediately prior to the formation of the Company.
The  establishment  of the Company was treated similar to a pooling of interests
for accounting purposes.  Therefore,  the consolidated  capitalization,  assets,
liabilities,  income and  expenses  of the  Company  immediately  following  its
formation will be substantially the same as those of the Association immediately
prior to the  formation,  all of which will be shown on the  Company's  books at
their historical recorded values.

The Company  conducts no business  other than holding stock in the  Association,
investing dividends received from the Association, repurchasing its common stock
from  time to  time,  and  distributing  dividends  on its  common  stock to its
shareholders.  The principal  business of the Association is accepting  deposits
from the general  public and using  those  deposits  and other  sources of funds
primarily to make loans  secured by real estate and, to a lesser  extent,  other
forms of collateral located in the Association's primary market area of Wake and
Franklin counties in North Carolina.

Members  of  the  MHC  consist  of  depositors  and  certain  borrowers  of  the
Association,  who have the sole authority to elect the board of directors of the
MHC for as long as it remains in mutual  form.  Initially,  the MHC's  principal
asset  consisted  of  635,000  shares of the  Association's  common  stock  (now
converted  to the  Company's  common  stock).  The MHC has  since  received  its
proportional  share of dividends  declared and paid by the Association  (now the
Company), and such funds are invested in deposits with the Association. The MHC,
which by law must own in excess of 50% of the  stock of the  Company,  currently
has an ownership interest of 54.2% of the Company. The MHC's Board of Directors,
which is currently  the same as the  Association's  and the  Company's  Board of
Directors,  will  generally  be able to  control  the  outcome  of most  matters
presented to the  stockholders  of the Company for resolution by vote except for
certain matters related to stock compensation plans, a vote regarding conversion
of the mutual  holding  company to stock form,  or other matters which require a
vote only by the minority  stockholders.  The Company and the MHC are registered
as a  savings  and  loan  holding  companies  and  are  subject  to  regulation,
examination, and supervision by the OTS.

The  Association's  results of operations  depend  primarily on its net interest
income,  which is the difference  between interest income from  interest-earning
assets and interest expense on interest-bearing  liabilities.  The Association's
operations  are also affected by  noninterest  income,  such as fees from loans,
customer  deposit account  service  charges,  and other sources of revenue.  The
Association's principal operating expenses, aside from interest expense, consist
of compensation and related benefits, federal deposit insurance premiums, office
occupancy costs, and other general and administrative expenses.

The  following  discussion  and  analysis  is  intended  to  assist  readers  in
understanding the results of operations and changes in financial position at and
for the years ended September 30, 2000 and 1999.


                                       3
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                               FINANCIAL CONDITION

Total assets  increased by $10.9  million  during  2000,  from $72.4  million at
September 30, 1999 to $83.3 million at September 30, 2000. The increase in total
assets  resulted  primarily  from an  increase  of  $10.2  million  in  customer
deposits. Total investments,  including short term interest-earning deposits and
U.S. Treasury and agency  obligations  decreased  slightly by $28,450 during the
current year.  The lack of volatility in the Company's  investment  portfolio is
primarily due to strong loan demand, which resulted in maintaining liquidity and
portfolio balances at current levels. The investment securities portfolio, which
amounted to $3.4 million at  September  30, 2000,  contains  available  for sale
securities  with net  unrealized  gains of  $800,350.  The net gain  reflects an
increase of approximately  $37,700 over the net unrealized gain on available for
sale securities at September 30, 1999, primarily as a result of unrealized gains
during the current  year on the  Association's  investment  in Federal Home Loan
Mortgage Company ("FHLMC") stock.

Loans receivable increased by approximately $11.1 million during 2000 from $61.5
million at  September  30, 1999 to $72.6  million at September  30,  2000.  Loan
demand in the Association's  primary lending markets continues to remain strong,
particularly  for new housing  starts.  The economic  base in the  Association's
primary  lending areas has increased over the last several years,  primarily due
to the  continuing  growth in the  Research  Triangle/Wake  County  area and the
expansion  of its  population  base into  surrounding  communities  such as Wake
Forest.

Customer  deposits  increased by  approximately  $10.2  million  during 2000 and
totaled $67.9 million at September 30, 2000. The increase  occurred  because the
Association  competitively  priced its deposit  products,  which was required in
order to fulfill the funding requirements of increased loan demand.

The Company had no outstanding  borrowings  during 2000 or 1999,  other than the
loan by the Employee  Stock  Ownership Plan of the  Association  (the "ESOP") to
purchase  shares of stock in the  Company,  which is shown as a liability of the
Company. The Company has borrowing capacity through the Association's ability to
borrow  funds from the  Federal  Home Loan Bank (the  "FHLB") of  Atlanta.  This
capacity is currently set at 12% of the Association's  total assets,  subject to
available collateral.

The  Company's  return on  average  assets was 1.71% and 1.62% and its return on
average equity was 9.64% and 8.83% for 2000 and 1999, respectively. The increase
in the returns on average  assets and average  equity  during 2000 was primarily
due to a change in the volume and mix of the Company's  interest earning assets.
During the current period, the Association's loan portfolio  increased and funds
on deposit at the Federal Home Loan Bank of Atlanta  decreased in  comparison to
average balances maintained in 1999. The overall increase in the volume of loans
outstanding and as a result,  interest earning assets, caused interest income to
rise during 2000.

The  Company  and  the   Association   are  required  to  meet  certain  capital
requirements as established by the OTS (the "Office of Thrift Supervision").  At
September  30,  2000,  all capital  requirements  were met.  (See Note 11 to the
consolidated financial statements).  On June 21, 1999, the Board of Directors of
the Company  approved the adoption of stock repurchase  program  authorizing the
Company to  repurchase up to 60,793  shares or 5.00% of its  outstanding  common
stock at such time. The repurchases are made through  registered  broker-dealers
from shareholders in open market purchases at the discretion of management.  The
Company  intends to hold the shares  repurchased  as  treasury  shares,  and may
utilize  such  shares  to fund  stock  benefit  plans or for any  other  general
corporate  purpose as permitted by applicable  law. At September  30, 2000,  the
Company had  repurchased  44,800  shares of its common stock for  $605,450.  The
program continues until terminated by the Board of Directors.


                                       4
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                              RESULTS OF OPERATIONS

Net Income.  The Company's net income for the years ended September 30, 2000 and
1999 was $1,330,900 and $1,202,550,  respectively. Net income in 2000 was higher
than the earnings  reported in 1999  primarily  due to an increase in the volume
and a change in the mix of interest  earning assets,  with higher yielding loans
comprising a greater percentage of interest earning assets during 2000.

Net Interest  Income.  Net interest  income  represents the  difference  between
income derived from  interest-earning  assets and interest  expense  incurred on
interest-bearing  liabilities.  Net interest  income is affected by both (i) the
difference between the rates of interest earned on  interest-earning  assets and
the rates paid on interest-bearing liabilities ("interest rate spread") and (ii)
the relative amounts of interest-earning assets and interest-bearing liabilities
outstanding during the period.

Net interest income  increased by $294,150 or 9.26% to $3.5 million for the year
ended  September  30, 2000 from $3.2 million  reported in 1999.  The rise in net
interest income during 2000 was attributable primarily to an overall increase in
interest  earnings  assets,  with an even greater  increase  occurring in higher
yielding  loans.  The  average  balance  of  interest  earning  assets and loans
receivable   increased  by   approximately   $3.2  million  and  $9.3   million,
respectively,  during  2000.  The  increase  in the volume of loans  outstanding
during 2000  allowed the  Company's  net interest  rate spread to increase  from
3.38% in 1999 to 3.54% in 2000.

Interest  Income.  Total interest income increased to $6.8 million for 2000 from
$6.2  million in 1999,  an increase  of  $593,800.  The rise in interest  income
during 2000 was primarily attributable to a $9.3 million increase in the average
balance of loans  outstanding in 2000.  The Company's  overall yield on interest
earning assets was 8.88% in 2000 as compared with 8.47% in 1999.

Interest Expense.  Total interest expense increased from $3.0 million in 1999 to
$3.3 million in 2000, an increase of $299,650.  During 2000,  the  Association's
average balance of outstanding  deposits increased by approximately $2.8 million
from 1999. The Association's cost of funds increased from 5.09% in 1999 to 5.34%
in 2000, an increase of 25 basis points.  The increase in interest  expense from
1999 to 2000 was due almost  equally to increases  in the volume of  outstanding
deposits and the Association's higher cost of funds.

Provision for Loan Losses.  The Association  provided $34,250 in additional loan
loss provisions  during 2000.  During the current year, the Association  charged
off $17,300 against its loan loss allowance for a non-performing  loan which was
subsequently paid off during the period. The Association's management determined
that its loan loss  allowances were adequate  during 1999 and,  accordingly,  no
additional  provisions  were  provided in 1999.  There were no loans charged off
against the allowances during 1999.

The  provision,  which is charged to  operations,  and the  resulting  loan loss
allowances are amounts the Association's management believes will be adequate to
absorb losses that are estimated to have occurred. Loans are charged off against
the  allowance  when  management  believes that  uncollectibility  is confirmed.
Subsequent recoveries,  if any, are credited to the allowance. The allowance for
loan losses is  evaluated  on a regular  basis by  management  and is based upon
management's  periodic  review  of the  collectibility  of the loans in light of
historical  experience,  the nature and  volume of the loan  portfolio,  adverse
situations that may affect the borrower's  ability to repay,  estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently   subjective  as  it  requires  estimates  that  are  susceptible  to
significant revisions as more information becomes available.


                                       5
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

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

The Association's  level of non-performing  loans,  defined as loans past due 90
days or more, amounted to .00% and .48% as percentage of total loans outstanding
at September  30, 2000 and 1999,  respectively.  Management  believes  that such
loans  are  adequately  collateralized  and that  the  Association's  loan  loss
allowances  are  adequate  to absorb the loss,  if any,  that might  result from
foreclosure.

Noninterest  Income.  Noninterest income amounted to $50,100 and $41,750 in 2000
and 1999, respectively. Noninterest income consists primarily of service charges
and fees associated with the Association's loan and deposit accounts.

Noninterest  Expense.   Noninterest  expense  consists  primarily  of  operating
expenses for compensation and related  benefits,  occupancy,  federal  insurance
premiums,  OTS operating assessments,  and data processing charges.  Noninterest
expenses amounted to $1,356,250 and $1,274,950 in 2000 and 1999, respectively.

Compensation and related benefits increased from $748,550 in 1999 to $872,200 in
2000. The increase in compensation and benefits occurred primarily due to salary
increases  and  related  bonuses  and due to an  increase  in  certain  employee
benefits,  including a 55.58% increase in the cost of health insurance  coverage
for the Company's employees.

Occupancy expense,  federal insurance premiums, OTS operating  assessments,  and
data  processing  expense changed  nominally from 1999 to 2000.  Other operating
expense  decreased from $323,300 in 1999 to $287,400  during 2000, a decrease of
$35,900.  The  decrease  in other  operating  expense was due  primarily  to the
occurrence of one-time costs  associated with the  establishment  of the Company
during 1999. Certain  administrative  costs are allocated to the MHC as shown in
Note 14 to the Consolidated Financial Statements.  The allocations appropriately
reflect  the  costs  associated  with  the  mutual  holding  company's  majority
ownership in the Company.

Income  Taxes.  The Company's  effective  income tax rate was 37.5% and 38.1% in
2000 and 1999, respectively. The differences in rates were due to changes in the
components of permanent tax differences.

                     IMPACT OF INFLATION AND CHANGING PRICES

The  consolidated  financial  statements  and  accompanying  footnotes have been
prepared in accordance with generally  accepted  accounting  principles  (GAAP),
which require the  measurement  of financial  position and operating  results in
terms of historical  dollars without  consideration  for changes in the relative
purchasing power of money over time due to inflation. The assets and liabilities
of the Company are  primarily  monetary in nature and changes in interest  rates
have a greater  impact  on the  Company's  performance  than do the  effects  of
inflation.


                                       6
<PAGE>

                  AVERAGE BALANCES, INTEREST, YIELDS AND COSTS

The following table sets forth certain information relating to the Association's
average balance sheets and reflects the average yield on assets and average cost
of  liabilities  at and for the  periods  indicated.  Such  yields and costs are
derived  by  dividing  income or  expense  by the  average  balance of assets or
liabilities,  respectively,  for the periods  presented.  Average  balances  are
derived from  month-end  balances.  Management  does not believe that the use of
month-end  balances  instead  of daily  average  balances  has caused a material
difference in the information presented.

<TABLE>
<CAPTION>
                                                                                 Year Ended September 30,
                                                             ----------------------------------------------------------------
                                     At September 30, 2000                 2000                            1999
                                    -----------------------  ---------------------------------  -----------------------------
                                                                                      Average                         Average
                                      Actual                  Average                  Yield/    Average               Yield/
                                      Balance    Yield/Cost   Balance     Interest      Cost     Balance  Interest      Cost
                                    ---------   -----------  ---------   ---------   ---------  --------  --------   --------
<S>                                 <C>        <C>          <C>         <C>          <C>        <C>       <C>        <C>
Assets:                                                            (Dollars in Thousands)

Interest earning assets:
    Interest-earning deposits         $ 6,250        6.64%     $ 5,155     $   316       6.13%   $11,169   $   557       4.99%
    Investment securities               3,356        5.70%       2,923         166       5.68%     2,974       171       5.75%
    Loans receivable (1)               72,564        9.19%      68,435       6,316       9.23%    59,124     5,476       9.26%
                                    ---------                 --------     -------               -------   -------
Total interest-earning assets          82,170        8.88%      76,513       6,798       8.88%    73,267   $ 6,204       8.47%
                                                                           -------                         -------
Non-interest-earning assets             1,098                    1,274                             1,154
                                    ---------                 --------                           -------
         Total                        $83,268                  $77,787     $                     $74,421
                                    =========                 ========                           =======

Liabilities and retained earnings:
Interest-bearing liabilities:
    ESOP Debt                         $   147        9.50%     $   190     $    17       8.96%   $   238   $    19       7.98%
    Passbook accounts                   3,276        3.00%       3,533         106       3.00%     3,433       103       3.00%
    NOW and MMDA accounts               9,356        4.28%       9,587         390       4.07%     9,565       327       3.42%
    Certificates of deposit            54,505        6.27%      48,936       2,814       5.75%    46,226     2,578       5.58%
                                    ---------                  -------     -------               -------   -------
Total interest-bearing liabilities     67,284        5.84%      62,246     $ 3,327       5.34%    59,462   $ 3,027       5.09%
                                                                           -------                         -------
Non-interest-bearing liabilities        1,812                    1,734                             1,333
Stockholders' Equity                   14,172                   13,807                            13,626
                                    ---------                  -------                           -------
         Total                        $83,268                  $77,787     $                     $74,421
                                    =========                  =======                           =======
Net interest income and interest
    rate spread (2)                                  3.04%                 $ 3,471      3.54%              $ 3,177       3.38%
                                                                           =======                         =======
Net yield on interest-
    earning assets (3)                               4.10%                               4.54%                           4.34%
Ratio of interest-earning assets
    to interest-bearing liabilities                122.12%                             122.92%                         123.22%
</TABLE>

(1)  Balance  is net of  deferred  loan fees and loans in  process.  Non-accrual
     loans are included in the balances.
(2)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(3)  Net yield on interest-earning assets represents net interest income divided
     by average interest-earning assets.

                                       7
<PAGE>

                   RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

The following table analyzes the dollar amount of changes in interest income and
interest  expense for major  components of the  Association's  interest  earning
assets and interest bearing  liabilities.  The table  distinguishes  between (i)
changes  in net  interest  income  attributable  to  volume  (changes  in volume
multiplied by the prior period's  interest  rate),  (ii) changes in net interest
income  attributable to rate (changes in interest rates  multiplied by the prior
period's  volume),  and (iii) mixed  changes  (changes in volume  multiplied  by
changes in rates).

<TABLE>
<CAPTION>
                                             Year ended September 30,                        Year ended September 30,
                                                 2000 vs. 1999                                   1999 vs. 1998
                                    ---------------------------------------------  -----------------------------------------
                                        Increase (Decrease) Attributable to            Increase (Decrease) Attributable to
                                    ---------------------------------------------  -----------------------------------------
                                                              Rate/                                       Rate/
                                       Volume     Rate       Volume       Net       Volume     Rate       Volume      Net
                                    ----------  --------   ----------  ----------  --------- ------   ------------- --------
<S>                                 <C>         <C>        <C>        <C>         <C>        <C>      <C>           <C>
Assets:                                                                   (In Thousands)
    Interest-earnings assets:
       Interest-bearing deposits     $   (300)   $  128     $  (69)    $  (241)   $   (79)   $ (71)      $   8       $ (142)
       Investment securities               (3)       (2)        --          (5)       (27)      20          (3)         (10)
       Loans receivable                   862       (19)        (3)        840        671     (263)        (35)         373
                                     ---------  --------   ----------  --------- ----------  ------  -------------  --------
            Total                         559       107        (72)        594        565     (314)        (30)         221
                                     ---------  --------   ----------  --------- ----------  ------  -------------  --------

Liabilities:
    Interest-bearing liabilities:
       ESOP Debt                           (4)        2         --          (2)        (5)      (2)         --           (7)
       Passbook savings                     3        --         --           3          3       --          --            3
       NOW and MMDA accounts                1        62         --          63         47      (20)         (3)          24
       Certificates of deposit            151        80          5         236         47     (110)         (2)         (65)
                                     ---------  --------   ----------  --------- ----------  ------  -------------  --------
           Total                          151       144          5         300         92     (132)         (5)         (45)
                                     ---------  --------   ----------  --------- ----------  ------  -------------  --------
           Net interest income       $    408    $  (37)    $  (77)    $   294    $   473    $(182)      $ (25)     $   266
                                     =========  ========   ==========  ========= ==========  ======  =============  ========
</TABLE>


                                       8
<PAGE>


WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                         CAPITAL RESOURCES AND LIQUIDITY

The Company  declared  dividends of $.12 per share for each quarter during 2000.
Although the Company anticipates that it will continue to declare cash dividends
on a regular basis, the Board of Directors will review its policy on the payment
of dividends on an ongoing  basis,  and such payment may be subject to dividends
received  from the  Association  to the Company,  future  earnings,  cash flows,
capital needs, and regulatory restrictions.

The  objective  of  the  Company's   liquidity   management  is  to  ensure  the
availability of sufficient  cash flows to meet all financial  commitments and to
capitalize on opportunities to enhance  stockholders'  value. More specifically,
liquidity ensures that adequate funds are available to meet deposit withdrawals,
fund loan and capital expenditure  commitments,  maintain reserve  requirements,
pay  operating  expenses,  and  provide  funds for debt  service,  dividends  to
stockholders,  and other institutional commitments. Funds are primarily provided
through financial resources from operating activities,  expansion of the deposit
base,  repayments  received  on  loans,  borrowings,  the  sale or  maturity  of
investments, or the ability to raise equity capital.

During the current year,  cash  increased by  approximately  $1.2  million,  and
amounted  to $6.7  million at  September  30,  2000.  Cash flow  resulting  from
internal operating  activities provided increases of $1.5 million in cash during
the year ended September 30, 2000. Cash flows from investing activities utilized
$9.7  million in cash  during the  current  year,  with a net growth in loans of
$11.1  million  being the  primary use of cash.  During  2000,  the  Association
allowed  $500,000 in investment  securities to mature  without  reinvesting  the
proceeds.  In addition,  the  Association had $1.0 million in certain short term
interest  earning time deposits with  maturities of 30 days to 364 days from the
FHLB of Atlanta which matured during 2000.

During 2000,  financing activities of the Company provided $9.3 million in cash,
including net deposit increases of $10.2 million.  The Association's  ability to
generate  deposits has historically  been sufficient to fund its loan demand and
provide for adequate  liquidity without the need to access other forms of credit
availability.  In addition,  the Association has a readily  available  source of
credit through its borrowing capacity at the FHLB of Atlanta, currently equal to
12% of total assets. Cash provided by operating and financing activities is used
to  originate  new loans to  customers,  to maintain  the  Association's  liquid
investment portfolios, and to meet short term liquidity requirements.

OTS regulated institutions,  including the Association, are required to maintain
a specified  liquidity ratio  (presently  4.0%) of cash and specified  unpledged
securities to net  withdrawable  deposit accounts and borrowings due in one year
or less. The  Association's  liquidity  ratio at September 30, 2000, as computed
under OTS  regulations,  was in excess of such  requirements.  Given its current
liquidity  and its  ability  to borrow  from the FHLB of  Atlanta,  the  Company
believes that it will have sufficient funds available to meet anticipated future
loan commitments, unexpected deposit withdrawals, and other cash requirements.


                                       9
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                   ASSET/LIABILITY MANAGEMENT AND MARKET RISK

Interest  rate risk can have a  material  market  risk  impact on the  operating
results of the Company due to the potential of economic  losses  associated with
future changes in interest  rates.  These economic  losses can be reflected as a
loss of future net interest  income and/or loss of current fair market values of
interest  sensitive  financial  instruments.  Interest  rate  risk  is the  most
significant market risk affecting the Company.

Other types of market risk,  such as foreign  currency and commodity price risk,
do not arise in the  normal  course of the  Company's  business  activities.  In
addition,  the Company does not  currently  engage in trading  activities or use
derivative  instruments to control  interest rate risk. The Company's  asset and
liability  management  objectives are to (i) improve the rate sensitivity of its
interest-earning  assets in relation to interest-bearing  liabilities,  and (ii)
maintain an appropriate ratio of interest-sensitive assets to interest-sensitive
liabilities with comparable  maturities.  Management  realizes certain risks are
inherent and that the goal is to minimize interest rate risk.

In the absence of other factors, the Company's overall yield on interest-earning
assets  will  increase  as  will  its  cost  of  funds  on its  interest-bearing
liabilities  when  market  rates  increase  over an  extended  period  of  time.
Conversely,  the  Company's  yields and cost of funds will  decrease when market
rates  decline.  The  Company is able to manage  these  swings to some extent by
attempting  to  control  the   maturities  or  repricing   adjustments   of  its
interest-earning  assets and interest-bearing  liabilities over given periods of
time.

The Company's "gap" is typically described as the difference between the amounts
of such  assets and  liabilities  which  reprice  within a period of time.  In a
declining  interest rate  environment,  a negative gap or a situation  where the
Company's interest-bearing  liabilities subject to repricing exceed the level of
interest-earning  assets which will mature or reprice, has a favorable impact on
the Company's net interest  income.  Conversely,  an increase in general  market
rates will tend to adversely affect the Company's net interest income.

In order to minimize the  potential  effects of adverse  material and  prolonged
increases or decreases in market  interest  rates on the  Company's  operations,
management has implemented an  asset/liability  program  designed to improve the
Company's interest rate gap. The program primarily emphasizes the origination of
balloon and other short term loans,  such as construction and home equity loans,
that are held for  investment  purposes.  In  addition,  the program  emphasizes
investing  in  short  or  intermediate  term  investment  securities,   and  the
solicitation  of  checking  or  transaction  deposit  accounts  which  are  less
sensitive to changes in interest rates and can be repriced rapidly.

The Board of Directors is  responsible  for reviewing  the  Company's  asset and
liability  policies.  On a quarterly basis, the Board reviews interest rate risk
and trends.  Management  of the Company is  responsible  for  administering  the
policies  established by the Board with respect to asset and liability goals and
strategies.

The following  Market Risk Analysis table  reflects  maturities of interest rate
sensitive assets and liabilities over the next five years.

                                       10
<PAGE>

                          WAKE FOREST BANCSHARES, INC.
                              MARKET RISK ANALYSIS

<TABLE>
<CAPTION>
                                                                   Expected Maturity Date
                              ---------------------------------------------------------------------------------------------------
                                                                   Year Ended September 30,
                              ---------------------------------------------------------------------------------------------------
                                                                    (Dollars in Thousands)

                                2001         2002         2003        2004       2005       Thereafter      Total      Fair Value
                              ----------   ---------- ----------  ---------- -----------  --------------  ----------  -----------
<S>                           <C>          <C>        <C>        <C>          <C>          <C>            <C>         <C>
Assets:

    Loans-fixed:
      Balance                   $ 21,290    $   523    $     37   $     39    $    106        $  2,765    $  24,760    $  24,721
      Interest rate                 9.75%      9.67%       9.13%     10.90%       9.57%           9.31%        9.70%          --

    Loans-variable (1):
      Balance                     12,499     12,683      14,816      7,329         477              --       47,804       47,572
      Interest rate                 9.97%      8.30%       8.81%      8.45%       8.40%             --         8.93%          --

    Investments (2):
      Balance                      8,864        743          --         --          --              --        9,607         9,607
      Interest rate                 6.31%      5.60%         --         --          --              --         6.25%           --

Liabilities:

    Deposits (3):
      Balance                     13,370         --          --         --          --              --       13,370       13,370
      Interest rate                 3.75%        --          --         --          --              --         3.75%          --

    Deposits-certificates:
      Balance                     25,693     17,149      3,079      1,530       7,054               --       54,505       54,361
      Interest rate                 5.66%      6.91%      6.39%     5.78%        6.87%              --         6.25%          --
</TABLE>
-------------------
(1)  Maturities of variable rate loans are based on contractual  maturity except
     home equity  loans and  commercial  lines of credit  which are based on the
     next repricing date
(2)  Includes  interest bearing deposits and investment  securities
(3)  Includes passbook accounts, NOW accounts and money market accounts


                                       11
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                                YEAR 2000 ISSUE:

The "Year  2000  Problem"  centers  on the  inability  of  computer  systems  to
recognize  the Year 2000.  Many  existing  computer  programs  and systems  were
originally  programmed  with six digit  dates that  provided  only two digits to
identify the calendar year in the date field,  without considering the change in
the century.  Like most financial  service  providers,  the Company  through its
wholly  owned  Association  could have been  significantly  affected by the Year
2000.   Software,   hardware,   and  equipment   both  within  and  outside  the
Association's  direct control and with whom the  Association  electronically  or
operationally  interfaces (e.g.  third party vendors  providing data processing,
information  system  management,  maintenance  of computer  systems,  and credit
bureau information) were subject to be affected.

The Company did not experience any Year 2000 related problems as a result of the
changeover  to the new  millennium.  Based upon  testing and the  occurrence  of
subsequent daily operations in January,  2000, the Company's systems reacted and
continue to function in a normal  fashion.  While there are a few date sensitive
time periods  which will still  require  monitoring,  such as December 31, 2000,
management does not expect significant problems to occur.

Monitoring and managing the Year 2000 project resulted in additional  direct and
indirect  costs to the  Company.  Direct  costs  include  charges by third party
software  vendors for product  enhancements,  costs involved in testing software
products for Year 2000  compliance,  and costs for developing  and  implementing
contingency  plans  for  critical  software  products  which  are not  enhanced.
Indirect costs principally  consist of the time devoted by existing employees to
monitor software vendor progress,  test enhanced software products and implement
any necessary contingency plans. The Company incurred  approximately $100,000 in
direct and indirect  costs on the Year 2000 project to date and  estimates  that
any  future  costs  will be  immaterial.  Both  direct  and  indirect  costs  of
addressing the Year 2000 problem were charged to earnings as incurred.

                  FUTURE REGULATORY AND REPORTING REQUIREMENTS

In July of  2000,  the  OTS  issued  proposed  regulatory  changes,  supervisory
initiatives  and interim  final rules,  all of which are designed to enhance the
mutual  holding  company  charter.  While  many of the  proposed  rules  address
amendments to the mutual-to-stock conversion regulations, certain aspects of the
proposed  regulations could favorably affect mutual holding companies already in
existence, including Wake Forest Bancorp, MHC. The OTS implemented changes would
generally  allow a mutual  holding  company to engage in the same  activities as
permitted  for a financial  holding  company under the  Gramm-Leach-Bliley  Act.
Also,  the OTS amended its MHC  dividend  waiver  provision.  Current OTS policy
penalizes  the waiver of  dividends  to a mutual  holding  company by  requiring
dilution of  minority  shareholders  in a full  conversion  to stock  form.  The
interim final rule clarifies that the OTS will not consider waived  dividends in
determining the appropriate  exchange ratio in the event of a full conversion to
stock  form.  The  timing  of  the  regulatory   developments  in  the  proposed
regulations varies, but supervisory guidance is expected to be issued during the
next year.

In July 1998, the Financial  Accounting  Standards Board (FASB) issued Statement
of Finanical  Acccounting  Standard  (SFAS) No. 133,  "Accounting for Derivative
Instruments and Hedging Activities," which establishes  accounting and reporting
standards  requiring balance sheet recognition of all derivative  instruments at
fair value.  SFAS No. 133 was subsequently  amended by SFAS No. 137 in June 1999
and by SFAS No. 138 in June 2000.  The  statement,  as amended,  specifies  that
changes in the fair value of derivative  instruments be recognized  currently in
earnings unless specific hedge accounting criteria are met.


                                       12
<PAGE>

WAKE FOREST BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS

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

Special  accounting for qualifying  hedges allows derivative gains and losses to
offset  related  results  on  hedged  items  in the the  income  statement.  The
statement is effective for fiscal years beginning after June 15, 2000.  Adoption
is not expected to have an impact on the Company.

In September  2000, the FASB issued SFAS No. 140,  "Accounting for Transfers and
Servicing of Financial Assets and  Extinguishments of Liabilities." SFAS No. 140
is a replacement of SFAS No. 125,  although SFAS No. 140 carried forward most of
the  provisions  of SFAS No. 125 without  change.  SFAS No. 140 is effective for
transfers  occurring  after  March  31,  2001 and for  disclosures  relating  to
securitizations,  retained  interests,  and  collateral  received and pledged in
reverse  repurchase  agreements for fiscal years ending after December 15, 2000.
The new statement eliminates the prior requirement to record collateral received
under certain securities financing transactions and requires reclassification in
the balance sheet of assets  pledged under certain  conditions.  The Adoption of
SFAS No. 140 is not expected to have an impact on the Company.


               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:

Statements  herein  regarding  estimated  future  revenue and expense levels and
other  matters  may  constitute  forward-looking  statements  under the  federal
securities laws. Such statements are subject to certain risks and  uncertainties
including  changes in  general  and local  market  conditions,  legislative  and
regulatory  conditions and an adverse interest rate environment.  Undue reliance
should  not be  placed on this  information.  These  estimates  are based on the
current  expectations  of  management,  which may  change in the future due to a
large number of potential events,  including  unanticipated future developments.
The Company and the Association does not undertake to update any forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Company or the Association.


                                       13
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders
Wake Forest Bancshares, Inc.
Wake Forest, North Carolina

We have audited the accompanying  consolidated statements of financial condition
of Wake Forest Bancshares,  Inc. and subsidiary as of September 30, 2000 and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial  statements based on our audit. The financial statements of Wake
Forest Bancshares,  Inc. and subsidiary as of September 30, 1999 were audited by
other  auditors  whose report dated  October 27, 1999  expressed an  unqualified
opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the 2000 consolidated  financial  statements  referred to above
present fairly, in all material respects,  the financial position of Wake Forest
Bancshares,  Inc. and subsidiary at September 30, 2000, and the results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
generally accepted accounting principles.

/s/ Dixon Odom PLLC

Dixon Odom PLLC
Sanford, North Carolina
October 19, 2000


                                       14

<PAGE>

WAKE FOREST BANCSHARES, INC.
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
SEPTEMBER 30, 2000 AND 1999

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

<TABLE>
<CAPTION>
ASSETS                                                                       2000           1999
                                                                        -------------  -------------
<S>                                                                     <C>            <C>
Cash:
  Interest-bearing deposits                                             $   6,250,450  $   5,827,000
  Noninterest-bearing deposits                                                485,400        674,050
                                                                        -------------  -------------
                                                                            6,735,850      6,501,050
                                                                        -------------  -------------
Investment securities (Note 2):
  Available for sale, at market value                                       3,065,550      3,527,750
  FHLB stock                                                                  290,700        280,400
Loans receivable, net (Note 3)                                             72,564,150     61,467,300
Accrued interest receivable                                                   126,800        101,850
Property and equipment, net (Note 4)                                          432,900        452,000
Prepaid expenses and other assets                                              52,400         65,200
                                                                        -------------  -------------
          Total assets                                                  $  83,268,350  $  72,395,550
                                                                        =============  =============

LIABILITIES AND STOCKHOLDERS' EQUITY
  Deposits:(Note 5)
    Noninterest-bearing                                                 $     681,400  $     303,500
    Interest bearing                                                       67,193,000     57,350,400
                                                                        -------------  -------------
      Total deposits                                                    $  67,874,400  $  57,653,900
  Accounts payable and accrued expenses                                       434,500        387,350
  Dividends payable                                                           140,550        143,700
  Note payable - ESOP (Note 9)                                                147,150        206,000
  Deferred income taxes (Note 10)                                             152,950        160,800
  Redeemable common stock held by the ESOP, net of
    unearned ESOP shares (Note 9)                                             347,250        375,950
                                                                        -------------  -------------
          Total liabilities                                                69,096,800     58,927,700
                                                                        -------------  -------------
Commitments and contingencies (Note 12)
Stockholders' Equity (Note 11):
  Preferred stock, authorized 1,000,000 shares, none issued                        --             --
  Common stock, $.01 par value, authorized 5,000,000 shares;
    issued 1,215,862 shares                                                    12,150         12,150
  Additional paid-in-capital                                                4,916,450      4,843,600
  Accumulated other comprehensive income                                      496,250        472,900
  Retained  earnings, substantially restricted (Note 11)                    9,352,150      8,490,850
  Common stock in treasury, at cost (Note 11)                                (605,450)      (351,650)
                                                                        -------------  -------------
          Total stockholders' equity                                       14,171,550     13,467,850
                                                                        -------------  -------------
                                                                        $  83,268,350  $  72,395,550
                                                                        =============  =============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       15
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2000 AND 1999

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                           2000            1999
                                                                     ---------------   -------------
<S>                                                                  <C>              <C>
Interest and dividend income:
  Loans                                                               $    6,316,250   $  5,476,150
  Investment securities                                                      166,050        171,200
  Interest-bearing deposits                                                  315,400        556,550
                                                                     ---------------   -------------
                                                                           6,797,700      6,203,900
                                                                     ---------------   -------------
Interest expense:
  Deposits (Note 5)                                                        3,309,750      3,007,350
  Borrowings                                                                  16,600         19,350
                                                                     ---------------   -------------
                                                                           3,326,350      3,026,700
                                                                     ---------------   -------------

Net interest income before provision for loan losses                       3,471,350      3,177,200
Provision for loan losses (Note 3)                                           (34,250)            --
                                                                     ---------------   -------------
Net interest income after provision for loan losses                        3,437,100      3,177,200
                                                                     ---------------   -------------

Noninterest income                                                            50,100         41,750
                                                                     ---------------   -------------
Noninterest expense:
  Compensation and benefits (Notes 6, 7, 8, and 9)                           872,200        748,550
  Occupancy                                                                   45,900         39,900
  Federal insurance premiums and operating assessments                        42,300         59,850
  Data processing and outside service fees                                   108,450        103,350
  Other operating expense                                                    287,400        323,300
                                                                     ---------------   -------------
                                                                           1,356,250      1,274,950
                                                                     ---------------   -------------
Income before income taxes                                                 2,130,950      1,944,000
                                                                     ---------------   -------------
Income taxes (Note 10):
  Current                                                                    822,250        748,650
  Deferred                                                                   (22,200)        (7,200)
                                                                     ---------------   -------------
                                                                             800,050        741,450
                                                                     ---------------   -------------
          Net income                                                  $    1,330,900   $  1,202,550
                                                                     ===============   =============
Basic earnings per share                                              $         1.15   $       1.02
Diluted earnings per share                                            $         1.15   $       1.02
Dividends paid per share                                              $         0.48   $       0.48

</TABLE>

See Notes to Consolidated Financial Statements.

                                       16
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                        Shares of                      Additional
                                                          Common          Common        Paid in
                                                          Stock           Stock         Capital
                                                      --------------  -------------  ------------
<S>                                                  <C>              <C>            <C>
Balance at September 30, 1998                             1,215,862      $  12,150    $ 4,772,800
Comprehensive income:
  Net income for 1999                                                           --             --
  Net change in unrealized gain on securities                                   --             --
     Total comprehensive income
Contributions to ESOP (Note 9)                                                  --         14,050
Market value adjustment for redeemable
  common stock held by ESOP                                                     --             --
Amortization of earned RRP shares (Note 7)                                      --         56,750
Cash dividends ($0.48 per share)                                                --             --
Acquisition of 25,400 shares of common
  stock for the treasury                                    (25,400)            --             --
                                                      --------------  -------------  ------------
Balance at September 30, 1999                             1,190,462         12,150      4,843,600
Comprehensive income:
  Net income for 2000                                                           --             --
  Net change in unrealized (loss) on securities                                 --             --
     Total comprehensive income
Contributions to ESOP (Note 9)                                                  --         16,100
Market value adjustment for redeemable
  common stock held by ESOP                                                     --             --
Amortization of earned RRP shares (Note 7)                                                 56,750
Cash dividends ($0.48 per share)                                                --             --
Acquisition of 19,400 shares of common
  stock for the treasury                                    (19,400)            --             --
                                                      --------------  -------------  ------------
Balance at September 30, 2000                             1,171,062     $   12,150    $ 4,916,450
                                                      ==============  =============  ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       17
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                        Accumulated
                                                           Other                       Treasury
                                                       Comprehensive     Retained       Stock
                                                          Income         Earnings      Acquired      Total
                                                      ---------------   -----------  -----------  ------------
<S>                                                    <C>             <C>           <C>         <C>
Balance at September 30, 1998                           $    477,100    $ 7,905,150  $      --    $ 13,167,200
Comprehensive income:
  Net income for 1999                                             --      1,202,550         --       1,202,550
  Net change in unrealized gain on securities                 (4,200)            --         --          (4,200)
                                                                                                  -------------
     Total comprehensive income                                                                      1,198,350
                                                                                                  -------------
Contributions to ESOP (Note 9)                                    --             --         --          14,050
Market value adjustment for redeemable
  common stock held by ESOP                                       --        (46,350)        --         (46,350)
Amortization of earned RRP shares (Note 7)                        --             --         --          56,750
Cash dividends ($0.48 per share)                                  --       (570,500)        --        (570,500)
Acquisition of 25,400 shares of common
  stock for the treasury                                          --             --   (351,650)       (351,650)
                                                      --------------    -----------  -----------  ------------
Balance at September 30, 1999                                472,900      8,490,850   (351,650)     13,467,850
Comprehensive income:
  Net income for 2000                                             --      1,330,900         --       1,330,900
  Net change in unrealized (loss) on securities               23,350             --         --          23,350
                                                                                                  ------------
     Total comprehensive income                                                                      1,354,250
                                                                                                  ------------
Contributions to ESOP (Note 9)                                    --             --         --          16,100
Market value adjustment for redeemable
  common stock held by ESOP                                       --         87,600         --          87,600
Amortization of earned RRP shares (Note 7)                        --             --         --          56,750
Cash dividends ($0.48 per share)                                  --       (557,200)        --        (557,200)
Acquisition of 19,400 shares of common
  stock for the treasury                                          --             --   (253,800)       (253,800)
                                                      --------------    -----------  -----------  ------------
Balance at September 30, 2000                                496,250    $ 9,352,150   (605,450)   $ 14,171,550
                                                      ==============    ===========  ===========  ============
</TABLE>


                                       18
<PAGE>

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                                         2000            1999
                                                                     ------------     -----------
<S>                                                                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income                                                           $ 1,330,900      $ 1,202,550
Adjustments to reconcile net income to net
 cash provided  by operations:
   Depreciation                                                           33,600           33,200
   Provision for loss on loans                                            34,250               --
   Amortization of premiums (discounts) on investments                       (50)             550
   Amortization of unearned RRP shares                                    56,750           56,750
   Amortization of unearned ESOP shares                                   58,850           58,850
   ESOP compensation expense credited to
     paid-in-capital                                                      16,100           14,050
   Deferred income taxes                                                 (22,200)          (7,200)
Changes in assets and liabilities:
  (Increase) decrease in:
    Accrued interest receivable                                          (24,950)         (76,300)
    Prepaid expenses and other assets                                     12,800          (13,850)
Increase (decrease) in:
    Accounts payable and accrued expenses                                 47,150           84,150
                                                                     ------------     -----------
          Net cash provided by operating activities                    1,543,200        1,352,750
                                                                     ------------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES

Principal collected on loans                                          36,428,900       45,803,000
Mortgage loans purchased                                                 (25,000)         (70,000)
Loans originated                                                     (47,535,000)     (51,836,850)
Purchase of FHLB time deposits                                                --       (3,500,000)
Maturities of FHLB time deposits                                       1,000,000        2,500,000
Purchase of available for sale investment securities                          --       (2,250,000)
Maturities of available for sale investment securities                   500,000        1,500,000
Purchase (redemption) of FHLB stock                                      (10,300)          83,700
Purchases of property and equipment                                      (14,500)         (25,650)
                                                                     ------------     -----------
          Net cash used in investing activities                       (9,655,900)      (7,795,800)
                                                                     ------------     -----------
</TABLE>

See Notes to Consolidated Financial Statements.


                                       19
<PAGE>


WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                                         2000               1999
                                                                   ---------------      -------------
<S>                                                                <C>                 <C>
CASH FLOWS FROM FINANCING ACTIVITIES

Cash dividends paid                                                  $    (560,350)      $   (572,700)
Principal payments on ESOP note payable                                    (58,850)           (58,850)
Purchase of treasury stock                                                (253,800)          (351,650)
Net increase (decrease) in savings accounts                             10,220,500         (2,384,050)
                                                                   ----------------     --------------
Net cash provided by (used in) financing activities                      9,347,500         (3,367,250)
                                                                   ----------------     --------------
          Net increase (decrease) in cash                                1,234,800         (9,810,300)
                                                                   ----------------     --------------

Cash:
  Beginning                                                              5,501,050         15,311,350
                                                                   ----------------     --------------
  Ending                                                             $   6,735,850        $ 5,501,050
                                                                   ================     ==============

Cash and cash Equivalents:
  Cash                                                               $     485,400        $   674,050
  Interest bearing overnight funds                                       6,250,450          4,327,000
  Time deposit with original maturity less than 90 days                         --            500,000
                                                                   ----------------     --------------
          Total cash and cash equivalents                                6,735,850          5,501,050
Time deposits with original maturities greater than 90 days                     --          1,000,000
                                                                   ----------------     --------------
Cash and interest bearing deposits                                   $   6,735,850        $ 6,501,050
                                                                   ================     ==============

Supplemental Disclosures of Cash Flow Information
  Cash payments for:
     Interest                                                        $   3,328,050        $ 3,027,100
     Income taxes                                                    $     828,950        $   724,300

Supplemental Schedule of Noncash Investing
 and Financing Activities:
  Fair value of ESOP shares in excess of unearned
     ESOP shares (charged) credited to retained earnings             $      87,600        $   (46,350)
Change in unrealized gain (loss) on available for sale
securities, net of tax effect                                        $      23,350        $    (4,200)
</TABLE>


                                       20
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

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

The Company is  majority  owned by Wake Forest  Bancorp,  M.H.C.,  (the "MHC") a
mutual  holding  company.  Members of the MHC consist of depositors  and certain
borrowers of the Association,  who have the sole authority to elect the board of
directors  of the MHC for as  long as it  remains  in  mutual  form.  The  MHC's
principal  assets  consist of 635,000  shares of the Company's  common stock and
deposits at the Association for accumulated  dividends paid on those shares. The
MHC,  which by law  must  own in  excess  of 50% of the  stock  of the  Company,
currently has an ownership interest of 54.2% of the Company.  The mutual holding
company is  registered  as a savings and loan holding  company and is subject to
regulation, examination, and supervision by the OTS.

The  Company  was  formed on May 7, 1999  solely for the  purpose of  becoming a
savings  and loan  holding  company  and had no  prior  operating  history.  The
formation of the Company had no impact on the  operations of the  Association or
the MHC. The  Association  continues to operate at the same  location,  with the
same management,  and subject to all the rights,  obligations and liabilities of
the Association which existed immediately prior to the formation of the Company.

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

A summary of the Company's significant accounting policies follows:

Basis  of  financial  statement  presentation:   The  preparation  of  financial
statements in conformity with generally accepted accounting  principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts or revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

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

Cash and cash  equivalents:  For purposes of reporting  cash flows,  the Company
considers  all  interest-bearing  deposits  with  maturities  of less than three
months at acquisition, noninterest-bearing deposits, and cash on hand to be cash
and  cash  equivalents.   At  times,  the  Association   maintains  deposits  in
correspondent  banks in  amounts  that may be in  excess  of the FDIC  insurance
limit.


                                       21
<PAGE>


WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Investment securities:  The Company carries its investments at fair market value
or  amortized  cost  depending  on  its   classification   of  such  securities.
Classification  of  securities  and the  Company's  accounting  policies  are as
follows:

         Securities held to maturity:  Securities classified as held to maturity
         are those debt  securities  the Company has both the intent and ability
         to hold  to  maturity  regardless  of  changes  in  market  conditions,
         liquidity  needs or  changes  in  general  economic  conditions.  These
         securities are carried at cost adjusted for amortization of premiums or
         accretion of  discounts,  computed by a method which  approximates  the
         interest method,  over their  contractual  lives. The Company currently
         has no securities which are classified as held to maturity.

         Securities available for sale:  Securities  classified as available for
         sale are those debt  securities that the Company intends to hold for an
         indefinite  period of time but not  necessarily  to maturity and equity
         securities not  classified as held for trading.  Any decision to sell a
         security  classified  as  available  for sale would be based on various
         factors,  including significant movements in interest rates, changes in
         the  maturity  mix  of  its  securities,   liquidity  needs  and  other
         significant factors.  Securities available for sale are carried at fair
         value adjusted for  amortization of premiums or accretion of discounts.
         Unrealized  gains and losses are  reported as a separate  component  of
         equity,  net of  related  tax  effects.  Realized  gains and losses are
         included in earnings.

         Securities   held  for  trading:   Trading   securities   are  held  in
         anticipation of short-term market gains. Such securities are carried at
         fair value with realized and  unrealized  gains and losses  included in
         earnings.  The Company currently has no securities which are classified
         as trading.

Loans receivable: Loans receivable are stated at unpaid principal balances, less
the  allowance  for loan losses and net  deferred  loan  origination  fees.  The
Association's   loan   portfolio   consists   principally   of  mortgage   loans
collateralized  by  first  trust  deeds  on  single  family  residences,   other
residential property, commercial property and land.

Loan fees: The  Association  receives fees for originating  mortgage loans.  The
Association  defers all loan fees less certain  direct costs as an adjustment to
yield with  subsequent  amortization  into  income  over the life of the related
loan.

Allowance  for loan losses:  The  allowance  for loan losses is  established  as
losses are  estimated  to have  occurred  through a  provision  for loan  losses
charged  to  earnings.  Such  evaluation  includes  a review  of loans for which
collectibility  appears  doubtful and other  factors,  including  the nature and
volume  of  the  portfolio,  historical  experience,   estimated  value  of  any
underlying  collateral,  and current economic conditions.  While management uses
the best information  available to make evaluations,  future  adjustments may be
necessary,  if  economic  or  other  conditions  differ  substantially  from the
assumptions used.

The Association  establishes specific loan loss allowances for impaired loans if
it is doubtful  that all  principal and interest due according to the loan terms
will be  collected.  An allowance is recorded if the present value of the loan's
future cash flows,  discounted using the loan's effective interest rate, is less
than the carrying value of the loan.


                                       22
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

An impaired  loan can also be valued at its fair value in the market place or on
the  basis of its  underlying  collateral  if the loan is  primarily  collateral
dependent. If foreclosure is imminent, and the loan is collateral dependent, the
loan is valued  based  upon the fair  value of the  underlying  collateral.  The
Association had no loans  outstanding  during the years ended September 30, 2000
and 1999 which it  considers  to be  impaired.  Therefore,  there is no specific
allowance for impaired loans at September 30, 2000 and 1999.

Interest income: The Association does not record interest on loans delinquent 90
days or more unless in the opinion of management,  collectibility is assured. If
collectibility  is not  certain,  the  Association  establishes  a  reserve  for
uncollected  interest.  Interest  collected  while the loan is in such status is
credited to income in the period received. If the loan is brought to a status in
which it is no longer  delinquent 90 days, the reserve for uncollected  interest
is reversed and interest income is recognized.  The Association anticipates that
it will  account  for  interest on  impaired  loans in a similar  fashion in the
future  if and  when  it has  impaired  loans.  Such  interest  when  ultimately
collected is credited to income in the period received.

Property, equipment and depreciation:  Property and equipment are stated at cost
less accumulated depreciation.  Depreciation is computed primarily by use of the
straight-line method.

Real estate acquired in settlement of loans: Real estate acquired through, or in
lieu of, loan  foreclosure  is  initially  recorded at fair value at the date of
foreclosure  establishing a new cost basis.  After  foreclosure,  valuations are
periodically performed by management and the real estate is carried at the lower
of cost or fair value minus costs to sell. Revenue and expenses from holding the
properties  and additions or recoveries to the valuation  allowance are included
in  operations.  The  Association  had no real estate  acquired in settlement of
loans during 2000 or 1999.

Income taxes:  Deferred income taxes are provided on a liability  method whereby
deferred tax assets are  recognized  for deductible  temporary  differences  and
deferred tax  liabilities  are  recognized  for taxable  temporary  differences.
Temporary differences are differences between the reported amounts of assets and
liabilities  and their tax bases.  Deferred  tax assets are reduced by valuation
allowances  if in the opinion of management it is more likely than not that some
portion or all of the  deferred  tax assets will not be  realized.  Deferred tax
assets and  liabilities  are adjusted for the effects of changes in tax laws and
rates on the date of enactment.

Earnings per share:  Statement of Financial  Accounting  Standard (SFAS) No. 128
requires dual  presentation of basic and diluted earnings per share (EPS) with a
reconciliation of the numerator and denominator of the EPS  computations.  Basic
earnings per share  amounts are based on the weighted  average  shares of common
stock outstanding. Diluted earnings per share assume the conversion, exercise or
issuance of all potential common stock instruments such as options, warrants and
convertible  securities,  unless  the  effect  is to  reduce a loss or  increase
earnings per share.  Shares owned by the Company's Employee Stock Ownership Plan
(the "ESOP") that have not been  committed to be released are not  considered to
be outstanding for the purposes of computing  earnings per share. No adjustments
were  required  to net income for any period  presented  in the  computation  of
diluted earnings per share.


                                       23
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The basic and diluted weighted average shares  outstanding for 2000 and 1999 are
as follows:

<TABLE>
<CAPTION>
                                                                          2000                1999
                                                                    ------------------  -----------------
<S>                                                                 <C>                 <C>
Weighted average outstanding shares used for basic EPS                   1,153,048           1,177,248
Plus incremental shares from assumed issuances
     pursuant to stock options and stock award plans                            --                 360
                                                                    ------------------  -----------------
Weighted average outstanding shares used for diluted EPS                 1,153,048           1,177,608
                                                                    ==================  =================
</TABLE>

Off-balance-sheet  risk and credit risk: The Association is a party to financial
instruments  with  off-balance-sheet  risk such as commitments to extend credit.
Management  assesses the risk related to these  instruments  for potential loss.
The Association  lends primarily on one-to-four  family  residential  properties
throughout  its  primary  lending  area,  Wake and  Franklin  counties  of North
Carolina.

Fair value of financial instruments:  Estimated fair values have been determined
by the Company using available  market  information  and  appropriate  valuation
methodologies.  However,  considerable  judgment  is  required  to  develop  the
estimates of fair value.  Accordingly,  the  estimates for the fair value of the
Company's  financial  instruments are not necessarily  indicative of the amounts
the Company could  realize in a current  market  exchange.  The use of different
market assumptions or estimation methodologies may have a material effect on the
estimated  fair value amounts.  The fair value  estimates are based on pertinent
information   available  to  management  as  of  September  30,  2000.  Although
management  is not aware of any  factors  that  would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  for  purposes  of these  financial  statements  since that  date,  and
therefore,  current  estimates of fair value may differ  significantly  from the
amounts presented herein. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:

   Cash and accrued  interest  receivable:  The carrying amounts reported in the
   statement of financial condition approximate those assets' fair values.

   Investment   securities:   The  fair  values  of  investment  securities  are
   determined based on quoted market values. For the Association's investment in
   Federal  Home Loan Bank stock,  no ready  market  exists and it has no quoted
   market value. For disclosure  purposes,  such stock is assumed to have a fair
   value which is equal to its cost.

   Loans   receivable:   The  fair  value  for  all  loans,   except  short-term
   construction  loans,  home equity loans and commercial  lines of credit,  has
   been estimated by discounting  projected  future cash flows using the current
   rate at which loans with similar  maturities  would be made to borrowers with
   similar  credit  ratings.  Certain  prepayment  assumptions  were made to the
   Association's  portfolio of long-term  fixed rate  mortgage  loans.  The fair
   value of  construction  loans,  home equity loans,  and  commercial  lines of
   credit is assumed to be equal to their  recorded  amounts  because such loans
   have relatively short terms.

   Deposits:  The fair value of deposits with no stated  maturities is estimated
   to be equal to the amount payable on demand.  The fair value of  certificates
   of deposit  is based upon the  discounted  value of future  contractual  cash
   flows.  The discount  rate is estimated  using rates  offered for deposits of
   similar remaining maturities.


                                       24
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

   ESOP note payable:  The fair value of the ESOP note is assumed to be equal to
   its  recorded  amount  because the terms of the note are similar to the terms
   that could currently be obtained for comparable debt instruments.

   Off-balance-sheet  commitments:  Because the Association's commitments, which
   consist  entirely of loan  commitments,  are either  short-term  in nature or
   subject to  immediate  repricing,  no fair value has been  assigned  to these
   off-balance-sheet items.

NOTE 2.  INVESTMENT SECURITIES

The amortized cost, estimated market value and gross unrealized gains and losses
of the Association's investment securities at September 30, 2000 and 1999 are as
follows:

<TABLE>
<CAPTION>
                                                                             2000
                                               ----------------------------------------------------------------
                                                                    Gross            Gross           Estimated
                                                 Amortized        Unrealized       Unrealized          Market
                                                    Cost            Gains            Losses             Value
                                               -------------    -------------     ------------      -----------
<S>                                            <C>               <C>              <C>               <C>
Available for sale securities:
 Marketable equity securities:
  FHLMC stock                                    $    15,200     $   822,950        $      --           838,150
 Debt securities:
  U.S. Treasury and agency securities              2,250,000              --          (22,600)        2,227,400
                                               -------------    -------------     ------------      -----------
                                                   2,265,200         822,950          (22,600)        3,065,550
Nonmarketable equity securities:
  Federal Home Loan Bank stock                       290,700              --               --           290,700
                                               -------------    -------------     ------------      -----------
                                                $  2,555,900     $   822,950        $ (22,600)      $ 3,356,250
                                               -------------    -------------     ------------      -----------

                                                                             1999
                                               ----------------------------------------------------------------
                                                                    Gross            Gross           Estimated
                                                 Amortized        Unrealized       Unrealized          Market
                                                    Cost            Gains            Losses             Value
                                               -------------    -------------     ------------      -----------
<S>                                            <C>               <C>              <C>               <C>
Available for sale securities:
 Marketable equity securities:
  FHLMC stock                                   $     15,200     $   791,000        $      --       $   806,200
 Debt securities:
  U.S. Treasury and agency securities              2,749,900              --          (28,350)        2,721,550
                                               -------------    -------------     ------------      -----------
                                                   2,765,100         791,000          (28,350)        3,527,750
Nonmarketable equity securities:
  Federal Home Loan Bank stock                       280,400              --               --           280,400
                                               -------------    -------------     ------------      -----------
                                                $  3,045,500     $   791,000        $ (28,350)      $ 3,808,150
                                               =============    =============     ============      ===========
</TABLE>


There were no sales of investment  securities  during the years ended  September
30, 2000 and 1999.


                                       25
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2.  INVESTMENT SECURITIES (CONTINUED)

The  amortized  cost and  estimated  market  values of  available  for sale debt
securities at September 30, 2000 by contractual maturity are shown below:

<TABLE>
<CAPTION>
                                                                            Amortized            Market
                                                                               Cost               Value
                                                                       -----------------  ------------------
<S>                                                                 <C>                   <C>
Due in one year or less                                              $        1,500,000   $       1,484,800
Due in one year through five years                                              750,000             742,600
                                                                       -----------------  ------------------
                                                                     $        2,250,000   $       2,227,400
                                                                       =================  ==================

</TABLE>

The change during 2000 and 1999 in net  unrealized  gains and losses  associated
with available for sale securities is as follows:

<TABLE>
<CAPTION>

                                                                             2000               1999
                                                                       -----------------  ------------------
<S>                                                                  <C>                  <C>
Balance in equity component, beginning of year                       $      472,900       $      477,100
  Change in unrealized gains                                                 37,700               (6,800)

Change in related deferred income taxes                                     (14,350)               2,600
                                                                       -----------------  ------------------
Balance in equity component, end of year                             $      496,250       $      472,900
                                                                       =================  ==================

</TABLE>
The Association,  as a member of the Federal Home Loan Bank system, maintains an
investment  in capital  stock of the  Federal  Home Loan Bank.  No ready  market
exists for the bank stock.  For  disclosure  purposes,  such stock is assumed to
have a market value which is equal to cost.

NOTE 3.  LOANS RECEIVABLE

<TABLE>
<CAPTION>
Loans receivable consist of the following:                                      2000                1999
                                                                          ---------------    -----------------
<S>                                                                   <C>                    <C>
First mortgage loans:
Single family, one-to-four units                                      $       27,073,250    $       24,394,050
Multifamily, residential                                                         186,850               183,800
Commercial real estate                                                        10,594,750             8,460,250
Land                                                                           6,342,450             8,231,950
Residential construction                                                      26,859,100            24,693,100
Commercial construction                                                        3,932,750             2,351,000
Lines of credit                                                                5,785,750             2,718,650
                                                                         -----------------   ------------------
                                                                              80,774,900            71,032,800
Equity line mortgages                                                          3,338,100             3,106,600
Loans on savings accounts                                                        643,750               222,350
                                                                         -----------------   ------------------
                                                                              84,756,750            74,361,750
                                                                         -----------------   ------------------
Less:
Undisbursed portion of loans in process                                       11,708,850            12,460,100
Allowance for loan losses                                                        280,000               263,000
Deferred loan fees                                                               203,750               171,350
                                                                         -----------------   ------------------
                                                                              12,192,600            12,894,450
                                                                         -----------------   ------------------
                                                                      $       72,564,150     $      61,467,300
                                                                         =================   ==================
Weighted average yield on loans receivable                                          9.19%                 8.65%

</TABLE>

                                       26
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3.  LOANS RECEIVABLE (CONTINUED)

The change in the Association's  allowance for loan losses is as follows for the
years ended September 30, 2000 and 1999:


<TABLE>
<CAPTION>
                                                      2000                1999
                                               ------------------  ----------------
<S>                                            <C>                 <C>
Balance, beginning of year                     $        263,000     $      263,000
Provision for loan loss                                  34,250                 --
Charge-offs                                             (17,250)                --
                                               ------------------  ----------------
Balance, end of year                           $        280,000     $      263,000
                                               ==================  ================

</TABLE>

The  Association  does not accrue interest on loans past due 90 days or more if,
in the  opinion of  management,  collectibility  is in doubt.  Such  interest is
removed  from income  through  the  establishment  of a reserve for  uncollected
interest.  At September  30, 1999, a reserve for  uncollected  interest on loans
delinquent more than 90 days was not established because management expected all
such  interest to be fully  collectible.  At September  30, 2000,  there were no
loans  delinquent more than 90 days. The balance of accruing loans past due more
than 90 days was approximately $293,800 at September 30, 1999.

Shareholders  of the  Company  with  10% or  more  ownership  and  officers  and
directors,  including  their  families and companies of which they are principal
owners,  are considered to be related  parties.  These related parties were loan
customers of, and had other  transactions  with the  Association in the ordinary
course of business. In management's  opinion,  these loans and transactions were
on  the  same  terms  as  those  for  comparable  loans  and  transactions  with
non-related parties during the years ended September 30, 2000 and 1999.

Aggregate  loan  transactions  with  related  parties  during  the  years  ended
September 30, 2000 and 1999 were as follows:


<TABLE>
<CAPTION>
                                                         2000               1999
                                                 -----------------  ------------------
<S>                                            <C>                 <C>
Beginning balance                              $        296,250     $        341,650
New loans                                               247,500               13,800
Reductions                                             (102,000)             (59,200)
                                                -----------------    -----------------
Ending balance                                 $        441,750     $        296,250
                                                =================    =================
Maximum balance during the year                $        523,800 $            341,650
                                                =================    =================
</TABLE>


NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2000 and 1999 are summarized as follows:

<TABLE>
<CAPTION>
                                                         2000               1999
                                                 -----------------  ------------------

<S>                                            <C>                 <C>
Land                                           $          20,950    $        20,950
Office buildings and improvements                        608,550            601,550
Furniture and fixtures                                   170,600            181,300
                                                 -----------------  ------------------
                                                         800,100            803,800
Less accumulated depreciation                           (367,200)          (351,800)
                                                 -----------------  ------------------
                                               $         432,900    $       452,000
                                                 =================  ==================
</TABLE>

                                       27
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 5.  DEPOSITS

Deposits at September 30, 2000 and 1999 consist of the following:

<TABLE>
<CAPTION>
                                                                                 2000                1999
                                                                           ------------------  -----------------
<S>                                                                     <C>                    <C>
Passbook accounts, weighted average rate of  3.00%
  (3.00% in 1999)                                                         $      3,276,150     $      3,554,050
MMDA accounts, weighted average rate of 4.65%
  (4.15% in 1999)                                                                7,766,150            7,922,800
NOW accounts, weighted average rate of  2.50%
  (2.50% in 1999)                                                                1,589,700            1,413,200
Noninterest-bearing accounts                                                       681,400              303,500
                                                                           ------------------  -----------------
                                                                                13,313,400           13,193,550
                                                                           ------------------  -----------------
Certificate of deposit accounts:
  3.00% to 5.00%                                                                 5,134,150           16,919,050
  5.01% to 7.00%                                                                42,321,650           27,379,050
  7.01% to 8.00%                                                                 7,049,000              104,350
                                                                           ------------------  -----------------
                                                                                54,504,800           44,402,450
                                                                           ------------------  -----------------
Accrued interest on deposits                                                        56,200               57,900
                                                                           ------------------  -----------------
                                                                           $    67,874,400      $    57,653,900
                                                                           ==================  =================
Weighted average cost of deposits                                                     5.77%                4.93%
                                                                           ==================  =================


</TABLE>


Certificate  of deposit by range of rate and maturity at September  30, 2000 are
summarized as follows:


<TABLE>
<CAPTION>
                                                        Amounts Maturing During
                      -------------------------------------------------------------------------------------------
Rate Range:                 2001               2002              2003           Thereafter           Total
                      -----------------  -----------------  ----------------  ----------------  -----------------
<S>                <C>                   <C>                <C>                <C>              <C>
3.00% to 5.00%        $    4,765,500     $      164,300     $       28,500     $    175,850     $    5,134,150
5.01% to 7.00%            20,826,850         10,566,150          3,050,500        7,878,150         42,321,650

7.01% to 8.00%               100,250          6,418,750                 --          530,000          7,049,000
                      -----------------  -----------------  ----------------  ----------------  -----------------
                      $   25,692,600     $   17,149,200      $   3,079,000     $  8,584,000     $   54,504,800
                      =================  =================  ================  ================  =================

</TABLE>


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

<TABLE>
<CAPTION>
<S>                                                              <C>
Maturity Period:
  Within three months                                            $      1,448,500
  After three months but within six months                                672,000
  After six months but within twelve months                             2,993,950
  After twelve months but within twenty four months                     4,667,500
  After twenty four months                                              3,696,600
                                                                  ----------------
                                                                 $     13,478,550
                                                                  ================

</TABLE>


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

                                       28
<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5.  DEPOSITS (CONTINUED)

Interest  expense on deposits for the years ended September 30, 2000 and 1999 is
summarized as follows:

<TABLE>
<CAPTION>
                                                             2000               1999
                                                       -----------------  ------------------
<S>                                                <C>                    <C>
Passbook accounts                                  $         106,300      $         103,300
MMDA and NOW accounts                                        389,900                327,500
Certificate of deposit accounts                            2,826,900              2,584,800
                                                     -----------------    ------------------
                                                           3,323,100              3,015,600

Forfeitures                                                  (13,350)                (8,250)
                                                     -----------------    ------------------
                                                   $       3,309,750      $       3,007,350
                                                     =================    ==================
</TABLE>

NOTE 6.  EMPLOYEES AND DIRECTORS BENEFIT PLANS

The Association has a noncontributory 401k plan for substantially all employees.
The  Association has no obligation to make  contributions  to the plan, but pays
administrative  costs of the Plan.  Plan expenses  amounted to $2,950 and $1,750
during 2000 and 1999, respectively.

The Association has a non-qualified noncontributory retirement plan covering its
directors.  Retirement plan expense is computed based on the discounted  present
value of  expected  future  payments  over the  expected  service  years for the
directors.  Under the plan,  directors  will  receive upon  retirement,  monthly
payments  for  ten  years  in  amounts  not to  exceed  $5,000  annually.  Other
stipulations  and limitations  based on years of service,  death and disability,
change of control, and early termination apply. Expense associated with the plan
amounted to $26,200 and $30,300 for 2000 and 1999, respectively.

The Association  has also entered into employment  agreements with its three key
executives.  The  agreements  provide  for a three  year  term,  but  upon  each
anniversary,  the agreements automatically extend so that the terms shall always
be three years,  unless either party gives notice that the agreement will not be
renewed.  Performance  reviews by a  committee  of the Board  will be  conducted
annually and the agreements can be terminated by the  Association at anytime for
cause as defined in the  agreements.  The  agreements  provide for a base salary
plus performance  bonus to be determined  annually.  In the event of termination
other than for cause,  the  employees are entitled to a lump sum cash payment in
an amount equal to the present  value of the base salary,  bonus  payments,  and
other benefits as described and determined in the agreements.

NOTE 7.  RECOGNITION AND RETENTION PLAN

The Company has a Recognition  and  Retention  Plan (the "RRP")  whereby  22,248
shares of common  stock were  awarded to employees  and  directors.  In January,
1998, the Association issued shares of common stock from authorized but unissued
shares to fund the plan.  The RRP  shares  vest over a five year  period  and at
September 30, 2000, 60% of the shares had vested.  Accelerated vesting may occur
in  certain  circumstances  as  disclosed  in the plan  documents.  Compensation
expense is incurred over the vesting  period.  Expense  associated with the plan
for  years  ended   September  30,  2000  and  1999  was  $52,550  and  $49,000,
respectively.

                                       29
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8.  STOCK OPTION PLAN

The Company has a stock option plan for the benefit of its officers,  directors,
and key  employees.  Options  totaling  54,000 at a grant  price of $12.75  were
granted on January 22, 1997. The options  become  exercisable at the rate of 20%
annually for five years during such periods of service as an employee,  officer,
or  director,  and expire  after ten  years.  Accelerated  vesting  may occur in
certain   circumstances  as  disclosed  in  the  plan  documents.   Options  are
exercisable  at the fair value on the date of grant.  There  were no  additional
options  granted,  exercised or forfeited  during 2000 or 1999. At September 30,
2000 and 1999, 30,952 and 19,186 options, respectively,  were exercisable at the
weighted average exercise price of $12.75 per share.

Grants  of  options  under  the  plan are  accounted  for  following  Accounting
Principles Board (APB) Opinion No. 25 and related interpretations.  Accordingly,
no  compensation  cost has been  recorded.  In 1995,  the  Financial  Accounting
Standards Board issued Standard No. 123, which requires  disclosures  concerning
the fair value of options  and  encourages  accounting  recognition  for options
using  the  fair  value   method.   The   Company   has  elected  to  apply  the
disclosure-only provisions of the Statement.

However,  had compensation cost been recorded based on the fair value ($4.17 per
share) of awards at the grant date,  the pro forma impact on the  Company's  net
income and net income per common share would have been to reduce such amounts by
approximately $28,000 and $0.02 per basic and dilutive share, respectively,  for
2000 and 1999. The fair value of each grant is estimated at the grant date using
the Black-Scholes  option-pricing model with the following  assumptions for 1997
when the options were granted:  dividend rate of 2.75%;  risk-free interest rate
of 5.87%; expected lives of 10 years; and price volatility of 26.51%.

NOTE 9.  EMPLOYEE STOCK OPTION PLAN (ESOP)

The Association has an ESOP to benefit substantially all employees. As a part of
the  Association's  initial  public  offering in April 1996,  the ESOP purchased
41,200  shares of common stock with the  proceeds  from a loan  received  from a
third  party  financial  institution.  The  note  requires  quarterly  principal
payments of $14,714 plus interest at the lending institution's prime rate (9.50%
at September 30, 2000) until March,  2003.  The  Association is expected to make
quarterly  contributions to the ESOP in amounts  sufficient to allow the ESOP to
make its scheduled  principal and interest payments on the note. The ESOP shares
are pledged as collateral for the debt.  Dividends on unallocated  shares may be
used by the ESOP to repay  the debt and are not  reported  as  dividends  in the
financial statements. As the debt is repaid, shares are released from collateral
and allocated to active employees,  based on the proportion of debt service paid
in the  year.  The  debt of the  ESOP  is  recorded  as  debt  in the  Company's
accompanying consolidated balance sheet.

At September 30, 2000, future principal payments are due as follows:

<TABLE>
<CAPTION>
<S>                                          <C>
    Year Ended:
September 30, 2001                            $         58,856
September 30, 2002                                      58,856
September 30, 2003                                      29,438
                                              -----------------
                                              $        147,150
                                              =================

</TABLE>

                                       30
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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

The Association makes cash  contributions to the ESOP sufficient to amortize the
debt, but records  expense based upon the fair value of the shares  allocated to
plan participants each year. The difference  between the cash  contributions and
the amount expensed is credited or charged to additional  paid-in capital.  ESOP
compensation  expense was $76,700 and $76,150 for the years ended  September 30,
2000 and 1999, respectively.

The ESOP has a put option which requires that the Company  repurchase its common
stock from  participants in the ESOP who are eligible to receive  benefits under
the terms of the plan and elect to receive  cash in  exchange  for their  common
stock.  The Company is required to reflect as a liability  the maximum  possible
cash  obligation  to redeem the shares,  which is the fair value of such shares,
whether  allocated or unallocated.  The initial  purchase of common stock by the
ESOP is treated as a reduction in  stockholder's  equity and as a liability  for
the put option.  The liability for the put option has been reduced to the extent
of the unearned  ESOP shares at the end of each fiscal year end.  The  liability
for the put option at September 30, 2000,  based upon the fair value of the ESOP
shares at that time of $12.00,  was  $347,250.  The liability for the put option
will  fluctuate  based  upon the fair  value of the  shares  with the  resulting
increase or decrease reflected as change to retained earnings.

Shares of the  Company  held by the ESOP at  September  30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
                                                          2000             1999
                                                     ---------------  ---------------
<S>                                                 <C>              <C>
Shares held by the ESOP                                    41,200           41,200
Shares released for allocation                            (26,486)         (20,600)
                                                     ---------------  ---------------
Unreleased (unearned) shares                               14,714           20,600
                                                     ===============  ===============
Fair value of unreleased (unearned) shares                 $176,550         $290,950
                                                     ===============  ===============
</TABLE>
NOTE 10.  INCOME TAXES

At September  30, 2000 and 1999,  retained  earnings  contain  $1,434,000 in tax
related bad debt reserves for which no deferred  income taxes have been provided
because the  Association  does not intend to use the reserves for purposes other
than to  absorb  losses.  The  balance  represents  the  Association's  bad debt
reserves at September 30, 1988, and the unrecorded  deferred income taxes amount
to approximately $545,000. If amounts which qualified as bad debt deductions are
used for purposes  other than to absorb losses or  adjustments  arising from the
carryback  of net  operating  losses,  income  taxes may be  imposed at the then
existing rates.

The  Association  also  must  recapture  its tax bad debt  reserves  which  have
accumulated  since 1988 (the "base year") amounting to  approximately  $189,000.
The tax associated with the recaptured reserves is approximately  $72,000 and is
being paid out over a six year period beginning with the 1999 year. At September
30, 2000, the remaining  liability  associated  with the recaptured  reserves is
approximately $47,900. Deferred income taxes have been established for the taxes
associated with the recaptured reserves.

                                       31
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Income tax expense differs from the federal statutory rate of 34% as follows:

<TABLE>
<CAPTION>
                                                                    2000                 1999
                                                             -----------------    -----------------
<S>                                                          <C>                  <C>
Statutory federal income tax rate
                                                                   34.00 %               34.00%
Increase (decrease) in income taxes resulting from:
  State income taxes, net of federal benefit                        3.65                  3.15
  Other, net
                                                                   (0.11)                 0.99
                                                             -----------------    -----------------
Effective tax rate
                                                                   37.54 %               38.14%
                                                             =================    =================

</TABLE>

Deferred  income taxes consist of the  following  components as of September 30,
2000 and 1999:

<TABLE>
<CAPTION>
                                                                      2000               1999
                                                                -----------------  ------------------
<S>                                                             <C>                <C>
Deferred tax assets:
  Loan loss allowances                                          $       106,400     $        99,950
  Deferred loan fees                                                     15,600              20,800
  Health insurance accrual                                               18,150              15,850
  Retirement plan accrual                                                82,300              74,250
                                                                -----------------  ------------------
                                                                        222,450             210,850
                                                                -----------------  ------------------
Deferred tax liabilities:
  Tax bad debt reserves                                                  47,900              59,900
  Excess accumulated tax depreciation                                    23,350              21,950
  Unrealized net appreciation, investments                              304,150             289,800
                                                                -----------------  ------------------
                                                                        375,400             371,650
                                                                -----------------  ------------------
                                                                $      (152,950)   $       (160,800)
                                                                =================  ==================
</TABLE>
NOTE 11.  CAPITAL

Concurrent  with the  reorganization  in 1996,  the  Association  established  a
liquidation  account  in an amount  equal to its net worth as  reflected  in its
latest statement of financial condition used in its final offering circular. The
liquidation  account  will be  maintained  for the benefit of  eligible  deposit
account holders and  supplemental  eligible deposit account holders who continue
to maintain their deposit accounts in the Association after the  reorganization.
Only in the  event of a  complete  liquidation  will  eligible  deposit  account
holders and supplemental eligible deposit account holders be entitled to receive
a  liquidation   distribution   from  the  liquidation   account   adjusted  for
transactions since the reorganization.  Dividends paid by the Association to the
Company  subsequent to the  reorganization  cannot be paid from this liquidation
account.

Subject to  applicable  law,  the Boards of  Directors  of the  Company  and the
Association may each provide for the payment of dividends.  Future  declarations
of cash dividends,  if any, by the Company may depend upon dividend  payments by
the Association to the Company.  Subject to regulations  promulgated by the OTS,
the  Association  will not be permitted to pay  dividends on its common stock if
its net worth would be reduced  below the amount  required  for the  liquidation
account or its minimum  regulatory  capital  requirements.  In  addition,  as an
institution  which  is  considered  well  capitalized  under  the  OTS's  Prompt
Corrective Action  regulations,  the Association may pay a cash dividend to Wake
Forest Bancshares, Inc., with prior notification to the OTS, if the total amount
of all capital  distributions  (including  the  proposed  distribution)  for the
applicable  calendar year does not exceed the  Association's  net income for the
year plus retained net income (net income minus capital  distributions)  for the
preceding  two years.  However,  the OTS  retains  the right to deny any capital
distribution if it raises safety and soundness concerns.

                                       32

<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The Association is subject to the capital requirements established by the Office
of Thrift  Supervision  (OTS).  The OTS requires that the Association meet three
separate capital  standards;  tangible capital of at least 1.5% of total assets,
core capital of at least 3% of total assets,  and risk-based capital of at least
8% of  risk-weighted  assets.  At September 30, 2000,  the  Association  met and
exceeded all of the capital  requirements  described above as shown in the table
below:
<TABLE>
<CAPTION>
                                                            Tangible              Core             Risk-based
                                                             Capital             Capital             Capital
                                                           Requirement         Requirement         Requirement
                                                        ------------------  ------------------  ------------------
<S>                                                 <C>                    <C>                 <C>
Equity (GAAP)                                           $   14,171,550     $    14,171,550     $    14,171,550
Equity of Wake Forest Bancshares                              (276,350)           (276,350)           (276,350)
Net unrealized gain on investment securities                  (496,250)           (496,250)           (496,250)
Supplemental capital items:
General valuation allowances                                        --                  --             280,000
                                                        ------------------  ------------------  ------------------
Regulatory capital                                          13,398,950          13,398,950          13,678,950
Minimum capital requirement                                  1,237,000           2,474,050           4,685,300
                                                        ------------------  ------------------  ------------------
Excess regulatory capital                               $   12,161,950      $   10,924,900      $    8,993,650
                                                        ==================  ==================  ==================
Total assets at September 30, 2000 less fair
  market value adjustment of securities                 $   82,467,950      $   82,467,950                  --
Risk-weighted assets at September 30, 2000                          --                  --       $  58,566,350

Capital as a percentage of assets:
  Actual                                                         16.25%              16.25%              23.36%
  Required
                                                                  1.50                3.00                8.00
                                                       ------------------  ------------------  -----------------
  Excess                                                         14.75%              13.25%              15.36%
                                                       ==================  ==================  =================
</TABLE>
Under the OTS prompt corrective  action  regulations,  a savings  association is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted  assets is at
least 6.0%,  and its ratio of core capital to total  average  assets is at least
5.0%. The Association  meets all of the above  requirements and is considered to
be well capitalized under the prompt corrective action regulations.

On June 21, 1999, the Board of Directors of the Company approved the adoption of
stock  repurchase  program  authorizing  the Company to  repurchase up to 60,793
shares  or 5.00% of its  outstanding  common  stock.  The  repurchases  are made
through registered  broker-dealers from shareholders in open market purchases at
the discretion of management. The Company intends to hold the shares repurchased
as treasury  shares,  and may utilize such shares to fund stock benefit plans or
for any other  general  corporate  purpose as  permitted by  applicable  law. At
September  30, 2000,  the Company had  repurchased  44,800  shares of its common
stock. The program continues until terminated by the Board of Directors.

                                       33

<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12.  CONCENTRATION OF CREDIT RISK AND OFF-BALANCE-SHEET RISK

The Association is a party to financial instruments with  off-balance-sheet risk
in the normal course of business to meet the financing  needs of its  customers.
These  financial  instruments  include  commitments  to  extend  credit  and the
undisbursed portion of construction loans. Those instruments involve, to varying
degrees,  elements  of credit and  interest  rate risk in excess of the  amounts
recognized  in the  statement of financial  condition.  The contract or notional
amounts of those  instruments  reflect the extent of involvement the Association
has in particular classes of financial instruments.

The Association's  exposure to credit loss in the event of nonperformance by the
other party to the  financial  instrument  for  commitments  to extend credit is
represented  by the  contractual  notional  amount  of  those  instruments.  The
Association uses the same credit policies in making  commitments and conditional
obligations as it does for on-balance-sheet  instruments.  At September 30, 2000
the Association had outstanding  loan commitments  amounting to $2,073,000.  The
undisbursed  portion of  construction  loans amounted to $11,708,850  and unused
lines of credit amounted to $3,258,000 at September 30, 2000.

The Association  evaluates each customer's  credit  worthiness on a case-by-case
basis. Commitments to extend credit are agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Association upon extension of credit,  is based on management's
credit  evaluation  of the  customer.  Collateral  held is the  underlying  real
estate.

NOTE 13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The following  table presents the carrying  amounts and estimated fair values of
the Company's  financial  instruments at September 30, 2000 and 1999. See Note 1
for a description of the Company's  accounting  policies and the  limitations of
its disclosures in reporting on the fair value of its financial instruments.
<TABLE>
<CAPTION>
                                                             September 30,
                                  -----------------------------------------------------------------------------
                                                    2000                                   1999
                                  ------------------------------------------ ----------------------------------
                                       Carrying                Fair             Carrying            Fair
                                        Amount                 Value             Amount             Value
                                  --------------------  -------------------- ----------------  ----------------
<S>                               <C>                   <C>                   <C>              <C>
Financial assets:
 Cash                             $    6,735,850         $   6,735,850        $   6,501,050     $    6,501,050
 Investment securities                 3,065,550             3,065,550            3,527,750          3,527,750
 FHLB stock                              290,700               290,700              280,400            280,400
 Loans receivable                     72,564,150            72,292,850           61,467,300         61,658,800
 Accrued interest receivable             126,800               126,800              101,850            101,850
Financial liabilities:
 Deposits                             67,874,400            67,730,450           57,653,900         58,284,400
 Note payable - ESOP                     147,150               147,150              206,000            206,000

</TABLE>
                                       34
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 14.  MUTUAL HOLDING COMPANY FINANCIAL DATA

The MHC owns  approximately  54% of the Company's  common stock.  Members of the
mutual  holding  company  consist of  depositors  and certain  borrowers  of the
Association,  who have the sole authority to elect the board of directors of the
mutual holding  company.  The mutual holding  company is registered as a savings
and  loan  holding  company  and is  subject  to  regulation,  examination,  and
supervision by the OTS.

The following is a summary of the condensed financial  statements of Wake Forest
Bancorp, M.H.C. as of and for the periods indicated:

                                    Condensed Balance Sheets
                                   September 30, 2000 and 1999

<TABLE>
<CAPTION>
                                                             2000                   1999
                                                        -----------             ----------
<S>                                                      <C>                     <C>
Assets:
 Cash and cash equivalents                              $   878,400             $  691,000
 Accrued dividends receivable, subsidiary                    72,200                 76,200
 Investment in Wake Forest Bancshares, Inc.               5,137,500              4,726,850
                                                        -----------             ----------
                      Total assets                      $ 6,092,100             $5,494,050
                                                        ===========             ==========

Liabilities:
 Accounts payable and accrued expenses                  $       --              $   11,200
                                                        -----------             ----------
Equity:
 Capitalization by Wake Forest Federal                      106,350                106,350
 Equity in Wake Forest Bancshares, Inc.                   3,854,700              3,854,700
 Retained earnings                                        2,131,050              1,521,800
                                                        -----------             ----------
                      Total equity                        6,092,100              5,482,850
                                                        -----------             ----------
                      Total liabillity and equity       $ 6,092,100             $5,494,050
                                                        ===========             ==========

</TABLE>
                            Condensed Balance Sheets
                 For the Years Ended September 30, 2000 and 1999

<TABLE>
<CAPTION>

<S>                                                     <C>                      <C>
Interest income                                         $    40,250              $  30,400
Equity in earnings of subsidiary                            715,450                627,300
Accounting and tax expense                                  (17,850)               (19,800)
Attorney Fees                                               (20,000)               (43,750)
Director's fees                                             (91,650)               (84,950)
Other                                                       (16,950)               (23,400)
                                                         -----------             ----------
                                                        $   609,250              $ 485,800
                                                         ===========             =========

</TABLE>

                                       35

<PAGE>

WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 14.  MUTUAL HOLDING COMPANY FINANCIAL DATA (CONTINUED)

                       Condensed Statements of Cash Flows
                 For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:                                      2000                  1999
                                                                    --------------------  --------------------
<S>                                                                 <C>                   <C>
Net income                                                          $       609,250        $       485,800
 Noncash income items:
  Equity in earnings of Wake Forest Federal                                (715,450)              (627,300)
  Change in assets and liabilities:
  Decrease in investment in subsidiary - dividends                          304,800                304,900
  Increase (decrease) in accounts payable                                   (11,200)                   700
                                                                    --------------------  --------------------
          Net cash provided by operating activities                         187,400                164,100
Cash and cash equivalents- beginning                                        691,000                526,900
                                                                    --------------------  --------------------
Cash and cash equivalents- ending                                   $       878,400       $        691,000
                                                                    ====================  ====================


</TABLE>


NOTE 15.  PARENT COMPANY ONLY FINANCIAL DATA

The following is a summary of the condensed financial  statements of Wake Forest
Bancshares, Inc. for the periods indicated:

                           Condensed Balance Sheets
                           September 30, 2000 and 1999

<TABLE>
<CAPTION>
                                                                             2000                 1999
                                                                     -------------------- --------------------

<S>                                                                <C>                            <C>

Assets:
 Cash and cash equivalents                                           $       279,700              522,900
 Accrued dividends receivable, Wake Forest Federal                           140,550              143,700
 Investment in Wake Forest Federal                                        13,738,300           12,982,500
                                                                     -------------------- --------------------
                                                                     $    14,158,550      $    13,649,100
                                                                     ==================== ====================
Liabilities:
 Accrued dividends payable                                           $       140,550      $       143,700
 Income taxes payable                                                          3,350                2,550
                                                                     -------------------- --------------------
                                                                             143,900              146,250
                                                                     -------------------- --------------------
Equity:
 Common stock                                                                 12,150               12,150
 Additional paid-in capital                                               13,715,850           13,715,850
 Retained earnings                                                           892,100              126,500
 Treasury stock acquired                                                    (605,450)            (351,650)
                                                                     -------------------- --------------------
                                                                          14,014,650           13,502,850
                                                                     -------------------- --------------------
                                                                      $   14,158,550      $    13,649,100
                                                                     ==================== ====================
</TABLE>

                                       36
<PAGE>
WAKE FOREST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15.  PARENT COMPANY ONLY FINANCIAL DATA (CONTINUED)

                         Condensed Statements of Income
For the Years Ended September 30, 2000 and from May 7, 1999 to
September 30, 1999

<TABLE>
<CAPTION>
                                                                          2000                    1999
                                                                ----------------------  ----------------------
<S>                                                             <C>                     <C>
Interest income                                                 $         16,800         $           6,550
Equity in earnings of Wake Forest Federal                              1,321,100                   412,100
Miscellaneous expense                                                       (850)                      (50)
Income tax expense                                                        (6,150)                   (2,500)
                                                                ----------------------  ----------------------
Net income                                                      $      1,330,900         $         416,100
                                                                ======================  ======================


</TABLE>


                        Condensed Statement of Cash Flows
           For the Year Ended  September 30, 2000 and Period from May 7, 1999 to
September 30, 1999

<TABLE>
<CAPTION>

                                                                             2000                 1999
                                                                      -------------------  -------------------
<S>                                                                   <C>                  <C>
Cash Flows from Operating Activities:
 Net income                                                           $    1,330,900      $        416,100
 Noncash income items:
  Equity in earnings of Wake Forest Federal                               (1,321,100)             (412,100)
 Change in assets and liabilities:
  (Increase) decrease in accrued dividends receivable                          3,150              (143,700)
  Increase (decrease) in accrued dividends payable                            (3,150)              143,700
  Increase in income tax payable                                                 800                 2,550
                                                                      -------------------  -------------------
          Net cash provided by operating activities                           10,600                 6,550
                                                                      -------------------  -------------------
Cash Flows from Financing Activities:
 Treasury stock acquired                                                    (253,800)             (351,650)
 Dividends received from Wake Forest Federal                                 560,350             1,157,600
 Dividends paid                                                             (560,350)             (289,600)
                                                                      -------------------  -------------------
          Net cash provided from financing activities                       (253,800)              516,350
                                                                      -------------------  -------------------
Increase (decrease) in cash                                                 (243,200)              522,900
Cash and cash equivalents- beginning                                         522,900                    --
                                                                      -------------------  -------------------
Cash and cash equivalents- ending                                     $      279,700       $       522,900
                                                                      ===================  ===================

</TABLE>

NOTE 16.  RECLASSIFICATIONS

Certain  amounts  in  the  1999  consolidated  financial  statements  have  been
reclassified to conform with classifications used in 2000.


                                       37

<PAGE>


                          WAKE FOREST BANCSHARES, INC.
                            COMMON STOCK INFORMATION

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


The  Company's  stock  (previously  as Wake  Forest  Federal  Savings  and  Loan
Association)  began  trading on April 3,  1996.  There are  1,171,062  shares of
common stock  outstanding  (net of treasury shares) of which  approximately  42%
were held by 265 stockholders of record on September 30, 2000. The MHC, ESOP and
RRP Trust hold  approximately  58%. The Company's stock is not actively  traded,
although  the stock is quoted on the OTC  Electronic  Bulletin  Board  under the
symbol "WAKE." The table below  reflects the stock trading and dividend  payment
frequency  of the  Company's  stock for the years ended  September  30, 2000 and
1999,  based upon  information  provided to management of the Company by certain
securities  firms  effecting  transactions  in the Company's  stock on an agency
basis.

<TABLE>
<CAPTION>
                                                                                             Stock Price
                                                                                       ---------------------------
                                                                         Dividends        High           Low
                                                                        ------------- -------------    -----------
<S>                                                                     <C>            <C>           <C>
2000
----
First Quarter                                                             $  0.12      $    14 1/8   $        13
Second Quarter                                                               0.12               14        12 1/2
Third Quarter                                                                0.12           12 3/4            10
Fourth Quarter                                                               0.12           12 3/4        11 7/8

1999
----
First Quarter                                                             $  0.12      $        16   $    10 1/2
Second Quarter                                                               0.12               15            11
Third Quarter                                                                0.12           13 1/4        11 1/4
Fourth Quarter                                                               0.12           14 7/8        11 3/4


</TABLE>

                                       38
<PAGE>

                                         WAKE FOREST BANCSHARES, INC.
                                           CORPORATE INFORMATION

                                           CORPORATE INFORMATION

                                             EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
<S>                                      <C>                                 <C>
Anna O. Sumerlin                         Carlton E.Chappell                  Robert C. White
President and CEO                        Vice President/Secretary &          Vice President and CFO
                                         Treasurer

                                                   DIRECTORS

Howard Brown                             Rodney M. Privette                  R. W. Wilkinson III
Chairman of the Board                    Owner of Insurance Agency           Vice Chairman of the Board
Former Owner of                                                              Former Managing Officer
Oil Distribution Company                                                     of Wake Forest Federal

John D. Lyon                             Paul Brixhoff                       Anna O. Sumerlin
Owner of Appraisal Company               Former Owner of Auto                CEO of the Company and
                                         Supply Company                      Wake Forest Federal

Harold R. Washington                     William S. Wooten                   Leelan A. Woodlief
Former Owner of                          Dentist                             Owner of Farm Supply
Automobile Distributorship                                                   Company

STOCK TRANSFER AGENT                     SPECIAL LEGAL COUNSEL               INDEPENDENT AUDITORS
--------------------                     ---------------------               --------------------

ChaseMellon Shareholder Services         Thacher, Proffitt & Wood            Dixon Odom PLLC
P.O. Box 3315                            1700 Pennsylvania Ave. N.W.         408 Summit Drive
South  Hackensack, NJ  07606             Washington, DC  20006               PO Box 70
                                                                             Sanford, NC  27331



</TABLE>


                                             ANNUAL MEETING

                     The 2001  annual  meeting of  stockholders  of Wake  Forest
                     Bancshares,  Inc.  will be  held  at  2:00  pm on  Tuesday,
                     February  20,  2001 at the Wake  Forest  Police and Justice
                     Center at 401 Elm Avenue, Wake Forest, N.C.

                                             FORM 10-KSB

                     A COPY OF THE  ANNUAL  REPORT ON FORM  10-KSB AS FILED WITH
                     THE  SECURITIES AND EXCHANGE  COMMISSION  WILL BE FURNISHED
                     WITHOUT CHARGE TO STOCKHOLDERS UPON WRITTEN REQUEST TO WAKE
                     FOREST  BANCSHARES,  INC., PO BOX 1167,  WAKE FOREST,  N.C.
                     27588.

                                       39